Note 5: Loans

Major classifications of loans were as follows:


	December 31, 2016		December 31, 2015
Commercial	$	228,113	$	115,603
Real estate - commercial		736,247		605,721
Real estate - construction		64,720		19,806
Real estate - residential		377,851		351,007
Consumer		3,237		4,216
Overdraft		436		483
Lease financing receivables		55,451		25,712
Other		11,537		10,130
		1,477,592		1,132,678
Net deferred loan costs		1,217		1,037
Total loans	$	1,478,809	$	1,133,715

Total loans reflects growth of $345.1 million for the year ended December 31, 2016. The Talmer branch acquisition in late 2016 comprised a large component of this growth, as $221.0 million of loans were acquired, net of a $2.8 million purchase accounting discount recorded. These acquired loans were primarily commercial, real estate-commerical and real estate-construction. In addition to the Talmer branch acquisition, lease financing receivables increased in 2016 due to purchased as well as originated leases, following management’s strategic plan to diversify the loan portfolio.

It is the policy of the Company to review each prospective credit in order to determine if an adequate level of security or collateral can be obtained prior to making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company’s access to collateral, in the event of borrower default, is assured through adherence to lending law, the Company’s lending standards and credit monitoring procedures. The Bank generally makes loans solely within its market area. There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector although the real estate related categories listed above represent 79.7% and 86.1% of the portfolio at December 31, 2016, and December 31, 2015, respectively.

Aged analysis of past due loans by class of loans as of December 31, 2016, and December 31, 2015, were as follows:


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2016	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial1	$	57	$	360	$	-	$	417	$	282,541	$	606	$	283,564	$	-
Real estate - commercial
Owner occupied general purpose		758		-		-		758		135,599		879		137,236		-
Owner occupied special purpose		-		-		-		-		177,755		385		178,140		-
Non-owner occupied general purpose		667		379		-		1,046		229,315		1,930		232,291		-
Non-owner occupied special purpose		-		-		-		-		118,052		1,013		119,065		-
Retail properties		-		-		-		-		53,474		1,179		54,653		-
Farm		1,353		-		-		1,353		13,509		-		14,862		-
Real estate - construction
Homebuilder		-		-		-		-		3,883		-		3,883		-
Land		-		-		-		-		3,029		-		3,029		-
Commercial speculative		-		-		-		-		22,654		74		22,728		-
All other		364		-		-		364		34,509		207		35,080		-
Real estate - residential
Investor		237		-		-		237		151,426		936		152,599		-
Owner occupied		274		-		-		274		116,900		6,452		123,626		-
Revolving and junior liens		225		405		-		630		99,374		1,622		101,626		-
Consumer		10		36		-		46		3,191		-		3,237		-
Other2		14		-		-		14		13,176		-		13,190		-
Total	$	3,959	$	1,180	$	-	$	5,139	$	1,458,387	$	15,283	$	1,478,809	$	-


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2015	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial1	$	394	$	-	$	-	$	394	$	140,848	$	73	$	141,315	$	-
Real estate - commercial
Owner occupied general purpose		652		119		-		771		123,479		1,254		125,504		-
Owner occupied special purpose		358		-		-		358		170,827		763		171,948		-
Non-owner occupied general purpose		-		-		-		-		166,668		975		167,643		-
Non-owner occupied special purpose		-		-		-		-		92,387		-		92,387		-
Retail properties		-		-		-		-		34,352		-		34,352		-
Farm		-		-		-		-		12,615		1,272		13,887		-
Real estate - construction
Homebuilder		-		-		-		-		2,604		-		2,604		-
Land		-		-		-		-		1,137		-		1,137		-
Commercial speculative		-		-		-		-		2,117		83		2,200		-
All other		6		77		65		148		13,717		-		13,865		67
Real estate - residential
Investor		101		-		-		101		125,611		972		126,684		-
Owner occupied		1,083		446		-		1,529		110,885		6,378		118,792		-
Revolving and junior liens		344		68		-		412		102,500		2,619		105,531		-
Consumer		4		-		-		4		4,212		-		4,216		-
Other2		-		-		-		-		11,650		-		11,650		-
Total	$	2,942	$	710	$	65	$	3,717	$	1,115,609	$	14,389	$	1,133,715	$	67

1 The “Commercial” class includes lease financing receivables.

2 The “Other” class includes overdrafts and net deferred costs.

Credit Quality Indicators:

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, historical payment experience, and current economic trends. This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and residential mortgages. Loans with a classified risk rating are reviewed quarterly regardless of size or loan type. The Company uses the following definitions for classified risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as 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.

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated. Loans listed as not rated have outstanding loans or commitments less than $50,000 or are included in groups of homogeneous loans.

Credit Quality Indicators by class of loans as of December 31, 2016, and December 31, 2015, were as follows:


December 31, 2016			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	267,394	$	12,534	$	3,636	$	-	$	283,564
Real estate - commercial
Owner occupied general purpose		135,503		53		1,680		-		137,236
Owner occupied special purpose		172,353		5,402		385		-		178,140
Non-owner occupied general purpose		229,448		913		1,930		-		232,291
Non-owner occupied special purpose		114,293		-		4,772		-		119,065
Retail Properties		52,207		1,267		1,179		-		54,653
Farm		11,840		1,240		1,782		-		14,862
Real estate - construction
Homebuilder		3,883		-		-		-		3,883
Land		3,029		-		-		-		3,029
Commercial speculative		22,654		-		74		-		22,728
All other		34,696		-		384		-		35,080
Real estate - residential
Investor		151,503		-		1,096		-		152,599
Owner occupied		115,831		570		7,225		-		123,626
Revolving and junior liens		99,286		-		2,340		-		101,626
Consumer		3,236		-		1		-		3,237
Other		13,165		25		-		-		13,190
Total	$	1,430,321	$	22,004	$	26,484	$	-	$	1,478,809


December 31, 2015			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	136,078	$	3,208	$	2,029	$	-	$	141,315
Real estate - commercial
Owner occupied general purpose		123,827		-		1,677		-		125,504
Owner occupied special purpose		171,185		-		763		-		171,948
Non-owner occupied general purpose		163,956		1,908		1,779		-		167,643
Non-owner occupied special purpose		88,468		-		3,919		-		92,387
Retail Properties		30,432		1,490		2,430		-		34,352
Farm		12,615		-		1,272		-		13,887
Real estate - construction
Homebuilder		2,604		-		-		-		2,604
Land		1,137		-		-		-		1,137
Commercial speculative		2,117		-		83		-		2,200
All other		13,865		-		-		-		13,865
Real estate - residential
Investor		125,548		-		1,136		-		126,684
Owner occupied		111,713		-		7,079		-		118,792
Revolving and junior liens		102,476		-		3,055		-		105,531
Consumer		4,215		-		1		-		4,216
Other		11,650		-		-		-		11,650
Total	$	1,101,886	$	6,606	$	25,223	$	-	$	1,133,715

1 The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

The Company had $1.8 million and $3.9 million in consumer mortgage loans in the process of foreclosure as of December 31, 2016 and December 31, 2015, respectively. The Company also had $225,000 and $2.3 million in residential real estate included in OREO as of Decenber 31, 2016 and December 31, 2015, respectively.

Impaired loans, which include nonaccrual loans and troubled debt restructurings, by class of loan as of December 31 were as follows:


	December 31, 2016						December 31, 2015
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Commercial	$	405	$	491	$	-	$	70	$	149	$	-
Commercial real estate
Owner occupied general purpose		1,881		2,131		-		2,314		3,004		-
Owner occupied special purpose		385		518		-		763		871		-
Non-owner occupied general purpose		1,744		2,010		-		1,047		1,065		-
Non-owner occupied special purpose		1,013		1,649		-		-		-		-
Retail properties		1,179		1,235		-		-		-		-
Farm		-		-		-		1,272		1,338		-
Construction
Homebuilder		-		-		-		-		-		-
Land		-		-		-		-		-		-
Commercial speculative		74		81		-		83		86		-
All other		207		221		-		-		-		-
Residential
Investor		1,841		2,308		-		1,906		2,259		-
Owner occupied		9,824		11,391		-		10,539		11,999		-
Revolving and junior liens		2,484		3,018		-		2,731		3,947		-
Consumer		201		268		-		-		-		-
Total impaired loans with no recorded allowance		21,238		25,321		-		20,725		24,718		-


With an allowance recorded
Commercial		-		-		-		3		8		3
Commercial real estate
Owner occupied general purpose		-		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-		-
Non-owner occupied general purpose		246		595		246		-		-		-
Non-owner occupied special purpose		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-
Farm		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-
Land		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-
All other		-		-		-		-		-		-
Residential
Investor		-		-		-		-		-		-
Owner occupied		803		853		803		112		112		31
Revolving and junior liens		-		-		-		46		46		-
Consumer		-		-		-		-		-		-
Total impaired loans with a recorded allowance		1,049		1,448		1,049		161		166		34
Total impaired loans	$	22,287	$	26,769	$	1,049	$	20,886	$	24,884	$	34

Average recorded investment and interest income recognized on impaired loans by class of loan for the years ending December 31 were as follows:


	Year to date				Year to date				Year to date
	December 31, 2016				December 31, 2015				December 31, 2014
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	238	$	-	$	785	$	-	$	764	$	-
Commercial real estate
Owner occupied general purpose		2,097		87		4,720		82		4,834		104
Owner occupied special purpose		574		-		1,280		-		2,584		45
Non-owner occupied general purpose		1,396		2		2,939		3		5,130		-
Non-owner occupied special purpose		506		-		712		-		1,042		-
Retail properties		590		-		-		-		1,572		-
Farm		636		-		636		-		-		-
Construction
Homebuilder		-		-		895		-		1,903		82
Land		-		-		-		-		105		-
Commercial speculative		78		-		42		-		369		-
All other		104		-		145		-		147		-
Residential
Investor		1,873		47		2,251		51		4,290		43
Owner occupied		10,182		158		10,979		160		10,299		187
Revolving and junior liens		2,608		29		2,484		7		2,004		6
Consumer		100		-		-		-		-		-
Total impaired loans with no recorded allowance		20,982		323		27,868		303		35,043		467


With an allowance recorded
Commercial		2		-		2		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		365		-
Owner occupied special purpose		-		-		-		-		2,150		-
Non-owner occupied general purpose		123		-		38		-		508		-
Non-owner occupied special purpose		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-
Farm		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		84		-
Land		-		-		-		-		-		-
Commercial speculative		-		-		-		-		587		-
All other		-		-		135		-		353		-
Residential
Investor		-		-		67		-		410		-
Owner occupied		457		-		68		-		794		1
Revolving and junior liens		23		-		208		3		934		-
Consumer		-		-		-		-		-		-
Total impaired loans with a recorded allowance		605		-		518		3		6,185		1
Total impaired loans	$	21,587	$	323	$	28,386	$	306	$	41,228	$	468

Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties. Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower. These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications. The Bank participates in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments.

The specific allocation of the allowance for loan losses on a TDR is determined by either discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio.

Loans that were modified during the period are summarized as follows:


	TDR Modifications
	Twelve months ended December 31, 2016
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1	2	$	312	$	205
Real estate - residential
Owner occupied
HAMP2	2		419		262
Revolving and junior liens
HAMP2	3		252		228
Other1	3		808		777
Total	10	$	1,791	$	1,472


	TDR Modifications
	Twelve months ended December 31, 2015
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Other1	2	$	256	$	255
Revolving and junior liens
HAMP2	5		193		153
Other1	3		378		347
Total	10	$	827	$	755

1 Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There were no TDRs that defaulted during year 2016 and 2015.

The Bank had no commitments to borrowers whose loans were classified as impaired at December 31, 2016.

Loans to principal officers, directors, and their affiliates, which are made in the ordinary course of business, were as follows at December 31:


	2016		2015
Beginning balance	$	1,787	$	7,793
New loans		157		864
Repayments and other reductions		(241)		(635)
Change in related party status		-		(6,235)
Ending balance	$	1,703	$	1,787

No loans to principal officers, directors, and their affiliates were past due greater than 90 days at either December 31, 2016, or December 31, 2015.