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):


	September 30,		December 31,
	2018		2017
Cash, Securities and Other	$	132,920	$	131,756
Construction and Development		37,423		24,914
1-4 Family Residential		327,674		282,014
Non-Owner Occupied CRE		165,670		176,987
Owner Occupied CRE		94,698		92,742
Commercial and Industrial		97,772		104,284
Total loans		856,157		812,697
Deferred costs, net		1,160		992
Allowance for loan losses		(7,118)		(7,287)
Net loans	$	850,199	$	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 September 30, 2018 and December 31, 2017 (in thousands):


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

Cash, Securities and Other	$	188	$	16	$	11,277	$	11,481	$	121,439	$	132,920
Construction and Development		4,473		—		—		4,473		32,950		37,423
1-4 Family Residential		700		—		1,217		1,917		325,757		327,674
Non-Owner Occupied CRE		595		568		2,193		3,356		162,314		165,670
Owner Occupied CRE		—		—		1,866		1,866		92,832		94,698
Commercial and Industrial		—		—		1,835		1,835		95,937		97,772
Total	$	5,956	$	584	$	18,388	$	24,928	$	831,229	$	856,157


	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 September 30, 2018, the Company had a 1‑4 Family Residential, Non-Owner Occupied CRE, and Owner Occupied CRE loan, all totaling $5.3 million, which are 90 days delinquent and accruing interest. At 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):


	September 30,		December 31,
	2018		2017
Non-accrual loans
Cash, Securities and Other	$	11,277	$	—
Construction and Development		—		—
1-4 Family Residential		—		1,171
Non-Owner Occupied CRE		—		—
Owner Occupied CRE		—		—
Commercial and Industrial		1,835		1,835
Total	$	13,112	$	3,006

At September 30, 2018 and December 31, 2017, the non‑accrual loans listed above included one loan classified as a TDR with a recorded investment 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):


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

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

During the three months ended September 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. As of and for the three months ended September 30, 2017, there was one loan 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
September 30, 2018	Investment		Allowance		Allowance		Losses		Balance		Investment		Recognized
Cash, Securities, and Other		11,277		11,277		—		—		11,277		11,388		—
Commercial and Industrial		1,835		—		1,835		1,040		1,835		1,835		—
Total	$	13,112	$	11,277	$	1,835	$	1,040	$	13,112	$	13,223	$	—


			Recorded		Recorded		Allowance		Unpaid
	Total		Investment		Investment		for		Contractual		Average		Interest
	Recorded		With No		With		Loan		Principal		Recorded		Income
September 30, 2017	Investment		Allowance		Allowance		Losses		Balance		Investment		Recognized
Commercial and Industrial	$	1,868	$	—	$	1,868	$	459	$	1,868	$	1,884	$	—
Total	$	1,868	$	—	$	1,868	$	459	$	1,868	$	1,884	$	—


			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 September 30, 2018
Beginning balance	$	934	$	227	$	1,957	$	1,199	$	626	$	2,157	$	7,100
Provision for (recovery of) credit losses		(94)		12		132		11		(22)		(21)		18
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	840	$	239	$	2,089	$	1,210	$	604	$	2,136	$	7,118

Changes in allowance for loan losses for the nine months ended September 30, 2018
Beginning balance	$	1,066	$	202	$	2,283	$	1,433	$	751	$	1,552	$	7,287
Provision for (recovery of) credit losses		(226)		37		(194)		(223)		(147)		584		(169)
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	840	$	239	$	2,089	$	1,210	$	604	$	2,136	$	7,118

Allowance for loan losses at September 30, 2018 allocated to loans evaluated for impairment:
Individually	$	—	$	—	$	—	$	—	$	—	$	1,040	$	1,040
Collectively		840		239		2,089		1,210		604		1,096		6,078
Ending balance	$	840	$	239	$	2,089	$	1,210	$	604	$	2,136	$	7,118

Loans at September 30, 2018, evaluated for impairment:
Individually	$	11,277	$	—	$	—	$	—	$	—	$	1,835	$	13,112
Collectively		121,643		37,423		327,674		165,670		94,698		95,937		843,045
Ending balance	$	132,920	$	37,423	$	327,674	$	165,670	$	94,698	$	97,772	$	856,157


	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 September 30, 2017
Beginning balance	$	1,127	$	262	$	2,270	$	1,462	$	709	$	1,152	$	6,982
Provision for (recovery of) credit losses		3		37		21		82		93		70		306
Charge-offs		—		—		—		—		—		—		—
Recoveries		1		—		—		—		—		—		1
Ending balance	$	1,131	$	299	$	2,291	$	1,544	$	802	$	1,222	$	7,289

Changes in allowance for loan losses for the nine months ended September 30, 2017
Beginning balance	$	846	$	301	$	1,833	$	1,153	$	476	$	1,869	$	6,478
Provision for (recovery of) credit losses		282		(2)		442		391		326		(647)		792
Charge-offs		—		—		—		—		—		—		—
Recoveries		3		—		16		—		—		—		19
Ending balance	$	1,131	$	299	$	2,291	$	1,544	$	802	$	1,222	$	7,289

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 jeopardizes 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 September 30, 2018 and December 31, 2017 (in thousands):


			Special
September 30, 2018	Pass		Mention		Substandard			Total

Cash, Securities and Other	$	121,643	$	—	$	11,277	$	132,920
Construction and Development		36,397		1,026		—		37,423
1-4 Family Residential		326,457		—		1,217		327,674
Non-Owner Occupied CRE		154,847		8,170		2,653		165,670
Owner Occupied CRE		94,698		—		—		94,698
Commercial and Industrial		87,164		—		10,608		97,772
Total	$	821,206	$	9,196	$	25,755	$	856,157


			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