NOTE 3 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The following presents a summary of the Company’s loans as of the dates noted (in thousands):


	June 30,		December 31,
	2018		2017
Cash, Securities and Other	$	135,393	$	131,756
Construction and Development		35,760		24,914
1-4 Family Residential		307,794		282,014
Non-Owner Occupied CRE		164,438		176,987
Owner Occupied CRE		98,393		92,742
Commercial and Industrial		99,711		104,284
Total loans		841,489		812,697
Deferred costs, net		1,155		992
Allowance for loan losses		(7,100)		(7,287)
Net loans	$	835,544	$	806,402

The following presents, by class, an aging analysis of the recorded investments (excluding accrued interest receivable, deferred loan fees and deferred costs which are not material) in loans past due as of June 30, 2018 and December 31, 2017 (in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
June 30, 2018	Past Due		Past Due		Past Due		Past Due		Current		Investment

Cash, Securities and Other	$	1,407	$	3	$	—	$	1,410	$	133,983	$	135,393
Construction and Development		—		175		—		175		35,585		35,760
1-4 Family Residential		1,188		—		1,217		2,405		305,389		307,794
Non-Owner Occupied CRE		288		—		—		288		164,150		164,438
Owner Occupied CRE		—		—		—		—		98,393		98,393
Commercial and Industrial		—		—		1,835		1,835		97,876		99,711
Total	$	2,883	$	178	$	3,052	$	6,113	$	835,376	$	841,489


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
December 31, 2017	Past Due		Past Due		Past Due		Past Due		Current		Investment

Cash, Securities and Other	$	50	$	99	$	—	$	149	$	131,607	$	131,756
Construction and Development		—		—		—		—		24,914		24,914
1-4 Family Residential		1,250		—		2,388		3,638		278,376		282,014
Non-Owner Occupied CRE		750		—		—		750		176,237		176,987
Owner Occupied CRE		—		—		—		—		92,742		92,742
Commercial and Industrial		1,614		—		1,835		3,449		100,835		104,284
Total	$	3,664	$	99	$	4,223	$	7,986	$	804,711	$	812,697

At June 30, 2018 and December 31, 2017, the Company had one 1‑4 Family Residential loan totaling $1.2 million which is 90 days delinquent and accruing interest.

Non‑Accrual Loans and Troubled Debt Restructurings (“TDR”)

The following presents the recorded investment in non‑accrual loans by class as of the dates noted (in thousands):


	June 30,		December 31,
	2018		2017
Non-accrual loans
Cash, Securities and Other	$	—	$	—
Construction and Development		—		—
1-4 Family Residential		—		1,171
Non-Owner Occupied CRE		—		—
Owner Occupied CRE		—		—
Commercial and Industrial		1,835		1,835
Total	$	1,835	$	3,006

At June 30, 2018 and December 31, 2017, the non‑accrual loans listed above included one loan classified as a TDR with recorded investments totaling $1.8 million. Non‑accrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following presents a summary of the unpaid principal balance of loans classified as TDRs as of the dates noted (in thousands):


	June 30,		December 31,
	2018		2017

Commercial and Industrial	$	1,835	$	1,835
Total		1,835		1,835
Allowance for loan associated with TDR		(1,040)		(722)
Net recorded investment	$	795	$	1,113

As of June 30, 2018 and December 31, 2017, the Company has not committed any additional funds to borrower with a loan classified as a TDR.

The Company did not modify any loans in a TDR during the three and six months ended June 30, 2018. The Company did not modify any loans in a TDR during the three month period ended June 30, 2017. The Company modified two loans in a TDR during the six month period ended June 30, 2017.

During the three months ended June 30, 2018 and the year ended December 31, 2017, a Commercial and Industrial loan which was classified as a TDR was not making payments in accordance with the modified terms and was placed on non‑accrual status in September 2017. During the three months ended June 30, 2017, two Commercial and Industrial loans in a TDR were settled. As of June 30, 2017 there were no loans classified as a TDR.

TDRs are reviewed individually for impairment and are included in the Company’s specific reserves in the allowance for loan losses. If charged off, the amount of the charge off is included in the Company’s charge off factors, which impact the Company’s reserves on non‑impaired loans.

The following presents the Company’s recorded investment in impaired loans as of the periods presented (in thousands):


			Recorded		Recorded		Allowance		Unpaid
	Total		Investment		Investment		for		Contractual		Average		Interest
	Recorded		With No		With		Loan		Principal		Recorded		Income
June 30, 2018	Investment		Allowance		Allowance		Losses		Balance		Investment		Recognized
Commercial and Industrial	$	1,835	$	—	$	1,835	$	1,040	$	1,835	$	1,835	$	—
Total	$	1,835	$	—	$	1,835	$	1,040	$	1,835	$	1,835	$	—


			Recorded		Recorded		Allowance		Unpaid
	Total		Investment		Investment		for		Contractual		Average		Interest
	Recorded		With No		With		Loan		Principal		Recorded		Income
June 30, 2017	Investment		Allowance		Allowance		Losses		Balance		Investment		Recognized
Commercial and Industrial	$	5,348	$	3,459	$	1,889	$	459	$	5,348	$	5,443	$	—
Total	$	5,348	$	3,459	$	1,889	$	459	$	5,348	$	5,443	$	—


			Recorded		Recorded		Allowance		Unpaid
	Total		Investment		Investment		for		Contractual		Average		Interest
	Recorded		With No		With		Loan		Principal		Recorded		Income
December 31, 2017	Investment		Allowance		Allowance		Losses		Balance		Investment		Recognized
Commercial and Industrial	$	1,835	$	—	$	1,835	$	722	$	1,835	$	1,066	$	—
Total	$	1,835	$	—	$	1,835	$	722	$	1,835	$	1,066	$	—

The recorded investment in loans in the previous tables, excludes accrued interest and deferred loan fees and costs due to their immateriality. Interest income, if any, was recognized on the cash basis.

Allowance for Loan Losses

Allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories. The following presents the activity in the Company’s allowance for loan losses by portfolio class for the periods presented (in thousands):


	Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended June 30, 2018
Beginning balance	$	969	$	228	$	2,334	$	1,313	$	724	$	1,532	$	7,100
Provision for (recovery of) credit losses		(35)		(1)		(377)		(114)		(98)		625		—
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	934	$	227	$	1,957	$	1,199	$	626	$	2,157	$	7,100

Changes in allowance for loan losses for the six months ended June 30, 2018
Beginning balance	$	1,066	$	202	$	2,283	$	1,433	$	751	$	1,552	$	7,287
Provision for (recovery of) credit losses		(132)		25		(326)		(234)		(125)		605		(187)
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	934	$	227	$	1,957	$	1,199	$	626	$	2,157	$	7,100

Allowance for loan losses at June 30, 2018 allocated to loans evaluated for impairment:
Individually	$	—	$	—	$	—	$	—	$	—	$	1,040	$	1,040
Collectively		934		227		1,957		1,199		626		1,117		6,060
Ending balance	$	934	$	227	$	1,957	$	1,199	$	626	$	2,157	$	7,100

Loans at June 30, 2018, evaluated for impairment:
Individually	$	—	$	—	$	—	$	—	$	—	$	1,835	$	1,835
Collectively		135,393		35,760		307,794		164,438		98,393		97,876		839,654
Ending balance	$	135,393	$	35,760	$	307,794	$	164,438	$	98,393	$	99,711	$	841,489


	Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended June 30, 2017
Beginning balance	$	838	$	287	$	1,849	$	1,211	$	485	$	2,032	$	6,702
Provision for (recovery of) credit losses		287		(25)		405		251		224		(880)		262
Charge-offs		—		—		—		—		—		—		—
Recoveries		2		—		16		—		—		—		18
Ending balance	$	1,127	$	262	$	2,270	$	1,462	$	709	$	1,152	$	6,982

Changes in allowance for loan losses for the six months ended June 30, 2017
Beginning balance	$	846	$	301	$	1,833	$	1,153	$	476	$	1,869	$	6,478
Provision for (recovery of) credit losses		279		(39)		421		309		233		(717)		486
Charge-offs		—		—		—		—		—		—		—
Recoveries		2		—		16		—		—		—		18
Ending balance	$	1,127	$	262	$	2,270	$	1,462	$	709	$	1,152	$	6,982

Allowance for loan losses at December 31, 2017 allocated to loans evaluated for impairment:
Individually	$	—	$	—	$	—	$	—	$	—	$	722	$	722
Collectively		1,066		202		2,283		1,433		751		830		6,565
Ending balance	$	1,066	$	202	$	2,283	$	1,433	$	751	$	1,552	$	7,287

Loans at December 31, 2017, evaluated for impairment:
Individually	$	—	$	—	$	—	$	—	$	—	$	1,835	$	1,835
Collectively		131,756		24,914		282,014		176,987		92,742		102,449		810,862
Ending balance	$	131,756	$	24,914	$	282,014	$	176,987	$	92,742	$	104,284	$	812,697

The Company categorizes loans into risk categories based on relevant information about the ability of the 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 loans individually by classifying the loans as to credit risk on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention—Loans classified as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.

Substandard—Substandard loans are considered “classified” and are inadequately protected by the current net worth and paying capacity of the obligor or by 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 bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non‑accrual status and may individually be evaluated for impairment if indicators of impairment exist.

Doubtful—Loans graded Doubtful are considered “classified” and 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 known facts, conditions and values, highly questionable and improbable. However, the amount of certainty of eventual loss is not known because of specific pending factors.

Loans not meeting any of the three criteria above are considered to be pass‑rated loans. The following presents, by class and by credit quality indicator, the recorded investment in the Company’s loans as of June 30, 2018 and December 31, 2017 (in thousands):


			Special
June 30, 2018	Pass		Mention		Substandard			Total

Cash, Securities and Other	$	135,393	$	—	$	—	$	135,393
Construction and Development		32,796		2,964		—		35,760
1-4 Family Residential		306,384		—		1,410		307,794
Non-Owner Occupied CRE		154,030		8,215		2,193		164,438
Owner Occupied CRE		98,393		—		—		98,393
Commercial and Industrial		91,331		—		8,380		99,711
Total	$	818,327	$	11,179	$	11,983	$	841,489


			Special
December 31, 2017	Pass		Mention		Substandard			Total

Cash, Securities and Other	$	131,756	$	—	$	—	$	131,756
Construction and Development		23,756		1,158		—		24,914
1-4 Family Residential		279,424		—		2,590		282,014
Non-Owner Occupied CRE		174,794		—		2,193		176,987
Owner Occupied CRE		92,742		—		—		92,742
Commercial and Industrial		93,624		114		10,546		104,284
Total	$	796,096	$	1,272	$	15,329	$	812,697