Note 3 – Loans

Major classifications of loans were as follows:


	September 30, 2015		December 31, 2014
Commercial	$	120,036	$	119,158
Real estate - commercial		609,937		600,629
Real estate - construction		23,461		44,795
Real estate - residential		354,106		370,191
Consumer		4,005		3,504
Overdraft		423		649
Lease financing receivables		9,697		8,038
Other		10,345		11,630
		1,132,010		1,158,594
Net deferred loan fees		902		738
	$	1,132,912	$	1,159,332

It is the policy of the Company to review each prospective credit in order to determine if an adequate level of security or collateral was obtained prior to making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company’s access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. With selected exceptions, the Bank makes loans solely within its market area. There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, although the real estate related categories listed above represent 87.2% and 87.6% of the portfolio at September 30, 2015, and December 31, 2014, respectively.

Aged analysis of past due loans by class of loans was as follows:


.															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
September 30, 2015	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	-	$	-	$	-	$	-	$	129,201	$	532	$	129,733	$	-
Real estate - commercial
Owner occupied general purpose		132		126		-		258		123,857		1,441		125,556		-
Owner occupied special purpose		136		-		-		136		172,906		778		173,820		-
Non-owner occupied general purpose		-		697		-		697		163,842		335		164,874		-
Non-owner occupied special purpose		-		-		-		-		92,623		-		92,623		-
Retail properties		-		-		-		-		39,219		-		39,219		-
Farm		1,398		-		-		1,398		11,175		1,272		13,845		-
Real estate - construction
Homebuilder		-		-		-		-		2,567		-		2,567		-
Land		-		-		-		-		1,164		-		1,164		-
Commercial speculative		-		-		-		-		2,047		3,561		5,608		-
All other		-		-		-		-		13,880		242		14,122		-
Real estate - residential
Investor		-		4		-		4		126,279		624		126,907		-
Owner occupied		-		156		-		156		111,933		6,465		118,554		-
Revolving and junior liens		588		120		-		708		104,963		2,974		108,645		-
Consumer		1		-		-		1		4,004		-		4,005		-
All other1		-		-		-		-		11,670		-		11,670		-
	$	2,255	$	1,103	$	-	$	3,358	$	1,111,330	$	18,224	$	1,132,912	$	-


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2014	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	38	$	-	$	-	$	38	$	125,658	$	1,500	$	127,196	$	-
Real estate - commercial
Owner occupied general purpose		699		-		-		699		126,029		5,937		132,665		-
Owner occupied special purpose		-		-		-		-		167,874		1,441		169,315		-
Non-owner occupied general purpose		-		-		-		-		153,328		4,907		158,235		-
Non-owner occupied special purpose		-		-		-		-		87,054		1,423		88,477		-
Retail properties		-		-		-		-		37,780		-		37,780		-
Farm		-		-		-		-		14,157		-		14,157		-
Real estate - construction
Homebuilder		-		-		-		-		3,204		-		3,204		-
Land		-		-		-		-		1,658		-		1,658		-
Commercial speculative		-		-		-		-		13,431		-		13,431		-
All other		71		29		-		100		25,841		561		26,502		-
Real estate - residential
Investor		-		-		-		-		135,273		1,942		137,215		-
Owner occupied		1,076		914		-		1,990		107,727		6,711		116,428		-
Revolving and junior liens		94		44		-		138		113,906		2,504		116,548		-
Consumer		-		-		-		-		3,504		-		3,504		-
All other1		-		-		-		-		13,017		-		13,017		-
	$	1,978	$	987	$	-	$	2,965	$	1,129,441	$	26,926	$	1,159,332	$	-

1. The “All other” class includes overdrafts and net deferred costs.

Credit Quality Indicators:

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

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

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

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.

Credit Quality Indicators by class of loans were as follows:


September 30, 2015			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	119,222	$	9,895	$	616	$	-	$	129,733
Real estate - commercial
Owner occupied general purpose		123,674		441		1,441		-		125,556
Owner occupied special purpose		172,835		207		778		-		173,820
Non-owner occupied general purpose		161,384		2,313		1,177		-		164,874
Non-owner occupied special purpose		88,665		-		3,958		-		92,623
Retail Properties		35,809		3,410		-		-		39,219
Farm		12,573		-		1,272		-		13,845
Real estate - construction
Homebuilder		2,567		-		-		-		2,567
Land		1,164		-		-		-		1,164
Commercial speculative		2,047		-		3,561		-		5,608
All other		13,880		-		242		-		14,122
Real estate - residential
Investor		126,101		-		806		-		126,907
Owner occupied		111,375		-		7,179		-		118,554
Revolving and junior liens		104,858		188		3,599		-		108,645
Consumer		4,004		-		1		-		4,005
All other		11,670		-		-		-		11,670
Total	$	1,091,828	$	16,454	$	24,630	$	-	$	1,132,912


December 31, 2014			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	118,845	$	3,948	$	4,403	$	-	$	127,196
Real estate - commercial
Owner occupied general purpose		124,936		253		7,476		-		132,665
Owner occupied special purpose		154,225		11,607		3,483		-		169,315
Non-owner occupied general purpose		148,212		3,235		6,788		-		158,235
Non-owner occupied special purpose		78,957		8,097		1,423		-		88,477
Retail Properties		36,779		1,001		-		-		37,780
Farm		14,157		-		-		-		14,157
Real estate - construction
Homebuilder		3,204		-		-		-		3,204
Land		1,658		-		-		-		1,658
Commercial speculative		9,947		-		3,484		-		13,431
All other		25,941		-		561		-		26,502
Real estate - residential
Investor		134,952		-		2,263		-		137,215
Owner occupied		109,085		-		7,343		-		116,428
Revolving and junior liens		112,647		188		3,713		-		116,548
Consumer		3,503		-		1		-		3,504
All other		13,017		-		-		-		13,017
Total	$	1,090,065	$	28,329	$	40,938	$	-	$	1,159,332

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

The Company did not have any repossessed assets reported in other assets as of September 30, 2015, and December 31, 2014. The Company had $3.3 million and $3.5 million residential assets in the process of foreclosure as of September 30, 2015, and December 31, 2014, respectively.

Impaired loans by class of loans were as follows:


							Nine Months Ended
	As of September 30, 2015						September 30, 2015
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	528	$	609	$	-	$	1,014	$	-
Commercial real estate
Owner occupied general purpose		2,589		3,483		-		4,857		62
Owner occupied special purpose		778		875		-		1,288		-
Non-owner occupied general purpose		335		566		-		2,583		-
Non-owner occupied special purpose		-		-		-		712		-
Retail properties		-		-		-		-		-
Farm		1,272		1,338		-		636		-
Construction
Homebuilder		-		-		-		896		-
Land		-		-		-		-		-
Commercial speculative		3,561		3,561		-		1,780		-
All other		242		288		-		266		-
Residential
Investor		1,504		1,820		-		2,050		33
Owner occupied		11,199		12,729		-		11,309		128
Revolving and junior liens		2,762		4,068		-		2,500		4
Consumer		-		-		-		-		-
Total impaired loans with no recorded allowance		24,770		29,337		-		29,891		227
With an allowance recorded
Commercial		4		9		5		2		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		38		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		135		-
Residential
Investor		-		-		-		67		-
Owner occupied		-		-		-		12		-
Revolving and junior liens		358		405		20		364		2
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		362		414		25		618		2
Total impaired loans	$	25,132	$	29,751	$	25	$	30,509	$	229

Impaired loans by class of loans were as follows:


							Nine Months Ended
	As of December 31, 2014						September 30, 2014
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	1,500	$	2,114	$	-	$	836	$	-
Commercial real estate
Owner occupied general purpose		7,125		7,870		-		4,860		81
Owner occupied special purpose		1,798		1,941		-		3,294		-
Non-owner occupied general purpose		4,831		5,653		-		6,246		45
Non-owner occupied special purpose		1,423		1,930		-		1,067		-
Retail properties		-		-		-		1,572		-
Farm		-		-		-		-		-
Construction
Homebuilder		1,791		1,791		-		1,903		69
Land		-		-		-		209		-
Commercial speculative		-		-		-		369		-
All other		291		323		-		155		-
Residential
Investor		2,595		3,024		-		4,269		32
Owner occupied		11,419		12,816		-		10,457		128
Revolving and junior liens		2,238		3,541		-		1,899		4
Consumer		-		-		-		-		-
Total impaired loans with no recorded allowance		35,011		41,003		-		37,136		359
With an allowance recorded
Commercial		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		365		-
Owner occupied special purpose		-		-		-		2,443		-
Non-owner occupied general purpose		76		76		21		469		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		84		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		588		-
All other		270		306		98		357		-
Residential
Investor		135		145		24		412		-
Owner occupied		23		65		38		912		15
Revolving and junior liens		371		405		97		912		-
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		875		997		278		6,542		15
Total impaired loans	$	35,886	$	42,000	$	278	$	43,678	$	374

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

The specific allocation of the allowance for loan losses on a TDR is determined by either discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category on loans that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

TDRs that were modified during the period are as follows:


	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2015					Nine Months Ended September 30, 2015
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Other1	-	$	-	$	-	3	$	404	$	412
Revolving and junior liens
HAMP2	1		45		11	4		178		142
Other1	3		378		349	3		378		349
	4	$	423	$	360	10	$	960	$	903


	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2014					Nine Months Ended September 30, 2014
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1	-	$	-	$	-	2	$	1,320	$	1,118
Real estate - residential
Investor
Other1	1		155		153	1		155		153
Owner occupied
HAMP2	-		-		-	1		102		74
Deferral3	-		-		-	2		344		226
Revolving and junior liens
Other1	1		62		59	3		222		218
	2	$	217	$	212	9	$	2,143	$	1,789

1. Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

3 Deferral: Refers to the deferral of principal

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no TDR default activity for three and nine months ending September 30, 2015, and September 30, 2014, that was restructured within the 12 month period prior to default.