LOANS AND ALLOWANCE FOR LOAN LOSSES | LOANS AND ALLOWANCE FOR LOAN LOSSES The Company’s loan portfolio consists of the following categories of loans as of the dates presented (dollars in thousands). September 30, 2018 December 31, 2017 Construction and development $ 160,921 $ 157,667 1-4 Family 286,976 276,922 Multifamily 50,770 51,283 Farmland 20,902 23,838 Commercial real estate 592,996 537,364 Total mortgage loans on real estate 1,112,565 1,047,074 Commercial and industrial 193,563 135,392 Consumer 52,284 76,313 Total loans $ 1,358,412 $ 1,258,779 Unamortized premiums and discounts on loans, included in the total loans balances above, were $1.6 million and $2.6 million at September 30, 2018 and December 31, 2017 , respectively. Nonaccrual and Past Due Loans Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regard to our collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower. The table below provides an analysis of the aging of loans as of the dates presented (dollars in thousands). September 30, 2018 Accruing Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Nonaccrual Total Past Due & Nonaccrual Acquired Impaired Loans Total Loans Construction and development $ 160,161 $ 39 $ — $ — $ 705 $ 744 $ 16 $ 160,921 1-4 Family 283,910 839 264 — 1,438 2,541 525 286,976 Multifamily 50,770 — — — — — — 50,770 Farmland 18,638 — — — — — 2,264 20,902 Commercial real estate 589,990 131 — 67 766 964 2,042 592,996 Total mortgage loans on real estate 1,103,469 1,009 264 67 2,909 4,249 4,847 1,112,565 Commercial and industrial 192,093 194 6 — 66 266 1,204 193,563 Consumer 50,815 379 63 — 982 1,424 45 52,284 Total loans $ 1,346,377 $ 1,582 $ 333 $ 67 $ 3,957 $ 5,939 $ 6,096 $ 1,358,412 December 31, 2017 Accruing Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Nonaccrual Total Past Due & Nonaccrual Acquired Impaired Loans Total Loans Construction and development $ 157,123 $ 225 $ — $ — $ 34 $ 259 $ 285 $ 157,667 1-4 Family 273,321 1,396 185 56 478 2,115 1,486 276,922 Multifamily 50,271 — — — — — 1,012 51,283 Farmland 19,619 — — 58 — 58 4,161 23,838 Commercial real estate 535,014 107 89 — 67 263 2,087 537,364 Total mortgage loans on real estate 1,035,348 1,728 274 114 579 2,695 9,031 1,047,074 Commercial and industrial 133,009 977 67 — 10 1,054 1,329 135,392 Consumer 74,409 610 152 20 1,118 1,900 4 76,313 Total loans $ 1,242,766 $ 3,315 $ 493 $ 134 $ 1,707 $ 5,649 $ 10,364 $ 1,258,779 Credit Quality Indicators Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance: Pass - Loans not meeting the criteria below are considered pass. These loans have high credit characteristics and financial strength. The borrowers at least generate profits and cash flow that are in line with peer and industry standards and have debt service coverage ratios above loan covenants and our policy guidelines. For some of these loans, a guaranty from a financially capable party mitigates characteristics of the borrower that might otherwise result in a lower grade. Special Mention - Loans classified as special mention possess some credit deficiencies that need to be corrected to avoid a greater risk of default in the future. For example, financial ratios relating to the borrower may have deteriorated. Often, a special mention categorization is temporary while certain factors are analyzed or matters addressed before the loan is re-categorized as either pass or substandard. Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or the liquidation value of any collateral. If deficiencies are not addressed, it is likely that this category of loan will result in the Bank incurring a loss. Where a borrower has been unable to adjust to industry or general economic conditions, the borrower’s loan is often categorized as substandard. 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. Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as recorded assets is not warranted. This classification does not mean that the assets have absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these assets. The table below presents the Company’s loan portfolio by category and credit quality indicator as of the dates presented (dollars in thousands). September 30, 2018 Pass Special Mention Substandard Doubtful Total Construction and development $ 160,273 $ — $ 648 $ — $ 160,921 1-4 Family 285,196 69 1,681 30 286,976 Multifamily 50,770 — — — 50,770 Farmland 18,638 — 2,264 — 20,902 Commercial real estate 591,562 — 1,434 — 592,996 Total mortgage loans on real estate 1,106,439 69 6,027 30 1,112,565 Commercial and industrial 190,578 — 2,985 — 193,563 Consumer 51,079 222 983 — 52,284 Total loans $ 1,348,096 $ 291 $ 9,995 $ 30 $ 1,358,412 December 31, 2017 Pass Special Mention Substandard Doubtful Total Construction and development $ 157,385 $ — $ 282 $ — $ 157,667 1-4 Family 275,492 74 1,356 — 276,922 Multifamily 51,283 — — — 51,283 Farmland 19,611 2,773 1,454 — 23,838 Commercial real estate 536,741 — 623 — 537,364 Total mortgage loans on real estate 1,040,512 2,847 3,715 — 1,047,074 Commercial and industrial 134,522 — 870 — 135,392 Consumer 74,934 258 1,121 — 76,313 Total loans $ 1,249,968 $ 3,105 $ 5,706 $ — $ 1,258,779 The Company had no loans that were classified as loss at September 30, 2018 or December 31, 2017 . Loan participations and whole loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The balance of loans serviced for others was $144.7 million and $204.2 million as of September 30, 2018 and December 31, 2017 , respectively. The unpaid principal balance of these loans was approximately $186.3 million and $237.3 million as of September 30, 2018 and December 31, 2017 , respectively. In the ordinary course of business, the Company makes loans to related parties including its executive officers, principal stockholders, directors and their immediate family members, as well as companies in which these individuals are principal owners. Loans outstanding to such related party borrowers amounted to approximately $29.0 million and $31.2 million as of September 30, 2018 and December 31, 2017 , respectively. During the three months ended September 30, 2018 , a related party loan in the amount of $0.7 million was classified as Substandard and placed on nonaccrual. The table below shows the aggregate amount of loans to such related parties as of the dates presented (dollars in thousands). September 30, 2018 December 31, 2017 Balance, beginning of period $ 31,153 $ 19,957 New loans 9,824 24,428 Repayments and changes in relationship (12,013 ) (13,232 ) Balance, end of period $ 28,964 $ 31,153 Loans Acquired with Deteriorated Credit Quality The Company accounts for certain loans acquired as acquired impaired loans under ASC 310-30 due to evidence of credit deterioration at acquisition and the probability that the Company will be unable to collect all contractually required payments. The table below shows the changes in the accretable yield on acquired impaired loans for the periods presented (dollars in thousands). For the three months ended September 30, For the nine months ended September 30, 2018 2017 2018 2017 Balance, beginning of period $ — $ — $ — $ 275 Loan disposals — (53 ) — (303 ) Accretion to interest income — 53 — 28 Balance at September 30, $ — $ — $ — $ — The table below shows a summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands). Three months ended September 30, Nine months ended September 30, 2018 2017 2018 2017 Balance, beginning of period $ 8,451 $ 7,320 $ 7,891 $ 7,051 Provision for loan losses 785 420 1,977 1,145 Loans charged off (264 ) (155 ) (1,001 ) (635 ) Recoveries 49 20 154 44 Balance, end of period $ 9,021 $ 7,605 $ 9,021 $ 7,605 The following tables outline the activity in the allowance for loan losses by collateral type for the three and nine months ended September 30, 2018 and 2017 , and show both the allowances and portfolio balances for loans individually and collectively evaluated for impairment as of September 30, 2018 and 2017 (dollars in thousands). Three months ended September 30, 2018 Construction & Development Farmland 1-4 Family Multifamily Commercial Real Estate Commercial & Consumer Total Allowance for loan losses: Beginning balance $ 1,018 $ 66 $ 1,339 $ 319 $ 3,817 $ 1,048 $ 844 $ 8,451 Provision 7 8 101 14 113 454 88 785 Charge-offs (8 ) — (44 ) — — (30 ) (182 ) (264 ) Recoveries 2 — 14 — — 13 20 49 Ending balance $ 1,019 $ 74 $ 1,410 $ 333 $ 3,930 $ 1,485 $ 770 $ 9,021 Three months ended September 30, 2017 Construction & Development Farmland 1-4 Family Multifamily Commercial Real Estate Commercial & Consumer Total Allowance for loan losses: Beginning balance $ 806 $ 54 $ 1,276 $ 361 $ 3,036 $ 683 $ 1,104 $ 7,320 Provision 28 6 (19 ) (21 ) 227 135 64 420 Charge-offs — — — — — (77 ) (78 ) (155 ) Recoveries 14 — 2 — — — 4 20 Ending balance $ 848 $ 60 $ 1,259 $ 340 $ 3,263 $ 741 $ 1,094 $ 7,605 Nine months ended September 30, 2018 Construction & Development Farmland 1-4 Family Multifamily Commercial Real Estate Commercial & Industrial Consumer Total Allowance for loan losses: Beginning balance $ 945 $ 60 $ 1,287 $ 332 $ 3,599 $ 693 $ 975 $ 7,891 Provision 88 14 182 1 331 1,219 142 1,977 Charge-offs (24 ) — (79 ) — — (481 ) (417 ) (1,001 ) Recoveries 10 — 20 — — 54 70 154 Ending balance $ 1,019 $ 74 $ 1,410 $ 333 $ 3,930 $ 1,485 $ 770 $ 9,021 Ending allowance balance for loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ 246 $ 246 Ending allowance balance for loans acquired with deteriorated credit quality — — — — — — — — Ending allowance balance for loans collectively evaluated for impairment $ 1,019 $ 74 $ 1,410 $ 333 $ 3,930 $ 1,485 $ 524 $ 8,775 Loans receivable: Balance of loans individually evaluated for impairment $ 222 $ — $ 1,911 $ — $ 711 $ 78 $ 910 $ 3,832 Balance of loans acquired with deteriorated credit quality 16 2,264 525 — 2,042 1,204 45 6,096 Balance of loans collectively evaluated for impairment 160,683 18,638 284,540 50,770 590,243 192,281 51,329 1,348,484 Total period-end balance $ 160,921 $ 20,902 $ 286,976 $ 50,770 $ 592,996 $ 193,563 $ 52,284 $ 1,358,412 Nine months ended September 30, 2017 Construction & Development Farmland 1-4 Family Multifamily Commercial Real Estate Commercial & Industrial Consumer Total Allowance for loan losses: Beginning balance $ 579 $ 60 $ 1,377 $ 355 $ 2,499 $ 759 $ 1,422 $ 7,051 Provision 241 — (122 ) (15 ) 764 252 25 1,145 Charge-offs — — — — — (270 ) (365 ) (635 ) Recoveries 28 — 4 — — — 12 44 Ending balance $ 848 $ 60 $ 1,259 $ 340 $ 3,263 $ 741 $ 1,094 $ 7,605 Ending allowance balance for loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ 336 $ 336 Ending allowance balance for loans collectively evaluated for impairment 848 60 1,259 340 3,263 741 758 7,269 Ending allowance balance for loans acquired with deteriorated credit quality $ — $ — $ — $ — $ — $ — $ — $ — Loans receivable: Balance of loans individually evaluated for impairment $ 186 $ — $ 1,452 $ — $ 651 $ 6 $ 1,182 $ 3,477 Balance of loans collectively evaluated for impairment 122,315 14,130 250,551 50,770 461,771 125,224 82,283 1,107,044 Total period-end balance $ 122,501 $ 14,130 $ 252,003 $ 50,770 $ 462,422 $ 125,230 $ 83,465 $ 1,110,521 Balance of loans acquired with deteriorated credit quality $ 55 $ — $ 2,814 $ 1,806 $ 3,033 $ 1,884 $ 5 $ 9,597 Impaired Loans The Company considers a loan to be impaired when, based on current information and events, the Company determines that it will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. Determination of impairment is treated the same across all classes of loans. When the Company identifies a loan as impaired, it measures the impairment based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loans is the operation or liquidation of the collateral. In these cases when foreclosure is probable, the Company uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If the Company determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), the Company recognizes impairment through an allowance estimate or a charge-off to the allowance. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual, contractual interest is credited to interest income when received, under the cash basis method. The following tables contain information on the Company’s impaired loans, which include troubled debt restructurings (“TDRs”), discussed in more detail below, and nonaccrual loans individually evaluated for impairment for purposes of determining the allowance for loan losses. The average balances are calculated based on the month-end balances of the loans during the period reported (dollars in thousands). September 30, 2018 Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Construction and development $ 222 $ 240 $ — 1-4 Family 1,911 1,921 — Commercial real estate 711 727 — Total mortgage loans on real estate 2,844 2,888 — Commercial and industrial 78 78 — Consumer 202 228 — Total 3,124 3,194 — With related allowance recorded: Consumer 708 745 246 Total 708 745 246 Total loans: Construction and development 222 240 — 1-4 Family 1,911 1,921 — Commercial real estate 711 727 — Total mortgage loans on real estate 2,844 2,888 — Commercial and industrial 78 78 — Consumer 910 973 246 Total $ 3,832 $ 3,939 $ 246 December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Construction and development $ 182 $ 202 $ — 1-4 Family 1,136 1,169 — Commercial real estate 640 654 — Total mortgage loans on real estate 1,958 2,025 — Consumer 168 217 — Total 2,126 2,242 — With related allowance recorded: Consumer 918 956 304 Total 918 956 304 Total loans: Construction and development 182 202 — 1-4 Family 1,136 1,169 — Commercial real estate 640 654 — Total mortgage loans on real estate 1,958 2,025 — Consumer 1,086 1,173 304 Total $ 3,044 $ 3,198 $ 304 Presented in the tables below is the average recorded investment of the impaired loans and the related amount of interest income recognized during the time within the period that the loans were impaired. The average balances are calculated based on the month-end balances of the loans during the periods reported (dollars in thousands). Three months ended September 30, 2018 2017 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Construction and development $ 266 $ 3 $ 187 $ 2 1-4 Family 1,739 9 1,231 18 Commercial real estate 711 2 632 8 Total mortgage loans on real estate 2,716 14 2,050 28 Commercial and industrial 76 — 22 — Consumer 235 — 196 — Total 3,027 14 2,268 28 With related allowance recorded: Consumer 693 — 933 — Total 693 — 933 — Total loans: Construction and development 266 3 187 2 1-4 Family 1,739 9 1,231 18 Commercial real estate 711 2 632 8 Total mortgage loans on real estate 2,716 14 2,050 28 Commercial and industrial 76 — 22 — Consumer 928 — 1,129 — Total $ 3,720 $ 14 $ 3,201 $ 28 Nine months ended September 30, 2018 2017 Average Interest Average Interest With no related allowance recorded: Construction and development $ 203 $ 7 $ 389 $ 8 1-4 Family 1,386 30 1,517 61 Commercial real estate 923 18 613 35 Total mortgage loans on real estate 2,512 55 2,519 104 Commercial and industrial 345 — 163 — Consumer 404 — 322 1 Total 3,261 55 3,004 105 With related allowance recorded: Consumer 626 — 813 1 Total 626 — 813 1 Total loans: Construction and development 203 7 389 8 1-4 Family 1,386 30 1,517 61 Commercial real estate 923 18 613 35 Total mortgage loans on real estate 2,512 55 2,519 104 Commercial and industrial 345 — 163 — Consumer 1,030 — 1,135 2 Total $ 3,887 $ 55 $ 3,817 $ 106 Troubled Debt Restructurings In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a TDR. The Company strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before such loans reach nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases in which the Company grants the borrower new terms that provide for a reduction of either interest or principal, or otherwise include a concession, the Company identifies the loan as a TDR and measures any impairment on the restructuring as previously noted for impaired loans. Loans classified as TDRs, consisting of 23 credits, totaled approximately $2.0 million at September 30, 2018 , compared to 18 credits totaling $1.6 million at December 31, 2017 . At September 30, 2018 , 15 of the restructured loans were considered TDRs due to modification of terms through adjustments to maturity, seven of the restructured loans were considered TDRs due to a reduction in the interest rate to a rate lower than the current market rate, and one restructured loan was considered a TDR due to forgiveness of interest due on the loan. As of September 30, 2018 three of the TDRs were in default of their modified terms and are included in nonaccrual loans. As of December 31, 2017 , all restructured loans were performing under their modified terms. The Company individually evaluates each TDR for allowance purposes, primarily based on collateral value, and excludes these loans from the loan population that is collectively evaluated for impairment. At September 30, 2018 and December 31, 2017 , there were no available balances on loans classified as TDRs that the Company was committed to lend. The table below presents the TDR pre- and post-modification outstanding recorded investments by loan categories for loans modified during the nine month periods ended September 30, 2018 and 2017 (dollars in thousands). September 30, 2018 September 30, 2017 Troubled Debt Restructurings Number of Contracts Pre- Modification Post- Modification Number of Contracts Pre- Modification Post- Modification Construction and development 2 $ 358 $ 358 — $ — $ — 1-4 Family 7 400 400 — — — Commercial and industrial 2 12 12 — — — Consumer — — — 1 6 6 Total $ 770 $ 770 $ 6 $ 6 There were two loans modified under TDRs during the previous twelve month period that subsequently defaulted during the nine months ended September 30, 2018 . |