Loans and Allowance for Loan Losses | NOTE 3 – LOANS AND ALLLOWANCE FOR LOAN LOSSES A summary of the loan portfolio as of June 30, 2017 and December 31, 2016 follows (dollars in thousands): June 30, 2017 December 31, 2016 Commercial real estate $ 385,758 $ 302,322 Consumer real estate 99,751 97,015 Construction and land development 62,152 94,491 Commercial and industrial 406,636 379,620 Consumer 4,096 5,974 Other 38,783 56,796 Total 997,176 936,218 Less net unearned income (559 ) (967 ) 996,617 935,251 Allowance for loan losses (12,454 ) (11,634 ) $ 984,163 $ 923,617 The adequacy of the allowance for loan losses (ALL) is assessed at the end of each quarter. The ALL includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogenous pools and collectively evaluated for impairment. The ALL factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors. The Company categorizes loans 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 Company analyzes all commercial loans, and consumer relationships with an outstanding balance greater than $500,000, individually and assigns each loan a risk rating. This analysis is performed on a continual basis by the relationship managers and credit department personnel. On at least an annual basis an independent party performs a formal credit risk review of a sample of the loan portfolio. Among other things, this review assesses the appropriateness of the loan’s risk rating. The Company uses the following definitions for risk ratings: Special Mention – A special mention asset possesses deficiencies or potential weaknesses deserving of management’s attention. If uncorrected, such weaknesses or deficiencies may expose the Company to an increased risk of loss in the future. Substandard – A substandard asset is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if 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. Doubtful – A doubtful asset has all weaknesses inherent in one classified substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset exist, therefore, its classification as an estimated loss is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Loans not falling into the criteria above are considered to be pass-rated loans. The Company utilizes six loan grades within the pass risk rating. The following tables present the loan balances by category as well as risk rating (dollars in thousands): Performing Loans June 30, 2017 Pass/Watch Special Mention Substandard Total Performing Total Loans Total Commercial real estate $ 384,498 $ — $ — $ 384,498 $ 1,260 $ 385,758 Consumer real estate 99,461 — 290 99,751 — 99,751 Construction and land development 62,152 — — 62,152 — 62,152 Commercial and industrial 381,333 17,841 5,493 404,667 1,969 406,636 Consumer 4,081 — 15 4,096 — 4,096 Other 38,783 — — 38,783 — 38,783 Total $ 970,308 $ 17,841 $ 5,798 $ 993,947 $ 3,229 $ 997,176 December 31, 2016 Commercial real estate $ 301,012 $ — $ — $ 301,012 $ 1,310 $ 302,322 Consumer real estate 96,722 — 293 97,015 — 97,015 Construction and land development 94,491 — — 94,491 — 94,491 Commercial and industrial 349,857 11,035 16,419 377,311 2,309 379,620 Consumer 5,958 — 16 5,974 — 5,974 Other 56,796 — — 56,796 — 56,796 Total $ 904,836 $ 11,035 $ 16,728 $ 932,599 $ 3,619 $ 936,218 None of the Company’s loans had a risk rating of “Doubtful” as of June 30, 2017 or December 31, 2016. The following tables detail the changes in the ALL for the three and six months ended June 30, 2017 and 2016 (in thousands): Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total Three Months Ended June 30, 2017 Balance, beginning of period $ 3,257 $ 1,048 $ 1,090 $ 8,013 $ 60 $ 529 $ 13,997 Charged-off loans — — — (11,244 ) — — (11,244 ) Recoveries — 1 — — 10 — 11 Provision for loan losses 276 32 (179 ) 9,626 (13 ) (52 ) 9,690 Balance, end of period $ 3,533 $ 1,081 $ 911 $ 6,395 $ 57 $ 477 $ 12,454 Three Months Ended June 30, 2016 Balance, beginning of period $ 2,970 $ 963 $ 799 $ 4,924 $ 113 $ 530 $ 10,299 Charged-off loans — — (11 ) (22 ) — (33 ) Recoveries — — — 4 1 — 5 Provision for loan losses (374 ) 5 144 120 12 276 183 Balance, end of period $ 2,596 $ 968 $ 943 $ 5,037 $ 104 $ 806 $ 10,454 Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total Six Months Ended June 30, 2017 Balance, beginning of period $ 2,655 $ 1,013 $ 1,574 $ 5,618 $ 76 $ 698 $ 11,634 Charged-off loans — — — (12,369 ) — — (12,369 ) Recoveries — 1 — 3 91 — 95 Provision for loan losses 878 67 (663 ) 13,143 (110 ) (221 ) 13,094 Balance, end of period $ 3,533 $ 1,081 $ 911 $ 6,395 $ 57 $ 477 $ 12,454 Six Months Ended June 30, 2016 Balance, beginning of period $ 2,879 $ 968 $ 914 $ 4,693 $ 103 $ 575 $ 10,132 Charged-off loans (350 ) — — (311 ) (146 ) — (807 ) Recoveries — — — 8 1 — 9 Provision for loan losses 67 — 29 647 146 231 1,120 Balance, end of period $ 2,596 $ 968 $ 943 $ 5,037 $ 104 $ 806 $ 10,454 A breakdown of the ALL and the loan portfolio by loan category at June 30, 2017 and December 31, 2016 follows (dollars in thousands): Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total June 30, 2017 Allowance for Loan Losses: Collectively evaluated for impairment $ 3,533 $ 1,081 $ 911 $ 5,895 $ 57 $ 477 $ 11,954 Individually evaluated for impairment — — — 500 — — 500 Balances, end of period $ 3,533 $ 1,081 $ 911 $ 6,395 $ 57 $ 477 $ 12,454 Loans: Collectively evaluated for impairment $ 384,498 $ 99,751 $ 62,152 $ 404,667 $ 4,096 $ 38,783 $ 993,947 Individually evaluated for impairment 1,260 — — 1,969 — — 3,229 Balances, end of period $ 385,758 $ 99,751 $ 62,152 $ 406,636 $ 4,096 $ 38,783 $ 997,176 December 31, 2016 Allowance for Loan Losses: Collectively evaluated for impairment $ 2,655 $ 1,013 $ 1,574 $ 5,118 $ 76 $ 698 $ 11,134 Individually evaluated for impairment — — — 500 — — 500 Balances, end of period $ 2,655 $ 1,013 $ 1,574 $ 5,618 $ 76 $ 698 $ 11,634 Loans: Collectively evaluated for impairment $ 301,012 $ 97,015 $ 94,491 $ 377,311 $ 5,974 $ 56,796 $ 932,599 Individually evaluated for impairment 1,310 — — 2,309 — — 3,619 Balances, end of period $ 302,322 $ 97,015 $ 94,491 $ 379,620 $ 5,974 $ 56,796 $ 936,218 The following table presents the allocation of the ALL for each respective loan category with the corresponding percentage of the ALL in each category to total loans, net of deferred fees as of June 30, 2017 and December 31, 2016 (dollars in thousands): June 30, 2017 December 31, 2016 Amount Percent of total loans, net of deferred fees Amount Percent of total loans, net of deferred fees Commercial real estate $ 3,533 0.35 % $ 2,655 0.28 % Consumer real estate 1,081 0.11 1,013 0.11 Construction and land development 911 0.09 1,574 0.17 Commercial and industrial 6,395 0.64 5,618 0.60 Consumer 57 0.01 76 0.01 Other 477 0.05 698 0.07 Total allowance for loan losses $ 12,454 1.25 % $ 11,634 1.24 % The following table presents the Company’s impaired loans that were evaluated for specific loss allowance as of June 30, 2017 and December 31, 2016 (dollars in thousands): June 30, 2017 December 31, 2016 Recorded investment Unpaid principal balance Related allowance Recorded investment Unpaid principal balance Related allowance With no related allowance recorded: Commercial real estate $ 1,260 $ 1,672 $ — $ 1,310 $ 1,686 $ — Consumer real estate — — — — — — Construction and land development — — — — — — Commercial and industrial — — — — — — Consumer — — — — — — Other — — — — — — Subtotal 1,260 1,672 — 1,310 1,686 — With an allowance recorded: Commercial real estate — — — — — — Consumer real estate — — — — — — Construction and land development — — — — — — Commercial and industrial 1,969 2,770 500 2,309 2,921 500 Consumer — — — — — — Other — — — — — — Subtotal 1,969 2,770 500 2,309 2,921 500 Total $ 3,229 $ 4,442 $ 500 $ 3,619 $ 4,607 $ 500 The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2017 and 2016 (dollars in thousands): Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016 Average recorded investment Interest income recognized Average recorded investment Interest income recognized Average recorded investment Interest income recognized Average recorded investment Interest income recognized With no related allowance recorded: Commercial real estate $ 1,278 $ — $ 1,598 $ — $ 1,286 $ — $ 1,771 $ — Consumer real estate — — 789 — — — 930 13 Construction and land development — — — — — — — — Commercial and industrial — — 3,476 — — — 3,596 — Consumer — — — — — — — — Other — — — — — — — — Subtotal 1,278 — 5,863 — 1,286 — 6,297 13 With an allowance recorded: Commercial real estate — — — — — — — — Consumer real estate — — — — — — — — Construction and land development — — — — — — — — Commercial and industrial 2,194 — — — 2,242 — — — Consumer — — — — — — — — Other — — — — — — — — Subtotal 2,194 — — — 2,242 — — — Total $ 3,472 $ — $ 5,863 $ — $ 3,528 $ — $ 6,297 $ 13 There was no interest income recognized on a cash basis for impaired loans for the three or six months ended June 30, 2017 or 2016. The following table presents the aging of the recorded investment in past-due loans as of June 30, 2017 and December 31, 2016 by class of loans (dollars in thousands): 30 - 59 60 - 89 Greater Than Days Days 89 Days Total Loans Not Past Due Past Due Past Due Past Due Past Due Total June 30, 2017 Commercial real estate $ 364 $ — $ — $ 364 $ 385,394 $ 385,758 Consumer real estate 418 — — 418 99,333 99,751 Construction and land development — — — — 62,152 62,152 Commercial and industrial 2,117 — — 2,117 404,519 406,636 Consumer — — 15 15 4,081 4,096 Other — — — — 38,783 38,783 Total $ 2,899 $ — $ 15 $ 2,914 $ 994,262 $ 997,176 December 31, 2016 Commercial real estate $ — $ — $ — $ — $ 302,322 $ 302,322 Consumer real estate 81 282 — 363 96,652 97,015 Construction and land development — — — — 94,491 94,491 Commercial and industrial — — — — 379,620 379,620 Consumer — — — — 5,974 5,974 Other — — — — 56,796 56,796 Total $ 81 $ 282 $ — $ 363 $ 935,855 $ 936,218 The following table presents the recorded investment in non-accrual loans, past due loans over 90 days outstanding and accruing and troubled debt restructurings (“TDR”) by class of loans as of June 30, 2017 and December 31, 2016 (dollars in thousands): Non-Accrual Past Due Over 90 Days and Accruing Troubled Debt Restructurings June 30, 2017 Commercial real estate $ 1,260 $ — $ 1,239 Consumer real estate — — — Construction and land development — — — Commercial and industrial 1,969 — — Consumer — 15 — Other — — — Total $ 3,229 $ 15 $ 1,239 December 31, 2016 Commercial real estate $ 1,310 $ — $ 1,272 Consumer real estate — — — Construction and land development — — — Commercial and industrial 2,309 — — Consumer — — — Other — — — Total $ 3,619 $ — $ 1,272 As of June 30, 2017 and December 31, 2016, all loans classified as nonperforming were deemed to be impaired. As of June 30, 2017 and December 31, 2016, the Company had a recorded investment in TDR of $1.2 million and $1.3 million, respectively. The Company had no specific allowance for those loans at June 30, 2017 or December 31, 2016 and there were no commitments to lend additional amounts. Loans accounted for as TDR include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s loan policy. Loans accounted for as TDR are individually evaluated for impairment. The following table presents loans by class modified as TDR that occurred during the three and six months ended June 30, 2016 (dollars in thousands). There were no TDR identified during the three or six months ended June 30, 2017. Three Months Ended Six Months Ended June 30, June 30, Number of contracts Pre modification outstanding recorded investment Post modification outstanding recorded investment, net of related allowance Number of contracts Pre modification outstanding recorded investment Post modification outstanding recorded investment, net of related allowance 2016 Commercial real estate — $ — $ — 1 $ 1,948 $ 1,170 Consumer real estate — — — — — — Construction and land development — — — — — — Commercial and industrial — — — — — — Consumer — — — — — — Other — — — — — — Total — $ — $ — 1 $ 1,948 $ 1,170 The following table presents loans by class modified as TDR for which there was a payment default within twelve months following the modification during the three and six months ended June 30, 2017 and 2016 (dollars in thousands). There were no TDR for which there was a payment default within twelve months following the modification during the three or six months ended June 30, 2017. Three Months Ended Six Months Ended June 30, June 30, Number of contracts Recorded investment Number of contracts Recorded investment 2016 Commercial real estate — $ — — $ — Consumer real estate — — — — Construction and land development — — — — Commercial and industrial — — — — Consumer — — 1 124 Other — — — — Total — $ — 1 $ 124 The consumer loan TDR that subsequently defaulted during the six months ended June 30, 2016 had no specific reserve in the allowance for loan losses and resulted in a $0.1 million charge-off. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. |