(3)

Loans

Composition of loans, net of deferred fees and costs, by primary loan portfolio class follows:

(in thousands)	March 31, 2017		December 31, 2016

Commercial and industrial	$	736,633	$	736,841
Construction and development, excluding undeveloped land		165,832		192,348
Undeveloped land		21,207		21,496

Real estate mortgage:
Commercial investment		546,957		538,886
Owner occupied commercial		406,209		408,292
1-4 family residential		244,349		249,498
Home equity - first lien		51,076		55,325
Home equity - junior lien		65,806		67,519
Subtotal: Real estate mortgage		1,314,397		1,319,520

Consumer		34,709		35,170

Total loans	$	2,272,778	$	2,305,375

The following table presents the balance in the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment evaluation method as of

March

31,

2017

and

December

31,

2016.

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
March 31, 2017	industrial		land		land		mortgage		Consumer		Total

Loans	$	736,633	$	165,832	$	21,207	$	1,314,397	$	34,709	$	2,272,778

Loans collectively evaluated for impairment	$	733,790	$	165,388	$	20,733	$	1,311,537	$	34,651	$	2,266,099

Loans individually evaluated for impairment	$	2,843	$	444	$	474	$	2,268	$	58	$	6,087

Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	592	$	-	$	592

				Construction
				and development
	Commercial			excluding
	and			undeveloped		Undeveloped			Real estate
	industrial			land		land			mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2016	$	10,483		$	1,923	$	684		$	10,573		$	344		$	24,007
Provision (credit)		789			202		(32	)		(75	)		16			900
Charge-offs		(450	)		-		-			(34	)		(121	)		(605	)
Recoveries		45			-		-			27			107			179
At March 31, 2017	$	10,867		$	2,125	$	652		$	10,491		$	346		$	24,481

Allowance for loans collectively evaluated for impairment	$	9,737		$	2,125	$	652		$	10,491		$	288		$	23,293

Allowance for loans individually evaluated for impairment	$	1,130		$	-	$	-		$	-		$	58		$	1,188

Allowance for loans acquired with deteriorated credit quality	$	-		$	-	$	-		$	-		$	-		$	-

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
December 31, 2016	industrial		land		land		mortgage		Consumer		Total

Loans	$	736,841	$	192,348	$	21,496	$	1,319,520	$	35,170	$	2,305,375

Loans collectively evaluated for impairment	$	734,139	$	191,810	$	21,022	$	1,316,400	$	35,111	$	2,298,482

Loans individually evaluated for impairment	$	2,682	$	538	$	474	$	2,516	$	59	$	6,269

Loans acquired with deteriorated credit quality	$	20	$	-	$	-	$	604	$	-	$	624

				Construction
				and development
	Commercial			excluding
	and			undeveloped			Undeveloped			Real estate
	industrial			land			land			mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2015	$	8,645		$	1,760		$	814		$	10,875		$	347		$	22,441
Provision (credit)		2,775			275			(130	)		(68	)		148			3,000
Charge-offs		(1,216	)		(133	)		-			(576	)		(568	)		(2,493	)
Recoveries		279			21			-			342			417			1,059
At December 31, 2016	$	10,483		$	1,923		$	684		$	10,573		$	344		$	24,007

Allowance for loans collectively evaluated for impairment	$	9,276		$	1,923		$	683		$	10,573		$	285		$	22,740

Allowance for loans individually evaluated for impairment	$	1,207		$	-		$	1		$	-		$	59		$	1,267

Allowance for loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

The considerations by Bancorp in computing its allowance for loan losses are determined based on the various risk characteristics of each loan segment. Relevant risk characteristics are as follows:

●

Commercial and industrial loans: Loans in this category are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A decline in the strength of the business or a weakened economy and resultant decreased consumer and/or business spending

may

have an effect on the credit quality in this loan category.

●

Construction and development, excluding undeveloped land: Loans in this category primarily include owner-occupied and investment construction loans and commercial development projects. In most cases, construction loans require only interest to be paid during construction. Upon completion or stabilization, the construction loan

may

convert to permanent financing in the real estate mortgage segment, requiring principal amortization. Repayment of development loans is derived from sale of lots or units including any pre-sold units. Credit risk is affected by construction delays, cost overruns, market conditions and availability of permanent financing, to the extent such permanent financing is not being provided by Bancorp.

●

Undeveloped land: Loans in this category are secured by land acquired for development by the borrower, but for which no development has yet taken place. Credit risk is primarily dependent upon the financial strength of the borrower, and can be affected by market conditions and time to develop land for ultimate sale. Credit risk is also affected by availability of development financing, to the extent such financing is not being provided by Bancorp.

●

Real estate mortgage: Loans in this category are made to and secured by owner-occupied residential real estate, owner-occupied real estate used for business purposes, and income-producing investment properties. For owner occupied residential and commercial real estate, repayment is dependent on financial strength of the borrower. For income-producing investment properties, repayment is dependent on financial strength of

tenants

in addition to the borrower. Underlying properties are generally located in Bancorp's primary market area. Cash flows of income producing investment properties

may

be adversely impacted by a downturn in the economy that

may

cause increased vacancy rates, which in turn, could have an effect on credit quality. Overall health of the economy, including unemployment rates and real estate prices, has an effect on credit quality in this loan category.

●

Consumer: Loans in this category

may

be either secured or unsecured and repayment is dependent on credit quality of the individual borrower and, if applicable, adequacy of collateral securing the loan. Therefore, overall health of the economy, including unemployment rates and stock prices, will have a significant effect on credit quality in this loan category.

Bancorp has loans that were acquired for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. The carrying amount of those loans is included in the balance sheet amounts of loans at

March

31,

2017

and

December

31,

2016.

Changes in the fair value adjustment for acquired impaired loans are shown in the following table:

(in thousands)	Accretable discount			Non- accretable discount
Balance at December 31, 2015	$	3		$	189

Accretion		(3	)		(41	)
Reclassifications from (to) non-accretable discount		-			-
Disposals		-			-
Balance at December 31, 2016	$	-		$	148

Accretion		-			-
Reclassifications from (to) non-accretable discount		-			-
Disposals		-			-
Balance at March 31, 2017	$	-		$	148

The following tables present loans individually evaluated for impairment as of

March

31,

2017

and

December

31,

2016.

(in thousands)			Unpaid				Average
	Recorded		principal		Related		recorded
March 31, 2017	investment		balance		allowance		investment

Loans with no related allowance recorded:
Commercial and industrial	$	199	$	708	$	-	$	261
Construction and development, excluding undeveloped land		444		614		-		491
Undeveloped land		474		507		-		353

Real estate mortgage
Commercial investment		169		169		-		138
Owner occupied commercial		1,236		1,674		-		1,139
1-4 family residential		688		688		-		792
Home equity - first lien		-		-		-		-
Home equity - junior lien		175		175		-		324
Subtotal: Real estate mortgage		2,268		2,706		-		2,393

Consumer		-		-		-		-
Subtotal	$	3,385	$	4,535	$	-	$	3,498

Loans with an allowance recorded:
Commercial and industrial	$	2,644	$	3,117	$	1,130	$	2,501
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		121

Real estate mortgage
Commercial investment		-		-		-		-
Owner occupied commercial		-		-		-		-
1-4 family residential		-		-		-		-
Home equity - first lien		-		-		-		-
Home equity - junior lien		-		-		-		-
Subtotal: Real estate mortgage		-		-		-		-

Consumer		58		58		58		58
Subtotal	$	2,702	$	3,175	$	1,188	$	2,680

Total:
Commercial and industrial	$	2,843	$	3,825	$	1,130	$	2,762
Construction and development, excluding undeveloped land		444		614		-		491
Undeveloped land		474		507		-		474

Real estate mortgage
Commercial investment		169		169		-		138
Owner occupied commercial		1,236		1,674		-		1,139
1-4 family residential		688		688		-		792
Home equity - first lien		-		-		-		-
Home equity - junior lien		175		175		-		324
Subtotal: Real estate mortgage		2,268		2,706		-		2,393

Consumer		58		58		58		58
Total	$	6,087	$	7,710	$	1,188	$	6,178

(in thousands)			Unpaid				Average
	Recorded		principal		Related		recorded
December 31, 2016	investment		balance		allowance		investment

Loans with no related allowance recorded:
Commercial and industrial	$	322	$	465	$	-	$	1,947
Construction and development, excluding undeveloped land		538		708		-		108
Undeveloped land		233		265		-		76

Real estate mortgage
Commercial investment		107		107		-		193
Owner occupied commercial		1,042		1,479		-		1,356
1-4 family residential		984		985		-		980
Home equity - first lien		-		-		-		3
Home equity - junior lien		383		383		-		315
Subtotal: Real estate mortgage		2,516		2,954		-		2,847

Consumer		-		-		-		18
Subtotal	$	3,609	$	4,392	$	-	$	4,996

Loans with an allowance recorded:
Commercial and industrial	$	2,360	$	2,835	$	1,207	$	1,619
Construction and development, excluding undeveloped land		-		-		-		182
Undeveloped land		241		241		1		149

Real estate mortgage
Commercial investment		-		-		-		-
Owner occupied commercial		-		-		-		554
1-4 family residential		-		-		-		-
Home equity - first lien		-		-		-		-
Home equity - junior lien		-		-		-		-
Subtotal: Real estate mortgage		-		-		-		554

Consumer		59		59		59		63
Subtotal	$	2,660	$	3,135	$	1,267	$	2,567

Total:
Commercial and industrial	$	2,682	$	3,300	$	1,207	$	3,566
Construction and development, excluding undeveloped land		538		708		-		290
Undeveloped land		474		506		1		225

Real estate mortgage		-		-		-		-
Commercial investment		107		107		-		193
Owner occupied commercial		1,042		1,479		-		1,910
1-4 family residential		984		985		-		980
Home equity - first lien		-		-		-		3
Home equity - junior lien		383		383		-		315
Subtotal: Real estate mortgage		2,516		2,954		-		3,401

Consumer		59		59		59		81
Total	$	6,269	$	7,527	$	1,267	$	7,563

Differences between recorded investment amounts and unpaid principal balance amounts less related allowance are due to partial charge-offs which have occurred over the life of loans.

Impaired loans include non-accrual loans and accruing loans accounted for as troubled debt restructurings (TDRs), which continue to accrue interest. Non-performing loans include the balance of impaired loans plus any loans over

days past due and still accruing interest. Bancorp had no loans past due more than

days and still accruing interest at

March

31,

2017,

compared with

$438

thousand at

December

31,

2016,

and none at

March

31,

2016.

The following table presents the recorded investment in non-accrual loans as of

March

31,

2017

and

December

31,

2016.

(in thousands)	March 31, 2017		December 31, 2016

Commercial and industrial	$	1,913	$	1,767
Construction and development, excluding undeveloped land		444		538
Undeveloped land		474		474

Real estate mortgage
Commercial investment		169		107
Owner occupied commercial		1,236		1,042
1-4 family residential		688		984
Home equity - first lien		-		-
Home equity - junior lien		175		383
Subtotal: Real estate mortgage		2,268		2,516

Consumer		-		-

Total	$	5,099	$	5,295

In the course of working with borrowers, Bancorp

may

elect to restructure the contractual terms of certain loans. Troubled debt restructurings (TDRs) occur when, for economic or legal reasons related to a borrower’s financial difficulties, Bancorp grants a concession to the borrower that it would not otherwise consider.

March

31,

2017

and

December

31,

2016,

Bancorp had

$988

thousand and

$974

thousand of accruing loans classified as TDRs, respectively. Bancorp did not modify and classify any additional loans as TDRs during the

three

-month period ended

March

31,

2016.

One commercial loan, with a recorded investment of

$38,000

March

31,

2017

was modified and classified as TDRs in the

three

-month period ended

March

31,

2017.

The pre and post-modification balance for this loan was

$39,000.

The monthly payment amount of this loan was modified to enable the borrower to fulfill the loan agreement. A specific reserve was established for the entire recorded investment of this loan.

No loans classified and reported as troubled debt restructured within the

twelve

months prior to

March

31,

2017

defaulted during the

three

-month period ended

March

31,

2017.

Loans accounted for as TDRs include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. Loans accounted for as TDRs are individually evaluated for impairment and, at

March

31,

2017,

had a total allowance allocation of

$339

thousand, compared with

$207

thousand at

December

31,

2016.

March

31,

2017

and

December

31,

2016,

Bancorp did not have any outstanding commitments to lend additional funds to borrowers whose loans have been modified as TDRs.

March

31,

2017

formal foreclosure proceedings were in process on

five

consumer mortgage loans with a total recorded investment of

$639

thousand, all secured by residential real estate properties. The recorded investments for these properties ranged from

$30

thousand to

$524

thousand, and these loans were reported as non-accrual as of

March

31,

2017.

The following table presents the aging of the recorded investment in loans as of

March

31,

2017

and

December

31,

2016.

													Recorded
(in thousands)							90 or more						investment
							days past						> 90 days
			30-59 days		60-89 days		due (includes)		Total		Total		and
March 31, 2017	Current		past due		past due		non-accrual)		past due		loans		accruing

Commercial and industrial	$	730,458	$	4,262	$	-	$	1,913	$	6,175	$	736,633	$	-
Construction and development, excluding undeveloped land		165,363		25		-		444		469		165,832		-
Undeveloped land		20,733		-		-		474		474		21,207		-

Real estate mortgage
Commercial investment		545,153		903		732		169		1,804		546,957		-
Owner occupied commercial		404,628		345		-		1,236		1,581		406,209		-
1-4 family residential		240,903		2,362		396		688		3,446		244,349		-
Home equity - first lien		51,073		3		-		-		3		51,076		-
Home equity - junior lien		65,463		168		-		175		343		65,806		-
Subtotal: Real estate mortgage		1,307,220		3,781		1,128		2,268		7,177		1,314,397		-

Consumer		34,707		-		2		-		2		34,709		-

Total	$	2,258,481	$	8,068	$	1,130	$	5,099	$	14,297	$	2,272,778	$	-

December 31, 2016

Commercial and industrial	$	734,682	$	84	$	290	$	1,785	$	2,159	$	736,841	$	18
Construction and development, excluding undeveloped land		191,810		-		-		538		538		192,348		-
Undeveloped land		21,022		-		-		474		474		21,496		-

Real estate mortgage
Commercial investment		537,998		631		64		193		888		538,886		86
Owner occupied commercial		406,726		342		-		1,224		1,566		408,292		182
1-4 family residential		246,730		1,174		576		1,018		2,768		249,498		34
Home equity - first lien		55,027		231		21		46		298		55,325		46
Home equity - junior lien		66,911		99		126		383		608		67,519		72
Subtotal: Real estate mortgage		1,313,392		2,477		787		2,864		6,128		1,319,520		420

Consumer		34,965		28		105		72		205		35,170		-

Total	$	2,295,871	$	2,589	$	1,182	$	5,733	$	9,504	$	2,305,375	$	438

Consistent with regulatory guidance, Bancorp categorizes loans into credit risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans included all risk-rated loans other than those classified as other assets especially mentioned, substandard, and doubtful, which are defined below:

●

Other assets especially mentioned (“OAEM”): Loans classified as OAEM have potential weaknesses that deserve management's close attention. These potential weaknesses

may

result in deterioration of repayment prospects for the loan or of Bancorp's credit position at some future date.

●

Substandard: Loans classified as substandard are inadequately protected by the paying capacity of the obligor or of collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize repayment of the debt. Default is a distinct possibility if the deficiencies are not corrected.

●

Substandard non-performing: Loans classified as substandard non-performing have all the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as troubled debt restructurings. Loans are placed on non-accrual status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for

days or more.

●

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 repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

As of

March

31,

2017

and

December

31,

2016,

the internally assigned risk grades of loans by category were as follows:

(in thousands)							Substandard				Total
March 31, 2017	Pass		OAEM		Substandard		non-performing		Doubtful		loans

Commercial and industrial	$	710,959	$	16,489	$	6,342	$	2,843	$	-	$	736,633
Construction and development, excluding undeveloped land		165,063		-		325		444		-		165,832
Undeveloped land		20,703		-		30		474		-		21,207

Real estate mortgage
Commercial investment		546,391		375		22		169		-		546,957
Owner occupied commercial		395,895		6,989		2,089		1,236		-		406,209
1-4 family residential		242,341		431		889		688		-		244,349
Home equity - first lien		50,901		-		-		175		-		51,076
Home equity - junior lien		65,429		53		324		-		-		65,806
Subtotal: Real estate mortgage		1,300,957		7,848		3,324		2,268		-		1,314,397

Consumer		34,545		106		-		58		-		34,709

Total	$	2,232,227	$	24,443	$	10,021	$	6,087	$	-	$	2,272,778


December 31, 2016

Commercial and industrial	$	714,025	$	14,266	$	5,850	$	2,700	$	-	$	736,841
Construction and development, excluding undeveloped land		191,455		-		355		538		-		192,348
Undeveloped land		21,022		-		-		474		-		21,496

Real estate mortgage
Commercial investment		538,688		-		5		193		-		538,886
Owner occupied commercial		396,997		7,960		2,111		1,224		-		408,292
1-4 family residential		247,888		-		592		1,018		-		249,498
Home equity - first lien		55,279		-		-		46		-		55,325
Home equity - junior lien		66,710		-		426		383		-		67,519
Subtotal: Real estate mortgage		1,305,562		7,960		3,134		2,864		-		1,319,520

Consumer		35,039		-		-		131		-		35,170

Total	$	2,267,103	$	22,226	$	9,339	$	6,707	$	-	$	2,305,375