Note 4 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2016, 2015 and 2014 are presented below:

Commercial	2016			2015			2014
	(dollars in thousands)
Balance, beginning of year	$	1,310		$	1,716		$	2,665
Provision (recovery) charged to operations		175			(527	)		(302	)
Charge-offs		(146	)		(89	)		(749	)
Recoveries		65			210			102
Net (charge-offs)		(81	)		121			(647	)
Other		—			—			—
Balance, end of year	$	1,404		$	1,310		$	1,716

Note 4 - Allowance for Loan Losses (Continued)

Non-Commercial	2016			2015			2014
	(dollars in thousands)
Balance, beginning of year	$	1,574		$	2,022		$	2,430
Provision (recovery) charged to operations		(263	)		(93	)		(87	)
Charge-offs		(244	)		(500	)		(482	)
Recoveries		236			145			161
Net (charge-offs)		(8	)		(355	)		(321	)
Other		—			—			—
Balance, end of year	$	1,303		$	1,574		$	2,022

Total	2016			2015			2014
	(dollars in thousands)
Balance, beginning of year	$	2,884		$	3,738		$	5,095
Provision (recovery) charged to operations		(88	)		(620	)		(389	)
Charge-offs		(390	)		(589	)		(1,231	)
Recoveries		301			355			263
Net (charge-offs)		(89	)		(234	)		(968	)
Other		—			—			—
Balance, end of year	$	2,707		$	2,884		$	3,738

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at December 31, 2016 and 2015:

December 31, 2016	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	16	$	1,993	$	1,388	$	190,229	$	1,404	$	192,222
Non-Commercial		123		4,096		1,180		145,511		1,303		149,607
Total	$	139	$	6,089	$	2,568	$	335,740	$	2,707	$	341,829

December 31, 2015	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	18	$	1,019	$	1,292	$	170,182	$	1,310	$	171,201
Non-Commercial		163		4,459		1,411		144,472		1,574		148,931
Total	$	181	$	5,478	$	2,703	$	314,654	$	2,884	$	320,132

Note 4 - Allowance for Loan Losses (Continued)

Past due loan information is used by management when assessing the adequacy of the allowance for loan loss. The following tables summarize the past due information of the loan portfolio by class:

December 31, 2016	Loans 30-89 Days Past Due		Loans 90 Days or More Past due and Non - Accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)
Commercial	$	—	$	—	$	—	$	55,752	$	55,752	$	—
Real estate - commercial		—		392		392		109,360		109,752		—
Other real estate construction		106		190		296		26,422		26,718		—
Real estate construction		—		—		—		5,625		5,625		—
Real estate - residential		510		846		1,356		80,413		81,769		—
Home equity		66		22		88		50,727		50,815		—
Consumer loan		36		—		36		9,675		9,711		—
Other loans		—		—		—		1,687		1,687		—
Total	$	718	$	1,450	$	2,168	$	339,661	$	341,829	$	—

December 31, 2015	Loans 30-89 Days Past Due		Loans 90 Days or More Past due and Non - Accrual		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
	(dollars in thousands)
Commercial	$	46	$	34	$	80	$	52,231	$	52,311	$	—
Real estate - commercial		74		—		74		101,124		101,198		—
Other real estate construction		110		195		305		17,387		17,692		—
Real estate construction		—		—		—		5,629		5,629		—
Real estate - residential		1,580		541		2,121		81,298		83,419		—
Home equity		75		13		88		49,332		49,420		—
Consumer loan		39		—		39		8,943		8,982		—
Other loans		—		—		—		1,481		1,481		—
Total	$	1,924	$	783	$	2,707	$	317,425	$	320,132	$	—

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accrual status 90 days or more until they are paid current or charged off.

Note 4 - Allowance for Loan Losses (Continued)

The composition of nonaccrual loans by class as of December 31, 2016 and 2015 is as follows:

	2016		2015
	(dollars in thousands)
Commercial	$	—	$	34
Real estate - commercial		392		—
Other real estate construction		190		195
Real estate 1 – 4 family construction		—		—
Real estate – residential		846		541
Home equity		22		13
Consumer loans		—		—
Other loans		—		—
	$	1,450	$	783

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. During 2016, nonperforming loans increased from $783,000 at December 31, 2015 to $1.5 million at December 31, 2016, an increase of $667,000. There were three main relationships driving the increase in nonaccruals; one was due to a company’s principal filing bankruptcy and two were in extended processes of foreclosure.

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and to measure the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by the loan officers and reviewed and monitored by the lenders and credit administration on an ongoing basis. The program has eight risk grades summarized in five categories as follows:

Pass: Loans that are pass grade credits include loans that are fundamentally sound and risk factors are reasonable and acceptable. They generally conform to policy with only minor exceptions and any major exceptions are clearly mitigated by other economic factors.

Watch: Loans that are watch credits include loans on management’s watch list where a risk concern may be anticipated in the near future.

Substandard: Loans that are considered substandard are loans that are inadequately protected by current sound net worth, paying capacity of the obligor or the value of the collateral pledged. All nonaccrual loans are graded as substandard.

Doubtful: Loans that are considered to be doubtful have all weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make the collection or liquidation in full on the basis of current existing facts, conditions and values highly questionable and improbable.

Loss: Loans that are considered to be a loss are considered to be uncollectible and of such little value that their continuance as bankable assets is not warranted.

The tables below summarize risk grades of the loan portfolio by class as of December 31, 2016 and 2015:

December 31, 2016	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)
Commercial	$	54,906	$	827	$	19	$	—	$	55,752
Real estate - commercial		105,366		1,937		2,449		—		109,752
Other real estate construction		24,312		1,876		530		—		26,718
Real estate 1 - 4 family construction		5,625		—		—		—		5,625
Real estate - residential		71,105		8,551		2,113		—		81,769
Home equity		49,818		973		24		—		50,815
Consumer loans		9,545		163		3		—		9,711
Other loans		1,687		—		—		—		1,687
Total	$	322,364	$	14,327	$	5,138	$	—	$	341,829

Note 4 - Allowance for Loan Losses (Continued)

December 31, 2015	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)
Commercial	$	52,096	$	130	$	85	$	—	$	52,311
Real estate - commercial		97,506		1,161		2,531		—		101,198
Other real estate construction		15,163		1,994		535		—		17,692
Real estate 1 - 4 family construction		5,526		103		—		—		5,629
Real estate - residential		71,736		9,398		2,285		—		83,419
Home equity		48,195		1,209		16		—		49,420
Consumer loans		8,583		394		5		—		8,982
Other loans		1,481		—		—		—		1,481
Total	$	300,286	$	14,389	$	5,457	$	—	$	320,132

The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2016 and 2015:

December 31, 2016	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	55,752	$	—	$	55,752
Real estate - commercial		109,360		392		109,752
Other real estate construction		26,528		190		26,718
Real estate 1 – 4 family construction		5,625		—		5,625
Real estate – residential		80,923		846		81,769
Home equity		50,793		22		50,815
Consumer loans		9,711		—		9,711
Other loans		1,687		—		1,687
Total	$	340,379	$	1,450	$	341,829

December 31, 2015	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	52,277	$	34	$	52,311
Real estate - commercial		101,198		—		101,198
Other real estate construction		17,497		195		17,692
Real estate 1 – 4 family construction		5,629		—		5,629
Real estate – residential		82,878		541		83,419
Home equity		49,407		13		49,420
Consumer loans		8,982		—		8,982
Other loans		1,481		—		1,481
Total	$	319,349	$	783	$	320,132

Note 4 - Allowance for Loan Losses (Continued)

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a valuation analysis is performed and a specific reserve is allocated if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class as of December 31, 2016 and 2015:

	As of December 31, 2016								Year Ended December 31, 2016
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	29	$	13	$	16	$	2	$	31	$	8
Real estate - commercial		1,671		1,552		119		9		887		64
Other real estate construction		831		190		103		5		296		6
Real estate 1 -4 family construction		6		—		6		—		9		1
Real estate - residential		3,994		2,072		1,922		123		4,434		201
Home equity		35		35		—		—		49		1
Consumer loans		61		61		—		—		71		6
Other loans		—		—		—		—		—		—
Total	$	6,627	$	3,923	$	2,166	$	139	$	5,777	$	287

									Year Ended
	As of December 31, 2015								December 31, 2015
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	97	$	80	$	17	$	2	$	81	$	4
Real estate - commercial		620		498		122		9		1,121		42
Other real estate construction		840		195		107		7		281		3
Real estate 1 -4 family construction		13		—		13		—		16		1
Real estate - residential		4,343		1,507		2,836		163		4,798		200
Home equity		28		28		—		—		50		1
Consumer loans		75		75		—		—		37		2
Other loans		—		—		—		—		—		—
Total	$	6,016	$	2,383	$	3,095	$	181	$	6,384	$	253

									Year Ended
	As of December 31, 2014								December 31, 2014
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	98	$	68	$	30	$	30	$	117	$	7
Real estate - commercial		1,820		1,242		389		145		2,641		73
Other real estate construction		934		342		54		4		1,108		6
Real estate 1 -4 family construction		20		—		20		1		109		1
Real estate - residential		5,298		1,865		3,433		257		5,865		268
Home equity		49		30		19		19		73		2
Consumer loans		69		29		40		—		83		4
Other loans		—		—		—		—		—		—
Total	$	8,288	$	3,576	$	3,985	$	456	$	9,996	$	361