Loans and Allowance for Loan Losses | NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of the loan portfolio as of September 30, 2018 and December 31, 2017 follows (dollars in thousands): September 30, 2018 December 31, 2017 Commercial real estate $ 404,753 $ 350,622 Consumer real estate 112,957 102,581 Construction and land development 129,799 82,586 Commercial and industrial 398,626 373,248 Consumer 8,274 6,862 Other 19,793 31,983 Total 1,074,202 947,882 Less net unearned income (332 ) (345 ) Total loans 1,073,870 947,537 Allowance for loan losses (15,218 ) (13,721 ) Total loans, net $ 1,058,652 $ 933,816 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): Non-impaired Loans September 30, 2018 Pass/Watch Special Mention Substandard Total Non-impaired Total Loans Total Commercial real estate $ 402,254 $ — $ 1,353 $ 403,607 $ 1,146 $ 404,753 Consumer real estate 112,640 — 225 112,865 92 112,957 Construction and land development 129,799 — — 129,799 — 129,799 Commercial and industrial 379,446 6,992 6,769 393,207 5,419 398,626 Consumer 8,174 — — 8,174 100 8,274 Other 19,793 — — 19,793 — 19,793 Total $ 1,052,106 $ 6,992 $ 8,347 $ 1,067,445 $ 6,757 $ 1,074,202 December 31, 2017 Commercial real estate $ 349,415 $ — $ — $ 349,415 $ 1,207 $ 350,622 Consumer real estate 102,571 — 10 102,581 — 102,581 Construction and land development 82,586 — — 82,586 — 82,586 Commercial and industrial 349,494 11,193 11,073 371,760 1,488 373,248 Consumer 6,849 — 13 6,862 — 6,862 Other 31,983 — — 31,983 — 31,983 Total $ 922,898 $ 11,193 $ 11,096 $ 945,187 $ 2,695 $ 947,882 None of the Company’s loans had a risk rating of “Doubtful” as of September 30, 2018 or December 31, 2017. The following tables detail the changes in the ALL for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands): Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total Three Months Ended September 30, 2018 Balance, beginning of period $ 3,551 $ 1,057 $ 1,764 $ 7,779 $ 120 $ 434 $ 14,705 Charged-off loans — — — — — — — Recoveries 6 1 — 22 3 — 32 Provision for loan losses (412 ) (75 ) 449 767 (30 ) (218 ) 481 Balance, end of period $ 3,145 $ 983 $ 2,213 $ 8,568 $ 93 $ 216 $ 15,218 Three Months Ended September 30, 2017 Balance, beginning of period $ 3,533 $ 1,081 $ 911 $ 6,395 $ 57 $ 477 $ 12,454 Charged-off loans — — — — — — — Recoveries 3 — — 1,860 — — 1,863 Provision for loan losses (242 ) (97 ) 576 (306 ) 22 (148 ) (195 ) Balance, end of period $ 3,294 $ 984 $ 1,487 $ 7,949 $ 79 $ 329 $ 14,122 Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total Nine Months Ended September 30, 2018 Balance, beginning of period $ 3,324 $ 1,063 $ 1,628 $ 7,209 $ 91 $ 406 $ 13,721 Charged-off loans — — — (226 ) (25 ) — (251 ) Recoveries 16 4 — 348 52 — 420 Provision for loan losses (195 ) (84 ) 585 1,237 (25 ) (190 ) 1,328 Balance, end of period $ 3,145 $ 983 $ 2,213 $ 8,568 $ 93 $ 216 $ 15,218 Nine Months Ended September 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 4 — — 1,862 91 — 1,957 Provision for loan losses 635 (29 ) (87 ) 12,838 (88 ) (369 ) 12,900 Balance, end of period $ 3,294 $ 984 $ 1,487 $ 7,949 $ 79 $ 329 $ 14,122 A breakdown of the ALL and the loan portfolio by loan category at September 30, 2018 and December 31, 2017 follows (dollars in thousands): Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total September 30, 2018 Allowance for Loan Losses: Collectively evaluated for impairment $ 3,145 $ 983 $ 2,213 $ 5,868 $ 93 $ 216 $ 12,518 Individually evaluated for impairment — — — 2,700 — — 2,700 Balances, end of period $ 3,145 $ 983 $ 2,213 $ 8,568 $ 93 $ 216 $ 15,218 Loans: Collectively evaluated for impairment $ 403,607 $ 112,865 $ 129,799 $ 393,207 $ 8,174 $ 19,793 $ 1,067,445 Individually evaluated for impairment 1,146 92 — 5,419 100 — 6,757 Balances, end of period $ 404,753 $ 112,957 $ 129,799 $ 398,626 $ 8,274 $ 19,793 $ 1,074,202 December 31, 2017 Allowance for Loan Losses: Collectively evaluated for impairment $ 3,324 $ 1,063 $ 1,628 $ 7,109 $ 91 $ 406 $ 13,621 Individually evaluated for impairment — — — 100 — — 100 Balances, end of period $ 3,324 $ 1,063 $ 1,628 $ 7,209 $ 91 $ 406 $ 13,721 Loans: Collectively evaluated for impairment $ 349,415 $ 102,581 $ 82,586 $ 371,760 $ 6,862 $ 31,983 $ 945,187 Individually evaluated for impairment 1,207 — — 1,488 — — 2,695 Balances, end of period $ 350,622 $ 102,581 $ 82,586 $ 373,248 $ 6,862 $ 31,983 $ 947,882 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 September 30, 2018 and December 31, 2017 (dollars in thousands): September 30, 2018 December 31, 2017 Amount Percent of total loans, net of deferred fees Amount Percent of total loans, net of deferred fees Commercial real estate $ 3,145 0.29 % $ 3,324 0.35 % Consumer real estate 983 0.09 1,063 0.11 Construction and land development 2,213 0.21 1,628 0.17 Commercial and industrial 8,568 0.80 7,209 0.77 Consumer 93 0.01 91 0.01 Other 216 0.02 406 0.04 Total allowance for loan losses $ 15,218 1.42 % $ 13,721 1.45 % The following table presents the Company’s impaired loans that were evaluated for specific loss allowance as of September 30, 2018 and December 31, 2017 (dollars in thousands): September 30, 2018 December 31, 2017 Recorded investment Unpaid principal balance Related allowance Recorded investment Unpaid principal balance Related allowance With no related allowance recorded: Commercial real estate $ 1,146 $ 1,617 $ — $ 1,207 $ 1,645 $ — Consumer real estate 92 92 — — — — Construction and land development — — — — — — Commercial and industrial — — — — — — Consumer 100 100 — — — — Other — — — — — — Subtotal 1,338 1,809 — 1,207 1,645 — With an allowance recorded: Commercial real estate — — — — — — Consumer real estate — — — — — — Construction and land development — — — — — — Commercial and industrial 5,419 5,419 2,700 1,488 2,770 100 Consumer — — — — — — Other — — — — — — Subtotal 5,419 5,419 2,700 1,488 2,770 100 Total $ 6,757 $ 7,228 $ 2,700 $ 2,695 $ 4,415 $ 100 The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands): Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017 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 $ 1,159 $ 15 $ 1,245 $ — $ 1,189 $ 25 $ 1,272 $ — Consumer real estate 92 — — — 92 3 — — Construction and land development — — — — — — — — Commercial and industrial — — — — — — — — Consumer 100 — — — 100 3 — — Other — — — — — — — — Subtotal 1,351 15 1,245 — 1,381 31 1,272 — With an allowance recorded: Commercial real estate — — — — — — — — Consumer real estate — — — — — — — — Construction and land development — — — — — — — — Commercial and industrial 5,419 — 1,941 — 5,369 118 2,141 — Consumer — — — — — — — — Other — — — — — — — — Subtotal 5,419 — 1,941 — 5,369 118 2,141 — Total $ 6,770 $ 15 $ 3,186 $ — $ 6,750 $ 149 $ 3,413 $ — Interest income recognized on a cash basis for impaired loans amounted to $15,000 and $25,000 for the three and nine months ended September 30, 2018. No interest income was recognized on a cash basis for impaired loans during the three or nine months ended September 30, 2017. The following table presents the aging of the recorded investment in past-due loans as of September 30, 2018 and December 31, 2017 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 September 30, 2018 Commercial real estate $ 2,474 $ — $ — $ 2,474 $ 402,279 $ 404,753 Consumer real estate 220 — 215 435 112,522 112,957 Construction and land development 133 — — 133 129,666 129,799 Commercial and industrial — 563 4,856 5,419 393,207 398,626 Consumer — — — — 8,274 8,274 Other 307 — — 307 19,486 19,793 Total $ 3,134 $ 563 $ 5,071 $ 8,768 $ 1,065,434 $ 1,074,202 December 31, 2017 Commercial real estate $ — $ — $ — $ — $ 350,622 $ 350,622 Consumer real estate — — 218 218 102,363 102,581 Construction and land development — — — — 82,586 82,586 Commercial and industrial 1,967 209 — 2,176 371,072 373,248 Consumer — — 13 13 6,849 6,862 Other — — — — 31,983 31,983 Total $ 1,967 $ 209 $ 231 $ 2,407 $ 945,475 $ 947,882 The following table presents the recorded investment in non-accrual loans, past due loans over 89 days outstanding and accruing and troubled debt restructurings (“TDR”) by class of loans as of September 30, 2018 and December 31, 2017 (dollars in thousands): Non-Accrual Past Due Over 89 Days and Accruing Troubled Debt Restructurings September 30, 2018 Commercial real estate $ — $ — $ 1,146 Consumer real estate 92 215 — Construction and land development — — — Commercial and industrial 5,419 — — Consumer 100 — — Other — — — Total $ 5,611 $ 215 $ 1,146 December 31, 2017 Commercial real estate $ 1,207 $ — $ 1,207 Consumer real estate — 218 — Construction and land development — — — Commercial and industrial 1,488 — — Consumer — 13 — Other — — — Total $ 2,695 $ 231 $ 1,207 As of September 30, 2018 and December 31, 2017, all loans classified as nonperforming were deemed to be impaired. As of both September 30, 2018 and December 31, 2017, the Company had a recorded investment in TDR of $1.1 million. The Company had no specific allowance for those loans at September 30, 2018 or December 31, 2017 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. There were no TDR identified during the three or nine months ended September 30, 2018 or 2017. There were no TDR for which there was a payment default within twelve months following the modification during the three or nine months ended September 30, 2018 or 2017. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. |