Note 4. Allowance for Loan Losses

The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management's quarterly evaluation of the collectability of the loan portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. To determine the total allowance for loan losses, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Within these segments, the Company has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes.

Loan Classes by Segments

Commercial loan segment:

Commercial and industrial - organic

Commercial and industrial - syndicated

Real estate construction and land loan segment:

Residential construction

Other construction and land

Real estate mortgage loan segment:

1-4 family residential

Home equity lines of credit

Multifamily

Commercial owner occupied

Commercial non-owner occupied

Consumer loan segment:

Consumer revolving credit

Consumer all other credit

Student loans purchased

Based on the internal risk ratings assigned to each credit, a historical loss factor is assigned to the balances for each class of loans, using a cumulative historical loss rate for the most recent twelve quarters. The Company's internal creditworthiness grading system is based on experiences with similarly graded loans. Higher risk-rated credits are reviewed quarterly by experienced senior lenders based on each borrower's situation. Additionally, internal monitoring and review of credits is conducted on an annual basis and a percentage of the loan portfolio is reviewed by an external loan review group.

Loans that trend upward on the risk ratings scale, toward more positive risk ratings, generally exhibit lower risk factor characteristics. Conversely, loans that migrate toward more negative ratings generally will result in a higher risk factor being applied to those related loan balances.

Risk Ratings And Historical Loss Factor Applied

Excellent

0% applied, as these loans are secured by cash and represent a minimal risk. The Company has never experienced a loss within this category.

Good

0% applied, as these loans represent a low risk and are either secured by marketable securities within margin, or in the case of the student loans purchased, are fully insured by a surety bond purchased by the Company. The Company has never experienced a loss within this category.

Pass

Historical loss factor for loans rated “pass” is applied to current balances of like-rated loans, pooled by class. Loans with the following risk ratings are pooled by class and considered together as “pass”:

Satisfactory - modest risk loans where the borrower has strong and liquid financial statements and more than adequate cash flow
Average – average risk loans where the borrower has reasonable debt service capacity
Marginal – acceptable risk loans where the borrower has acceptable financial statements but is leveraged
Watch – acceptable risk loans which require more attention than normal servicing

Special Mention

These potential problem loans are currently protected but are potentially weak. Historical loss factor for loans rated “special mention” is applied to current balances of like-rated loans pooled by class.

Substandard

These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged. These loans may be considered impaired and evaluated on an individual basis. Otherwise, an historical loss factor for loans rated “substandard” is applied to current balances of all other “substandard” loans pooled by class.

Doubtful

Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable. These loans would be considered impaired and evaluated on an individual basis.

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of September 30, 2015 and December 31, 2014 (dollars in thousands).

							Special		Sub-
September 30, 2015		Excellent		Good		Pass		Mention		standard		Doubtful		TOTAL
Commercial
Commercial and industrial - organic	$	660	$	31,300	$	15,970	$	-	$	111	$	-	$	48,041
Commercial and industrial - syndicated		-		-		21,057		-		2,970		-		24,027
Real estate construction
Residential construction		-		-		1,025		-		-		-		1,025
Other construction and land		-		-		17,470		-		638		-		18,108
Real estate mortgages
1-4 family residential		-		1,500		60,232		618		716		-		63,066
Home equity lines of credit		-		-		28,631		-		82		-		28,713
Multifamily		-		-		21,170		-		-		-		21,170
Commercial owner occupied		-		-		57,562		-		1,116		-		58,678
Commercial non-owner occupied		-		-		88,067		1,071		1,139		-		90,277
Consumer
Consumer revolving credit		88		15,523		544		-		6		-		16,161
Consumer all other credit		253		8,439		1,573		-		43		-		10,308
Student loans purchased		-		10,524		-		-		-		-		10,524
Total Loans	$	1,001	$	67,286	$	313,301	$	1,689	$	6,821	$	-	$	390,098

							Special		Sub-
December 31, 2014		Excellent		Good		Pass		Mention		standard		Doubtful		TOTAL
Commercial
Commercial and industrial - organic	$	3,579	$	23,261	$	18,487	$	64	$	734	$	-	$	46,125
Commercial and industrial - syndicated		-		-		14,815		-		-		-		14,815
Real estate construction
Residential construction		-		-		337		-		-		-		337
Other construction and land		-		-		10,903		507		165		-		11,575
Real estate mortgages
1-4 family residential		-		1,910		56,968		455		829		-		60,162
Home equity lines of credit		-		-		25,411		-		87		-		25,498
Multifamily		-		-		26,462		-		-		-		26,462
Commercial owner occupied		-		-		58,890		-		1,978		-		60,868
Commercial non-owner occupied		-		-		54,012		-		-		-		54,012
Consumer
Consumer revolving credit		34		3,054		332		-		8		-		3,428
Consumer all other credit		200		7,856		1,867		-		49		-		9,972
Total Loans	$	3,813	$	36,081	$	268,484	$	1,026	$	3,850	$	-	$	313,254

In addition to the historical factors, the adequacy of the Company's allowance for loan losses is evaluated through reference to eight qualitative factors, listed below and ranked in order of importance:

1)		Changes in national and local economic conditions, including the condition of various market segments
2)		Changes in the value of underlying collateral
3)		Changes in volume of classified assets, measured as a percentage of capital
4)		Changes in volume of delinquent loans
5)		The existence and effect of any concentrations of credit and changes in the level of such concentrations
6)		Changes in lending policies and procedures, including underwriting standards
7)		Changes in the experience, ability and depth of lending management and staff
8)		Changes in the level of policy exceptions

It has been the Company's experience that the first four factors drive losses to a much greater extent than the last four factors; therefore, the first four factors are weighted more heavily. Although the markets served by the Company remain stronger than the national economy as a whole, management continues to pay close attention on a case-by-case basis for any yet unforeseen potential ripple effects of the housing downturn and the related financial market fallout.

Like the historical factors, qualitative factors are not assessed against loans rated “excellent” or rated “good,” since these are fully collateralized by cash, readily marketable securities, or, in the case of the student loans purchased, are fully insured by a surety bond purchased by the Company.

For each segment and class of loans, management must exercise significant judgment to determine the estimation method that fits the credit risk characteristics of its various segments. Although this evaluation is inherently subjective, qualified management utilizes its significant knowledge and experience related to both the market and history of the Company's loan losses.

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the seven loans in the amount of $1.685 million classified as impaired loans at September 30, 2015, there was no specific valuation allowance on any of these loans after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower.

A summary of the transactions in the Allowance for Loan Losses by loan portfolio segment for the nine months ended September 30, 2015 and the year ended December 31, 2014 appears below (dollars in thousands):

As of and for the period ended September 30, 2015

				Real Estate
	Commercial			Construction and		Real Estate		Consumer
	Loans			Land		Mortgages		Loans			Total
Allowance for Loan Losses:
Balance as of December 31, 2014	$	674		$	102	$	2,360	$	28		$	3,164
Charge-offs		(126	)		-		-		(3	)		(129	)
Recoveries		27			-		46		-			73
Provision for (recovery of) loan losses		191			39		179		(4	)		405
Ending Balance	$	766		$	141	$	2,585	$	21		$	3,513

Ending Balance:
Individually evaluated for impairment	$	-		$	-	$	-	$	-		$	-
Collectively evaluated for impairment		766			141		2,585		21			3,513

Loans:
Individually evaluated for impairment	$	47		$	62	$	1,576	$	-		$	1,685
Collectively evaluated for impairment		72,021			19,071		260,328		36,993			388,413
Ending Balance	$	72,068		$	19,133	$	261,904	$	36,993		$	390,098

As of and for the year ended December 31, 2014

				Real Estate
	Commercial			Construction and			Real Estate			Consumer
	Loans			Land			Mortgages			Loans			Total
Allowance for Loan Losses:
Balance as of December 31, 2013	$	340		$	198		$	2,788		$	34		$	3,360
Charge-offs		(286	)		-			(262	)		(3	)		(551	)
Recoveries		32			-			10			7			49
Provision for (recovery of) loan losses		588			(96	)		(176	)		(10	)		306
Ending Balance	$	674		$	102		$	2,360		$	28		$	3,164

Ending Balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-
Collectively evaluated for impairment		674			102			2,360			28			3,164

Loans:
Individually evaluated for impairment	$	-		$	69		$	1,628		$	-		$	1,697
Collectively evaluated for impairment		60,940			11,843			225,374			13,400			311,557
Ending Balance	$	60,940		$	11,912		$	227,002		$	13,400		$	313,254

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its allowance for loan losses is changes in the volume of delinquent loans. Management monitors payment activity on a regular basis. For all classes of loans, the Company considers the entire balance of the loan to be contractually delinquent if the minimum payment is not received by the due date. Interest and fees continue to accrue on past due loans until they are changed to non-accrual status.

The following tables show the aging of past due loans as of September 30, 2015 and December 31, 2014. Also included are loans that are 90 or more days past due but still accruing, because they are well secured and in the process of collection. (Dollars below reported in thousands.)

Past Due Aging as of													90 Days
September 30, 2015		30-59		60-89		90 Days or								Past Due
	Days Past		Days Past		More Past		Total Past				Total		and Still
	Due		Due		Due		Due		Current		Loans		Accruing
Commercial loans
Commercial and industrial - organic	$	-	$	-	$	47	$	47	$	47,994	$	48,041	$	-
Commercial and industrial - syndicated		-		-		-		-		24,027		24,027		-
Real estate construction and land
Residential construction		-		-		-		-		1,025		1,025		-
Other construction and land		-		-		-		-		18,108		18,108		-
Real estate mortgages
1-4 family residential		-		36		23		59		63,007		63,066		23
Home equity lines of credit		12		-		-		12		28,701		28,713		-
Multifamily		-		-		-		-		21,170		21,170		-
Commercial owner occupied		-		-		-		-		58,678		58,678		-
Commercial non-owner occupied		-		-		-		-		90,277		90,277		-
Consumer loans
Consumer revolving credit		34		-		-		34		16,127		16,161		-
Consumer all other credit		3		-		-		3		10,305		10,308		-
Student loans purchased		127		5		28		160		10,364		10,524		28
Total Loans	$	176	$	41	$	98	$	315	$	389,783	$	390,098	$	51

Past Due Aging as of															90 Days
December 31, 2014		30-59		60-89			90 Days or									Past Due
	Days Past		Days Past			More Past		Total Past				Total			and Still
	Due		Due			Due		Due		Current		Loans			Accruing
Commercial loans
Commercial and industrial - organic	$	6	$	-	$		-	$	6	$	46,119	$	46,125	$		-
Commercial and industrial - syndicated		-		-			-		-		14,815		14,815			-
Real estate construction and land
Residential construction		-		-			-		-		337		337			-
Other construction and land		-		-			-		-		11,575		11,575			-
Real estate mortgages
1-4 family residential		-		24			-		24		60,138		60,162			-
Home equity lines of credit		-		-			-		-		25,498		25,498			-
Multifamily		-		-			-		-		26,462		26,462			-
Commercial owner occupied		-		-			-		-		60,868		60,868			-
Commercial non-owner occupied		-		-			-		-		54,012		54,012			-
Consumer loans
Consumer revolving credit		1		-			-		1		3,427		3,428			-
Consumer all other credit		12		30			-		42		9,930		9,972			-
Total Loans	$	19	$	54	$		-	$	73	$	313,181	$	313,254	$		-