
	NOTE 6 – LOANS

Loans consist of the following:



(dollars in thousands)	December 31, 2017	%	December 31, 2016	%

Commercial real estate	$ 727,314	63.25%	$ 667,105	61.25%
Residential first mortgages	170,374	14.81%	171,004	15.70%
Residential rentals	110,228	9.58%	101,897	9.36%
Construction and land development	27,871	2.42%	36,934	3.39%
Home equity and second mortgages	21,351	1.86%	21,399	1.97%
Commercial loans	56,417	4.91%	50,484	4.64%
Consumer loans	573	0.05%	422	0.04%
Commercial equipment	35,916	3.12%	39,737	3.65%
	1,150,044	100.00%	1,088,982	100.00%
Less:
Deferred loan fees and premiums	(1,086)	-0.09%	(397)	-0.04%
Allowance for loan losses	10,515	0.91%	9,860	0.91%
	9,429		9,463
	$ 1,140,615		$ 1,079,519

At December 31, 2017 and 2016, the Bank’s allowance for loan losses totaled $10.5 million and $9.9 million, or 0.91% and 0.91%, 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.

Net deferred loan fees and premiums of $1.1 million at December 31, 2017 included net deferred fees paid by customers of $2.8 million offset by net deferred premiums paid for the purchase of residential first mortgages and deferred costs of $3.9 million. Net deferred loan fees and premiums of $397,000 at December 31, 2016 included net deferred fees paid by customers of $2.7 million offset by net deferred premiums paid for the purchase of residential first mortgages and deferred costs of $3.1 million.

Prior to April 1, 2016, loans secured by residential rental property were included in the residential first mortgage and commercial real estate loan portfolios. Beginning in the second quarter of 2016, the Company segregated loans secured by residential rental property into a new loan portfolio segment. Residential rental property includes income producing properties comprising 1-4 family units and apartment buildings. The Company’s decision to segregate the residential rental property portfolio for financial reporting was based on the growth and size of the portfolio and risk characteristics unique to residential rental properties. Comparative financial information was reclassified to conform to the classification presented in 2016.

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 6.2% and 9.3% of the CRE portfolio at December 31, 2017 and December 31, 2016, 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. During the years ended December 31, 2017 and 2016, the Bank purchased residential first mortgages of $25.5 million and $64.2 million, respectively.

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 $56.9 million or 5.0% of total gross loans of $1.15 billion at December 31, 2017 compared to $45.6 million or 4.2% of total gross loans of $1.09 billion at December 31, 2016.

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 December 31, 2017 and December 31, 2016, $85.0 million and $84.9 million, respectively, were 1-4 family units and $25.2 million and $17.0 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. 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 rental portfolio was $93.4 million or 8.1% of total gross loans of $1.15 billion at December 31, 2017 compared to $84.0 million or 7.7% of total gross loans of $1.09 billion at December 31, 2016.

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 by 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 is heightened as the market value of residential property has not fully returned to pre-financial crisis levels and interest rates began to increase in 2017.

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 borrower 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 or secured by real property, accounts receivable, or other security as determined by the Bank. 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 December 31, 2017 and December 31, 2016 were as follows:



	December 31, 2017
(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	$ 1,148	4	$ 839	3	$ 1,987	7
Residential first mortgages	478	3	507	1	985	4
Residential rentals	84	1	741	3	825	4
Home equity and second mortgages	134	3	123	1	257	4
Commercial loans	172	2	-	-	172	2
Commercial equipment	467	3	-	-	467	3
	$ 2,483	16	$ 2,210	8	$ 4,693	24



	December 31, 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	$ 2,371	7	$ -	-	$ 2,371	7
Residential first mortgages	623	4	-	-	623	4
Residential rentals	577	4	-	-	577	4
Construction and land development	3,048	2	-	-	3,048	2
Home equity and second mortgages	61	2	-	-	61	2
Commercial loans	375	3	669	2	1,044	5
Commercial equipment	650	5	-	-	650	5
	$ 7,705	27	$ 669	2	$ 8,374	29

Non-accrual loans (90 days or greater delinquent and non-accrual only loans) decreased $3.7 million from $8.4 million or 0.77% of total loans at December 31, 2016 to $4.7 million or 0.41% of total loans at December 31, 2017. Non-accrual only loans are loans classified as non-accrual due to customer operating results or payment history. All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. In accordance with the Company’s policy, interest income is recognized on a cash basis or cost-recovery method, until qualifying for return to accrual status.

At December 31, 2017, non-accrual loans of $4.7 million included 24 loans, of which $3.3 million, or 71% represented 10 loans and five customer relationships. During the year ended December 31, 2017 non-accrual loans decreased $3.0 million due to the foreclosure of a stalled residential development project. The Bank is working with a construction manager to stabilize and market the project. Before the foreclosure, the loans in this relationship were troubled debt restructures (“TDRs”). Additionally, during the third quarter of 2017, non-accrual loans decreased $607,000 due to the foreclosure of a commercial office building. At December 31, 2016, non-accrual loans of $8.4 million included 29 loans, of which $6.4 million, or 77% of represented 15 loans and six customer relationships. Non-accrual loans included one TDR totaling $769,000 at December 31, 2017 and six TDRs totaling $4.7 million at December 31, 2016. 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 $3.8 million and $7.8 million at December 31, 2017 and 2016, respectively. Interest due but not recognized on these balances at December 31, 2017 and 2016 was $85,000 and $947,000, respectively. Non-accrual loans with a specific allowance for impairment on which the recognition of interest has been discontinued amounted to $876,000 and $575,000 at December 31, 2017 and 2016, respectively. Interest due but not recognized on these balances at December 31, 2017 and 2016 was $100,000 and $156,000, respectively.

An analysis of past due loans as of December 31, 2017 and 2016 was as follows:


	December 31, 2017
(dollars in thousands)	Current	31-60 Days	61-89 Days	90 or Greater Days	Total Past Due	Total Loan Receivables
Commercial real estate	$ 719,455	$ -	$ 6,711	$ 1,148	$ 7,859	$ 727,314
Residential first mortgages	169,828	-	68	478	546	170,374
Residential rentals	109,937	-	207	84	291	110,228
Construction and land dev.	27,871	-	-	-	-	27,871
Home equity and second mtg.	21,180	19	18	134	171	21,351
Commercial loans	55,054	892	299	172	1,363	56,417
Consumer loans	572	-	1	-	1	573
Commercial equipment	34,437	1,012	-	467	1,479	35,916
Total	$ 1,138,334	$ 1,923	$ 7,304	$ 2,483	$ 11,710	$ 1,150,044


	December 31, 2016
(dollars in thousands)	Current	31-60 Days	61-89 Days	90 or Greater Days	Total Past Due	Total Loan Receivables
Commercial real estate	$ 664,250	$ -	$ 484	$ 2,371	$ 2,855	$ 667,105
Residential first mortgages	170,381	-	-	623	623	171,004
Residential rentals	101,309	-	11	577	588	101,897
Construction and land dev.	33,886	-	-	3,048	3,048	36,934
Home equity and second mtg.	21,175	130	33	61	224	21,399
Commercial loans	49,778	331	-	375	706	50,484
Consumer loans	420	-	2	-	2	422
Commercial equipment	39,044	42	1	650	693	39,737
Total	$ 1,080,243	$ 503	$ 531	$ 7,705	$ 8,739	$ 1,088,982

There were no loans greater than 90 days still accruing interest at December 31, 2017 and 2016, respectively.

Impaired Loans and Troubled Debt Restructures (“TDRs”)

Impaired loans, including TDRs, at December 31, 2017 and 2016 were as follows:



	December 31, 2017
(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	$ 33,180	$ 30,921	$ 2,008	$ 32,929	$ 370	$ 33,575	$ 1,379
Residential first mortgages	2,455	1,978	459	2,437	2	2,479	91
Residential rentals	2,389	1,981	395	2,376	18	2,432	111
Construction and land dev.	729	-	729	729	163	729	26
Home equity and second mtg.	317	317	-	317	-	318	12
Commercial loans	3,010	2,783	168	2,951	168	3,048	137
Commercial equipment	1,538	1,048	467	1,515	303	1,578	73
Total	$ 43,618	$ 39,028	$ 4,226	$ 43,254	$ 1,024	$ 44,159	$ 1,829


	December 31, 2016
(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	$ 22,195	$ 14,896	$ 7,081	$ 21,977	$ 806	$ 22,303	$ 908
Residential first mortgages	2,436	1,938	475	2,413	7	2,445	90
Residential rentals	3,440	2,850	178	3,028	36	3,486	134
Construction and land dev.	4,304	2,926	851	3,777	178	3,867	16
Home equity and second mtg.	170	170	-	170	-	176	7
Commercial loans	3,285	3,004	200	3,204	123	3,442	137
Commercial equipment	855	652	139	791	139	815	17
Total	$ 36,685	$ 26,436	$ 8,924	$ 35,360	$ 1,289	$ 36,534	$ 1,309

TDRs, included in the impaired loan schedules above, as of December 31, 2017 and 2016 were as follows:


	December 31, 2017		December 31, 2016
(dollars in thousands)	Dollars	Number of Loans	Dollars	Number of Loans

Commercial real estate	$ 9,273	9	$ 9,587	8
Residential first mortgages	527	2	545	2
Residential rentals	221	1	227	1
Construction and land development	729	2	3,777	4
Commercial loans	4	1	872	5
Commercial equipment	36	1	113	2
Total TDRs	$ 10,790	16	$ 15,121	22
Less: TDRs included in non-accrual loans	(769)	(1)	(4,673)	(6)
Total accrual TDR loans	$ 10,021	15	$ 10,448	16

TDRs decreased $4.3 million from $15.1 million at December 31, 2016 to $10.8 million at December 31, 2017. TDRs that are included in non-accrual are classified solely as non-accrual loans for the calculation of financial ratios. The Company had specific reserves of $413,000 on seven TDRs totaling $3.0 million at December 31, 2017 and $844,000 on nine TDRs totaling $5.7 million at December 31, 2016. During the year ended December 31, 2017, TDR disposals, which included payoffs and refinancing decreased by seven loans totaling $3.9 million, of which $3.0 million related to the foreclosure of the stalled residential development project mentioned previously. TDR loan principal curtailment was $385,000 for the year ended December 31, 2017. There were no TDRs added during the year ended December 31, 2017.

During the year ended December 31, 2016 the Company added one TDR loan totaling $196,000. TDR disposals, which included payoffs and refinancing for the year ended December 31, 2016 decreased by nine loans or $2.1 million. TDR loan principal curtailment was $1.6 million for the year ended December 31, 2016.

Interest income in the amount of $327,000 and $357,000 was recognized on outstanding TDR loans for the years ended December 31, 2017 and 2016, respectively.

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses at and for the years ended December 31, 2017, 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.


Year Ended	December 31, 2017
(dollars in thousands)	Beginning Balance	Charge-offs	Recoveries	Provisions	Ending Balance
Commercial real estate	$ 5,212	$ (217)	$ 63	$ 1,393	$ 6,451
Residential first mortgages	1,406	-	-	(262)	1,144
Residential rentals	362	(42)	-	192	512
Construction and land development	941	(26)	-	(453)	462
Home equity and second mortgages	138	(14)	1	37	162
Commercial loans	794	(13)	1	231	1,013
Consumer loans	3	(2)	-	6	7
Commercial equipment	1,004	(168)	62	(134)	764
	$ 9,860	$ (482)	$ 127	$ 1,010	$ 10,515


Year Ended	December 31, 2016
(dollars in thousands)	Beginning Balance	Charge-offs	Recoveries	Provisions	Ending Balance
Commercial real estate	$ 3,465	$ -	$ 58	$ 1,689	$ 5,212
Residential first mortgages	584	-	-	822	1,406
Residential rentals	538	(14)	-	(162)	362
Construction and land development	1,103	(526)	1	363	941
Home equity and second mortgages	142	-	5	(9)	138
Commercial loans	1,477	(594)	18	(107)	794
Consumer loans	2	(1)	-	2	3
Commercial equipment	1,229	(34)	48	(239)	1,004
	$ 8,540	$ (1,169)	$ 130	$ 2,359	$ 9,860


Year Ended	December 31, 2015
(dollars in thousands)	Beginning Balance	Charge-offs	Recoveries	Provisions	Ending Balance
Commercial real estate	$ 3,528	$ (78)	$ 17	$ (2)	$ 3,465
Residential first mortgages	1,047	(30)	1	(434)	584
Residential rentals	593	-	-	(55)	538
Construction and land development	1,071	-	32	-	1,103
Home equity and second mortgages	173	(100)	-	69	142
Commercial loans	1,677	(432)	11	221	1,477
Consumer loans	3	-	-	(1)	2
Commercial equipment	389	(818)	23	1,635	1,229
	$ 8,481	$ (1,458)	$ 84	$ 1,433	$ 8,540

The following tables detail loan receivable and allowance balances disaggregated on the basis of the Company’s impairment methodology at December 31, 2017 and 2016, respectively.


	December 31, 2017			December 31, 2016
(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
Loan Receivables:
Commercial real estate	$ 32,929	$ 694,385	$ 727,314	$ 21,977	$ 645,128	$ 667,105
Residential first mortgages	2,437	167,937	170,374	2,413	168,591	171,004
Residential rentals	2,376	107,852	110,228	3,028	98,869	101,897
Construction and land development	729	27,142	27,871	3,777	33,157	36,934
Home equity and second mortgages	317	21,034	21,351	170	21,229	21,399
Commercial loans	2,951	53,466	56,417	3,204	47,280	50,484
Consumer loans	-	573	573	-	422	422
Commercial equipment	1,515	34,401	35,916	791	38,946	39,737
	$ 43,254	$ 1,106,790	$ 1,150,044	$ 35,360	$ 1,053,622	$ 1,088,982

Allowance for loan losses:
Commercial real estate	$ 370	$ 6,081	$ 6,451	$ 806	$ 4,406	$ 5,212
Residential first mortgages	2	1,142	1,144	7	1,399	1,406
Residential rentals	18	494	512	36	326	362
Construction and land development	163	299	462	178	763	941
Home equity and second mortgages	-	162	162	-	138	138
Commercial loans	168	845	1,013	123	671	794
Consumer loans	-	7	7	-	3	3
Commercial equipment	303	461	764	139	865	1,004
	$ 1,024	$ 9,491	$ 10,515	$ 1,289	$ 8,571	$ 9,860

During the fourth quarter of 2016, the Company expanded its factor scoring categories from three levels to five levels to capture additional movements in qualitative factors used to calculate the general allowance of each portfolio segment. No additional qualitative factors were added to the Company’s methodology as part of this change. There were no material changes to the existing allowance for loan losses by portfolio segment or in the aggregate as a result of the change.

Credit Quality Indicators

Credit quality indicators as of December 31, 2017 and 2016 were as follows:


Credit Risk Profile by Internally Assigned Grade

	Commercial Real Estate		Construction and Land Dev.		Residential Rentals
(dollars in thousands)	12/31/2017	12/31/2016	12/31/2017	12/31/2016	12/31/2017	12/31/2016

Unrated	$ 75,581	$ 51,503	$ 1,775	$ 1,632	$ 28,428	$ 25,563
Pass	619,604	594,768	25,367	31,525	80,279	74,989
Special mention	-	-	-	-	-	-
Substandard	32,129	20,834	729	3,777	1,521	1,345
Doubtful	-	-	-	-	-	-
Loss	-	-	-	-	-	-
Total	$ 727,314	$ 667,105	$ 27,871	$ 36,934	$ 110,228	$ 101,897

	Commercial Loans		Commercial Equipment		Total Commercial Portfolios
(dollars in thousands)	12/31/2017	12/31/2016	12/31/2017	12/31/2016	12/31/2017	12/31/2016

Unrated	$ 14,356	$ 11,266	$ 10,856	$ 11,769	$ 130,996	$ 101,733
Pass	39,118	36,221	23,581	27,290	787,949	764,793
Special mention	-	-	-	-	-	-
Substandard	2,943	2,997	1,479	541	38,801	29,494
Doubtful	-	-	-	137	-	137
Loss	-	-	-	-	-	-
Total	$ 56,417	$ 50,484	$ 35,916	$ 39,737	$ 957,746	$ 896,157

Credit Risk Profile Based on Payment Activity

	Residential First Mortgages		Home Equity and Second Mtg.		Consumer Loans
(dollars in thousands)	12/31/2017	12/31/2016	12/31/2017	12/31/2016	12/31/2017	12/31/2016

Performing	$ 169,896	$ 170,381	$ 21,217	$ 21,338	$ 573	$ 422
Nonperforming	478	623	134	61	-	-
Total	$ 170,374	$ 171,004	$ 21,351	$ 21,399	$ 573	$ 422

A risk grading scale is used to assign grades to commercial relationships, which include commercial real estate, residential rentals, construction and land development, commercial loans and commercial equipment loans. Loans are graded at inception, annually thereafter when financial statements are received and at other times when there is an indication that a credit may have weakened or improved. Only commercial loan relationships with an aggregate exposure to the Bank of $1,000,000 or greater are subject to being risk rated.

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 our 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.

Maturity of Loan Portfolio

The following table sets forth certain information at December 31, 2017 and 2016 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.


December 31, 2017	Due within one	Due after one year	Due more than
(dollars in thousands)	year after	through five years from	five years from
Description of Asset	December 31, 2017	December 31, 2017	December 31, 2017
Real Estate Loans
Commercial	$ 67,951	$ 150,075	$ 509,288
Residential first mortgage	8,596	35,208	126,570
Residential rentals	4,288	21,627	84,313
Construction and land development	21,226	6,645	-
Home equity and second mortgage	242	811	20,298
Commercial loans	56,417	-	-
Consumer loans	200	307	66
Commercial equipment	12,113	18,051	5,752
Total loans	$ 171,033	$ 232,724	$ 746,287


December 31, 2016	Due within one	Due after one year	Due more than
(dollars in thousands)	year after	through five years from	five years from
Description of Asset	December 31, 2016	December 31, 2016	December 31, 2016
Real Estate Loans
Commercial	$ 86,782	$ 128,431	$ 451,892
Residential first mortgage	8,501	34,592	127,911
Residential rentals	3,847	17,911	80,139
Construction and land development	23,674	10,212	3,048
Home equity and second mortgage	296	877	20,226
Commercial loans	50,484	-	-
Consumer loans	163	164	95
Commercial equipment	10,049	18,812	10,876
Total loans	$ 183,796	$ 210,999	$ 694,187

The following table sets forth the dollar amount of all loans due after one year from December 31, 2017 and 2016, which have predetermined interest rates and have floating or adjustable interest rates.


December 31, 2017
(dollars in thousands)		Floating or
Description of Asset	Fixed Rates	Adjustable Rates	Total
Real Estate Loans
Commercial	$ 157,667	$ 501,696	$ 659,363
Residential first mortgage	106,792	54,986	161,778
Residential rentals	16,974	88,966	105,940
Construction and land development	3,521	3,124	6,645
Home equity and second mortgage	1,285	19,824	21,109
Commercial loans	-	-	-
Consumer loans	373	-	373
Commercial equipment	21,924	1,879	23,803
	$ 308,536	$ 670,475	$ 979,011


December 31, 2016
(dollars in thousands)		Floating or
Description of Asset	Fixed Rates	Adjustable Rates	Total
Real Estate Loans
Commercial	$ 124,549	$ 455,774	$ 580,323
Residential first mortgage	118,205	44,298	162,503
Residential rentals	17,499	80,551	98,050
Construction and land development	4,533	8,727	13,260
Home equity and second mortgage	1,454	19,649	21,103
Commercial loans	-	-	-
Consumer loans	259	-	259
Commercial equipment	24,635	5,053	29,688
	$ 291,134	$ 614,052	$ 905,186

Related Party Loans

Included in loans receivable were loans made to executive officers and directors of the Bank. These loans were made in the ordinary course of business at substantially the same terms and conditions as those prevailing at the time for comparable transactions with persons not affiliated with the Bank and are not considered to involve more than the normal risk of collectability. For the years ended December 31, 2017, 2016 and 2015, all loans to directors and executive officers of the Bank performed according to original loan terms. Activity in loans outstanding to executive officers and directors are summarized as follows:


	At and For the Years Ended December 31,
(dollars in thousands)	2017	2016	2015

Balance, beginning of period	$ 26,464	$ 28,105	$ 24,403
Loans and additions	3,699	2,547	6,822
Change in Directors' status	-	2,299	(642)
Repayments	(3,687)	(6,487)	(2,478)
Balance, end of period	$ 26,476	$ 26,464	$ 28,105