Loans and the Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 2016

Loans and the Allowance for Loan Losses [Abstract]

The following is a summary of the balances in each class of the Company's loan portfolio as of the dates indicated:

	September 30, 2016			December 31, 2015
	(in thousands)
Mortgage loans on real estate:
Residential 1-4 family	$	97,278		$	96,997
Commercial		286,759			277,758
Construction		22,679			19,685
Second mortgages		16,895			15,148
Equity lines of credit		47,439			47,256
Total mortgage loans on real estate		471,050			456,844
Commercial loans		47,239			43,197
Consumer loans		49,628			50,427
Other		26,003			18,007
Total loans, net of deferred fees (1)		593,920			568,475
Less: Allowance for loan losses		(7,780	)		(7,738	)
Loans, net of allowance and deferred fees (1)	$	586,140		$	560,737

(1) Deferred loan fees totaled $480 thousand and $407 thousand at September 30, 2016 and December 31, 2015, respectively.

Overdrawn deposit accounts are reclassified as loans and included in the Other category in the table above. Overdrawn deposit accounts totaled $707 thousand and $648 thousand at September 30, 2016 and December 31, 2015, respectively.

Credit Quality Information

The following table presents credit quality exposures by internally assigned risk ratings as of the dates indicated:

Credit Quality Information As of September 30, 2016
(in thousands)
	Pass		OAEM		Substandard		Total
Mortgage loans on real estate:
Residential 1-4 family	$	94,209	$	1,020	$	2,049	$	97,278
Commercial		267,661		6,834		12,264		286,759
Construction		21,776		162		741		22,679
Second mortgages		16,197		490		208		16,895
Equity lines of credit		47,083		213		143		47,439
Total mortgage loans on real estate		446,926		8,719		15,405		471,050
Commercial loans		43,230		2,611		1,398		47,239
Consumer loans		49,389		0		239		49,628
Other		26,003		0		0		26,003
Total	$	565,548	$	11,330	$	17,042	$	593,920

Credit Quality Information As of December 31, 2015
(in thousands)
	Pass		OAEM		Substandard		Total
Mortgage loans on real estate:
Residential 1-4 family	$	94,576	$	0	$	2,421	$	96,997
Commercial		261,749		7,394		8,615		277,758
Construction		18,931		0		754		19,685
Second mortgages		14,835		0		313		15,148
Equity lines of credit		47,161		0		95		47,256
Total mortgage loans on real estate		437,252		7,394		12,198		456,844
Commercial loans		40,268		467		2,462		43,197
Consumer loans		50,327		0		100		50,427
Other		18,007		0		0		18,007
Total	$	545,854	$	7,861	$	14,760	$	568,475

As of September 30, 2016 and December 31, 2015, the Company did not have any loans internally classified as Loss or Doubtful.

Past Due Loans

All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection. Loans in nonaccrual status that are also past due are included in the aging categories in the table below.

Age Analysis of Past Due Loans as of September 30, 2016
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Total Current Loans ⁽¹⁾		Total Loans		Recorded Investment > 90 Days Past Due and Accruing
	(in thousands)
Mortgage loans on real estate:
Residential 1-4 family	$	304	$	562	$	826	$	1,692	$	95,586	$	97,278	$	0
Commercial		795		124		108		1,027		285,732		286,759		0
Construction		0		456		0		456		22,223		22,679		0
Second mortgages		195		0		77		272		16,623		16,895		0
Equity lines of credit		359		0		50		409		47,030		47,439		50
Total mortgage loans on real estate		1,653		1,142		1,061		3,856		467,194		471,050		50
Commercial loans		0		6		86		92		47,147		47,239		0
Consumer loans		1,981		824		2,647		5,452		44,176		49,628		2,566
Other		48		7		4		59		25,944		26,003		4
Total	$	3,682	$	1,979	$	3,798	$	9,459	$	584,461	$	593,920	$	2,620

⁽¹⁾ For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

In the table above, the consumer category includes student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $4.3 million at September 30, 2016.

Age Analysis of Past Due Loans as of December 31, 2015
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Total Current Loans ⁽¹⁾		Total Loans		Recorded Investment > 90 Days Past Due and Accruing
	(in thousands)
Mortgage loans on real estate:
Residential 1-4 family	$	309	$	1,042	$	275	$	1,626	$	95,371	$	96,997	$	0
Commercial		1,266		31		23		1,320		276,438		277,758		23
Construction		161		0		0		161		19,524		19,685		0
Second mortgages		21		39		165		225		14,923		15,148		0
Equity lines of credit		170		0		0		170		47,086		47,256		0
Total mortgage loans on real estate		1,927		1,112		463		3,502		453,342		456,844		23
Commercial loans		500		88		232		820		42,377		43,197		164
Consumer loans		1,673		1,350		3,163		6,186		44,241		50,427		3,163
Other		64		3		6		73		17,934		18,007		6
Total	$	4,164	$	2,553	$	3,864	$	10,581	$	557,894	$	568,475	$	3,356

⁽¹⁾ For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

Although the portion of the student loan portfolio that is 90 days or more past due would normally be considered impaired, the Company does not include these loans in its impairment analysis. Because the federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans, management does not expect significant increases in past due student loans to have a material effect on the Company.

Nonaccrual Loans

The following table presents loans in nonaccrual status by class of loan as of the dates indicated:

Nonaccrual Loans by Class
	September 30, 2016		December 31, 2015
	(in thousands)
Mortgage loans on real estate
Residential 1-4 family	$	1,587	$	1,457
Commercial		6,366		2,623
Second mortgages		129		226
Equity lines of credit		93		0
Total mortgage loans on real estate		8,175		4,306
Commercial loans		196		276
Consumer loans		179		0
Total	$	8,550	$	4,582

Interest Income Would Have Been Recorded Under Original Loan Terms

The following table presents the interest income that the Company would have earned under the original terms of its nonaccrual loans and the actual interest recorded by the Company on nonaccrual loans for the periods presented:

	Nine Months Ended September 30,
	2016			2015
	(in thousands)
Interest income that would have been recorded under original loan terms		$	232	$	90
Actual interest income recorded for the period			182		65
Reduction in interest income on nonaccrual loans		$	50	$	25

Troubled Debt Restructurings by Class

The following table presents TDRs during the period indicated, by class of loan.

Troubled Debt Restructurings by Class
For the Three Months Ended September 30, 2016
(dollars in thousands)
	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification		Current Investment on September 30, 2016
Mortgage loans on real estate:
Residential 1-4 family		4	$	1,002	$	1,002	$	1,002
Commercial		1		150		150		150
Second mortgages		1		53		53		53
Equity lines of credit		1		93		93		93
Total mortgage loans on real estate		7		1,298		1,298		1,298
Consumer loans		2		8		8		8
Total		9	$	1,306	$	1,306	$	1,306

Troubled Debt Restructurings by Class
For the Three Months Ended September 30, 2015
(dollars in thousands)
	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification		Current Investment on September 30, 2015
Mortgage loans on real estate:
Commercial		1	$	194	$	194	$	0
Construction		1		435		435		410
Second mortgages		1		61		61		61
Total		3	$	690	$	690	$	664

Troubled Debt Restructurings by Class
For the Nine Months Ended September 30, 2016
(dollars in thousands)
	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification		Current Investment on September 30, 2016
Mortgage loans on real estate:
Residential 1-4 family		4	$	1,002	$	1,002	$	1,002
Commercial		1		150		150		150
Second mortgages		1		53		53		53
Equity lines of credit		1		93		93		93
Total mortgage loans on real estate		7		1,298		1,298		1,298
Commercial loans		1		152		152		109
Consumer loans		2		8		8		8
Total		10	$	1,458	$	1,458	$	1,415

Troubled Debt Restructurings by Class
For the Nine Months Ended September 30, 2015
(dollars in thousands)
	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification		Current Investment on September 30, 2015
Mortgage loans on real estate:
Commercial		1	$	194	$	194	$	193
Construction		1		435		435		410
Second mortgages		1		61		61		61
Total		3	$	690	$	690	$	664

Impaired Loans by Class

The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans with the associated allowance amount, if applicable, as of the dates presented. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the periods presented. The average balances are calculated based on daily average balances.

Impaired Loans by Class (in thousands)
	As of September 30, 2016												For the nine months ended September 30, 2016
				Recorded Investment
	Unpaid Principal Balance			Without Valuation Allowance			With Valuation Allowance			Associated Allowance			Average Recorded Investment			Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family		$	3,351		$	2,474		$	762		$	75		$	2,833		$	101
Commercial			13,992			9,409			3,756			304			10,645			418
Construction			623			533			96			34			454			32
Second mortgages			530			401			52			5			522			21
Equity lines of credit			93			93			0			0			31			2
Total mortgage loans on real estate		$	18,589		$	12,910		$	4,666		$	418		$	14,485		$	574
Commercial loans			1,061			196			777			180			772			57
Consumer loans			178			81			97			35			64			6
Total		$	19,828		$	13,187		$	5,540		$	633		$	15,321		$	637

Impaired Loans by Class (in thousands)
	As of December 31, 2015											For the Year Ended December 31, 2015
			Recorded Investment
	Unpaid Principal Balance		Without Valuation Allowance			With Valuation Allowance			Associated Allowance			Average Recorded Investment			Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family	$	2,994		$	1,530		$	1,261		$	146		$	2,267		$	132
Commercial		10,203			6,166			3,208			608			9,305			473
Construction		99			0			99			36			465			5
Second mortgages		535			499			0			0			571			21
Total mortgage loans on real estate	$	13,831		$	8,195		$	4,568		$	790		$	12,608		$	631
Commercial loans		330			207			68			8			952			28
Consumer loans		12			12			0			0			13			1
Total	$	14,173		$	8,414		$	4,636		$	798		$	13,573		$	660

Allowance for Loan Losses by Segment

The following table presents, by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS
(in thousands)
For the Nine Months Ended September 30, 2016	Commercial			Real Estate - Construction		Real Estate - Mortgage ⁽¹⁾			Consumer			Other			Total
Allowance for Loan Losses:
Balance at the beginning of period	$	633		$	985	$	5,628		$	279		$	213		$	7,738
Charge-offs		(915	)		0		(393	)		(132	)		(99	)		(1,539	)
Recoveries		33			3		192			23			30			281
Provision for loan losses		1,209			93		(305	)		175			128			1,300
Ending balance	$	960		$	1,081	$	5,122		$	345		$	272		$	7,780
Ending balance individually evaluated for impairment	$	180		$	34	$	384		$	35		$	0		$	633
Ending balance collectively evaluated for impairment		780			1,047		4,738			310			272			7,147
Ending balance	$	960		$	1,081	$	5,122		$	345		$	272		$	7,780
Loan Balances:
Ending balance individually evaluated for impairment	$	973		$	629	$	16,947		$	178		$	0		$	18,727
Ending balance collectively evaluated for impairment		46,266			22,050		431,424			49,450			26,003			575,193
Ending balance	$	47,239		$	22,679	$	448,371		$	49,628		$	26,003		$	593,920

For the Year Ended December 31, 2015	Commercial			Real Estate - Construction		Real Estate - Mortgage ⁽¹⁾			Consumer			Other			Total
Allowance for Loan Losses:
Balance at the beginning of period	$	595		$	703	$	5,347		$	219		$	211		$	7,075
Charge-offs		(293	)		0		(321	)		(92	)		(191	)		(897	)
Recoveries		50			1		393			39			52			535
Provision for loan losses		281			281		209			113			141			1,025
Ending balance	$	633		$	985	$	5,628		$	279		$	213		$	7,738
Ending balance individually evaluated for impairment	$	8		$	36	$	754		$	0		$	0		$	798
Ending balance collectively evaluated for impairment		625			949		4,874			279			213			6,940
Ending balance	$	633		$	985	$	5,628		$	279		$	213		$	7,738
Loan Balances:
Ending balance individually evaluated for impairment	$	275		$	99	$	12,664		$	12		$	0		$	13,050
Ending balance collectively evaluated for impairment		42,922			19,586		424,495			50,415			18,007			555,425
Ending balance	$	43,197		$	19,685	$	437,159		$	50,427		$	18,007		$	568,475

⁽¹⁾ The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.

Financing Receivable, Allowance for Credit Losses, Policy or Methodology Change [Policy Text Block]

Historical loss rates calculated by migration analysis are determined by the performance of a loan over a period of time (the migration period). This migration period can be lengthened or shortened based on management's assessment of the most appropriate length of time over which to analyze losses in the loan portfolio. The Company can also calculate multiple migration periods, allowing management to assess the migration of loans based on more than one starting point.

In the third quarter of 2016, management made the following changes to its method for calculating the allowance:

The number of migration periods was changed from one to four. Each migration period remains at twelve quarters, the length of the migration period used by the Company in prior periods. This change reduced the provision for loan losses by $293 thousand.

The Company further sub-segmented its pool of consumer loans not secured by real estate to separate a pool of loans that share characteristics with each other that are not shared with other consumer loans. The new sub-segment is comprised of loans purchased from a single source for which management does not expect any charge-offs against the allowance. Accordingly, beginning with the third quarter of 2016, the historic loss factor does not apply to this group of loans. In addition, management determined that some of the qualitative factors that had previously been applied to these loans when they were grouped with all other consumer loans were no longer appropriate once these loans were separated into a new sub-segment. Creating this new sub-segment, which includes no anticipated losses, and applying the relevant qualitative factors to it reduced the provision for loan losses by $491 thousand.

As part of the process to determine whether a new sub-segment was appropriate, management analyzed the qualitative factors applied to each segment of the portfolio. Based on this analysis, management changed its qualitative factor adjustments on the Company's student loan portfolio to better reflect those factors that could potentially have an impact on the portfolio. This change reduced the provision for loan losses by $63 thousand.

The following table represents the effect on the loan loss provision as a result of these changes in methodology. It compares the methodology actually used for the nine months ended September 30, 2016 to that used in prior periods.

	Calculated Provision Based on Current Quarter Methodology			Calculated Provision Based on Prior Quarter Methodology			Difference
	(in thousands)
Portfolio Segment:
Commercial	$	1,209		$	1,491		$	(282	)
Real estate - construction		93			(5	)		98
Real estate - mortgage		(305	)		(195	)		(110	)
Consumer loans		175			729			(554	)
Other		128			127			1
Total	$	1,300		$	2,147		$	(847	)

The allowance for loan losses was 1.31% of total loans at September 30, 2016, compared to 1.33% at June 30, 2016 and 1.36% at December 31, 2015.