Note 4: Loans

Major classifications of loans were as follows:


	December 31, 2015		December 31, 2014
Commercial	$	130,362	$	119,158
Real estate - commercial		605,721		600,629
Real estate - construction		19,806		44,795
Real estate - residential		351,007		370,191
Consumer		4,216		3,504
Overdraft		483		649
Lease financing receivables		10,953		8,038
Other		10,130		11,630
		1,132,678		1,158,594
Net deferred loan costs		1,037		738
	$	1,133,715	$	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 law, the Company’s lending standards and credit monitoring procedures. The Bank generally 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 86.1% and 87.6% of the portfolio at December 31, 2015, and December 31, 2014, respectively.

Aged analysis of past due loans by class of loans as of December 31, 2015, and December 31, 2014, were as follows:


.															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2015	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	394	$	-	$	-	$	394	$	140,848	$	73	$	141,315	$	-
Real estate - commercial
Owner occupied general purpose		652		119		-		771		123,479		1,254		125,504		-
Owner occupied special purpose		358		-		-		358		170,827		763		171,948		-
Non-owner occupied general purpose		-		-		-		-		166,668		975		167,643		-
Non-owner occupied special purpose		-		-		-		-		92,387		-		92,387		-
Retail properties		-		-		-		-		34,352		-		34,352		-
Farm		-		-		-		-		12,615		1,272		13,887		-
Real estate - construction
Homebuilder		-		-		-		-		2,604		-		2,604		-
Land		-		-		-		-		1,137		-		1,137		-
Commercial speculative		-		-		-		-		2,117		83		2,200		-
All other		6		77		65		148		13,717		-		13,865		65
Real estate - residential
Investor		101		-		-		101		125,611		972		126,684		-
Owner occupied		1,083		446		-		1,529		110,885		6,378		118,792		-
Revolving and junior liens		344		68		-		412		102,500		2,619		105,531		-
Consumer		4		-		-		4		4,212		-		4,216		-
All other1		-		-		-		-		11,650		-		11,650		-
	$	2,942	$	710	$	65	$	3,717	$	1,115,609	$	14,389	$	1,133,715	$	65


															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 loan fees and 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. Loans listed as not rated have outstanding loans or commitments less than $50,000 or are included in groups of homogeneous loans.

Credit Quality Indicators by class of loans as of December 31, 2015, and December 31, 2014, were as follows:


December 31, 2015			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	136,078	$	3,208	$	2,029	$	-	$	141,315
Real estate - commercial
Owner occupied general purpose		123,827		-		1,677		-		125,504
Owner occupied special purpose		171,185		-		763		-		171,948
Non-owner occupied general purpose		163,956		1,908		1,779		-		167,643
Non-owner occupied special purpose		88,468		-		3,919		-		92,387
Retail Properties		30,432		1,490		2,430		-		34,352
Farm		12,615		-		1,272		-		13,887
Real estate - construction
Homebuilder		2,604		-		-		-		2,604
Land		1,137		-		-		-		1,137
Commercial speculative		2,117		-		83		-		2,200
All other		13,865		-		-		-		13,865
Real estate - residential
Investor		125,548		-		1,136		-		126,684
Owner occupied		111,713		-		7,079		-		118,792
Revolving and junior liens		102,476		-		3,055		-		105,531
Consumer		4,215		-		1		-		4,216
All other		11,650		-		-		-		11,650
Total	$	1,101,886	$	6,606	$	25,223	$	-	$	1,133,715


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

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

Impaired loans by class of loan as of December 31 were as follows:


	December 31, 2015						December 31, 2014
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Commercial	$	70	$	149	$	-	$	1,500	$	2,114	$	-
Commercial real estate
Owner occupied general purpose		2,314		3,004		-		7,125		7,870		-
Owner occupied special purpose		763		871		-		1,798		1,941		-
Non-owner occupied general purpose		1,047		1,065		-		4,831		5,653		-
Non-owner occupied special purpose		-		-		-		1,423		1,930		-
Retail properties		-		-		-		-		-		-
Farm		1,272		1,338		-		-		-		-
Construction
Homebuilder		-		-		-		1,791		1,791		-
Land		-		-		-		-		-		-
Commercial speculative		83		86		-		-		-		-
All other		-		-		-		291		323		-
Residential
Investor		1,906		2,259		-		2,595		3,024		-
Owner occupied		10,539		11,999		-		11,419		12,816		-
Revolving and junior liens		2,731		3,947		-		2,238		3,541		-
Consumer		-		-		-		-		-		-
Total impaired loans with no recorded allowance		20,725		24,718		-		35,011		41,003		-


With an allowance recorded
Commercial		3		8		3		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		76		76		21
Non-owner occupied special purpose		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-
Farm		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-
Land		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-
All other		-		-		-		270		306		98
Residential
Investor		-		-		-		135		145		24
Owner occupied		112		112		31		23		65		38
Revolving and junior liens		46		46		-		371		405		97
Consumer		-		-		-		-		-		-
Total impaired loans with a recorded allowance		161		166		34		875		997		278
Total impaired loans	$	20,886	$	24,884	$	34	$	35,886	$	42,000	$	278

Average recorded investment and interest income recognized on impaired loans by class of loan for the years ending December 31 were as follows:


	Year to date				Year to date				Year to date
	December 31, 2015				December 31, 2014				December 31, 2013
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	785	$	-	$	764	$	-	$	112	$	-
Commercial real estate
Owner occupied general purpose		4,720		82		4,834		104		3,508		3
Owner occupied special purpose		1,280		-		2,584		45		5,275		-
Non-owner occupied general purpose		2,939		3		5,130		-		9,892		75
Non-owner occupied special purpose		712		-		1,042		-		569		-
Retail properties		-		-		1,572		-		5,962		-
Farm		636		-		-		-		1,259		-
Construction
Homebuilder		895		-		1,903		82		3,085		97
Land		-		-		105		-		232		-
Commercial speculative		42		-		369		-		1,501		-
All other		145		-		147		-		41		-
Residential
Investor		2,251		51		4,290		43		5,576		-
Owner occupied		10,979		160		10,299		187		9,284		209
Revolving and junior liens		2,484		7		2,004		6		1,570		6
Consumer		-		-		-		-		11		-
Total impaired loans with no recorded allowance		27,868		303		35,043		467		47,877		390


With an allowance recorded
Commercial		2		-		-		-		283		-
Commercial real estate
Owner occupied general purpose		-		-		365		-		872		-
Owner occupied special purpose		-		-		2,150		-		4,277		-
Non-owner occupied general purpose		38		-		508		-		1,859		-
Non-owner occupied special purpose		-		-		-		-		-		-
Retail properties		-		-		-		-		876		-
Farm		-		-		-		-		-		-
Construction
Homebuilder		-		-		84		-		97		-
Land		-		-		-		-		-		-
Commercial speculative		-		-		587		-		2,748		-
All other		135		-		353		-		458		-
Residential
Investor		67		-		410		-		2,713		-
Owner occupied		68		-		794		1		3,737		-
Revolving and junior liens		208		3		934		-		1,981		-
Consumer		-		-		-		-		-		-
Total impaired loans with a recorded allowance		518		3		6,185		1		19,901		-
Total impaired loans	$	28,386	$	306	$	41,228	$	468	$	67,778	$	390

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.

Loans that were modified during the period are summarized as follows:


	TDR Modifications
	Twelve months ended December 31, 2015
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Other1	2	$	256	$	255
Revolving and junior liens
HAMP3	5		193		153
Other1	3		378		347
	10	$	827	$	755


	TDR Modifications
	Twelve months ended December 31, 2014
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1	2	$	1,320	$	1,106
Bifurcate2	1		675		357
Real estate - residential
Investor
Other1	2		237		221
Owner occupied
Other1	1		136		133
HAMP3	2		250		218
Deferral4	2		344		224
Revolving and junior liens
Other1	5		343		334
	15	$	3,305	$	2,593

Other: Change of terms from bankruptcy court

Bifurcate: Refers to an “A/B” restructure separated into two notes, charging off the entire B portion of the note.

HAMP: Home Affordable Modification Program

⁴

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. The following table presents TDRs that defaulted during the periods shown and were restructured within the 12 month period prior to default.


	TDR Default Activity			TDR Default Activity
	Twelve months ended December 31, 2015			Twelve months ended December 31, 2014
Troubled debt restructurings that	# of	Pre-modification outstanding		# of	Pre-modification outstanding
Subsequently Defaulted	contracts	recorded investment		contracts	recorded investment
Real estate - commercial
Owner occupied special purpose	-	$	-	-	$	-
Real estate - residential
Investor	-		-	-		-
Owner occupied	-		-	1		137
Revolving and junior liens	-		-	2		210
	-	$	-	3	$	347

The Bank had no commitments to borrowers whose loans were classified as impaired at December 31, 2015.

Loans to principal officers, directors, and their affiliates, which are made in the ordinary course of business, were as follows at December 31:


	2015		2014
Beginning balance	$	7,793	$	6,414
New loans		864		41,810
Repayments and other reductions		(635)		(38,295)
Change in related party status		(6,235)		(2,136)
Ending balance	$	1,787	$	7,793

No loans to principal officers, directors, and their affiliates were past due greater than 90 days at either December 31, 2015, or December 31, 2014.