
	NOTE 11 – LOANS

Loans consist of the following:


(dollars in thousands)	June 30, 2016	%	December 31, 2015	%

Commercial real estate	$ 608,380	60.53%	$ 538,888	58.64%
Residential first mortgages	148,138	14.74%	131,401	14.30%
Residential rentals	100,202	9.97%	93,157	10.14%
Construction and land development	35,560	3.54%	36,189	3.94%
Home equity and second mortgages	22,104	2.20%	21,716	2.36%
Commercial loans	57,167	5.69%	67,246	7.32%
Consumer loans	332	0.03%	366	0.04%
Commercial equipment	33,185	3.30%	29,931	3.26%
	1,005,068	100.00%	918,894	100.00%
Less:
Deferred loan fees and premiums	447	0.04%	1,154	0.13%
Allowance for loan losses	9,106	0.91%	8,540	0.93%
	9,553		9,694
	$ 995,515		$ 909,200

At June 30, 2016 and December 31, 2015, the Bank’s allowance for loan losses totaled $9.1 million and $8.5 million, respectively or 0.91% and 0.93%, respectively, of loan balances. Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to the overall loss experience, current economic conditions, size, growth and composition of the loan portfolio, financial condition of the borrowers and other relevant factors that, in management’s judgment, warrant recognition in providing an adequate allowance.

Deferred loan fees and premiums include net deferred fees paid by customers of $2.6 million and $2.6 million at June 30, 2016 and December 31, 2015, respectively offset by net deferred premiums paid for the purchase of residential first mortgages of $2.2 million and $1.4 million at June 30, 2016 and December 31, 2015.

The Company separated residential rentals into a new loan portfolio segment beginning in the second quarter of 2016. Residential rentals include income producing properties secured by 1-4 family units and apartment buildings. The Company’s decision to segregate the residential rental portfolio for financial reporting and valuation purposes was based on the growth and size of the portfolio and risk characteristics unique to residential rental properties.

Risk Characteristics of Portfolio Segments

The Company manages its credit products and exposure to credit losses (credit risk) by the following specific portfolio segments (classes), which are levels at which the Company develops and documents its allowance for loan loss methodology. These segments are:

Commercial Real Estate (“CRE”)

Commercial and other real estate projects include office buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction balances were 6.5% and 6.1% of the CRE portfolio at June 30, 2016 and December 31, 2015, respectively. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The primary security on a commercial real estate loan is the real property and the leases that produce income for the real property. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years.

Loans secured by commercial real estate are larger and involve greater risks than one-to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy.

Residential First Mortgages

Residential first mortgage loans are generally long-term loans, amortized on a monthly basis, with principal and interest due each month. The contractual loan payment period for residential loans typically ranges from ten to 30 years. The Bank’s experience indicates that real estate loans remain outstanding for significantly shorter time periods than their contractual terms. Borrowers may refinance or prepay loans at their option, without penalty. The Bank’s residential portfolio has both fixed-rate and adjustable-rate residential first mortgages.

The annual and lifetime limitations on interest rate adjustments may limit the increases in interest rates on these loans. There are also credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential first mortgage portfolio was $30.9 million or 3.1% of total gross loans of $1.0 billion at June 30, 2016 compared to $18.9 million or 2.1% of gross loans of $918.9 million at December 31, 2015.

Residential Rentals

Residential rental mortgage loans are amortizing, with principal and interest due each month. The loans are secured by income-producing 1-4 family units and apartments. As of June 30, 2016 and December 31, 2015, $88.0 million and $80.8 million, respectively, were 1-4 family units and $12.2 million and $12.4 million, respectively, were apartment buildings. Loans secured by residential rental properties are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years. The primary security on a residential rental loan is the property and the leases that produce income.

Loans secured by residential rental properties involve greater risks than 1-4 family residential mortgage loans. Although, there are similar risk characteristics shared with commercial real estate loans, the balances for the loans secured by residential rental properties are generally smaller. Because payments on loans secured residential rental properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to a greater extent to adverse conditions in the rental real estate market or the economy than similar owner occupied properties.

Construction and Land Development

The Bank offers loans for the construction of one-to-four family dwellings. Generally, these loans are secured by the real estate under construction as well as by guarantees of the principals involved. In addition, the Bank offers loans to acquire and develop land, as well as loans on undeveloped, subdivided lots for home building.

A decline in demand for new housing might adversely affect the ability of borrowers to repay these loans. Construction and land development loans are inherently riskier than providing financing on owner-occupied real estate. The Bank’s risk of loss is affected by the accuracy of the initial estimate of the market value of the completed project as well as the accuracy of the cost estimates made to complete the project. In addition, the volatility of the real estate market has made it increasingly difficult to ensure that the valuation of land associated with these loans is accurate. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, a project’s value might be insufficient to assure full repayment. As a result of these factors, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank forecloses on a project, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

Home Equity and Second Mortgage Loans

The Bank maintains a portfolio of home equity and second mortgage loans. These products contain a higher risk of default than residential first mortgages as in the event of foreclosure, the first mortgage would need to be paid off prior to collection of the second mortgage. This risk has been heightened as the market value of residential property has declined.

Commercial Loans

The Bank offers commercial loans to its business customers. The Bank offers a variety of commercial loan products including term loans and lines of credit. Such loans are generally made for terms of five years or less. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. When making commercial business loans, the Bank considers the financial condition of the borrower, the borrower’s payment history of both corporate and personal debt, the projected cash flows of the business, the viability of the industry in which the consumer operates, the value of the collateral, and the borrower’s ability to service the debt from income. These loans are primarily secured by equipment, real property, accounts receivable, or other security as determined by the Bank.

Commercial loans are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself.

Consumer Loans

Consumer loans consist of loans secured by automobiles, boats, recreational vehicles and trucks. The Bank also makes home improvement loans and offers both secured and unsecured personal lines of credit. Consumer loans entail greater risk from other loan types due to being secured by rapidly depreciating assets or the reliance on the borrower’s continuing financial stability.

Commercial Equipment Loans

These loans consist primarily of fixed-rate, short-term loans collateralized by a commercial customer’s equipment. When making commercial equipment loans, the Bank considers the same factors it considers when underwriting a commercial business loan. Commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure, collateral would need to be liquidated to provide repayment for the loan. In many cases, the highly specialized nature of collateral equipment would make full recovery from the sale of collateral problematic.

Non-accrual and Past Due Loans

Non-accrual loans as of June 30, 2016 and December 31, 2015 were as follows:


	June 30, 2016
(dollars in thousands)	90 or Greater Days Delinquent	Number of Loans	Non-accrual Only Loans	Number of Loans	Total Non-accrual Loans	Total Number of Loans

Commercial real estate	$ 2,416	7	$ -	-	$ 2,416	7
Residential first mortgages	1,070	6	-	-	1,070	6
Residential rentals	689	5	-	-	689	5
Construction and land development	3,641	3	-	-	3,641	3
Home equity and second mortgages	-	-	-	-	-	-
Commercial loans	1,030	4	684	2	1,714	6
Commercial equipment	694	6	-	-	694	6
	$ 9,540	31	$ 684	2	$ 10,224	33


	December 31, 2015
(dollars in thousands)	90 or Greater Days Delinquent	Number of Loans	Non-accrual Only Loans	Number of Loans	Total Non-accrual Loans	Total Number of Loans

Commercial real estate	$ 2,875	7	$ -	-	$ 2,875	7
Residential first mortgages	1,948	7	-	-	1,948	7
Residential rentals	605	4	-	-	605	4
Construction and land development	3,555	3	-	-	3,555	3
Home equity and second mortgages	48	3	-	-	48	3
Commercial loans	1,361	8	693	2	2,054	10
Commercial equipment	348	4	-	-	348	4
	$ 10,740	36	$ 693	2	$ 11,433	38

Non-accrual loans (90 days or greater delinquent and non-accrual only loans) decreased $1.2 million from $11.4 million or 1.24% of total loans at December 31, 2015 to $10.2 million or 1.02% of total loans at June 30, 2016. Non-accrual only loans are loans classified as non-accrual due to customer operating results or payment history. In accordance with the Company’s policy, interest income is recognized on a cash basis for these loans.

The Company had 33 non-accrual loans at June 30, 2016 compared to 38 non-accrual loans at December 31, 2015. Non-accrual loans at June 30, 2016 included $7.7 million, or 75% of non-accrual loans, attributed to 17 loans representing six customer relationships classified as substandard. Non-accrual loans at December 31, 2015 included $8.1 million, or 71% of non-accrual loans, attributed to 19 loans representing six customer relationships classified as substandard. Of these loans at June 30, 2016 and December 31, 2015, $3.6 million and $3.8 million, respectively, represented a residential development project. During the second quarter of 2014, the Company deferred the collection of principal and interest on this project. The project is currently being built out with the support of private equity funds which have been used for vertical construction that has significantly improved the collateral value and the viability of the project. The Company’s loans remain classified as troubled debt restructures (“TDRs”) and non-accrual. In addition, at June 30, 2016 and December 31, 2015, the Company had three TDR loans totaling $1.6 million and $1.7 million, respectively, classified as non-accrual. These loans are classified solely as non-accrual loans for the calculation of financial ratios.

Non-accrual loans on which the recognition of interest has been discontinued, which did not have a specific allowance for impairment, amounted to $9.5 million and $10.5 million at June 30, 2016 and December 31, 2015, respectively. Interest due but not recognized on these balances at June 30, 2016 and December 31, 2015 was $974,000 and $953,000, respectively. Non-accrual loans with a specific allowance for impairment on which the recognition of interest has been discontinued amounted to $682,000 and $902,000 at June 30, 2016 and December 31, 2015, respectively. Interest due but not recognized on these balances at June 30, 2016 and December 31, 2015 was $83,000 and $34,000, respectively.

Past due loans as of June 30, 2016 and December 31, 2015 were as follows:


	June 30, 2016
(dollars in thousands)	Current	31-60 Days	61-89 Days	90 or Greater Days	Total Past Due	Total Loan Receivables	Loans > 90 Days and Accruing
Commercial real estate	$ 605,520	$ -	$ 444	$ 2,416	$ 2,860	$ 608,380	$ -
Residential first mortgages	146,880	-	188	1,070	1,258	148,138	-
Residential rentals	99,513	-	-	689	689	100,202
Construction and land dev.	31,919	-	-	3,641	3,641	35,560	-
Home equity and second mtg.	21,990	69	45	-	114	22,104	-
Commercial loans	56,096	41	-	1,030	1,071	57,167	-
Consumer loans	332	-	-	-	-	332	-
Commercial equipment	32,457	-	34	694	728	33,185	-
Total	$ 994,707	$ 110	$ 711	$ 9,540	$ 10,361	$ 1,005,068	$ -


	December 31, 2015
(dollars in thousands)	Current	31-60 Days	61-89 Days	90 or Greater Days	Total Past Due	Total Loan Receivables	Loans > 90 Days and Accruing
Commercial real estate	$ 536,013	$ -	$ -	$ 2,875	$ 2,875	$ 538,888	$ -
Residential first mortgages	129,154	-	299	1,948	2,247	131,401	-
Residential rentals	92,552	-	-	605	605	93,157
Construction and land dev.	32,634	-	-	3,555	3,555	36,189	-
Home equity and second mtg.	21,603	65	-	48	113	21,716	-
Commercial loans	65,747	-	138	1,361	1,499	67,246	-
Consumer loans	365	-	1	-	1	366	-
Commercial equipment	29,138	152	293	348	793	29,931	-
Total	$ 907,206	$ 217	$ 731	$ 10,740	$ 11,688	$ 918,894	$ -

Impaired Loans and Troubled Debt Restructures (“TDRs”)

Impaired loans, including TDRs, at June 30, 2016 and 2015 and at December 31, 2015 were as follows:


	June 30, 2016
(dollars in thousands)	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Total Recorded Investment	Related Allowance	Quarter Average Recorded Investment	Quarter Interest Income Recognized	YTD Average Recorded Investment	YTD Interest Income Recognized

Commercial real estate	$ 22,444	$ 20,010	$ 2,404	$ 22,414	$ 582	$ 22,503	$ 243	$ 22,724	$ 420
Residential first mortgages	2,957	2,472	485	2,957	20	2,982	23	2,990	51
Residential rentals	3,987	3,352	239	3,591	53	3,747	42	3,798	67
Construction and land dev.	4,443	3,939	431	4,370	398	4,317	4	4,264	7
Home equity and second mtg.	109	109	-	109	-	109	1	108	2
Commercial loans	4,551	4,222	5	4,227	5	4,237	36	4,238	69
Commercial equipment	839	623	193	816	165	828	5	840	11
Total	$ 39,330	$ 34,727	$ 3,757	$ 38,484	$ 1,223	$ 38,723	$ 354	$ 38,962	$ 627


	December 31, 2015
(dollars in thousands)	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Total Recorded Investment	Related Allowance	Average Recorded Investment	Interest Income Recognized

Commercial real estate	$ 21,477	$ 19,081	$ 2,367	$ 21,448	$ 601	$ 21,786	$ 774
Residential first mortgages	4,226	3,730	495	4,225	27	4,276	141
Residential rentals	4,473	3,893	181	4,074	40	4,400	170
Construction and land dev.	4,283	3,780	504	4,284	471	4,302	13
Home equity and second mtg.	154	154	-	154	-	163	8
Commercial loans	4,775	4,195	380	4,575	330	4,524	251
Commercial equipment	518	338	139	477	139	491	9
Total	$ 39,906	$ 35,171	$ 4,066	$ 39,237	$ 1,608	$ 39,942	$ 1,366


	June 30, 2015
(dollars in thousands)	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Total Recorded Investment	Related Allowance	Quarter Average Recorded Investment	Quarter Interest Income Recognized	YTD Average Recorded Investment	YTD Interest Income Recognized

Commercial real estate	$ 20,648	$ 18,519	$ 2,099	$ 20,618	$ 133	$ 20,719	$ 170	$ 20,765	$ 359
Residential first mortgages	3,465	2,960	505	3,465	75	3,473	25	3,480	56
Residential rentals	7,893	7,436	457	7,893	17	7,904	71	7,926	147
Construction and land dev.	4,329	4,329	-	4,329	-	4,382	4	4,285	7
Home equity and second mtg.	488	429	-	429	-	434	2	437	6
Commercial loans	5,184	4,499	581	5,080	227	5,041	44	5,034	96
Commercial equipment	1,462	292	1,097	1,389	1,021	1,401	12	1,407	26
Total	$ 43,469	$ 38,464	$ 4,739	$ 43,203	$ 1,473	$ 43,354	$ 328	$ 43,334	$ 697

TDRs, included in the impaired loan schedules above, as of June 30, 2016 and December 31, 2015 were as follows:


	June 30, 2016		December 31, 2015
(dollars in thousands)	Dollars	Number of Loans	Dollars	Number of Loans

Commercial real estate	$ 9,715	8	$ 9,839	8
Residential first mortgages	556	2	881	3
Residential rentals	230	1	2,058	5
Construction and land development	4,370	4	4,283	4
Commercial loans	1,141	7	1,384	8
Commercial equipment	118	2	123	2
Total TDRs	$ 16,130	24	$ 18,568	30
Less: TDRs included in non-accrual loans	(5,252)	(5)	(5,435)	(7)
Total accrual TDR loans	$ 10,878	19	$ 13,133	23

At June 30, 2016, the Company had 19 accruing TDRs totaling $10.9 million compared to 23 accruing TDRs totaling $13.1 million as of December 31, 2015. The Company had specific reserves of $968,000 on seven TDRs totaling $3.3 million at June 30, 2016 and specific reserves of $1.3 million on nine TDRs totaling $3.6 million at December 31, 2015. At June 30, 2016, $8.1 million or 74% of accruing TDRs related to one customer relationship. The $8.1 million in TDRs is for eight loans with two construction and land development loans totaling $724,000, one commercial loan of $197,000 and five commercial real estate loans totaling $7.1 million. The loans in this relationship have been classified as TDRs since the fourth quarter of 2014 and have performed according to the terms of their restructured agreements with all required payments made timely. They presently remain classified as TDRs due to below market rates of interest negotiated at the time the loans were restructured to obtain additional collateral. The Company has a strong collateral position in this relationship and as of June 30, 2016 has specific reserves of $470,000 on the relationship.

At June 30, 2016 and December 31, 2015, non-accrual TDRs included $3.6 million and $3.8 million, respectively, related to a residential development project. During the second quarter of 2014, the Company deferred the collection of principal and interest on this project. The project is currently being built out with the support of private equity funds which have been used for vertical construction that has significantly improved the collateral value and the viability of the project. In addition, at June 30, 2016 and December 31, 2015, the Company had three TDR loans totaling $1.6 million and $1.7 million, respectively, classified as non-accrual. These loans are classified solely as non-accrual loans for the calculation of financial ratios. There were no TDRs added during the six months ended June 30, 2016.

Interest income in the amount of $253,000 and $508,000 was recognized on TDR loans for the six months ended June 30, 2016 and the year ended December 31, 2015, respectively.

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses at and for the three and six months ended June 30, 2016 and 2015, respectively. An allocation of the allowance to one category of loans does not prevent the Company from using that allowance to absorb losses in a different category.


	June 30, 2016
(dollars in thousands)	Beginning Balance	Charge-offs	Recoveries	Provisions	Ending Balance
Three Months Ended
Commercial real estate	$ 3,838	$ -	$ 3	$ 539	$ 4,380
Residential first mortgages	591	-	-	344	935
Residential rentals	590	-	-	23	613
Construction and land development	1,129	-	-	(85)	1,044
Home equity and second mortgages	134	-	-	7	141
Commercial loans	1,046	(69)	8	(276)	709
Consumer loans	1	-	-	1	2
Commercial equipment	1,262	-	9	11	1,282
	$ 8,591	$ (69)	$ 20	$ 564	$ 9,106

Six Months Ended
Commercial real estate	$ 3,465	$ -	$ 5	$ 910	$ 4,380
Residential first mortgages	584	-	-	351	935
Residential rentals	538	-	-	75	613
Construction and land development	1,103	(73)	1	13	1,044
Home equity and second mortgages	142	-	5	(6)	141
Commercial loans	1,477	(394)	11	(385)	709
Consumer loans	2	(1)	-	1	2
Commercial equipment	1,229	-	21	32	1,282
	$ 8,540	$ (468)	$ 43	$ 991	$ 9,106


	June 30, 2015
(dollars in thousands)	Beginning Balance	Charge-offs	Recoveries	Provisions	Ending Balance
Three Months Ended
Commercial real estate	$ 3,770	$ -	$ 4	$ (440)	$ 3,334
Residential first mortgages	870	(30)	-	9	849
Residential rentals	612	-	-	(51)	561
Construction and land development	1,099	-	32	74	1,205
Home equity and second mortgages	208	-	-	(2)	206
Commercial loans	1,740	(215)	6	(165)	1,366
Consumer loans	2	-	-	-	2
Commercial equipment	320	(54)	1	967	1,234
	$ 8,621	$ (299)	$ 43	$ 392	$ 8,757

Six Months Ended
Commercial real estate	$ 3,528	$ (46)	$ 7	$ (155)	$ 3,334
Residential first mortgages	1,047	(30)	1	(169)	849
Residential rentals	593	-	-	(32)	561
Construction and land development	1,071	-	32	102	1,205
Home equity and second mortgages	173	-	-	33	206
Commercial loans	1,677	(215)	7	(103)	1,366
Consumer loans	3	-	-	(1)	2
Commercial equipment	389	(54)	4	895	1,234
	$ 8,481	$ (345)	$ 51	$ 570	$ 8,757

The following tables detail loan receivable and allowance balances disaggregated on the basis of the Company’s impairment methodology at June 30, 2016 and 2015 and December 31, 2015.


	June 30, 2016			December 31, 2015			June 30, 2015
(dollars in thousands)	Ending balance: individually evaluated for impairment	Ending balance: collectively evaluated for impairment	Total	Ending balance: individually evaluated for impairment	Ending balance: collectively evaluated for impairment	Total	Ending balance: individually evaluated for impairment	Ending balance: collectively evaluated for impairment	Total
Loan Receivables:
Commercial real estate	$ 22,414	$ 585,966	$ 608,380	$ 21,448	$ 517,440	$ 538,888	$ 20,618	$ 502,207	$ 522,825
Residential first mortgages	2,957	145,181	148,138	4,225	127,176	131,401	3,465	133,974	137,439
Residential rentals	3,591	96,611	100,202	4,074	89,083	93,157	7,893	76,775	84,668
Construction and land development	4,370	31,190	35,560	4,284	31,905	36,189	4,329	34,830	39,159
Home equity and second mortgages	109	21,995	22,104	154	21,562	21,716	429	20,639	21,068
Commercial loans	4,227	52,940	57,167	4,575	62,671	67,246	5,080	58,400	63,480
Consumer loans	-	332	332	-	366	366	-	396	396
Commercial equipment	816	32,369	33,185	477	29,454	29,931	1,389	25,415	26,804
	$ 38,484	$ 966,584	$ 1,005,068	$ 39,237	$ 879,657	$ 918,894	$ 43,203	$ 852,636	$ 895,839

Allowance for loan losses:
Commercial real estate	$ 582	$ 3,798	$ 4,380	$ 601	$ 2,864	$ 3,465	$ 133	$ 3,201	$ 3,334
Residential first mortgages	20	915	935	27	557	584	75	774	849
Residential rentals	53	560	613	40	498	538	17	544	561
Construction and land development	398	646	1,044	471	632	1,103	-	1,205	1,205
Home equity and second mortgages	-	141	141	-	142	142	-	206	206
Commercial loans	5	704	709	330	1,147	1,477	227	1,139	1,366
Consumer loans	-	2	2	-	2	2	-	2	2
Commercial equipment	165	1,117	1,282	139	1,090	1,229	1,021	213	1,234
	$ 1,223	$ 7,883	$ 9,106	$ 1,608	$ 6,932	$ 8,540	$ 1,473	$ 7,284	$ 8,757

Credit Quality Indicators

Credit quality indicators as of June 30, 2016 and December 31, 2015 were as follows:


Credit Risk Profile by Internally Assigned Grade

	Commercial Real Estate		Construction and Land Dev.		Residential Rentals
(dollars in thousands)	6/30/2016	12/31/2015	6/30/2016	12/31/2015	6/30/2016	12/31/2015

Unrated	$ 50,104	$ 51,924	$ 2,961	$ 4,399	$ 23,209	$ 21,585
Pass	537,078	466,601	28,229	27,507	75,520	67,926
Special mention	-	250	-	-	-	845
Substandard	21,198	20,113	4,005	3,845	1,473	2,801
Doubtful	-	-	365	438	-	-
Loss	-	-	-	-	-	-
Total	$ 608,380	$ 538,888	$ 35,560	$ 36,189	$ 100,202	$ 93,157

	Commercial Loans		Commercial Equipment
(dollars in thousands)	6/30/2016	12/31/2015	6/30/2016	12/31/2015

Unrated	$ 11,373	$ 11,281	$ 10,137	$ 10,074
Pass	41,789	51,569	22,752	19,610
Special mention	-	-	-	-
Substandard	4,005	4,110	159	110
Doubtful	-	286	137	137
Loss	-	-	-	-
Total	$ 57,167	$ 67,246	$ 33,185	$ 29,931


Credit Risk Profile Based on Payment Activity

	Residential First Mortgages		Home Equity and Second Mtg.		Consumer Loans
(dollars in thousands)	6/30/2016	12/31/2015	6/30/2016	12/31/2015	6/30/2016	12/31/2015

Performing	$ 147,068	$ 129,453	$ 22,104	$ 21,668	$ 332	$ 366
Nonperforming	1,070	1,948	-	48	-	-
Total	$ 148,138	$ 131,401	$ 22,104	$ 21,716	$ 332	$ 366

Summary of Total Classified Loans

(dollars in thousands)		6/30/2016	12/31/2015
By Internally Assigned Grade		$ 31,342	$ 31,840
By Payment Activity		594	964
Total Classified		$ 31,936	$ 32,804

Management uses a risk scale to assign grades to commercial real estate, residential rentals, construction and land development, commercial loans and commercial equipment loans. Commercial loan relationships with an aggregate exposure to the Bank of $750,000 or greater are risk rated. Residential first mortgages, home equity and second mortgages and consumer loans are monitored on an ongoing basis based on borrower payment history. Consumer loans and residential real estate loans are classified as unrated unless they are part of a larger commercial relationship that requires grading or are troubled debt restructures or nonperforming loans with an Other Assets Especially Mentioned or higher risk rating due to a delinquent payment history

Home equity and second mortgages and consumer loans are evaluated for creditworthiness in underwriting and are monitored based on borrower payment history. Residential first mortgages are evaluated for creditworthiness during credit due diligence before being purchased. Residential first mortgages, home equity and second mortgages and consumer loans are classified as unrated unless they are part of a larger commercial relationship that requires grading or are troubled debt restructures or nonperforming loans with an Other Assets Especially Mentioned (“OAEM”) or higher risk rating due to a delinquent payment history.

Management regularly reviews credit quality indicators as part of its individual loan reviews and on a monthly and quarterly basis. The overall quality of the Bank’s loan portfolio is assessed using the Bank’s risk grading scale, the level and trends of net charge-offs, nonperforming loans and delinquencies, the performance of troubled debt restructured loans and the general economic conditions in the Company’s geographical market. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Credit quality indicators and allowance factors are adjusted based on management’s judgment during the monthly and quarterly review process. Loans subject to risk ratings are graded on a scale of one to ten. The Company considers loans classified substandard, doubtful and loss as classified assets for regulatory and financial reporting.

Ratings 1 thru 6 - Pass

Ratings 1 thru 6 have asset risks ranging from excellent low risk to adequate. The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.

Rating 7 - OAEM (Other Assets Especially Mentioned) – Special Mention

These credits, while protected by the financial strength of the borrowers, guarantors or collateral, have reduced quality due to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. OAEM loans are the first adversely classified assets on the Bank’s watch list. These relationships will be reviewed at least quarterly.

Rating 8 - Substandard

Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor strength or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in the loan loss allowance analysis. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.

Rating 9 - Doubtful

Doubtful assets have many of the same characteristics of Substandard with the exception that the Bank has determined that loss is not only possible but is probable and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and the loan will receive a specific reserve in the loan loss allowance analysis. These relationships will be reviewed at least quarterly.

Rating 10 – Loss

Once an asset is identified as a definite loss to the Bank, it will receive the classification of “loss”. There may be some future potential recovery; however it is more practical to write off the loan at the time of classification. Losses will be taken in the period in which they are determined to be uncollectable.