NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company's loan portfolio is subject to varying degrees of credit risk. These risks entail both general risks, which are inherent in the lending process, and risks specific to individual borrowers. The Company's credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type. The loan portfolio segment balances are presented in the following table:


	June 30,		December 31,
	2017		2016
Commercial & Industrial	$	69,901,427	$	67,234,642
Commercial Real Estate		226,287,060		205,495,337
Residential Real Estate		148,333,597		153,368,115
Home Equity Line of Credit		34,052,780		33,256,012
Land		4,187,897		5,870,999
Construction		24,915,461		19,804,912
Consumer & Other		1,917,377		2,073,696
Total Loans		509,595,599		487,103,713
Less: Allowance for Loan Losses		(3,608,484)		(2,823,153)
Net Loans	$	505,987,115	$	484,280,560

At June 30, 2017 and December 31, 2016, loans not considered to have deteriorated credit quality at acquisition had a total remaining unamortized discount of $3,395,116 and $3,793,033, respectively, and carrying values of $162,758,426 and $187,483,532, respectively.

Portfolio Segments:

The Company currently manages its credit products and the respective exposure to loan losses by the following specific portfolio segments, which are levels at which the Company develops and documents its systematic methodology to determine the allowance for loan losses. The Company considers each loan type to be a portfolio segment having unique risk characteristics.

Commercial & Industrial

Commercial & Industrial (“C&I”) loans are made to provide funds for equipment and general corporate needs. Repayment of these loans depends primarily on the funds generated from the operation of the borrower's business. C&I loans also include lines of credit that are utilized to finance a borrower's short-term credit needs and/or to finance a percentage of eligible receivables or inventory. Of primary concern in C&I lending is the borrower's creditworthiness and ability to successfully generate sufficient cash flow from its business to service the debt.

Commercial Real Estate

Commercial Real Estate loans are bifurcated into Investor and Owner Occupied types (classes). Commercial Real Estate - Investor loans consist of loans secured by non-owner occupied properties and involve investment properties for warehouse, retail, apartment, and office space with a history of occupancy and cash flow. This commercial real estate class includes mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale(s) to repay the loan. Commercial Real Estate - Owner Occupied loans consist of commercial mortgage loans secured by owner occupied properties and involves a variety of property types to conduct the borrower's operations. The primary source of repayment for this type of loan is the cash flow from the business and is based upon the borrower's financial health and the ability of the borrower and the business to repay. At June 30, 2017 and December 31, 2016, Commercial Real Estate – Investor loans had a total balance of $148,236,433 and $138,527,163, respectively. At June 30, 2017 and December 31, 2016, Commercial Real Estate – Owner Occupied loans had a total balance of $78,050,627 and $66,968,174, respectively.

Residential Real Estate

Residential Real Estate loans are bifurcated into Investor and Owner Occupied types (classes). Residential Real Estate -Investor loans consist of loans secured by non-owner occupied residential properties and usually carry higher credit risk than Residential Real Estate – Owner Occupied loans due to their reliance on stable rental income and due to a lower incentive for the borrower to avoid foreclosure. Payments on loans secured by rental properties often depend on the successful operation and management of the properties and the payment of rent by tenants. At June 30, 2017 and December 31, 2016, Residential Real Estate – Investor loans had a total balance of $41,627,020 and $44,787,040, respectively. At June 30, 2017 and December 31, 2016, Residential Real Estate – Owner Occupied loans had a total balance of $106,706,576 and $108,581,075, respectively.

Home Equity Line of Credit

Home Equity Lines of Credit (“HELOCs”) are a form of revolving credit in which a borrower's primary residence serves as collateral. Borrowers use HELOCs primarily for education, home improvements, and other significant personal expenditures. The borrower will be approved for a specific credit limit set at a percentage of the home's appraised value less the balance owed on the existing first mortgage. Major risks in HELOC lending include the borrower's ability to service the existing first mortgage plus the HELOC, the Company's ability to pursue collection in a second lien position upon default, and overall risks in fluctuation in the value of the underlying collateral property.

Land

Land loans are secured by underlying properties that usually consist of tracts of undeveloped land that do not produce income. These loans carry the risk that there will be inadequate demand to ensure the sale of the property within an acceptable time. As a result, land loans carry the risk that the builder will have to pay the property taxes and other carrying costs of the property until a buyer is identified.

Construction

Construction loans, which include land development loans, are generally considered to involve a higher degree of credit risk than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property's value at completion of construction and estimated costs of construction, as well as the property’s ability to attract and retain tenants. Loan funds are disbursed periodically as pre-specified stages of completion are attained based upon site inspections. If the Company is forced to foreclose on a building before or at completion due to a default, it may be unable to recover all of the unpaid balance of and accrued interest on the loan as well as related foreclosure and holding costs.

Consumer & Other

Consumer & Other loans include installment loans, personal lines of credit, and automobile loans. Payment on these loans often depends on the borrower's creditworthiness and ability to generate sufficient cash flow to service the debt.

Allowance for Loan Losses

To control and monitor credit risk, management has an internal credit process in place to determine whether credit standards are maintained along with in-house loan administration accompanied by oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks that involves the analysis of the borrower's ability to service the debt as well as the assessment of the underlying collateral. Oversight and review procedures include the monitoring of the portfolio credit quality, early identification of potential problem credits and the management of the problem credits. As part of the oversight and review process, the Company maintains an allowance for loan losses to absorb estimated and probable losses inherent in the loan portfolio.

For purposes of calculating the allowance, the Company segregates its loan portfolio into segments based primarily on the type of supporting collateral. The Commercial Real Estate and Residential Real Estate segments, which both exclude any collateral property currently under construction, are further segregated into Owner Occupied and Investor classes for each. Further, all segments are also segregated as either purchased credit impaired (“PCI”) loans, purchased loans not deemed impaired, troubled debt restructurings (“TDR”s), or new originations.

The analysis for determining the allowance is consistent with guidance set forth in U.S. GAAP and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. Pursuant to Bank policy, the allowance is evaluated quarterly by management and is based upon management's review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The allowance consists of specific and general reserves. The specific reserves relate to loans classified as impaired consisting primarily of nonaccrual loans, TDR and PCI loans where cash flows have deteriorated from those forecasted as of the acquisition date. The reserve for these loans is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the impaired loan is lower than the carrying value. For impaired loans, any measured impairment is charged-off against the loan and allowance for those loans that are collateral dependent in the applicable reporting period.

The general reserve covers loans that are not classified as impaired and primarily includes purchased loans not deemed impaired and new loan originations. The general reserve requirement is based on historical loss experience and several qualitative factors derived from economic and market conditions that have been determined to have an effect on the probability and magnitude of a loss. Since the Bank does not have sufficient historical loss experience, management also references the historical net charge-off experience of peer groups to determine a reasonable range of reserve values, which is permissible per Bank policy. The peer groups consist of competing Maryland-based financial institutions with established ranges in total asset size. Management will continue to evaluate the appropriateness of the peer group data used with each quarterly allowance analysis until such time that the Bank has sufficient loss experience to provide a foundation for the general reserve requirement. The qualitative analysis incorporates global environmental factors in the following trends: national and local economic metrics; portfolio risk ratings and composition; and concentrations in credit.

The following tables provides information on the activity in the allowance for loan losses by the respective loan portfolio segment for the three- and six-month periods ended June 30, 2017:


Three Months:	Commercial		Commercial		Residential		Home Equity						Consumer
	& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Beginning balance	$	414,045	$	1,293,859	$	1,088,063	$	199,678	$	21,357	$	130,701	$	12,066	$	3,159,769
Charge-offs		—		—		(97,505)		—		—		(15,593)		—		(113,098)
Recoveries		75		—		39,415		—		—		—		—		39,490
Provision		49,672		145,562		260,185		24,830		(9,169)		50,408		835		522,323
Ending balance	$	463,792	$	1,439,421	$	1,290,158	$	224,508	$	12,188	$	165,516	$	12,901	$	3,608,484


Six Months:	Commercial		Commercial		Residential		Home Equity						Consumer
	& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Beginning balance	$	369,857	$	1,082,855	$	1,043,778	$	184,296	$	19,159	$	111,503	$	11,705	$	2,823,153
Charge-offs		—		—		(225,940)		—		—		(15,593)		—		(241,533)
Recoveries		188		—		63,732		—		—		—		100		64,020
Provision		93,747		356,566		408,588		40,212		(6,971)		69,606		1,096		962,844
Ending balance	$	463,792	$	1,439,421	$	1,290,158	$	224,508	$	12,188	$	165,516	$	12,901	$	3,608,484

The following table presents loans and the related allowance for loan losses, by respective loan portfolio segment at June 30, 2017:


	Commercial		Commercial		Residential		Home Equity						Consumer
	& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Ending balance:
individually
evaluated for
impairment	$	—	$	—	$	392,120	$	—	$	—	$	—	$	—	$	392,120
Ending balance:
collectively
evaluated
for impairment		463,792		1,439,421		898,038		224,508		12,188		165,516		12,901		3,216,364
Totals	$	463,792	$	1,439,421	$	1,290,158	$	224,508	$	12,188	$	165,516	$	12,901	$	3,608,484

Loans:
Ending balance:
individually
evaluated for
impairment	$	501,474	$	—	$	4,969,305	$	57,624	$	—	$	—	$	5,798	$	5,534,201
Ending balance:
collectively
evaluated
for impairment		68,720,673		213,280,908		133,063,505		33,265,591		1,805,895		24,524,693		1,911,579		476,572,844
Ending balance: loans
acquired with
deteriorated credit
quality(1)		679,280		13,006,152		10,300,787		729,565		2,382,002		390,768		—		27,488,554
Totals	$	69,901,427	$	226,287,060	$	148,333,597	$	34,052,780	$	4,187,897	$	24,915,461	$	1,917,377	$	509,595,599

(1) Includes one loan acquired with deteriorated credit quality of $6,859 that have current period charge offs.

The following tables provides information on the activity in the allowance for loan losses by the respective loan portfolio segment for the three- and six-month periods ended June 30, 2016:


Three Months:	Commercial		Commercial		Residential		Home Equity						Consumer
	& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Beginning balance	$	220,569	$	792,847	$	693,085	$	164,313	$	16,016	$	56,360	$	5,346	$	1,948,536
Charge-offs		—		—		(54,604)		—		—		—		—		(54,604)
Recoveries		—		—		41,485		—		—		—		—		41,485
Provision		63,437		147,041		120,943		10,691		1,451		12,821		1,149		357,533
Ending balance	$	284,006	$	939,888	$	800,909	$	175,004	$	17,467	$	69,181	$	6,495	$	2,292,950


Six Months:	Commercial		Commercial		Residential		Home Equity						Consumer
	& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Beginning balance	$	210,798	$	727,869	$	593,084	$	157,043	$	15,713	$	62,967	$	5,535	$	1,773,009
Charge-offs		—		—		(174,414)		(2,183)		—		—		(480)		(177,077)
Recoveries		—		—		41,485		—		—		—		—		41,485
Provision		73,208		212,019		340,754		20,144		1,754		6,214		1,440		655,533
Ending balance	$	284,006	$	939,888	$	800,909	$	175,004	$	17,467	$	69,181	$	6,495	$	2,292,950

The following table presents loans and the related allowance for loan losses, by respective loan portfolio segment at December 31, 2016:


	Commercial		Commercial		Residential		Home Equity						Consumer
	& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Ending balance:
individually
evaluated for
impairment	$	—	$	—	$	270,526	$	—	$	—	$	—	$	—	$	270,526
Ending balance:
collectively
evaluated
for impairment		369,857		1,082,855		773,252		184,296		19,159		111,503		11,705		2,552,627
Totals	$	369,857	$	1,082,855	$	1,043,778	$	184,296	$	19,159	$	111,503	$	11,705	$	2,823,153

Loans:
Ending balance:
individually
evaluated for
impairment	$	641,774	$	277,515	$	4,521,110	$	55,552	$	—	$	—	$	5,798	$	5,501,749
Ending balance:
collectively
evaluated
for impairment		65,341,316		191,303,934		136,607,497		32,558,837		3,384,741		19,698,823		2,067,898		450,963,046
Ending balance: loans
acquired with
deteriorated credit
quality(1)		1,251,552		13,913,888		12,239,508		641,623		2,486,258		106,089		—		30,638,918
Totals	$	67,234,642	$	205,495,337	$	153,368,115	$	33,256,012	$	5,870,999	$	19,804,912	$	2,073,696	$	487,103,713

(1) Includes loans acquired with deteriorated credit quality of $104,460 that have current period charge-offs.

The following table presents information with respect to impaired loans, which includes loans acquired with deteriorated credit quality that have current period charge-offs, at June 30, 2017 and for the three- and six-month periods ended June 30, 2017:


							For the three months ended				For the Six Months Ended
	At June 30, 2017						June 30, 2017				June 30, 2017
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	501,474	$	588,656	$	—	$	567,298	$	9,720	$	588,963	$	31,027
Commercial Real Estate - Owner occupied		—		—		—		—		—		—		—
Commercial Real Estate - Investor		—		—		—		—		—		—		—
Residential Real Estate - Investor		761,048		852,663		—		827,594		787		882,220		12,909
Residential Real Estate - Owner occupied		3,221,832		3,420,867		—		3,435,168		29,259		3,475,250		98,238
Home Equity Line of Credit		57,624		87,331		—		73,771		(3)		74,454		(11)
Consumer & Other		5,798		189,204		—		97,501		—		97,501		—

With an allowance recorded:
Residential Real Estate - Investor		592,598		627,785		219,366		617,502		1,992		626,619		3,980
Residential Real Estate - Owner occupied		587,589		563,226		172,754		582,540		—		582,540		(264)
Total		5,727,963		6,329,732		392,120		6,201,374		41,755		6,327,547		145,879

Total impaired loans:
Commercial & Industrial	$	501,474	$	588,656	$	—	$	567,298	$	9,720	$	588,963	$	31,027
Commercial Real Estate		—		—		—		—		—		—		—
Residential Real Estate		5,163,067		5,464,541		392,120		5,462,804		32,038		5,566,629		114,863
Home Equity Line of Credit		57,624		87,331		—		73,771		(3)		74,454		(11)
Consumer & Other		5,798		189,204		—		97,501		—		97,501		—
Total	$	5,727,963	$	6,329,732	$	392,120	$	6,201,374	$	41,755	$	6,327,547	$	145,879

The following table presents information with respect to impaired loans, which includes loans acquired with deteriorated credit quality that have current period charge-offs, at December 31, 2016 and for the year ended December 31, 2016:


							For the year ended				For the Six Months Ended
	At December 31, 2016						December 31, 2016				June 30, 2016
			Unpaid		Average		Average				Average
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	641,774	$	739,128	$	—	$	804,938	$	79,886	$	855,500	$	52,267
Commercial Real Estate - Investor		277,515		277,515		—		294,053		—		352,315		1,048
Residential Real Estate - Investor		785,500		890,719		—		994,674		11,748		1,149,681		35,973
Residential Real Estate - Owner occupied		3,008,832		3,196,027		—		3,225,912		103,916		2,331,172		70,245
Home Equity Line of Credit		55,552		85,470		—		73,026		(68)		112,616		(69)
Construction		—		—		—		—		—		71,459		—
Consumer & Other		5,798		189,204		—		97,501		—		189,204		—

With an allowance recorded:
Residential Real Estate - Investor		790,537		813,087		268,537		832,508		5,920		523,195		3,004
Residential Real Estate - Owner occupied		159,028		159,028		1,989		160,102		—		—		—
Total		5,724,536		6,350,178		270,526		6,482,714		201,402		5,585,142		162,468

Total impaired loans:
Commercial & Industrial	$	641,774	$	739,128	$	—	$	804,938	$	79,886	$	855,500	$	52,267
Commercial Real Estate		277,515		277,515		—		294,053		—		352,315		1,048
Residential Real Estate		4,743,897		5,058,861		270,526		5,213,196		121,584		4,004,048		109,222
Home Equity Line of Credit		55,552		85,470		—		73,026		(68)		112,616		(69)
Construction		—		—		—		—		—		71,459		—
Consumer & Other		5,798		189,204		—		97,501		—		189,204		—
Total	$	5,724,536	$	6,350,178	$	270,526	$	6,482,714	$	201,402	$	5,585,142	$	162,468

In addition to monitoring the performance status of the loan portfolio, the Company utilizes a risk rating scale (1-8) to evaluate loan asset quality for all loans. Loans that are rated 1-4 are classified as pass credits. Loans rated a 5 (Watch) are pass credits, but are loans that have been identified as warranting additional attention and monitoring. Loans that are risk rated 5 or higher are placed on the Company's monthly watch list. For the pass rated loans, management believes there is a low risk of loss related to these loans and, as necessary, credit may be strengthened through improved borrower performance and/or additional collateral. Loans rated a 6 (Special Mention) or higher are considered criticized loans and represent an increased level of credit risk and are placed into these three categories:

6 (Special Mention) - Borrowers exhibit potential credit weaknesses or downward trends that may weaken the credit position, if uncorrected. The borrowers are considered marginally acceptable without potential for loss of principal or interest.

7 (Substandard) - Borrowers have well defined weaknesses or characteristics that present the possibility that the Company will sustain some loss if the deficiencies are not corrected.

8 (Doubtful) - Borrowers classified as doubtful have the same weaknesses found in substandard borrowers; however, these weaknesses indicate that the collection of debt in full (principal and interest), based on current conditions, is highly questionable and improbable.

In the normal course of loan portfolio management, relationship managers are responsible for continuous assessment of credit risk arising from the individual borrowers within their portfolio and assigning appropriate risk ratings. Credit Administration is responsible for ensuring the integrity and operation of the risk rating system and maintenance of the watch list. The Officer's Loan Committee meets monthly to discuss and monitor problem credits and internal risk rating downgrades that result in updates to the watch list.

The following table provides information with respect to the Company's credit quality indicators by class of the loan portfolio at June 30, 2017:


	Risk Rating
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial & Industrial	$	67,057,433	$	1,493,143	$	1,350,851	$	—	$	69,901,427
Commercial Real Estate - Investor		145,303,898		146,832		2,785,703		—		148,236,433
Commercial Real Estate - Owner Occupied		75,859,111		1,072,201		1,119,315		—		78,050,627
Residential Real Estate - Investor		35,503,640		232,778		5,890,603		—		41,627,021
Residential Real Estate - Owner Occupied		101,067,852		—		5,638,724		—		106,706,576
Home Equity Line of Credit		33,761,495		—		291,285		—		34,052,780
Land		1,915,511		—		2,272,386		—		4,187,897
Construction		24,524,693		—		390,768		—		24,915,461
Consumer & Other		1,911,579		—		5,798		—		1,917,377
Total	$	486,905,212	$	2,944,954	$	19,745,433	$	—	$	509,595,599

The following table provides information with respect to the Company's credit quality indicators by class of the loan portfolio at December 31, 2016:


	Risk Rating
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial & Industrial	$	63,961,379	$	688,595	$	2,584,668	$	—	$	67,234,642
Commercial Real Estate - Investor		134,601,346		2,958,695		967,122		—		138,527,163
Commercial Real Estate - Owner Occupied		64,761,020		1,126,705		1,080,449		—		66,968,174
Residential Real Estate - Investor		36,905,288		240,700		7,641,052		—		44,787,040
Residential Real Estate - Owner Occupied		102,367,880		—		6,213,195		—		108,581,075
Home Equity Line of Credit		32,969,668		—		286,344		—		33,256,012
Land		3,513,607		—		2,357,392		—		5,870,999
Construction		19,698,823		—		106,089		—		19,804,912
Consumer & Other		2,067,898		—		5,798		—		2,073,696
Total	$	460,846,909	$	5,014,695	$	21,242,109	$	—	$	487,103,713

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a payment is past due.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans at June 30, 2017. PCI loans are excluded from this aging and nonaccrual loans schedule.


	Accrual Loans
	30-59		60-89		90 or More
	Days		Days		Days		Total				Nonaccrual		Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Loans
Commercial & Industrial	$	—	$	59,129	$	—	$	59,129	$	68,905,297	$	257,721	$	69,222,147
Commercial Real Estate - Investor		—		—		—		—		140,504,962		—		140,504,962
Commercial Real Estate - Owner Occupied		—		—		—		—		72,775,947		—		72,775,947
Residential Real Estate - Investor		—		—		—		—		33,038,530		1,114,322		34,152,852
Residential Real Estate - Owner Occupied		27,934		451,120		—		479,054		99,740,351		3,660,552		103,879,957
Home Equity Line of Credit		—		253,439		—		253,439		33,012,152		57,624		33,323,215
Land		—		—		—		—		1,805,895		—		1,805,895
Construction		—		—		—		—		24,524,693		—		24,524,693
Consumer & Other		2,817		16,678		—		19,495		1,892,084		5,798		1,917,377
Total	$	30,751	$	780,366	$	—	$	811,117	$	476,199,911	$	5,096,017	$	482,107,045

Purchased credit impaired loans														27,488,554
Total Loans													$	509,595,599

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans at December 31, 2016. PCI loans are excluded from this aging and nonaccrual loans schedule.


	Accrual Loans
	30-59		60-89		90 or More
	Days		Days		Days		Total				Nonaccrual		Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Loans
Commercial & Industrial	$	17,737	$	—	$	—	$	17,737	$	65,582,550	$	382,802	$	65,983,089
Commercial Real Estate - Investor		—		—		—		—		129,751,253		277,515		130,028,768
Commercial Real Estate - Owner Occupied		139,670		149,119		—		288,789		61,263,891		—		61,552,680
Residential Real Estate - Investor		702,856		—		—		702,856		34,114,611		1,260,961		36,078,428
Residential Real Estate - Owner Occupied		2,933,983		373,168		—		3,307,151		98,724,320		3,018,710		105,050,181
Home Equity Line of Credit		136,387		—		—		136,387		32,422,450		55,552		32,614,389
Land		—		—		—		—		3,384,741		—		3,384,741
Construction		173,105		—		—		173,105		19,525,718		—		19,698,823
Consumer & Other		—		—		—		—		2,067,898		5,798		2,073,696
Total	$	4,103,738	$	522,287	$	—	$	4,626,025	$	446,837,432	$	5,001,338	$	456,464,795

Purchased credit impaired loans														30,638,918
Total Loans													$	487,103,713

Troubled Debt Restructurings

The restructuring of a loan constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction of interest rate or the forgiveness of principal and/or accrued interest. If the debtor is experiencing financial difficulty and the creditor has granted a concession, the Company will make the necessary disclosures related to the TDR. In certain cases, a modification may be made in an effort to retain a customer who is not experiencing financial difficulty. This type of modification is not considered to be a TDR. Once a loan has been modified and is considered a TDR, it is reported as an impaired loan. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for credit losses calculation. A specific allowance for TDR loans is established when the discounted cash flows, collateral value or observable market price, whichever is appropriate, of the TDR is lower than the carrying value. If a loan deemed a TDR has performed for at least six months at the level prescribed by the modification, it is not considered to be non-performing; however, it will generally continue to be reported as impaired, but may be returned to accrual status. A TDR is deemed in default on its modified terms once a contractual payment is 30 or more days past due.

The following tables present a breakdown of loans that the Company modified during the three- and six-month periods ended June 30, 2017 and 2016:


	Three Months Ended June 30, 2017					Three Months Ended June 30, 2016
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
	Contracts	Investment		Investment		Contracts	Investment		Investment
Troubled Debt Restructurings:
Residential Real Estate - Owner Occupied	2	$	199,962	$	199,962	—	$	—	$	—
Totals	2	$	199,962	$	199,962	—	$	—	$	—


	Six Months Ended June 30, 2017					Six Months Ended June 30, 2016
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
	Contracts	Investment		Investment		Contracts	Investment		Investment
Troubled Debt Restructurings:
Residential Real Estate - Investor	—	$	—	$	—	1	$	38,785	$	38,785
Residential Real Estate - Owner Occupied	2		199,962		199,962	—		—		—
Totals	2	$	199,962	$	199,962	1	$	38,785	$	38,785

For the three- and six-month periods ended June 30, 2017, there were two loans modified as a TDR. For the three- and six-month periods ended June 30, 2016, there were none and two loans modified, respectively, as a TDR.

None of the loans modified as a TDR during the previous 12 months were in default of their modified terms at the quarter ended June 30, 2017.

At June 30, 2017 and December 31, 2016, the Bank had $1,866,688 and $1,824,206, respectively, in loans identified as TDRs of which $1,428,504 and $1,323,795, respectively, were on nonaccrual status.