Note 3 – Loans

The composition of the loan portfolio by loan classification appears below.

	December 31, 2015			December 31, 2014
Commercial
Commercial and industrial - organic	$	47,215		$	46,125
Commercial and industrial - syndicated		23,653			14,815
Total commercial and industrial		70,868			60,940
Real estate construction and land
Residential construction		2,178			337
Other construction and land		16,733			11,575
Total construction and land		18,911			11,912
Real estate mortgages
1-4 family residential		63,544			60,162
Home equity lines of credit		27,599			25,498
Multifamily		20,209			26,462
Commercial owner occupied		66,244			60,868
Commercial non-owner occupied		91,805			54,012
Total real estate mortgage		269,401			227,002
Consumer
Consumer revolving credit		17,174			3,428
Consumer all other credit		11,655			9,972
Student loans purchased		35,655			-
Total consumer		64,484			13,400
Total loans		423,664			313,254
Less: Allowance for loan losses		(3,567	)		(3,164	)
Net loans	$	420,097		$	310,090

Loan origination/risk management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and the Board of Directors approve lending policies on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. Underwriting standards are designed to promote relationship banking rather than transactional banking.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Management examines current and projected cash flows to determine the ability of borrowers to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable, inventory or marketable securities and may incorporate personal guaranties; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

The Company identifies commercial and industrial loans by classifying them into two classes. Organic loans are originated by the Bank's commercial lenders. Syndicated loans, also referred to as Shared National Credits, are purchased from national lending correspondents. Both organic and syndicated loans are underwritten according to the Bank's loan policies. The Company has developed policies to limit overall credit exposure to the syndicated market as a whole and to each borrower.

Real estate construction and land loans consist primarily of loans for the purchase or refinance of unimproved lots or raw land. Additionally, the Company finances the construction of real estate projects typically where the permanent mortgage will remain with the Company. Specific underwriting guidelines are delineated in the loan policy.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those specific to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on cash flows, collateral, geography and risk grade criteria. As a general rule, the Company avoids financing projects where the source of repayment is dependent upon the sale or operation of the collateral, unless other underwriting factors are present to help mitigate risk.

Residential mortgages include consumer purpose 1-to-4 family residential properties and home equity loans as well as investor-owned residential real estate, Consumer purpose loans have underwriting standards that are heavily influenced by statutory requirements, which include, but are not limited to, documentation requirements, limits on maximum loan-to-value percentages, and collection remedies. Loans to finance 1-4 family investment properties are primarily dependent upon rental income generated from the property and secondarily supported by the borrower's personal income. The Company typically originates residential mortgages with the intention of retaining in its portfolio adjustable-rate mortgages and shorter-term, fixed-rate loans. The Company also originates longer-term, fixed rates loans, which are sold to secondary mortgage market correspondents.

Consumer loans are generally small loans spread across many borrowers and are underwritten after determining the ability of the consumer borrower to repay their obligations as agreed. The underwriting standards are heavily influenced by statutory requirements, which include, but are not limited to, documentation requirements and collection remedies. Consumer loans may be secured or unsecured and are comprised of revolving lines, installment loans and other consumer loans. Included in consumer loans are two packages of student loans that were purchased in the second and fourth quarters of 2015. Along with the purchase of these student loans, the Company purchased a surety bond that fully insures this portion of the Company's consumer portfolio. Deposit account overdrafts are included in the consumer loan balances and totaled $38,000 and $53,000 at December 31, 2015 and 2014, respectively.

Independent loan review is performed by an independent loan review firm that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Audit and Compliance Committee of the Board. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures.

Concentrations of credit. Most of the Company's lending activity occurs within the Commonwealth of Virginia, primarily in the Company's primary markets and surrounding areas. The majority of the Company's loan portfolio consists of commercial and industrial and commercial real estate loans. As of December 31, 2015, there were no concentrations of loans related to any single industry in excess of 20% of total loans.

Related party loans. In the ordinary course of business, the Company has granted loans to certain directors, principal officers and their affiliates (collectively referred to as “related party loans”). Activity in related party loans during 2015 and 2014 is presented in the following table.

	2015			2014
Balance outstanding at beginning of year	$	10,841		$	6,526
Principal additions		10,445			8,043
Principal reductions		(9,730	)		(3,728	)
Balance outstanding at end of year	$	11,556		$	10,841

Past due, non-accrual and charged-off loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Student loans purchased are not placed in non-accrual as they are fully insured by surety bonds, and the Company expects to recover all principal and interest once a claim is processed. Smaller, unsecured consumer loans are typically charged-off when management judges such loans to be uncollectible or the borrowers file for bankruptcy and are generally not placed in non-accrual status prior to charge-off. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Company considers the borrower's debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Company's collateral position.

Regulatory provisions would typically require a loan to be charged-off or placed on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

Non-accrual loans are shown below by class:

	December 31, 2015		December 31, 2014
Other construction and land	$	59	$	69
1-4 family residential mortgages		132		149
Total nonaccrual loans	$	191	$	218

The following tables show the aging of past due loans as of December 31, 2015 and December 31, 2014. Also included are loans that are 90 or more days past due but still accruing, because they are well secured and in the process of collection. As of December 31, 2015 and 2014, the Company had no loans that were 90 days or more past due and still accruing.

Past Due Aging as of													90 Days
December 31, 2015	30-59		60-89		90 Days or								Past Due
	Days Past		Days Past		More Past		Total Past				Total		and Still
	Due		Due		Due		Due		Current		Loans		Accruing

Commercial loans
Commercial and industrial - organic	$	211	$	40	$	-	$	251	$	46,964	$	47,215	$	-
Commercial and industrial - syndicated		-		-		-		-		23,653		23,653		-
Real estate construction and land
Residential construction		-		-		-		-		2,178		2,178		-
Other construction and land		7		-		-		7		16,726		16,733		-
Real estate mortgages
1-4 family residential		156		36		-		192		63,352		63,544		-
Home equity lines of credit		-		-		-		-		27,599		27,599		-
Multifamily		-		-		-		-		20,209		20,209		-
Commercial owner occupied		-		-		-		-		66,244		66,244		-
Commercial non-owner occupied		-		-		-		-		91,805		91,805		-
Consumer loans
Consumer revolving credit		-		-		-		-		17,174		17,174		-
Consumer all other credit		58		1		-		59		11,596		11,655		-
Student loans purchased		813		1		-		814		34,841		35,655		-
Total Loans	$	1,245	$	78	$	-	$	1,323	$	422,341	$	423,664	$	-

Past Due Aging as of													90 Days
December 31, 2014	30-59		60-89		90 Days or								Past Due
	Days Past		Days Past		More Past		Total Past				Total		and Still
	Due		Due		Due		Due		Current		Loans		Accruing

Commercial loans
Commercial and industrial - organic	$	6	$	-	$	-	$	6	$	46,119	$	46,125	$	-
Commercial and industrial - syndicated		-		-		-		-		14,815		14,815		-
Real estate construction and land
Residential construction		-		-		-		-		337		337		-
Other construction and land		-		-		-		-		11,575		11,575		-
Real estate mortgages
1-4 family residential		-		24		-		24		60,138		60,162		-
Home equity lines of credit		-		-		-		-		25,498		25,498		-
Multifamily		-		-		-		-		26,462		26,462		-
Commercial owner occupied		-		-		-		-		60,868		60,868		-
Commercial non-owner occupied		-		-		-		-		54,012		54,012		-
Consumer loans
Consumer revolving credit		1		-		-		1		3,427		3,428		-
Consumer all other credit		12		30		-		42		9,930		9,972		-
Total Loans	$	19	$	54	$	-	$	73	$	313,181	$	313,254	$	-

Impaired loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts when due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, of the impairment, using either the present value of estimated future cash flows at the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Regulatory guidelines require the Company to reevaluate the fair value of collateral supporting impaired collateral dependent loans on at least an annual basis.

The following tables provide a breakdown by class of the loans classified as impaired loans as of December 31, 2015 and December 31, 2014. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company's balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for the twelve months ended December 31, 2015 and December 31, 2014. Interest income recognized is for the years ended December 31, 2015 and December 31, 2014.

December 31, 2015			Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Commercial and industrial - organic	$	-	$	-	$	-	$	4	$	-
Other construction and land		59		103		-		64		-
1-4 family residential mortgages		499		524		-		685		23
Commercial non-owner occupied real estate		1,061		1,061		-		1,080		47
Impaired loans with a valuation allowance		-		-		-		-		-
Total impaired loans	$	1,619	$	1,688	$	-	$	1,833	$	70

December 31, 2014			Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Other construction and land	$	69	$	109	$	-	$	79	$	1
1-4 family residential mortgages		525		545		-		437		16
Home equity lines of credits		-		-		-		50		3
Commercial owner occupied real estate		1,103		1,103		-		1,124		60
Commercial non-owner occupied real estate		-		-		-		46		-
Impaired loans with a valuation allowance		-		-		-		-		-
Total impaired loans	$	1,697	$	1,757	$	-	$	1,736	$	80

Troubled debt restructurings (“TDRs”) are also considered impaired loans. TDRs occur when the Bank agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower. These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

The following provides a summary, by class, of modified loans that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and modified loans that have been placed in non-accrual status, which are considered to be nonperforming.

Troubled debt restructuring (TDRs)	December 31, 2015			December 31, 2014
	No. of	Recorded		No. of	Recorded
	Loans	Investment		Loans	Investment
Performing TDRs
1-4 family residential mortgages	2	$	366	2	$	376
Commercial owner occupied real estate	1		1,061	1		1,103
Total performing TDRs	3	$	1,427	3	$	1,479

Nonperforming TDRs
Other construction and land	1	$	34	1	$	39
Total TDRs	4	$	1,461	4	$	1,518

None of the loans shown above were modified as TDRs during 2015. A summary of loans shown above that were modified as TDRs during the year ended December 31, 2014 is shown below by class. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported. The Post-Modification Recorded Balance reflects any interest or fees from the original loan which may have been added to the principal balance on the new note as a condition of the TDR. Additionally, the Post-Modification Recorded Balance is reported below at the period end balances, inclusive of all partial principal pay downs and principal charge-offs since the modification date.

Loans modified at below market rates	During year ended
	December 31, 2014
			Pre-		Post-
			Modification		Modification
	Number		Recorded		Recorded
	of Loans		Balance		Balance
Other construction and land		1	$	40	$	39
1-4 family residential mortgage		1		156		155
Total loans modified during the period		2	$	196	$	194

There were no loans modified as TDRs that subsequently defaulted during the years ended December 31, 2015 and 2014 and were modified as TDRs during the twelve months prior to default.

There were no loans secured by 1-4 family residential property that were in the process of foreclosure at either December 31, 2015 or December 31, 2014. The one property that had previously been transferred to OREO consisted of a 1-4 family residential property and was reported net of valuation allowance at $1.2 million at December 31, 2014. The property was sold in 2015.