Note 5 - Loans

3 Months Ended

Mar. 31, 2016

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 5. LOANS

Outstanding loan balances consist of the following at March 31, 2016, and December 31, 2015.

(Amounts in thousands)	March 31,			December 31,
Loan Portfolio	2016			2015
Commercial	$	136,721		$	132,805
Commercial real estate:
Real estate - construction and land development		27,554			28,319
Real estate - commercial non-owner occupied		247,840			243,374
Real estate - commercial owner occupied		154,484			156,299
Residential real estate:
Real estate - residential - Individual Tax Identification Number (“ITIN”)		48,384			49,106
Real estate - residential - 1-4 family mortgage		10,947			11,390
Real estate - residential - equity lines		44,327			45,473
Consumer and other		53,986			49,873
Gross loans		724,243			716,639
Deferred fees and costs		985			870
Loans, net of deferred fees and costs		725,228			717,509
Allowance for loan and lease losses		(11,495	)		(11,180	)
Net loans	$	713,733		$	706,329

Gross loan balances in the table above include net purchase discounts of $2.7 million and $2.3 million as of March 31, 2016, and December 31, 2015, respectively.

Loans are reported as past due when any portion of the principal and interest are not received by the due date. The days past due will continue to increase for each day until full principal and interest are received (i.e. if payment is not received within 30 days of the due date, the loan will be considered 30 days past due; if payment is not received within 60 days of the due date, the loan will be considered 60 days past due, etc.). Loans that become 90 days past due will be placed in nonaccrual status unless well secured and in the process of collection.

Age analysis of gross loan balances for past due loans, segregated by class of loans, as of March 31, 2016, and December 31, 2015, was as follows.

					Greater								Recorded
(Amounts in thousands)	30-59		60-89		Than 90								Investment >
Past Due Loans at	Days Past		Days Past		Days Past		Total Past						90 Days and
March 31, 2016	Due		Due		Due		Due		Current		Total		Accruing
Commercial	$	605	$	244	$	623	$	1,472	$	135,249	$	136,721	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		27,554		27,554		—
Real estate - commercial non-owner occupied		—		—		1,197		1,197		246,643		247,840		—
Real estate - commercial owner occupied		368		—		—		368		154,116		154,484		—
Residential real estate:
Real estate - residential - ITIN		728		238		881		1,847		46,537		48,384		—
Real estate - residential - 1-4 family mortgage		—		372		665		1,037		9,910		10,947		—
Real estate - residential - equity lines		291		453		—		744		43,583		44,327		—
Consumer and other		148		65		—		213		53,773		53,986		—
Total	$	2,140	$	1,372	$	3,366	$	6,878	$	717,365	$	724,243	$	—

					Greater								Recorded
(Amounts in thousands)	30-59		60-89		Than 90								Investment >
Past Due Loans at	Days Past		Days Past		Days Past		Total Past						90 Days and
December 31, 2015	Due		Due		Due		Due		Current		Total		Accruing
Commercial	$	—	$	30	$	634	$	664	$	132,141	$	132,805	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		28,319		28,319		—
Real estate - commercial non-owner occupied		64		—		5,665		5,729		237,645		243,374		—
Real estate - commercial owner occupied		—		—		1,071		1,071		155,228		156,299		—
Residential real estate:
Real estate - residential - ITIN		1,018		118		850		1,986		47,120		49,106		—
Real estate - residential - 1-4 family mortgage		—		404		871		1,275		10,115		11,390		—
Real estate - residential - equity lines		137		97		—		234		45,239		45,473		—
Consumer and other		150		50		88		288		49,585		49,873		88
Total	$	1,369	$	699	$	9,179	$	11,247	$	705,392	$	716,639	$	88

A loan is considered impaired when based on current information and events we determine it is probable that we will not be able to collect all amounts due according to the original loan contract, including scheduled interest payments. Generally, when we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, the current fair value of collateral is used, less selling costs.

The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every six to twelve months. We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is experienced in the appraisal of properties similar to the property being appraised, (3) is actively engaged in the appraisal work, (4) has knowledge of current real estate market conditions and financing trends, (5) is reputable, and (6) is not on Freddie Mac’s nor our Exclusionary List of appraisers and brokers. In certain cases, appraisals will be reviewed by another independent third party to ensure the quality of the appraisal and the expertise and independence of the appraiser.

Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment. Our impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required. Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by our Chief Credit Officer.

Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Based on these processes, we do not believe there are significant time lapses for the recognition of additional losses on collateral dependent loans.

The following tables summarize impaired loans by loan class as of March 31, 2016, and December 31, 2015.

	As of March 31, 2016
			Unpaid
(Amounts in thousands)	Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	1,908	$	2,232	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		1,197		1,197		—
Real estate - commercial owner occupied		1,190		1,952		—
Residential real estate:
Real estate - residential - ITIN		7,282		8,923		—
Real estate - residential - 1-4 family mortgage		1,742		2,543		—
Real estate - residential - equity lines		143		143		—
Total with no related allowance recorded	$	13,462	$	16,990	$	—
With an allowance recorded:
Commercial	$	695	$	766	$	124
Commercial real estate:
Real estate - commercial non-owner occupied		821		821		32
Real estate - commercial owner occupied		347		347		62
Residential real estate:
Real estate - residential - ITIN		1,924		1,958		308
Real estate - residential - equity lines		1,822		1,822		530
Consumer and other		31		31		12
Total with an allowance recorded	$	5,640	$	5,745	$	1,068
Subtotal:
Commercial	$	2,603	$	2,998	$	124
Commercial real estate		3,555		4,317		94
Residential real estate		12,913		15,389		838
Consumer and other		31		31		12
Total impaired loans	$	19,102	$	22,735	$	1,068

	As of December 31, 2015
(Amounts in thousands)	Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	1,282	$	1,519	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		5,488		6,226		—
Real estate - commercial owner occupied		1,071		1,794		—
Residential real estate:
Real estate - residential - ITIN		7,063		8,662		—
Real estate - residential - 1-4 family mortgage		1,775		2,775		—
Real estate - residential - equity lines		142		142		—
Consumer and other		—		—		—
Total with no related allowance recorded	$	16,821	$	21,118	$	—
With an allowance recorded:
Commercial	$	761	$	820	$	122
Commercial real estate:
Real estate - commercial non-owner occupied		824		824		35
Real estate - commercial owner occupied		350		350		62
Residential real estate:
Real estate - residential - ITIN		2,044		2,089		321
Real estate - residential - 1-4 family mortgage
Real estate - residential - equity lines		558		558		279
Consumer and other		32		32		13
Total with an allowance recorded	$	4,569	$	4,673	$	832
Subtotal:
Commercial	$	2,043	$	2,339	$	122
Commercial real estate		7,733		9,194		97
Residential real estate		11,582		14,226		600
Consumer and other		32		32		13
Total impaired loans	$	21,390	$	25,791	$	832

Had nonaccrual loans performed in accordance with their contractual terms, we would have recognized additional interest income, net of tax, of approximately $84 thousand and $163 thousand for the three months ended March 31, 2016 and 2015, respectively.

Nonaccrual loans, segregated by loan class, were as follows as of March 31, 2016 and December 31, 2015.

(Amounts in thousands)	March 31,		December 31,
Nonaccrual Loans	2016		2015
Commercial	$	2,563	$	1,994
Commercial real estate:
Real estate - commercial non-owner occupied		1,197		5,488
Real estate - commercial owner occupied		1,190		1,071
Residential real estate:
Real estate - residential - ITIN		3,705		3,649
Real estate - residential - 1-4 family mortgage		1,742		1,775
Real estate - residential - equity lines		1,270		—
Consumer and other		31		32
Total	$	11,698	$	14,009

The following table summarizes average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2016 and 2015.

	Three Months Ended				Three Months Ended
	March 31, 2016				March 31, 2015
	Average		Interest		Average		Interest
(Amounts in thousands)	Recorded		Income		Recorded		Income
Average Recorded Investment and Interest Income	Investment		Recognized		Investment		Recognized
Commercial	$	2,215	$	1	$	5,363	$	20
Commercial real estate:
Real estate - commercial non-owner occupied		2,020		12		8,705		13
Real estate - commercial owner occupied		1,449		6		2,292		19
Residential real estate:
Real estate - residential - ITIN		9,158		40		10,045		33
Real estate - residential - 1-4 family mortgage		1,753		—		1,988		—
Real estate - residential - equity lines		1,120		6		776		7
Consumer and other		32		—		35		—
Total	$	17,747	$	65	$	29,204	$	92

The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans. Loans are reported as troubled debt restructurings when we grant a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as we will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement.

At both March 31, 2016 and December 31, 2015, impaired loans of $6.9 million were classified as performing restructured loans. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms.

In order for a restructured loan to be on accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. We had no obligations to lend additional funds on the restructured loans as of March 31, 2016 and December 31, 2015.

As of March 31, 2016, we had $11.4 million in troubled debt restructurings compared to $15.9 million as of December 31, 2015. As of March 31, 2016, we had 119 loans that qualified as troubled debt restructurings, of which 108 loans were performing according to their restructured terms. Troubled debt restructurings represented 1.58% of gross loans as of March 31, 2016, compared to 2.22% at December 31, 2015.

The types of modifications offered can generally be described in the following categories:

Rate – A modification in which the interest rate is modified.

Maturity – A modification in which the maturity date, timing of payments or frequency of payments is modified.

Payment deferral – A modification in which a portion of the principal is deferred.

The following tables present the period ended balances of newly restructured loans and the types of modifications that occurred during the three months ended March 31, 2016 and 2015, respectively.

	For the Three Months Ended March 31, 2016				For the Three Months Ended March 31, 2015
(Amounts in thousands)	Payment				Payment
Troubled Debt Restructuring Modification Types	Deferral		Total		Deferral		Total
Commercial	$	—	$	—	$	787	$	787
Residential real estate:
Real estate - residential - ITIN		—		—		274		274
Total	$	—	$	—	$	1,061	$	1,061

The table below provides information regarding the number of loans where the contractual terms have been restructured in a manner, which grants a concession to a borrower experiencing financial difficulties for the three months ended March 31, 2016 and 2015.

	For the Three Months Ended March 31, 2016						For the Three Months Ended March 31, 2015
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
(Amounts in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded
Troubled Debt Restructurings	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		—	$	—	$	—		1	$	823	$	823
Residential real estate:
Real estate - residential - ITIN		—		—		—		3		259		275
Total		—	$	—	$	—		4	$	1,082	$	1,098

The following table presents loans modified as troubled debt restructurings for which there was a payment default during the three months ended March 31, 2016 or during the three months ended March 31, 2015 on loans which were restructured within the 12 month periods preceding those dates.

	For the Three Months Ended				For the Three Months Ended
	March 31, 2016				March 31, 2015
(Amounts in thousands)	Number of		Recorded		Number of		Recorded
Troubled Debt Restructurings That Subsequently Defaulted	Contracts		Investment		Contracts		Investment
Residential real estate:
Real estate - residential - ITIN		—	$	—		1	$	52
Total		—	$	—		1	$	52

We define a performing loan as a loan where any installment of principal or interest is not 90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. We define a nonperforming loan as an impaired loan, which may be on nonaccrual, 90 days past due and still accruing, or has been restructured and is not in compliance with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain. The foundation or primary factor in determining the appropriate credit quality indicators is the degree of a debtor’s willingness and ability to perform as agreed.

Performing and nonperforming loans, segregated by class of loans, are as follows at March 31, 2016 and December 31, 2015.

(Amounts in thousands)	March 31, 2016
Performing and Nonperforming Loans	Performing		Nonperforming		Total
Commercial	$	134,158	$	2,563	$	136,721
Commercial real estate:
Real estate - construction and land development		27,554		—		27,554
Real estate - commercial non-owner occupied		246,643		1,197		247,840
Real estate - commercial owner occupied		153,294		1,190		154,484
Residential real estate:
Real estate - residential - ITIN		44,679		3,705		48,384
Real estate - residential - 1-4 family mortgage		9,205		1,742		10,947
Real estate - residential - equity lines		43,057		1,270		44,327
Consumer and other		53,955		31		53,986
Total	$	712,545	$	11,698	$	724,243

(Amounts in thousands)	December 31, 2015
Performing and Nonperforming Loans	Performing		Nonperforming		Total
Commercial	$	130,811	$	1,994	$	132,805
Commercial real estate:
Real estate - construction and land development		28,319		—		28,319
Real estate - commercial non-owner occupied		237,886		5,488		243,374
Real estate - commercial owner occupied		155,228		1,071		156,299
Residential real estate:
Real estate - residential - ITIN		45,457		3,649		49,106
Real estate - residential - 1-4 family mortgage		9,615		1,775		11,390
Real estate - residential - equity lines		45,473		—		45,473
Consumer and other		49,753		120		49,873
Total	$	702,542	$	14,097	$	716,639

In conjunction with evaluating the performing versus nonperforming nature of our loan portfolio, management evaluates the following credit risk and other relevant factors in determining the appropriate credit quality indicator (rating) for each loan class:

Pass Grade: A Pass loan is a strong credit with no existing or known weaknesses that may require management’s close attention. Some pass loans require short term enhanced monitoring to determine when the credit relationship would merit either an upgrade or a downgrade. Loans classified as Pass Grade specifically demonstrate:

● Strong Cash Flows – borrower’s cash flows must meet or exceed our minimum debt service coverage ratio.

● Collateral Margin – generally, the borrower must have pledged an acceptable collateral class with an adequate collateral margin.

● Qualitative Factors – in addition to meeting our minimum cash flow and collateral requirements, a number of other qualitative factors are also factored into assigning a Pass Grade including the borrower’s level of leverage (debt to equity), prospects, history and experience in their industry, credit history, and any other relevant factors including a borrower’s character.

Those borrowers who qualify for unsecured loans must fully demonstrate above average cash flows and strong secondary sources of repayment to mitigate the lack of unpledged collateral.

Watch Grade: The credit is acceptable but the borrower has experienced a temporary setback or adverse information has been received, and may exhibit one or more of the characteristics shown in the list below. This risk grade could apply to credits on a temporary basis pending a full review. Credits with this risk grade will require more handling time and increased management. The list below contains characteristics of this risk grade, but individually do not automatically cause the loan to be assigned a Watch Grade.

● The primary source of repayment may be weakening causing greater reliance on the secondary source of repayment or

● The primary source of repayment is adequate, but the secondary source of repayment is insufficient

● In-depth financial analysis would compare to the lower quartile in two or more of the major components of the Risk Management Association Annual Statement Studies

● Volatile or deteriorating collateral

● Management decisions may be called into question

● Delinquencies in bank credits or other financial/trade creditors

● Frequent overdrafts

● Significant change in management/ownership

Special Mention Grade: Credits in this grade are potentially weak and deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the credit. Special Mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. The list below exhibits the characteristics of this grade, but individually do not automatically cause the borrower to be assigned a grade of Special Mention:

● Inadequate or incomplete loan documentation or perfection of collateral, or any other deviation from prudent lending practices

● Credit is structured in a manner in which the timing of the repayment source does not match the payment schedule or maturity, materially jeopardizing repayment

● Current economic or market conditions exist which may affect the borrower's ability to perform or affect the Bank's collateral position

● Adverse trends in the borrower's operations or continued deterioration in the borrower’s financial condition that has not yet reached a point where the retirement of debt is jeopardized. A credit in this grade should have favorable prospects of the deteriorating financial trends reversing within a reasonable timeframe.

● The borrower is less than cooperative or unable to produce current and adequate financial information

Substandard Grade: A Substandard credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard credits have a well-defined weakness or weaknesses that jeopardize the liquidation or timely collection of the debt. Substandard credits are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. However, a potential loss does not have to be recognizable in an individual credit for it to be considered a substandard credit. As such, substandard credits may or may not be graded as impaired.

The following represents, but is not limited to, the potential characteristics of a Substandard Grade and do not necessarily generate automatic reclassification into this loan grade:

● Sustained or substantial deteriorating financial trends,

● Unresolved management problems,

● Collateral is insufficient to repay debt; collateral is not sufficiently supported by independent sources, such as asset-based financial audits, appraisals, or equipment evaluations,

● Improper perfection of lien position, which is not readily correctable,

● Unanticipated and severe decline in market values,

● High reliance on secondary source of repayment,

● Legal proceedings, such as bankruptcy or a divorce, which has substantially decreased the borrower’s capacity to repay the debt,

● Fraud committed by the borrower,

● IRS liens that take precedence,

● Forfeiture statutes for assets involved in criminal activities,

● Protracted repayment terms outside of policy that are for longer than the same type of credit in our portfolio,

● Any other relevant quantitative or qualitative factor that negatively affects the current net worth and paying capacity of the borrower or of the collateral pledged, if any.

Doubtful Grade: A Doubtful loan has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain pending factors that may work to the advantage and strengthening of the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include, but are not limited to:

● Proposed merger(s),

● Acquisition or liquidation procedures,

● Capital injection,

● Perfecting liens on additional collateral,

● Refinancing plans.

Generally, a Doubtful Grade does not remain outstanding for a period greater than six months. After six months, the pending events should have either occurred or not occurred. The credit grade should have improved or the principal balance charged against the ALLL.

The following tables summarize internal risk rating by loan class as of March 31, 2016, and December 31, 2015.

	As of March 31, 2016
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial	$	110,209	$	13,595	$	10,092	$	2,825	$	—	$	136,721
Commercial real estate:
Real estate - construction and land development		27,136		418		—		—		—		27,554
Real estate - commercial non-owner occupied		242,940		936		952		3,012		—		247,840
Real estate - commercial owner occupied		146,093		5,636		1,219		1,536		—		154,484
Residential real estate:
Real estate - residential - ITIN		40,638		—		—		7,746		—		48,384
Real estate - residential - 1-4 family mortgage		8,630		—		575		1,742		—		10,947
Real estate - residential - equity lines		40,405		1,733		—		2,189		—		44,327
Consumer and other		53,673		5		244		64		—		53,986
Total	$	669,724	$	22,323	$	13,082	$	19,114	$	—	$	724,243

	As of December 31, 2015
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial	$	108,696	$	10,240	$	9,587	$	4,282	$	—	$	132,805
Commercial real estate:
Real estate - construction and land development		28,291		28		—		—		—		28,319
Real estate - commercial non-owner occupied		234,177		917		1,588		6,692		—		243,374
Real estate - commercial owner occupied		149,327		3,864		1,687		1,421		—		156,299
Residential real estate:
Real estate - residential - ITIN		41,480		—		—		7,626		—		49,106
Real estate - residential - 1-4 family mortgage		9,041		—		575		1,774		—		11,390
Real estate - residential - equity lines		41,149		1,760		1,682		882		—		45,473
Consumer and other		49,551		—		256		66		—		49,873
Total	$	661,712	$	16,809	$	15,375	$	22,743	$	—	$	716,639

The following tables summarize the ALLL by portfolio for the three months ended March 31, 2016 and 2015.

	For the Three Months Ended March 31, 2016
(Amounts in thousands)				Commercial			Residential
ALLL by Portfolio	Commercial			Real Estate			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	2,493		$	5,784		$	1,577		$	770		$	556		$	11,180
Charge offs		(85	)		(6	)		(73	)		(143	)		—			(307	)
Recoveries		32			528			8			54			—			622
Provision		26			(414	)		449			133			(194	)		—
Ending balance	$	2,466		$	5,892		$	1,961		$	814		$	362		$	11,495

	For the Three Months Ended March 31, 2015
(Amounts in thousands)				Commercial			Residential
ALLL by Portfolio	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total
Beginning balance	$	3,503		$	4,875		$	1,670		$	450		$	322	$	10,820
Charge offs		(52	)		—			(15	)		(112	)		—		(179	)
Recoveries		26			594			35			—			—		655
Provision		(232	)		(155	)		29			234			124		—
Ending balance	$	3,245		$	5,314		$	1,719		$	572		$	446	$	11,296

The following tables summarize the ALLL and the recorded investment in loans and leases as of March 31, 2016 and December 31, 2015.

	As of March 31, 2016
			Commercial		Residential
(Amounts in thousands)	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	124	$	94	$	838	$	12	$	—	$	1,068
Collectively evaluated for impairment		2,342		5,798		1,123		802		362		10,427
Total	$	2,466	$	5,892	$	1,961	$	814	$	362	$	11,495
Gross loans:
Individually evaluated for impairment	$	2,603	$	3,555	$	12,913	$	31	$	—	$	19,102
Collectively evaluated for impairment		134,118		426,323		90,745		53,955		—		705,141
Total gross loans	$	136,721	$	429,878	$	103,658	$	53,986	$	—	$	724,243

	As of December 31, 2015
			Commercial		Residential
(Amounts in thousands)	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	122	$	97	$	600	$	13	$	—	$	832
Collectively evaluated for impairment		2,371		5,687		977		757		556		10,348
Total	$	2,493	$	5,784	$	1,577	$	770	$	556	$	11,180
Gross loans:
Individually evaluated for impairment	$	2,043	$	7,733	$	11,582	$	32	$	—	$	21,390
Collectively evaluated for impairment		130,762		420,259		94,387		49,841		—		695,249
Total gross loans	$	132,805	$	427,992	$	105,969	$	49,873	$	—	$	716,639

The ALLL totaled $11.5 million or 1.59% of total gross loans at March 31, 2016 and $11.2 million or 1.56% at December 31, 2015. As of March 31, 2016, we had $203.0 million in commitments to extend credit, and recorded a reserve for unfunded commitments of $695 thousand in Other Liabilities in the Consolidated Balance Sheets.

The ALLL is based upon estimates of loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan portfolio. Our ALLL methodology significantly incorporates management’s current judgments, and reflects the reserve amount that is necessary for estimated loan and lease losses and risks inherent in the loan portfolio in accordance with ASC Topic 450 Contingencies and ASC Topic 310 Receivables.

The allowance is increased by provisions charged to expense and reduced by net charge offs. In periodic evaluations of the adequacy of the allowance balance, management considers past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. We formally assess the adequacy of the ALLL on a monthly basis. These assessments include the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially rated when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies.

Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, a formal impairment measurement is performed at least quarterly on a loan-by-loan basis.

Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for loan categories are based on analysis of local economic factors applicable to each loan category. Allowances for changing environmental factors are management’s best estimate of the probable impact these changes have had on the loan portfolio as a whole.

We believe that the ALLL was adequate as of March 31, 2016. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Company, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.

As of March 31, 2016, approximately 74% of our gross loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. The U.S. recession, the housing market downturn, and low real estate values in our markets have negatively impacted aspects of our residential development, commercial real estate, commercial construction and commercial loan portfolios. Deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

All impaired loans are individually evaluated for impairment. If the measurement of each impaired loans’ value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL. For collateral dependent loans, this can be accomplished by charging off the impaired portion of the loan based on the underlying value of the collateral. For non-collateral dependent loans, we establish a specific component within the ALLL based on the present value of the future cash flows. If we determine the sources of repayment will not result in a reasonable probability that the carrying value of a loan can be recovered, the amount of a loan’s specific impairment is charged off against the ALLL. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL.

The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component, or in the specific impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of March 31, 2016, the unallocated allowance amount represented 3% of the ALLL, compared to 5% at December 31, 2015. The ALLL composition should not be interpreted as an indication of specific amounts or loan categories in which future charge offs may occur.

We have lending policies and procedures in place with the objective of optimizing loan income within an accepted risk tolerance level. We review and approve these policies and procedures annually. Monitoring and reporting systems supplement the review process with regular frequency as related to loan production, loan quality, concentrations of credit, potential problem loans, loan delinquencies, and nonperforming loans.

The following is a brief summary, by loan type, of management’s evaluation of the general risk characteristics and underwriting standards:

Commercial Loans – Commercial loans are underwritten after evaluating the borrower’s financial ability to maintain profitability including future expansion objectives. In addition, the borrower’s qualitative qualities are evaluated, such as management skills and experience, ethical traits, and overall business acumen. Commercial loans are primarily extended based on the cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The borrower’s cash flow may deviate from initial projections, and the value of collateral securing these loans may vary.

Most commercial loans are generally secured by the assets being financed and other business assets such as accounts receivable or inventory. Management may also incorporate a personal guarantee; however, some short term loans may be extended on an unsecured basis. Repayment of commercial loans secured by accounts receivable may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate (“CRE”) Loans – CRE loans are subject to similar underwriting standards and processes as commercial loans. CRE loans are viewed predominantly as cash flow loans and secondarily as loans collateralized by real estate. Generally, CRE lending involves larger principal amounts with repayment largely dependent on the successful operation of the property securing the loan or the business conducted on the collateralized property. CRE loans tend to be more adversely affected by conditions in the real estate markets or by general economic conditions.

The properties securing the CRE portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce our exposure to adverse economic events that affect any single industry. We monitor and evaluate CRE loans based on occupancy status (investor versus owner occupied), collateral, geography, and risk grade criteria.

Generally, CRE loans to developers and builders that are secured by non-owner occupied properties require the borrower to have had an existing relationship with the Company and a proven record of success. Construction loans are underwritten utilizing feasibility studies, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of cost and value associated with the complete project (as-is value). These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment largely dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is secured. These loans are closely monitored by on-site inspections, and are considered to have higher inherent risks than other CRE loans due to their ultimate repayment sensitivity to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long term financing.

Consumer Loans – Our consumer loan originations are generally limited to home equity loans with nominal originations in unsecured personal loans. The portfolio also includes unsecured consumer home improvement loans with an ongoing purchase commitment and residential solar panel loans secured by UCC filing purchased during 2014 We are highly dependent on third party credit scoring analysis to supplement the internal underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by management and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

We maintain an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to the Board of Directors and Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.

Management’s continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provide the foundation for the three major components of the ALLL: (1) historical valuation allowances established in accordance with ASC 450, Contingencies (“ASC 450”) for groups of similarly situated loan pools; (2) general valuation allowances established in accordance with ASC 450 and based on qualitative credit risk factors; and (3) specific valuation allowances established in accordance with ASC 310, Receivables (“ASC 310”) and based on estimated probable losses on specific impaired loans. All three components are aggregated and constitute the ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is our policy to classify a credit as loss with a concurrent charge off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future.

In accordance with ASC 450, historical valuation allowances are established for loan pools with similar risk characteristics common to each loan grouping. Our loan portfolio is evaluated by general loan class including commercial, commercial real estate (which includes construction and other real estate), residential real estate (which includes 1-4 family and home equity loans), consumer and other loans.

These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all relevant risk characteristics that are common to these segmented groups of loans. These characteristics include a significant emphasis on historical losses within each loan group, inherent risks for each, and specific loan class characteristics such as trends related to nonaccrual loans, past due loans, criticized loans, net charge offs or recoveries, among other relevant credit risk factors. We periodically review and update our historical loss ratios based on net charge off experience for each loan and lease class. Other credit risk factors are also reviewed periodically and adjusted as necessary to account for any changes in potential loss exposure.

General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such as changes in asset quality trends, concentrations of credit or changes in concentrations of credit, changes in underwriting standards, changes in experience or depth of lending staff or management, the effectiveness of loan grading and the internal loan review function, and any other relevant factors. Management evaluates each qualitative component quarterly to determine the associated risks to the quality of our loan portfolio.