NOTE 3 – LOANS AND ASSET QUALITY

Asset Quality. The following tables set forth the amount of the Bank’s current, past due, and non-accrual loans by categories of loans and restructured loans, at the dates indicated.

At June 30, 2016					90 Days or
(Dollars in Thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	4,509	$	-	$	-	$	-	$	4,509
Commercial real estate		62,139		-		-		618		62,757
Consumer and indirect		76,210		1,164		-		389		77,763
Residential real estate		109,630		315		177		1,658		111,780

	$	252,488	$	1,479	$	177	$	2,665	$	256,809

At December 31, 2015					90 Days or
(Dollars in Thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	4,540	$	-	$	-	$	-	$	4,540
Commercial real estate		64,270		2		-		-		64,272
Consumer and indirect		73,568		1,122		16		597		75,303
Residential real estate		115,715		806		39		3,183		119,743

	$	258,093	$	1,930	$	55	$	3,780	$	263,858

The balances in the above charts have not been reduced by the allowance for loan loss and the unearned income on loans. For the period ending June 30, 2016, the allowance for loan loss is $2,291,000 and the unearned income is $1,028,000. For the period ending December 31, 2015, the allowance for loan loss is $3,150,000 and the unearned income is $1,071,000.

	At			At
	June 30,			December 31,
	2016			2015
	(Dollars in Thousands)

Troubled debt restructured loans	$	322		$	290
Non-accrual and 90 days or more and still accruing loans to gross loans		1.11	%		1.45	%
Allowance for credit losses to non-accrual and 90 days or more and still accruing loans		80.61	%		82.14	%

At June 30, 2016 there were three troubled debt restructured loans consisting of a commercial loan of $235,000, a residential real estate loan of $49,000 and a consumer loan of $38,000. The consumer loan was restructured during the quarter ended June 30, 2016 and is currently on nonaccrual. The commercial loan had a troubled debt restructured balance of $241,000 and the residential real estate loan had a balance of $49,000 at December 31, 2015.

At June 30, 2016, there was $1,206,000 in loans outstanding, included in the current and 30-89 days past due columns in the above table, as to which known information about possible credit problems of borrowers caused management to have doubts as to the ability of such borrowers to comply with present loan repayment terms. Such loans consist of loans which were not 90 days or more past due but where the borrower is in bankruptcy or has a history of delinquency, or the loan to value ratio is considered excessive due to deterioration of the collateral or other factors. The three loans outstanding, totaling $1,206,000, are as follows: $803,000 Commercial Real Estate loan where the guarantor is in bankruptcy and the loan has an accelerated payoff since we have an assignment of rents from the property which has a very long-term national tenant; $168,000 Home Equity Line of Credit which is paying as agreed, however the borrower has defaulted on other commercial loans which have been satisfied; and a $235,000 Commercial loan with a loan to value ratio which has deteriorated, which has a complete specific reserve of $235,000. All three of these loans are classified with a risk rating of Substandard.

Non-accrual loans with specific reserves at June 30, 2016 are comprised of:

Consumer loans – Two loans to two borrowers in the amount of $136,000 with a specific reserve of $56,000 established for the loans.

Commercial Real Estate – One loan to one borrower in the amount of $292,000, secured by commercial and/or residential properties with a specific reserve of $92,000 established for the loan.

Residential Real Estate – One loan to one borrower in the amount of $49,000, secured by residential property with a specific reserve of $12,000 established for the loan.

Below is a summary of the recorded investment amount and related allowance for losses of the Bank’s impaired loans at June 30, 2016 and December 31, 2015.

(Dollars in thousands)
June 30, 2016	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized		Specific Reserve		Average Recorded Investment
Impaired loans with specific reserves:
Real-estate - mortgage:
Residential	$	49		49		-		12		50
Commercial		292		292		-		92		303
Consumer		136		136		-		56		168
Installment		-		-		-		-		-
Home Equity		-		-		-		-		-
Commercial		235		235		5		235		237
Total impaired loans with specific reserves	$	712		712		5		395		758

Impaired loans with no specific reserve:
Real-estate - mortgage:
Residential	$	1,896		2,863		11		n/a		2,874
Commercial		1,129		1,129		23		n/a		1,145
Consumer		38		38		-		n/a		72
Installment		288		288		-		n/a		288
Home Equity		-		-		-		n/a		-
Commercial		2		2		-		n/a		3
Total impaired loans with no specific reserve	$	3,353		4,320		34		-		4,382

(Dollars in thousands)
December 31, 2015	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized		Specific Reserve		Average Recorded Investment
Impaired loans with specific reserves:
Real-estate - mortgage:
Residential	$	1,809		1,809		57		697		1,820
Commercial		300		300		-		101		315
Consumer		146		146		-		65		170
Installment		-		-		-		-		-
Home Equity		-		-		-		-		-
Commercial		241		241		10		241		247
Total impaired loans with specific reserves	$	2,496		2,496		67		1,104		2,552

Impaired loans with no specific reserve:
Real-estate - mortgage:
Residential	$	983		1,116		14		n/a		1,171
Commercial		843		843		38		n/a		876
Consumer		365		449		2		n/a		453
Installment		440		440		-		n/a		-
Home Equity		-		-		-		n/a		-
Commercial		-		-		-		n/a		-
Total impaired loans with no specific reserve	$	2,631		2,848		54		-		2,500

Credit Quality Information

The following tables represent credit exposures by creditworthiness category for the quarter ending June 30, 2016 and the year ended December 31, 2015. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Bank’s internal creditworthiness is based on experience with similarly graded credits. Loans that trend upward toward higher credit grades typically have less credit risk and loans that migrate downward typically have more credit risk.

The Bank’s internal risk ratings are as follows:

Superior – minimal risk (normally supported by pledged deposits, United States government securities, etc.)

Above Average – low risk. (all of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Average – moderately low risk. (most of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Acceptable – moderate risk. (the weighted overall risk associated with this credit based on each of the bank’s creditworthiness criteria is acceptable)

Other Assets Especially Mentioned – moderately high risk. (possesses deficiencies which corrective action by the bank would remedy; potential watch list)

Substandard – (the bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected)

Doubtful – (weaknesses make collection or liquidation in full, based on currently existing facts, improbable)

Loss – (of little value; not warranted as a bankable asset)

Loans rated 1-4 are considered “Pass” for purposes of the risk rating chart below. Risk ratings of loans by categories of loans are as follows:

	Commercial				Consumer
June 30, 2016	and		Commercial		and		Residential
(Dollars in Thousands)	Industrial		Real Estate		Indirect		Real Estate		Total

Pass	$	4,198	$	57,462	$	75,570	$	109,815	$	247,045
Special mention		77		3,874		1,362		507		5,820
Substandard		234		1,421		667		1,458		3,780
Doubtful		-		-		164		-		164
Loss		-		-		-		-		-

	$	4,509	$	62,757	$	77,763	$	111,780	$	256,809

Non-accrual		-		618		389		1,658		2,665
Troubled debt restructures		235		-		38		49		322
Number of TDRs contracts		1		-		1		1		3
Non-performing TDRs		-		-		-		-		-
Number of TDR accounts		-		-		-		-		-

	Commercial				Consumer
December 31, 2015	and		Commercial		and		Residential
(Dollars in Thousands)	Industrial		Real Estate		Indirect		Real Estate		Total

Pass	$	3,879	$	58,706	$	72,976	$	116,596	$	252,157
Special mention		168		4,422		1,653		539		6,782
Substandard		493		1,144		509		2,076		4,222
Doubtful		-		-		165		532		697
Loss		-		-		-		-		-

	$	4,540	$	64,272	$	75,303	$	119,743	$	263,858

Non-accrual		-		-		597		3,183		3,780
Troubled debt restructures		241		-		-		49		290
Number of TDRs contracts		1		-		-		1		2
Non-performing TDRs		-		-		-		-		-
Number of TDR accounts		-		-		-		-		-