Note 3. Loans and Allowance for Loan Losses

The Company segregates its loan portfolio into several loan segments: commercial and industrial, real estate, consumer and student loans. Real estate loans are segregated into the following classes: construction and land, commercial real estate, residential real estate and home equity lines of credit. The following tables present the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), and total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

	As of and for the Three Months Ended March 31, 2018
(In thousands)	Commercial and Industrial			Commercial Real Estate		Construction and Land		Consumer			Student			Residential Real Estate			Home Equity Lines of Credit		Unallocated			Total
Allowance for Loan Losses
Beginning balance, December 31, 2017	$	518		$	1,609	$	879	$	105		$	72		$	1,174		$	387	$	350		$	5,094
Charge-offs		(39	)		-		-		(3	)		(9	)		-			-		-			(51	)
Recoveries		6			-		-		3			-			47			1		-			57
Provision (recovery)		160			99		72		(2	)		10			(36	)		4		(7	)		300
Ending balance, March 31, 2018	$	645		$	1,708	$	951	$	103		$	73		$	1,185		$	392	$	343		$	5,400
Ending balances individually evaluated for impairment	$	286		$	310	$	375	$	-		$	-		$	-		$	48	$	-		$	1,019
Ending balances collectively evaluated for impairment	$	359		$	1,398	$	575	$	103		$	73		$	1,185		$	345	$	343		$	4,381
Loans
Individually evaluated for impairment	$	875		$	3,616	$	5,013	–			–			$	575		$	655				$	10,734
Collectively evaluated for impairment		24,166			170,550		50,863		4,624			10,212			189,272			42,670					492,357
Ending balance, March 31, 2018	$	25,041		$	174,166	$	55,876	$	4,624		$	10,212		$	189,847		$	43,325				$	503,091

	As of and for the Three Months Ended March 31, 2017
(In thousands)	Commercial and Industrial			Commercial Real Estate		Construction and Land			Consumer			Student			Residential Real Estate			Home Equity Lines of Credit			Unallocated			Total
Allowance for Loan Losses
Beginning balance, December 31, 2016	$	561		$	1,569	$	661		$	21		$	76		$	943		$	307		$	387		$	4,525
Charge-offs		(15	)		-		-			(29	)		(4	)		(51	)		-			-			(99	)
Recoveries		-			-		-			1			-			-			-			-			1
Provision (recovery)		(75	)		59		(28	)		52			-			77			(3	)		(32	)		50
Ending balance, March 31, 2017	$	471		$	1,628	$	633		$	45		$	72		$	969		$	304		$	355		$	4,477

	As of and for the Year Ended December 31, 2017
(In thousands)	Commercial and Industrial			Commercial Real Estate			Construction and Land		Consumer			Student			Residential Real Estate			Home Equity Lines of Credit		Unallocated			Total
Allowance for Loan Losses
Beginning balance, December 31, 2016	$	561		$	1,569		$	661	$	21		$	76		$	943		$	307	$	387		$	4,525
Charge-offs		(19	)		(476	)		-		(114	)		(31	)		(51	)		-		-			(691	)
Recoveries		154			575			-		2			-			6			3		-			740
Provision (recovery)		(178	)		(59	)		218		196			27			276			77		(37	)		520
Ending balance, December 31, 2017	$	518		$	1,609		$	879	$	105		$	72		$	1,174		$	387	$	350		$	5,094
Ending balances individually evaluated for impairment	$	247		$	257		$	357	$	-		$	-		$	-		$	51	$	-		$	912
Ending balances collectively evaluated for impairment	$	271		$	1,352		$	522	$	105		$	72		$	1,174		$	336	$	350		$	4,182
Loans
Individually evaluated for impairment	$	758		$	3,631		$	5,234	$	-		$	-		$	581		$	658				$	10,862
Collectively evaluated for impairment		23,655			173,196			48,928		5,068			10,677			186,523			43,890					491,937
Ending balance, December 31, 2017	$	24,413		$	176,827		$	54,162	$	5,068		$	10,677		$	187,104		$	44,548				$	502,799

The following tables present the recorded investment in loans, by portfolio segment, that have been classified according to the internal risk rating system.

	As of March 31, 2018
(In thousands)	Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Student		Residential Real Estate		Home Equity Lines of Credit		Total
Grade:
Pass	$	20,507	$	165,439	$	45,521	$	4,621	$	10,212	$	183,227	$	39,220	$	468,747
Special mention		3,170		3,843		136		3	–			802		804		8,758
Substandard		1,364		4,884		10,219	–		–			5,818		3,301		25,586
Doubtful	–		–		–		–		–		–		–		–
Loss	–		–		–		–		–		–		–		–
Total	$	25,041	$	174,166	$	55,876	$	4,624	$	10,212	$	189,847	$	43,325	$	503,091

	As of December 31, 2017
(In thousands)	Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Student		Residential Real Estate		Home Equity Lines of Credit		Total
Grade:
Pass	$	21,769	$	167,625	$	44,006	$	5,065	$	10,677	$	180,119	$	40,373	$	469,634
Special mention		1,152		4,243		143		3	–			763		813		7,117
Substandard		1,492		4,959		10,013	–		–			6,222		3,362		26,048
Doubtful	–		–		–		–		–		–		–		–
Loss	–		–		–		–		–		–		–		–
Total	$	24,413	$	176,827	$	54,162	$	5,068	$	10,677	$	187,104	$	44,548	$	502,799

The following table presents the aging of the recorded investment in past due loans and nonaccrual loans, by portfolio segment.

	As of March 31, 2018
(In thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Greater than 90 Days Past Due and Accruing		Nonaccruals
Commercial and industrial	$	3	$	14	$	263	$	280	$	24,761	$	25,041	$	-	$	263
Commercial real estate	–		–			1,327		1,327		172,839		174,166		-		1,327
Construction and land		1,050	–			1,335		2,385		53,491		55,876		-		1,335
Consumer		25		5	–			30		4,594		4,624		-	–
Student		685		684		1,330		2,699		7,513		10,212		1,330	–
Residential real estate		496		316		152		964		188,883		189,847		152		178
Home equity lines of credit		561		80		1,205		1,846		41,479		43,325		620		585
Total	$	2,820	$	1,099	$	5,612	$	9,531	$	493,560	$	503,091	$	2,102	$	3,688

	As of December 31, 2017
(In thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Greater than 90 Days Past Due and Accruing		Nonaccruals
Commercial and industrial	$	83	$	153	$	60	$	296	$	24,117	$	24,413	$	49	$	140
Commercial real estate		-		1,404	–			1,404		175,423		176,827	–			936
Construction and land		430	–			1,335		1,765		52,397		54,162	–			1,335
Consumer		5		22	–			27		5,041		5,068	–		–
Student		504		512		1,616		2,632		8,045		10,677		1,616	–
Residential real estate		637		153	–			790		186,314		187,104	–			181
Home equity lines of credit		337		346		588		1,271		43,277		44,548	–			588
Total	$	1,996	$	2,590	$	3,599	$	8,185	$	494,614	$	502,799	$	1,665	$	3,180

The following table presents information related to impaired loans, by portfolio segment.

	March 31, 2018
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	-	$	-	$	-	$	-	$	-
Commercial real estate		2,390		2,404		-		2,387		19
Construction and land		795		795		-		906		10
Student		-		-		-		-		-
Residential real estate		575		584		-		578		4
Home equity lines of credit		70		70		-		70		1
Consumer		-		-		-		-		-

With an allowance recorded:
Commercial and industrial	$	875	$	905	$	286	$	891	$	8
Commercial real estate		1,226		1,226		310		1,421		10
Construction and land		4,218		4,298		375		4,218		-
Student		-		-		-		-		-
Residential real estate		-		-		-		-		-
Home equity lines of credit		585		600		48		587		-
Consumer		-		-		-		-		-

Total:
Commercial and industrial	$	875	$	905	$	286	$	891	$	8
Commercial real estate		3,616		3,630		310		3,808		29
Construction and land		5,013		5,093		375		5,124		10
Student		-		-		-		-		-
Residential real estate		575		584		-		578		4
Home equity lines of credit		655		670		48		657		1
Consumer		-		-		-		-		-
Total	$	10,734	$	10,882	$	1,019	$	11,058	$	52

	December 31, 2017
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	-	$	-	$	-	$	-	$	-
Commercial real estate		2,383		2,383		-		2,429		124
Construction and land		1,829		1,881		-		2,041		56
Student		-		-		-		-		-
Residential real estate		581		585		-		591		22
Home equity lines of credit		70		70		-		70		3
Consumer		-		-		-		-		-

With an allowance recorded:
Commercial and industrial	$	758	$	788	$	247	$	791	$	29
Commercial real estate		1,248		1,248		257		1,256		58
Construction and land		3,405		3,433		357		3,451		134
Student		-		-		-		-		-
Residential real estate		588		-		-		-		-
Home equity lines of credit		-		600		51		594		5
Consumer		-		-		-		-		-

Total:
Commercial and industrial	$	758	$	788	$	247	$	791	$	29
Commercial real estate		3,631		3,631		257		3,685		182
Construction and land		5,234		5,314		357		5,492		190
Student		-		-		-		-		-
Residential real estate		1,169		585		-		591		22
Home equity lines of credit		70		670		51		664		8
Consumer		-		-		-		-		-
Total	$	10,862	$	10,988	$	912	$	11,223	$	431

U.S. GAAP requires that the impairment of loans that have been separately identified for evaluation be measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral.

A loan is considered impaired when it is probable that the Bank will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and the current economic conditions. A performing loan may be considered impaired if the factors above indicate a need for impairment. A loan on nonaccrual status may not be impaired if it is in the process of collection or if the shortfall in payment is insignificant. A delay of less than 30 days or a shortfall of less than 5% of the required principal and interest payments generally is considered “insignificant” and would not indicate an impairment situation, if in management’s judgment the loan will be paid in full. Loans that meet the regulatory definitions of doubtful or loss generally qualify as impaired loans under U.S. GAAP. As is the case for all loans, charge-offs for impaired loans occur when the loan or portion of the loan is determined to be uncollectible.

At March 31, 2018, there were 11 loans in the portfolio, totaling $5.2 million, that have been identified as TDR, of which, seven were current and performing in accordance with the modified terms. At March 31, 2017, there were 10 loans in the portfolio, totaling $6.1 million, that have been identified as a troubled debt restructure (“TDR”), of which six were current and performing in accordance with the modified terms. Loan modifications that were classified as TDRs during the three months ended March 31, 2018 and 2017 are as follows:

Three Months Ended

March 31, 2018

Three Months Ended

March 31, 2017

Class of Loan

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Commercial and industrial

191,000

–

There were no defaults on TDRs occurring within 12 months of modification during the three months ended March 31, 2018 and 2017.

At March 31, 2018, the Company had no foreclosed residential real estate property in its possession or in the process of foreclosure. At March 31, 2017, the Company had one foreclosed residential real estate property in its possession or in the process of foreclosure with a recorded investment of $52,000.