LOANS HELD FOR INVESTMENT

The following table summarizes loans held for investment at

December

31,

2016

and

2015:

	December 31, 2016					December 31, 2015
	Amount		Percent of Total			Amount		Percent of Total
	(Dollars in thousands)
Loans Held for Investment
Mortgage loans:
Residential real estate	$	67,264		9.6	%	$	68,229		11.2	%
Residential construction		7,875		1.1			3,934		0.6
Residential lots and raw land		154		0.0			157		0.1
Total mortgage loans		75,293		10.7			72,320		11.9

Commercial loans and leases:
Commercial real estate		378,173		53.9			338,714		55.7
Commercial construction		56,118		8.0			42,987		7.1
Commercial lots and raw land		33,434		4.8			28,271		4.7
Commercial and industrial		67,980		9.7			45,481		7.5
Lease receivables		21,236		3.0			17,235		2.8
Total commercial loans and leases		556,941		79.4			472,688		77.8

Consumer loans:
Consumer real estate		16,967		2.4			17,239		2.8
Consumer construction		105		0.0			196		0.1
Consumer lots and raw land		8,975		1.3			9,643		1.6
Home equity lines of credit		36,815		5.3			29,709		4.8
Consumer other		6,347		0.9			6,070		1.0
Total consumer loans		69,209		9.9			62,857		10.3

Gross loans held for investment		701,443		100.0	%		607,865		100.0	%

Less deferred loan origination fees, net		801					850
Less allowance for loan and lease losses		8,673					7,867

Net loans held for investment	$	691,969				$	599,148

The Bank has pledged eligible loans as collateral for potential borrowings from the FHLB and the Federal Reserve Bank of Richmond (FRB). At

December

31,

2016,

the Bank pledged

$278.6

million and

$139.7

million of loans to the FHLB and FRB, respectively. See Note

below for additional information.

The following table presents nonaccrual loans, including TDR loans, accounted for on a nonaccrual basis and segregated by class of financing receivables at the dates indicated.

	December 31, 2016			December 31, 2015
	(Dollars in thousands)
Non-accrual loans held for investment:
Non-TDR loans accounted for on a non-accrual status:
Residential real estate	$	773		$	635
Residential lots and raw land		-			-
Commercial real estate		482			594
Commercial construction		-			-
Commercial lots and raw land		-			-
Commercial and industrial		72			-
Lease receivables		-			95
Consumer real estate		94			148
Consumer lots and raw land		80			140
Home equity lines of credit		166			81
Consumer other		-			2
Total non-TDR loans accounted for on a nonaccrual status		1,667			1,695

TDR loans accounted for on a nonaccrual status:
Past Due TDRs:
Residential real estate		161			-
Commercial real estate		652			-
Commercial construction		-			-
Commercial lots and raw land		-			-
Commercial and industrial		-			-
Consumer real estate		149			159
Total Past Due TDRs		962			159

Current TDRs:
Residential real estate		163			809
Commercial real estate		-			534
Commercial construction		-			-
Commercial lots and raw land		-			-
Commercial and industrial		170			-
Consumer lots and raw land		89			-
Total Current TDRs		422			1,343

Total TDR loans accounted for on a nonaccrual status		1,384			1,502
Total non-performing loans	$	3,051			3,197
Percentage of total loans held for investment, net		0.4	%		0.5	%
Loans over 90 days past due, still accruing	$	-		$	115
Other real estate owned		3,229			6,125
Total non-performing assets	$	6,280		$	9,437

Cumulative interest income not recorded on loans accounted for on a nonaccrual basis was

$115,318,

$71,723

and

$109,598

December

31,

2016,

2015

and

2014,

respectively.

The following tables present an age analysis of past due loans, segregated by class of loans as of

December

31,

2016

and

2015:

	30-59		60-89		90 Days		Total				Total		Over 90
	Days		Days		or More		Past				Financing		Days and
Past due loans held for investment:	Past Due		Past Due		Past Due		Due		Current		Receivables		Accruing
	(In thousands)
December 31, 2016
Residential real estate	$	1,048	$	176	$	565	$	1,789	$	65,475	$	67,264	$	-
Residential construction		-		-		-		-		7,875		7,875		-
Residential lots and raw land		-		-		-		-		154		154		-
Commercial real estate		726		4		1,022		1,752		376,421		378,173		-
Commercial construction		-		-		-		-		56,118		56,118		-
Commercial lots and raw land		-		-		-		-		33,434		33,434		-
Commercial and industrial		-		-		72		72		67,908		67,980		-
Lease receivables		-		-		-		-		21,236		21,236		-
Consumer real estate		-		42		206		248		16,719		16,967		-
Consumer construction		-		-		-		-		105		105		-
Consumer lots and raw land		-		8		81		89		8,886		8,975		-
Home equity lines of credit		121		33		98		252		36,563		36,815		-
Consumer other		7		2		-		9		6,338		6,347		-
Total	$	1,902	$	265	$	2,044	$	4,211	$	697,232	$	701,443	$	-

	30-59		60-89		90 Days		Total				Total		Over 90
	Days		Days		or More		Past				Financing		Days and
Past due loans held for investment:	Past Due		Past Due		Past Due		Due		Current		Receivables		Accruing
	(In thousands)
December 31, 2015
Residential real estate	$	2,238	$	107	$	354	$	2,699	$	65,530	$	68,229	$	115
Residential construction		120		-		-		120		3,814		3,934		-
Residential lots and raw land		-		-		-		-		157		157		-
Commercial real estate		1,054		227		103		1,384		337,330		338,714		-
Commercial construction		-		-		-		-		42,987		42,987		-
Commercial lots and raw land		69		-		-		69		28,202		28,271		-
Commercial and industrial		3		-		-		3		45,478		45,481		-
Lease receivables		-		-		95		95		17,140		17,235		-
Consumer real estate		429		113		237		779		16,460		17,239		-
Consumer construction		-		-		-		-		196		196		-
Consumer lots and raw land		211		-		140		351		9,292		9,643		-
Home equity lines of credit		122		72		34		228		29,481		29,709		-
Consumer other		3		2		1		6		6,064		6,070		-
Total	$	4,249	$	521	$	964	$	5,734	$	602,131	$	607,865	$	115

The following table presents information on loans that were considered impaired as of

December

31,

2016

and

2015.

Impaired loans include loans modified in a TDR, whether on accrual or nonaccrual status. At

December

31,

2016,

impaired loans included

$1.9

million of impaired TDRs, compared to

$2.4

million at

December

31,

2015

			Contractual				YTD Average		Interest Income
	Recorded		Unpaid Principal		Related		Recorded		Recognized on
Impaired Loans December 31, 2016	Investment		Balance		Allowance		Investment		Impaired Loans
	(In thousands)
With no related allowance recorded:
Residential real estate	$	597	$	730	$	-	$	804	$	32
Commercial real estate		6,581		6,645		-		7,742		408
Commercial lots and raw land		2,185		2,185		-		2,376		121
Commercial and industrial		102		102		-		59		5
Consumer real estate		221		232		-		257		8
Consumer lots and raw land		129		135		-		86		10
Home equity lines of credit		71		73		-		50		3
Consumer other		38		38		-		40		2
Subtotal:		9,924		10,140		-		11,414		589

With an allowance recorded:
Commercial real estate		287		287		-		579		15
Commercial and industrial		242		678		226		48		35
Consumer lots and raw land		647		647		144		687		34
Home equity lines of credit		23		25		23		18		3
Subtotal		1,199		1,637		393		1,332		87

Totals:
Residential		597		730		-		804		32
Commercial		9,397		9,897		226		10,804		584
Consumer		1,129		1,150		167		1,138		60
Grand Total	$	11,123	$	11,777	$	393	$	12,746	$	676

			Contractual				YTD Average		Interest Income
	Recorded		Unpaid Principal		Related		Recorded		Recognized on
Impaired Loans December 31, 2015	Investment		Balance		Allowance		Investment		Impaired Loans
	(In thousands)
With no related allowance recorded:
Residential real estate	$	1,087	$	1,384	$	-	$	1,180	$	62
Commercial real estate		9,521		9,573		-		10,883		564
Commercial construction		574		574		-		305		14
Commercial lots and raw land		2,616		2,616		-		2,764		139
Commercial and industrial		42		42		-		44		2
Consumer real estate		201		207		-		277		8
Consumer lots and raw land		50		50		-		55		3
Home equity lines of credit		50		51		-		56		2
Consumer other		42		42		-		44		2
Subtotal:		14,183		14,539		-		15,608		796

With an allowance recorded:
Commercial real estate		821		823		365		1,434		57
Commercial and industrial		14		14		14		61		2
Consumer real estate		79		79		30		100		2
Consumer lots and raw land		723		723		209		619		35
Subtotal		1,637		1,639		618		2,214		96

Totals:
Residential		1,087		1,384		-		1,180		62
Commercial		13,588		13,642		379		15,491		778
Consumer		1,145		1,152		239		1,151		52
Grand Total	$	15,820	$	16,178	$	618	$	17,822	$	892

Credit Quality Indicators

The Bank assigns a risk grade to each loan in the portfolio as part of the on-going monitoring of the credit quality of the loan portfolio.

Commercial loans are graded on a scale of

A description of the general characteristics of the

risk grades is as follows:

•

Risk Grade

(Excellent) - Loans in this category are considered to be of the highest quality. The borrower(s) has significant financial strength, stability, and liquidity. Proven cash flow is significantly more than required to service current and proposed debt with consistently strong earnings. Collateral position is very strong and a

secondary

source of repayment is self-evident. Guarantors

may

not be necessary to support the debt.

•

Risk Grade

(Above Average) - Loans are supported by above average financial strength and stability. Cash flow is more than sufficient to meet current demands. Earnings are strong and reliable, but

may

differ from year to year. Collateral is highly liquid and sufficient to repay the debt in full. Guarantors

may

qualify for the loan on a direct basis.

•

Risk Grade

(Average) - Credits in this group are supported by upper tier industry-average financial strength and stability. Liquidity levels fluctuate and need for short-term credit is demonstrated. Cash flow is steady and adequate to meet demands but can fluctuate. Earnings should be consistent but operating losses have not occurred recently. Collateral is generally pledged at an acceptable loan to value, but the credit can support some level of unsecured exposure. Guarantors with demonstrable financial strength are typically required on loans to business entities, but

may

not be on loans to individual borrowers.

•

Risk Grade

(Acceptable) - Credits in this group are supported by lower end industry-average financial strength and stability. Liquidity levels fluctuate but are acceptable and need for short term credit is demonstrated. Cash flow is adequate to meet demands but can fluctuate. Earnings

may

be inconsistent but operating losses have not occurred recently. Collateral is generally pledged at an acceptable loan to value. Guarantors with demonstrable financial strength are required on loans to business entities, but

may

not be on loans to individual borrowers.

•

Risk Grade

(Watch) - An asset in this category is

one

that has been identified by the lender, or credit administration as a loan that has shown some degree of deterioration from its original status. These loans are typically protected by collateral but have potential weaknesses that deserve management’s close attention, but are not yet at a point to become a classified asset. There

may

be unsecured loans that are included in this category. These are loans that management feels need to be watched more closely than those rated as acceptable and if left uncorrected, these potential weaknesses

may

result in the deterioration of the repayment prospects for the asset to warrant including them as classified assets.

•

Risk Grade

(Special Mention) - An asset in this category is currently protected by collateral but has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses

may

result in the deterioration of the repayment prospects for the asset or in the Bank’s position at some future date.

•

Risk Grade

(Substandard) - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the debtor(s) or of the collateral pledged, if any. These credits have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.

•

Risk Grade

(Doubtful) - A loan graded in this category has all the weaknesses inherent in

one

graded 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.

•

Risk Grade

(Loss) - A loan graded as Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This grade does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery

may

be affected in the future.

Consumer loans are graded on a scale of

A description of the general characteristics of the

risk grades is as follows:

•

Risk Grades

(Pass) - Loans in this category generally show little to no signs of weakness or have adequate mitigating factors that minimize the risk of loss. Some of the characteristics of these loans include, but are not limited to, adequate financial strength and stability, adequate cash flow, collateral with acceptable loan to value, additional repayment sources, and reliable earnings.

•

Risk Grade

may

result in the deterioration of the repayment prospects for the asset or in the Bank’s position at some future date.

•

Risk Grade

•

Risk Grade

(Doubtful) - A loan graded in this category has all the weaknesses inherent in

one

•

Risk Grade

may

be affected in the future.

Mortgage loans are graded on a scale of

A description of the general characteristics of the

risk grades is as follows:

•

Risk Grades

(Pass) - Loans in this category generally show little to no signs of weakness or have adequate mitigating factors that minimize the risk of loss. Some of the characteristics of these loans include, but are not limited to, adequate financial strength and stability, acceptable credit history, adequate cash flow, collateral with acceptable loan to value, additional repayment sources, and reliable earnings.

•

Risk Grade

(Special Mention) – Special Mention loans are currently protected by collateral but have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses

may

result in the deterioration of the repayment prospects for the asset or in the Bank’s position at some future date.

•

Risk Grade

(Substandard) - Substandard loans are inadequately protected by their sound net worth and paying capacity of the borrower(s). Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•

Risk Grade

(Doubtful) - Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

•

Risk Grade

(Loss) - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery

may

be affected in the future.

The following table presents information on risk ratings of the commercial and consumer held for investment loan portfolios, segregated by loan class as of

December

31,

2016

and

2015:

December 31, 2016
Commercial Credit Exposure by Assigned Risk Grade	Commercial Real Estate		Commercial Construction		Commercial Lots and Raw Land		Commercial and Industrial
	(In thousands)
1-Excellent	$	-	$	-	$	-	$	72
2-Above Average		2,567		-		203		520
3-Average		112,489		13,986		2,237		14,331
4-Acceptable		237,473		40,819		22,042		48,305
5-Watch		17,869		1,184		7,027		1,890
6-Special Mention		3,424		129		1,384		672
7-Substandard		4,351		-		541		2,190
8-Doubtful		-		-		-		-
9-Loss		-		-		-		-
Total	$	378,173	$	56,118	$	33,434	$	67,980

December 31, 2016
Consumer Credit Exposure by Assigned Risk Grade	Consumer Real Estate		Consumer Construction		Consumer Lots and Raw Land		Home Equity Line of Credit		Consumer Other
	(In thousands)
Pass	$	16,472	$	105	$	8,595	$	36,474	$	6,345
6-Special Mention		252		-		211		84		2
7-Substandard		243		-		169		257		-
8-Doubtful		-		-		-		-		-
9-Loss		-		-		-		-		-
Total	$	16,967	$	105	$	8,975	$	36,815	$	6,347

December 31, 2016
Mortgage and Lease Receivable Credit Exposure by Assigned Risk Grade	Residential Real Estate		Residential Construction		Residential Lots and Raw Land		Lease Receivable
	(In thousands)
Pass	$	65,406	$	7,875	$	154	$	21,236
6-Special Mention		761		-		-		-
7-Substandard		1,097		-		-		-
8-Doubtful		-		-		-		-
9-Loss		-		-		-		-
Total	$	67,264	$	7,875	$	154	$	21,236

December 31, 2015
Commercial Credit Exposure by Assigned Risk Grade	Commercial Real Estate		Commercial Construction		Commercial Lots and Raw Land		Commercial and Industrial
	(In thousands)
1-Excellent	$	-	$	-	$	-	$	-
2-Above Average		2,788		-		160		3,757
3-Average		98,148		10,023		2,247		8,095
4-Acceptable		209,936		31,139		18,086		30,218
5-Watch		11,877		391		3,821		1,350
6-Special Mention		7,872		860		2,715		41
7-Substandard		8,093		574		1,242		2,020
8-Doubtful		-		-		-		-
9-Loss		-		-		-		-
Total	$	338,714	$	42,987	$	28,271	$	45,481

December 31, 2015
Consumer Credit Exposure by Assigned Risk Grade	Consumer Real Estate		Consumer Construction		Consumer Lots and Raw Land		Home Equity Line of Credit		Consumer Other
	(In thousands)
Pass	$	16,253	$	196	$	7,906	$	29,523	$	6,000
6-Special Mention		679		-		1,270		61		26
7-Substandard		307		-		277		125		44
8-Doubtful		-		-		190		-		-
9-Loss		-		-		-		-		-
Total	$	17,239	$	196	$	9,643	$	29,709	$	6,070

December 31, 2015
Mortgage and Lease Receivable Credit Exposure by Assigned Risk Grade	Residential Real Estate		Residential Construction		Residential Lots and Raw Land		Lease Receivable
	(In thousands)
Pass	$	65,977	$	3,934	$	157	$	17,140
6-Special Mention		791		-		-		-
7-Substandard		1,461		-		-		95
8-Doubtful		-		-		-		-
9-Loss		-		-		-		-
Total	$	68,229	$	3,934	$	157	$	17,235