Note 3 — Loans and Allowance for Loan Losses

Loans are summarized as follows:

	June 30,			December 31,
(in thousands)	2016			2015
Loans held for investment:
Commercial real estate loans:
Real estate term	$	592,253		$	577,804
Construction and land development		212,937			179,664
Total commercial real estate loans		805,190			757,468
Commercial and industrial loans		208,563			208,277
Consumer loans:
Residential and home equity		71,768			71,169
Consumer and other		14,617			14,945
Total consumer loans		86,385			86,114
Total gross loans		1,100,138			1,051,859
Less:
Net deferred loan fees		(4,310	)		(3,884	)
Total loans held for investment		1,095,828			1,047,975
Less: allowance for loan losses		(16,152	)		(15,557	)
Total loans held for investment, net	$	1,079,676		$	1,032,418

Note 3 — Loans and Allowance for Loan Losses – Continued

Changes in the allowance for loan losses (“ALLL”) are as follows:

	Three Months Ended June 30, 2016
	Real		Construction		Commercial			Residential			Consumer
	Estate		and Land		and			and			and
(in thousands)	Term		Development		Industrial			Home Equity			Other			Total
Balance at beginning of period	$	6,692	$	4,344	$	3,921		$	595		$	171		$	15,723
Additions: Provisions for loan losses		172		351		(224	)		(44	)		(30	)		225
Deductions:
Gross loan charge-offs		—		—		—			—			(56	)		(56	)
Recoveries		5		30		71			77			77			260
Net loan charge-offs		5		30		71			77			21			204
Balance at end of period	$	6,869	$	4,725	$	3,768		$	628		$	162		$	16,152

	Three Months Ended June 30, 2015
	Real			Construction			Commercial			Residential			Consumer
	Estate			and Land			and			and			and
(in thousands)	Term			Development			Industrial			Home Equity			Other			Total
Balance at beginning of period	$	5,564		$	4,125		$	4,682		$	670		$	256		$	15,297
Additions: Provisions for loan losses		(443	)		(61	)		986			(20	)		(12	)		450
Deductions:
Gross loan charge-offs		(1	)		(245	)		(19	)		—			(28	)		(293	)
Recoveries		64			33			45			42			17			201
Net loan charge-offs		63			(212	)		26			42			(11	)		(92	)
Balance at end of period	$	5,184		$	3,852		$	5,694		$	692		$	233		$	15,655

	Six Months Ended June 30, 2016
	Real		Construction		Commercial			Residential			Consumer
	Estate		and Land		and			and			and
(in thousands)	Term		Development		Industrial			Home Equity			Other			Total
Balance at beginning of period	$	6,783	$	3,984	$	3,941		$	603		$	246		$	15,557
Additions: Provisions for loan losses		77		695		(209	)		(56	)		(82	)		425
Deductions:
Gross loan charge-offs		—		—		(72	)		—			(120	)		(192	)
Recoveries		9		46		108			81			118			362
Net loan charge-offs		9		46		36			81			(2	)		170
Balance at end of period	$	6,869	$	4,725	$	3,768		$	628		$	162		$	16,152

Note 3 — Loans and Allowance for Loan Losses – Continued

	Six Months Ended June 30, 2015
	Real			Construction			Commercial			Residential			Consumer
	Estate			and Land			and			and			and
(in thousands)	Term			Development			Industrial			Home Equity			Other			Total
Balance at beginning of period	$	5,181		$	4,425		$	4,608		$	671		$	266		$	15,151
Additions: Provisions for loan losses		(65	)		(364	)		1,004			(26	)		51			600
Deductions:
Gross loan charge-offs		(1	)		(245	)		(34	)		—			(121	)		(401	)
Recoveries		69			36			116			47			37			305
Net loan charge-offs		68			(209	)		82			47			(84	)		(96	)
Balance at end of period	$	5,184		$	3,852		$	5,694		$	692		$	233		$	15,655

Non-accrual loans are summarized as follows:

	June 30,		December 31,
(in thousands)	2016		2015
Non-accrual loans, not troubled debt restructured:
Real estate term	$	2,134	$	2,961
Construction and land development		364		56
Commercial and industrial		838		1,176
Residential and home equity		448		631
Consumer and other		7		88
Total non-accrual loans, not troubled debt restructured		3,791		4,912
Troubled debt restructured loans, non-accrual:
Real estate term		849		1,153
Construction and land development		709		1,329
Commercial and industrial		19		21
Residential and home equity		—		—
Consumer and other		—		—
Total troubled debt restructured loans, non-accrual		1,577		2,503
Total non-accrual loans	$	5,368	$	7,415

Troubled debt restructured loans are summarized as follows:

	June 30,		December 31,
(in thousands)	2016		2015
Accruing troubled debt restructured loans	$	6,127	$	7,049
Non-accrual troubled debt restructured loans		1,577		2,503
Total troubled debt restructured loans	$	7,704	$	9,552

A restructured loan is considered a troubled debt restructured loan (“TDR”), if the Company, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession in terms or a below-market interest rate to the debtor that it would not otherwise consider. Each TDR loan is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service the debt as modified.

Note 3 — Loans and Allowance for Loan Losses – Continued

Current and past due loans held for investment (accruing and non-accruing) are summarized as follows:

	June 30, 2016
			30-89 Days		90+ Days				Total		Total
(in thousands)	Current		Past Due		Past Due		Non-accrual		Past Due		Loans
Commercial real estate:
Real estate term	$	588,384	$	886	$	—	$	2,983	$	3,869	$	592,253
Construction and land development		211,425		439		—		1,073		1,512		212,937
Total commercial real estate		799,809		1,325		—		4,056		5,381		805,190
Commercial and industrial		207,144		562		—		857		1,419		208,563
Consumer:
Residential and home equity		71,185		135		—		448		583		71,768
Consumer and other		14,335		260		15		7		282		14,617
Total consumer		85,520		395		15		455		865		86,385
Total gross loans	$	1,092,473	$	2,282	$	15	$	5,368	$	7,665	$	1,100,138

	December 31, 2015
			30-89 Days		90+ Days				Total		Total
(in thousands)	Current		Past Due		Past Due		Non-accrual		Past Due		Loans
Commercial real estate:
Real estate term	$	567,886	$	5,804	$	—	$	4,114	$	9,918	$	577,804
Construction and land development		170,495		7,784		—		1,385		9,169		179,664
Total commercial real estate		738,381		13,588		—		5,499		19,087		757,468
Commercial and industrial		205,765		1,315		—		1,197		2,512		208,277
Consumer:
Residential and home equity		69,950		588		—		631		1,219		71,169
Consumer and other		14,596		258		3		88		349		14,945
Total consumer		84,546		846		3		719		1,568		86,114
Total gross loans	$	1,028,692	$	15,749	$	3	$	7,415	$	23,167	$	1,051,859

Credit Quality Indicators:

In addition to past due and non-accrual criteria, the Company also analyzes loans using a loan grading system. Performance-based grading follows the Company’s definitions of Pass, Special Mention, Substandard and Doubtful, which are consistent with published definitions of regulatory risk classifications.

Definitions of Pass, Special Mention, Substandard and Doubtful are summarized as follows:

Pass: A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is considered remote.

Special Mention: A Special Mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the Company is currently protected and loss is considered unlikely and not imminent.

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 have well defined weaknesses and are characterized by the distinct possibility that the Company may sustain some loss if deficiencies are not corrected.

Doubtful: A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable.

For Consumer loans, the Company generally assigns internal risk grades similar to those described above based on payment performance.

Note 3 — Loans and Allowance for Loan Losses – Continued

Outstanding loan balances (accruing and non-accruing) categorized by these credit quality indicators are summarized as follows:

	June 30, 2016
			Special		Substandard		Total		Total
(in thousands)	Pass		Mention		and Doubtful		Loans		Allowance
Commercial real estate:
Real estate term	$	568,323	$	15,842	$	8,088	$	592,253	$	6,869
Construction and land development		206,947		2,617		3,373		212,937		4,725
Total commercial real estate		775,270		18,459		11,461		805,190		11,594
Commercial and industrial		200,441		986		7,136		208,563		3,768
Consumer loans:
Residential and home equity		67,771		2,045		1,952		71,768		628
Consumer and other		14,506		13		98		14,617		162
Total consumer		82,277		2,058		2,050		86,385		790
Total	$	1,057,988	$	21,503	$	20,647	$	1,100,138	$	16,152

	December 31, 2015
			Special		Substandard		Total		Total
(in thousands)	Pass		Mention		and Doubtful		Loans		Allowance
Commercial real estate:
Real estate term	$	551,001	$	16,326	$	10,477	$	577,804	$	6,783
Construction and land development		172,368		2,934		4,362		179,664		3,984
Total commercial real estate		723,369		19,260		14,839		757,468		10,767
Commercial and industrial		195,611		5,626		7,040		208,277		3,941
Consumer loans:
Residential and home equity		67,088		1,666		2,415		71,169		603
Consumer and other		14,816		36		93		14,945		246
Total consumer		81,904		1,702		2,508		86,114		849
Total	$	1,000,884	$	26,588	$	24,387	$	1,051,859	$	15,557

The ALLL and outstanding loan balances reviewed according to the Company’s impairment method are summarized as follows:

	June 30, 2016
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and		and
(in thousands)	Term		Development		Industrial		Home Equity		Other		Total
Allowance for loan losses:
Individually evaluated for impairment	$	275	$	67	$	818	$	75	$	-	$	1,235
Collectively evaluated for impairment		6,594		4,658		2,950		553		162		14,917
Total	$	6,869	$	4,725	$	3,768	$	628	$	162	$	16,152
Outstanding loan balances:
Individually evaluated for impairment	$	7,986	$	3,509	$	7,477	$	1,509	$	15	$	20,496
Collectively evaluated for impairment		584,267		209,428		201,086		70,259		14,602		1,079,642
Total gross loans	$	592,253	$	212,937	$	208,563	$	71,768	$	14,617	$	1,100,138

Note 3 — Loans and Allowance for Loan Losses – Continued

	December 31, 2015
	Real		Construction		Commercial		Residential		Consumer
	Estate		and Land		and		and		and
(in thousands)	Term		Development		Industrial		Home Equity		Other		Total
Allowance for loan losses:
Individually evaluated for impairment	$	283	$	67	$	1,078	$	79	$	15	$	1,522
Collectively evaluated for impairment		6,500		3,917		2,863		524		231		14,035
Total	$	6,783	$	3,984	$	3,941	$	603	$	246	$	15,557
Outstanding loan balances:
Individually evaluated for impairment	$	10,225	$	4,219	$	7,009	$	2,451	$	15	$	23,919
Collectively evaluated for impairment		567,579		175,445		201,268		68,718		14,930		1,027,940
Total gross loans	$	577,804	$	179,664	$	208,277	$	71,169	$	14,945	$	1,051,859

Information on impaired loans is summarized as follows:

	June 30, 2016
			Recorded Investment
	Unpaid						Total
	Principal		With No		With		Recorded		Related
(in thousands)	Balance		Allowance		Allowance		Investment		Allowance
Commercial real estate:
Real estate term	$	8,164	$	5,084	$	2,902	$	7,986	$	275
Construction and land development		5,353		3,298		211		3,509		67
Total commercial real estate		13,517		8,382		3,113		11,495		342
Commercial and industrial		7,890		3,825		3,652		7,477		818
Consumer loans:
Residential and home equity		1,573		1,103		406		1,509		75
Consumer and other		15		15		-		15		-
Total consumer		1,588		1,118		406		1,524		75
Total	$	22,995	$	13,325	$	7,171	$	20,496	$	1,235

	December 31, 2015
			Recorded Investment
	Unpaid						Total
	Principal		With No		With		Recorded		Related
(in thousands)	Balance		Allowance		Allowance		Investment		Allowance
Commercial real estate:
Real estate term	$	10,430	$	7,266	$	2,959	$	10,225	$	283
Construction and land development		6,055		4,007		212		4,219		67
Total commercial real estate		16,485		11,273		3,171		14,444		350
Commercial and industrial		7,562		3,510		3,499		7,009		1,078
Consumer loans:
Residential and home equity		2,514		2,019		432		2,451		79
Consumer and other		58		15		-		15		15
Total consumer		2,572		2,034		432		2,466		94
Total	$	26,619	$	16,817	$	7,102	$	23,919	$	1,522

Note 3 — Loans and Allowance for Loan Losses – Concluded

The interest income recognized on impaired loans was as follows:

	Three Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(in thousands)	Investment		Recognition		Investment		Recognition
Commercial real estate:
Real estate term	$	8,416	$	74	$	11,616	$	109
Construction and land development		3,767		47		5,526		66
Total commercial real estate		12,183		121		17,142		175
Commercial and industrial		7,934		97		4,886		48
Consumer loans:
Residential and home equity		1,794		12		3,358		40
Consumer and other		15		-		33		-
Total consumer		1,809		12		3,391		40
Total	$	21,926	$	230	$	25,419	$	263

	Six Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(in thousands)	Investment		Recognition		Investment		Recognition
Commercial real estate:
Real estate term	$	9,106	$	153	$	12,479	$	215
Construction and land development		3,865		102		5,271		146
Total commercial real estate		12,971		255		17,750		361
Commercial and industrial		7,243		185		4,994		92
Consumer loans:
Residential and home equity		1,980		34		3,362		69
Consumer and other		15		-		32		1
Total consumer		1,995		34		3,394		70
Total	$	22,209	$	474	$	26,138	$	523

Loans and Deposits to affiliates — The Company has entered into loan transactions with certain directors, affiliated companies and executive committee members (“affiliates”). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Total outstanding loans with affiliates were approximately $322,000 and $48,000 as of June 30, 2016 and December 31, 2015, respectively. Available lines of credit for loans and credit cards to affiliates were approximately $544,000 as of June 30, 2016. Deposits held by affiliates were $9.8 million and $7.9 million as of June 30, 2016 and December 31, 2015, respectively.