Note 4 - Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2017, 2016 and 2015 are presented below:

Commercial	2017			2016			2015
	(dollars in thousands)
Balance, beginning of year	$	1,404		$	1,310		$	1,716
Provision (recovery) charged to operations		(72	)		175			(527	)
Charge-offs		(31	)		(146	)		(89	)
Recoveries		100			65			210
Net (charge-offs)		69			(81	)		121
Other		—			—			—
Balance, end of year	$	1,401		$	1,404		$	1,310

Note 4 - Allowance for Loan Losses (Continued)

Non-Commercial	2017			2016			2015
	(dollars in thousands)
Balance, beginning of year	$	1,303		$	1,574		$	2,022
Provision (recovery) charged to operations		(164	)		(263	)		(93	)
Charge-offs		(177	)		(244	)		(500	)
Recoveries		95			236			145
Net (charge-offs)		(82	)		(8	)		(355	)
Other		—			—			—
Balance, end of year	$	1,057		$	1,303		$	1,574

Total	2017			2016			2015
	(dollars in thousands)
Balance, beginning of year	$	2,707		$	2,884		$	3,738
Provision (recovery) charged to operations		(236	)		(88	)		(620	)
Charge-offs		(208	)		(390	)		(589	)
Recoveries		195			301			355
Net (charge-offs)		(13	)		(89	)		(234	)
Other		—			—			—
Balance, end of year	$	2,458		$	2,707		$	2,884

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at December 31, 2017 and 2016:

December 31, 2017	Individually Evaluated				Collectively Evaluated				Total
	Reserve		Loans		Reserve		Loans		Reserve		Loans
	(dollars in thousands)
Commercial	$	22	$	1,788	$	1,379	$	208,022	$	1,401	$	209,810
Non-Commercial		172		3,781		885		143,280		1,057		147,061
Total	$	194	$	5,569	$	2,264	$	351,302	$	2,458	$	356,871

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

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, 2017	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	$	—	$	34	$	34	$	54,878	$	54,912	$	—
Real estate - commercial		—		377		377		114,335		114,712		—
Other real estate construction		—		51		51		40,135		40,186		—
Real estate construction		—		—		—		5,024		5,024		—
Real estate - residential		579		540		1,119		76,800		77,919		—
Home equity		108		23		131		50,375		50,506		—
Consumer loan		83		—		83		10,691		10,774		—
Other loans		—		—		—		2,838		2,838		—
Total	$	770	$	1,025	$	1,795	$	355,076	$	356,871	$	—

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	$	—

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, 2017 and 2016 is as follows:

	2017		2016
	(dollars in thousands)
Commercial	$	34	$	—
Real estate - commercial		377		392
Other real estate construction		51		190
Real estate 1 – 4 family construction		—		—
Real estate – residential		540		846
Home equity		23		22
Consumer loans		—		—
Other loans		—		—
	$	1,025	$	1,450

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. During 2017, nonperforming loans decreased from $1.5 million at December 31, 2016 to $1.0 million at December 31, 2017, a decrease of $425,000. The main relationship driving the decrease in nonaccruals is a loan that was sold during 2017.

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, 2017 and 2016:

December 31, 2017	Pass		Watch		Sub- standard		Doubtful		Total
	(dollars in thousands)
Commercial	$	53,649	$	1,215	$	48	$	—	$	54,912
Real estate - commercial		109,224		3,321		2,167		—		114,712
Other real estate construction		38,082		1,713		391		—		40,186
Real estate 1 - 4 family construction		5,024		—		—		—		5,024
Real estate - residential		69,645		7,119		1,155		—		77,919
Home equity		49,743		740		23		—		50,506
Consumer loans		10,709		64		1		—		10,774
Other loans		2,838		—		—		—		2,838
Total	$	338,914	$	14,172	$	3,785	$	—	$	356,871

Note 4 - Allowance for Loan Losses (Continued)

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

The following tables show the breakdown between performing and nonperforming loans by class as of December 31, 2017 and 2016:

December 31, 2017	Performing		Non- Performing		Total
	(dollars in thousands)
Commercial	$	54,878	$	34	$	54,912
Real estate - commercial		114,335		377		114,712
Other real estate construction		40,135		51		40,186
Real estate 1 – 4 family construction		5,024		—		5,024
Real estate – residential		77,379		540		77,919
Home equity		50,483		23		50,506
Consumer loans		10,774		—		10,774
Other loans		2,838		—		2,838
Total	$	355,846	$	1,025	$	356,871

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

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, 2017 and 2016:

	As of December 31, 2017								Year Ended December 31, 2017
			Recorded		Recorded
	Unpaid		Investment		Investment				Average
	Principal		With No		With		Related		Recorded		Interest
	Balance		Allowance		Allowance		Allowance		Investment		Income
	(dollars in thousands)
Commercial	$	44	$	10	$	34	$	10	$	25	$	2
Real estate - commercial		1,593		1,305		288		9		1,650		72
Other real estate construction		689		101		50		3		208		5
Real estate 1 -4 family construction		—		—		—		—		3		—
Real estate - residential		3,701		1,319		2,382		171		3,762		179
Home equity		35		22		13		1		66		1
Consumer loans		45		45		—		—		53		4
Other loans		—		—		—		—		—		—
Total	$	6,107	$	2,802	$	2,767	$	194	$	5,767	$	263

									Year Ended
	As of December 31, 2016								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