Note 6

: Loans Receivable

and Allowance for Loan Losses

The following table sets forth the Company’s gross loans by major categories as of September 30, 2016 and December 31, 2015:

(dollars in thousands)	September 30, 2016			December 31, 2015

Commercial real estate	$	376,466		$	349,726
Construction and land development		48,983			46,547
Commercial and industrial		186,126			181,850
Owner occupied real estate		268,435			246,398
Consumer and other		58,580			48,126
Residential mortgage		6,909			2,380
Total loans receivable		945,499			875,027
Deferred costs (fees)		42			(258	)
Allowance for loan losses		(9,453	)		(8,703	)
Net loans receivable	$	936,088		$	866,066

The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for loan losses. The Company’s loan groups include commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer, and residential mortgages. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.

A loan is considered impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans, but also include internally classified accruing loans. The following table summarizes information with regard to impaired loans by loan portfolio class as of September 30, 2016 and December 31, 2015:

	September 3 0 , 2016						December 31, 2015
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial real estate	$	12,305	$	12,307	$	-	$	11,692	$	11,730	$	-
Construction and land development		-		-		-		117		2,208		-
Commercial and industrial		1,515		2,648		-		2,381		3,683		-
Owner occupied real estate		672		685		-		507		507		-
Consumer and other		1,092		1,400		-		800		1,084		-
Total	$	15,584	$	17,040	$	-	$	15,497	$	19,212	$	-

With an allowance recorded:
Commercial real estate	$	7,165	$	7,179	$	1,290	$	511	$	511	$	47
Construction and land development		56		2,050		56		-		-		-
Commercial and industrial		3,719		6,385		1,799		3,112		5,779		1,111
Owner occupied real estate		1,859		1,860		544		2,862		2,876		1,059
Consumer and other		292		293		71		147		147		21
Total	$	13,091	$	17,767	$	3,760	$	6,632	$	9,313	$	2,238

Total:
Commercial real estate	$	19.470	$	19,486	$	1,290	$	12,203	$	12,241	$	47
Construction and land development		56		2,050		56		117		2,208		-
Commercial and industrial		5,234		9,033		1,799		5,493		9,462		1,111
Owner occupied real estate		2,531		2,545		544		3,369		3,383		1,059
Consumer and other		1,384		1,693		71		947		1,231		21
Total	$	28,675	$	34,807	$	3,760	$	22,129	$	28,525	$	2,238

The following table presents additional information regarding the Company’s impaired loans for the three months ended September 30, 2016 and September 30, 2015:

	Three Months Ended September 30,
	201 6				201 5
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	12,188	$	65	$	13,923	$	73
Construction and land development		22		-		328		2
Commercial and industrial		1,611		9		2,459		16
Owner occupied real estate		665		3		589		1
Consumer and other		1,027		5		754		3
Total	$	15,513	$	82	$	18,053	$	95

With an allowance recorded:
Commercial real estate	$	6,058	$	19	$	2,479	$	3
Construction and land development		43		-		62		-
Commercial and industrial		3,607		18		3,776		12
Owner occupied real estate		1,977		9		3,293		27
Consumer and other		278		2		111		1
Total	$	11,963	$	48	$	9,721	$	43

Total:
Commercial real estate	$	18,246	$	84	$	16,402	$	76
Construction and land development		65		-		390		2
Commercial and industrial		5,218		27		6,235		28
Owner occupied real estate		2,642		12		3,882		28
Consumer and other		1,305		7		865		4
Total	$	27,476	$	130	$	27,774	$	138

The following table presents additional information regarding the Company’s impaired loans for the nine months ended September 30, 2016 and September 30, 2015:

	Nine Months Ended September 30,
	201 6				201 5
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	11,954	$	197	$	13,073	$	214
Construction and land development		72		-		228		3
Commercial and industrial		1,797		30		3,435		64
Owner occupied real estate		647		6		749		5
Consumer and other		901		11		656		7
Total	$	15,371	$	244	$	18,141	$	293

With an allowance recorded:
Commercial real estate	$	3,844	$	43	$	6,803	$	6
Construction and land development		15		-		112		-
Commercial and industrial		3,389		56		2,456		12
Owner occupied real estate		2,205		23		3,837		90
Consumer and other		252		7		37		1
Total	$	9,705	$	129	$	13,245	$	109

Total:
Commercial real estate	$	15,798	$	240	$	19,876	$	220
Construction and land development		87		-		340		3
Commercial and industrial		5,186		86		5,891		76
Owner occupied real estate		2,852		29		4,586		95
Consumer and other		1,153		18		693		8
Total	$	25,076	$	373	$	31,386	$	402

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three and nine months ended September 30, 2016 and 2015:

(dollars in thousands)	Commercial Real Estate			Construction and Land Development			Commercial and Industrial			Owner Occupied Real Estate			Consumer and Other		Residential Mortgage		Unallocated			Total

Three months ended September 30, 201 6
Allowance for loan losses:

Beginning balance:	$	3,293		$	365		$	3,136		$	1,366		$	324	$	11	$	266		$	8,761
Charge-offs		-			(3	)		-			-			-		-		-			(3	)
Recoveries		-			-			88			-			-		-		-			88
Provisions (credits)		9			137			(79	)		251			16		31		242			607
Ending balance	$	3,302		$	499		$	3,145		$	1,617		$	340	$	42	$	508		$	9,453

Three months ended September 30, 201 5
Allowance for loan losses:

Beginning balance:	$	2,707		$	311		$	2,823		$	1,787		$	251	$	2	$	517		$	8,398
Charge-offs		-			-			-			(78	)		-		-		-			(78	)
Recoveries		-			-			2			-			1		-		-			3
Provisions (credits)		(79	)		26			313			19			28		12		(319	)		-
Ending balance	$	2,628		$	337		$	3,138		$	1,728		$	280	$	14	$	198		$	8,323

(dollars in thousands)	Commercial Real Estate			Construction and Land Development			Commercial and Industrial			Owner Occupied Real Estate			Consumer and Other		Residential Mortgage		Unallocated			Total

Nine months ended September 30, 201 6
Allowance for loan losses:

Beginning balance:	$	2,393		$	338		$	2,932		$	2,030		$	295	$	14	$	701		$	8,703
Charge-offs		-			(3	)		(18	)		(954	)		-		-		-			(975	)
Recoveries		6			-			162			-			-		-		-			168
Provisions (credits)		903			164			69			541			45		28		(193	)		1,557
Ending balance	$	3,302		$	499		$	3,145		$	1,617		$	340	$	42	$	508		$	9,453

Nine months ended September 30, 201 5
Allowance for loan losses:

Beginning Balance:	$	6,828		$	917		$	1,579		$	1,638		$	234	$	2	$	338		$	11,536
Charge-offs		(2,623	)		(222	)		(325	)		(133	)		-		-		-			(3,303	)
Recoveries		4			5			48			-			33		-		-			90
Provisions (credits)		(1,581	)		(363	)		1,836			223			13		12		(140	)		-
Ending balance	$	2,628		$	337		$	3,138		$	1,728		$	280	$	14	$	198		$	8,323

The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of September 30, 2016 and December 31, 2015:

(dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate		Consumer and Other		Residential Mortgage		Unallocated		Total

September 30, 201 6

Allowance for loan losses:
Individually evaluated for impairment	$	1,290	$	56	$	1,799	$	544	$	71	$	-	$	-	$	3,760
Collectively evaluated for impairment		2,012		443		1,346		1,073		269		42		508		5,693

Total allowance for loan losses	$	3,302	$	499	$	3,145	$	1,617	$	340	$	42	$	508	$	9,453

Loans receivable:

Loans evaluated individually	$	19,470	$	56	$	5,234	$	2,531	$	1,384	$	-	$	-	$	28,675

Loans evaluated collectively		356,996		48,927		180,892		265,904		57,196		6,909		-		916,824

Total loans receivable	$	376,466	$	48,983	$	186,126	$	268,435	$	58,580	$	6,909	$	-	$	945,499

(dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate		Consumer and Other		Residential Mortgage		Unallocated		Total

December 31, 201 5

Allowance for loan losses:
Individually evaluated for impairment	$	47	$	-	$	1,111	$	1,059	$	21	$	-	$	-	$	2,238
Collectively evaluated for impairment		2,346		338		1,821		971		274		14		701		6,465

Total allowance for loan losses	$	2,393	$	338	$	2,932	$	2,030	$	295	$	14	$	701	$	8,703

Loans receivable:

Loans evaluated individually	$	12,203	$	117	$	5,493	$	3,369	$	947	$	-	$	-	$	22,129

Loans evaluated collectively		337,523		46,430		176,357		243,029		47,179		2,380		-		852,898

Total loans receivable	$	349,726	$	46,547	$	181,850	$	246,398	$	48,126	$	2,380	$	-	$	875,027

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2016 and December 31, 2015:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
At September 30 , 201 6
Commercial real estate	$	-	$	12	$	13,280	$	13,292	$	363,174	$	376,466	$	-
Construction and land development		-		-		56		56		48,927		48,983		-
Commercial and industrial		-		747		3,149		3,896		182,230		186,126		-
Owner occupied real estate		-		-		1,874		1,874		266,561		268,435		-
Consumer and other		-		22		995		1,017		57,563		58,580		16
Residential mortgage		-		-		137		137		6,772		6,909		137
Total	$	-	$	781	$	19,491	$	20,272	$	925,227	$	945,499	$	153

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
At December 31, 201 5
Commercial real estate	$	-	$	7,657	$	5,913	$	13,570	$	336,156	$	349,726	$	-
Construction and land development		-		-		117		117		46,430		46,547		-
Commercial and industrial		1,661		997		3,156		5,814		176,036		181,850		-
Owner occupied real estate		800		469		2,894		4,163		242,235		246,398		-
Consumer and other		285		192		542		1,019		47,107		48,126		-
Residential mortgage		132		-		-		132		2,248		2,380		-
Total	$	2,878	$	9,315	$	12,622	$	24,815	$	850,212	$	875,027	$	-

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2016 and December 31, 2015:

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
At September 30, 2 016 :
Commercial real estate	$	361,806	$	887	$	13,773	$	-	$	376,466
Construction and land development		48,927		-		56		-		48,983
Commercial and industrial		180,836		56		3,805		1,429		186,126
Owner occupied real estate		265,904		-		2,531		-		268,435
Consumer and other		57,196		-		1,384		-		58,580
Residential mortgage		6,909		-		-		-		6,909
Total	$	921,578	$	943	$	21,549	$	1,429	$	945,499

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
At December 31, 2015 :
Commercial real estate	$	329,567	$	7,956	$	12,203	$	-	$	349,726
Construction and land development		46,430		-		117		-		46,547
Commercial and industrial		176,132		225		4,064		1,429		181,850
Owner occupied real estate		242,560		469		3,369		-		246,398
Consumer and other		47,104		75		947		-		48,126
Residential mortgage		2,380		-		-		-		2,380
Total	$	844,173	$	8,725	$	20,700	$	1,429	$	875,027

The following table shows non-accrual loans by class as of September 30, 2016 and December 31, 2015:

(dollars in thousands)	September 30, 2016		December 31, 2015
Commercial real estate	$	13,280	$	5,913
Construction and land development		56		117
Commercial and industrial		3,149		3,156
Owner occupied real estate		1,874		2,894
Consumer and other		979		542
Residential mortgage		-		-
Total	$	19,338	$	12,622

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $271,000 and $784,000 for the three and nine months ended September 30, 2016, respectively, and $110,000 and $573,000 for the nine months ended September 30, 2015, respectively.

Troubled Debt Restructurings

A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.

The following table summarizes the balance of outstanding TDRs September 30, 2016 and December 31, 2015:

(dollars in thousands)	Number of Loans		Accrual Status		Non- Accrual Status		Total TDRs
September 30, 201 6
Commercial real estate		1	$	5,697	$	-	$	5,697
Construction and land development		-		-		-		-
Commercial and industrial		2		234		349		583
Owner occupied real estate		-		-		-		-
Consumer and other		-		-		-		-
Residential mortgage		-		-		-		-
Total		3	$	5,931	$	349	$	6,280

December 31, 201 5
Commercial real estate		1	$	5,778	$	-	$	5,778
Construction and land development		-		-		-		-
Commercial and industrial		2		252		935		1,187
Owner occupied real estate		1		-		1,825		1,825
Consumer and other		-		-		-		-
Residential mortgage		-		-		-		-
Total		4	$	6,030	$	2,760	$	8,790

All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into the Company’s estimate of the allowance for loan losses. The level of any subsequent defaults will likely be affected by future economic conditions.

There were no loan modifications made during the three months ended September 30, 2015 that met the criteria of a TDR. The Company modified one commercial and industrial loan during the nine months ended September 30, 2015. In accordance with the modified terms of the commercial and industrial loan, the Company modified the amortization timeframe and reduced the effective interest rate when compared to the interest rate of the original loan. The company also extended the maturity date of the loan. The loan was unsecured and the Company had elected to carry the loan as a non-accrual loan until a satisfactory performance history was established. The pre-modification balance was $1.2 million and the post modification balance was $1.2 million. A payment of $350,000 was received during the second quarter of 2015 and the remaining $850,000 transitioned to other assets in the fourth quarter of 2015 as the loan was converted to a legal settlement. The balance in other assets at September 30, 2016 is $586,000. There were no loan modifications made during the three and nine months ended September 30, 2016 that met the criteria of a TDR.

There were no residential mortgages in the process of foreclosure as of September 30, 2016 and December 31, 2015. Other real estate owned relating to residential real estate was $126,000 and $193,000 at September 30, 2016 and December 31, 2015.

After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three and nine months ended September 30, 2016. There was one TDR that subsequently defaulted during the fourth quarter of the year ended December 31, 2015. A partial writedown and payoff were recorded on this loan during the nine months ended September 30, 2016.