Loans, net of deferred fees, consist of the following at year end (in thousands):

(1)	Includes $13.5 million and $18.3 million of loans as of December 31, 2019 and 2018, respectively, acquired in the GAB transaction covered under an FDIC loss-share agreement. The agreement covering single family loans expired on December 31, 2019.

In 2019, $33.9 million of commercial loans were reclassified into loans secured by real estate, upon review and validation of collateral and Call Report codes.

Accounting policy related to the allowance for loan losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.

As part of the GAB acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of GAB’s assets. There were two agreements with the FDIC, one for single family loans which was a 10-year agreement which expired on December 31, 2019, and one for non-single family (commercial) assets which was a 5-year agreement which expired on December 31, 2014. The Bank shared in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement related to single family loans; we

referred to these assets collectively as “covered assets.” Loans that were not covered in the loss sharing agreement were referred to as “non-covered loans.” Covered loans totaled $13.5 million and $18.3 million at December 31, 2019 and 2018, respectively.

Accretable discount on the acquired loans totaled $11.2 million and $15.1 million at December 31, 2019 and 2018, respectively. Accretion associated with the acquired loans held for investment of $3.9 million, $4.5 million and $3.9 million was recognized during the twelve months ended December 31, 2019, 2018 and 2017, respectively.

Impaired loans for the portfolio were as follows (in thousands):


	Total Loans
			Unpaid
	Recorded		Principal		Related
December 31, 2019	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	6,890	$	8,530	$	—
Commercial real estate - non-owner occupied (2)		3,120		3,363		—
Construction and land development		345		747		—
Commercial loans		5,049		8,490		—
Residential 1-4 family (3)		1,021		2,719		—
Other consumer loans		—		—		—
Total	$	16,425	$	23,849	$	—

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		176		281		1
Construction and land development		—		—		—
Commercial loans		2,498		2,533		957
Residential 1-4 family (3)		2,841		3,243		92
Other consumer loans		39		39		1
Total	$	5,554	$	6,096	$	1,051
Grand total	$	21,979	$	29,945	$	1,051

(1)	Recorded investment is after cumulative prior charge offs of $1.5 million. These loans also have aggregate SBA guarantees of $4.4 million.

(2)	Includes loans secured by farmland and multi-family residential loans.

(3)	Includes home equity lines of credit.


	Total Loans
			Unpaid
	Recorded		Principal		Related
December 31, 2018	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	2,795	$	4,777	$	—
Commercial real estate - non-owner occupied (2)		171		333		—
Construction and land development		—		336		—
Commercial loans		3,450		6,013		—
Residential 1-4 family (3)		1,591		5,911		—
Other consumer loans		—		—		—
Total	$	8,007	$	17,370	$	—

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		—		—		—
Construction and land development		—		—		—
Commercial loans		2,626		3,276		612
Residential 1-4 family (3)		1,429		1,476		6
Other consumer loans		—		—		—
Total	$	4,055	$	4,752	$	618
Grand total	$	12,062	$	22,122	$	618

(1)	Recorded investment is after cumulative prior charge offs of $1.5 million. These loans also have aggregate SBA guarantees of $3.4 million.

(2)	Includes loans secured by farmland and multi-family residential loans.

(3)	Includes home equity lines of credit.

The following tables present the average recorded investment and interest income recognized for impaired loans recognized by class of loans for the years ended December 31, 2019, 2018 and 2017 (in thousands):


	Total Loans
	Average		Interest
	Recorded		Income
Year Ended December 31, 2019	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	7,387	$	453
Commercial real estate - non-owner occupied (1)		3,205		191
Construction and land development		398		57
Commercial loans		5,254		214
Residential 1-4 family (2)		1,061		149
Other consumer loans		—		—
Total	$	17,305	$	1,064

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		182		19
Construction and land development		—		—
Commercial loans		3,027		176
Residential 1-4 family (2)		2,944		111
Other consumer loans		39		—
Total	$	6,192	$	306
Grand total	$	23,497	$	1,370

(1)	Includes loans secured by farmland and multi-family residential loans.

(2)	Includes home equity lines of credit.


	Total Loans
	Average		Interest
	Recorded		Income
Year Ended December 31, 2018	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	2,780	$	179
Commercial real estate - non-owner occupied (1)		169		22
Construction and land development		—		—
Commercial loans		3,319		92
Residential 1-4 family (2)		1,582		125
Other consumer loans		—		—
Total	$	7,850	$	418

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		—		—
Construction and land development		—		—
Commercial loans		2,530		200
Residential 1-4 family (2)		1,422		67
Other consumer loans		—		—
Total	$	3,952	$	267
Grand total	$	11,802	$	685

(1)	Includes loans secured by farmland and multi-family residential loans.

(2)	Includes home equity lines of credit.


	Total Loans
	Average		Interest
	Recorded		Income
For the Year Ended December 31, 2017	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	875	$	34
Commercial real estate - non-owner occupied (1)		890		56
Construction and land development		9,942		139
Commercial loans		12,655		485
Residential 1-4 family (2)		3,398		91
Other consumer loans		—		—
Total	$	27,760	$	805

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		—		—
Construction and land development		—		—
Commercial loans		—		—
Residential 1-4 family (2)		—		—
Other consumer loans		—		—
Total	$	—	$	—
Grand total	$	27,760	$	805

(1)	Includes loans secured by farmland and multi-family residential loans.

(2)	Includes home equity lines of credit.

The following tables present the aging of the recorded investment in past due loans by class of loans as of December 31, 2019 and 2018 (in thousands):


	30 - 59		60 - 89		90
	Days		Days		Days		Total		Nonaccrual		Loans Not		Total
December 31, 2019	Past Due		Past Due		or More		Past Due		Loans		Past Due		Loans
Total loans:
Commercial real estate - owner occupied	$	813	$	—	$	—	$	813	$	—	$	413,666	$	414,479
Commercial real estate - non-owner occupied (1)		936		—		—		936		—		657,936		658,872
Construction and land development		746		275		—		1,021		—		149,729		150,750
Commercial loans		234		62		—		296		6,337		214,814		221,447
Residential 1-4 family (2)		4,060		—		—		4,060		2,524		707,199		713,783
Other consumer loans		107		—		—		107		39		26,158		26,304
Total	$	6,896	$	337	$	—	$	7,233	$	8,900	$	2,169,502	$	2,185,635


	30 - 59		60 - 89		90
	Days		Days		Days		Total		Nonaccrual		Loans Not		Total
December 31, 2018	Past Due		Past Due		or More		Past Due		Loans		Past Due		Loans
Total loans:
Commercial real estate - owner occupied	$	577	$	344	$	—	$	921	$	1,284	$	404,826	$	407,031
Commercial real estate - non-owner occupied (1)		581		617		—		1,198		—		642,982		644,180
Construction and land development		851		—		—		851		—		145,803		146,654
Commercial loans		319		168		—		487		3,391		251,563		255,441
Residential 1-4 family (2)		5,523		197		—		5,720		2,055		685,533		693,308
Other consumer loans		142		18		—		160		—		32,187		32,347
Total	$	7,993	$	1,344	$	—	$	9,337	$	6,730	$	2,162,894	$	2,178,961

(1)	Includes loans secured by farmland and multi-family residential loans.

(2)	Includes home equity lines of credit.

Nonaccrual loans include SBA guaranteed amounts totaling $4.1 million and $3.4 million at December 31, 2019 and 2018, respectively.

Activity in the allowance for loan and lease losses by class of loan for the years ended December 31, 2019, 2018 and 2017 is summarized below (in thousands):


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Year Ended December 31, 2019	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283
Provision (recovery) for non-purchased loans		587		904		(138)		(1,708)		596		199		(390)		50
Provision for purchase credit impaired loans		—		—		—		300		—		—		—		300
Total provision (recovery)		587		904		(138)		(1,408)		596		199		(390)		350
Charge offs		(782)		(863)		—		(622)		(742)		(269)		—		(3,278)
Recoveries		203		10		—		351		306		36		—		906
Ending balance	$	810	$	1,720	$	683	$	5,418	$	1,266	$	190	$	174	$	10,261

Year Ended December 31, 2018
Allowance for loan losses:
Beginning balance	$	690	$	1,321	$	692	$	4,496	$	1,586	$	612	$	—	$	9,397
Provision (recovery) for non-purchased loans		497		348		129		1,941		237		(116)		564		3,600
Provision for purchase credit impaired loans		—		—		—		600		—		—		—		600
Total provision (recovery)		497		348		129		2,541		237		(116)		564		4,200
Charge offs		(400)		—		—		(1,566)		(842)		(290)		—		(3,098)
Recoveries		15		—		—		1,626		125		18		—		1,784
Ending balance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283

Year ended December 31, 2017
Allowance for loan losses:
Beginning balance	$	905	$	1,484	$	752	$	3,366	$	1,279	$	78	$	746	$	8,610
Provision (recovery)		(347)		(362)		(61)		8,842		659		640		(746)		8,625
Charge offs		—		(100)		—		(8,250)		(369)		(110)		—		(8,829)
Recoveries		132		299		1		538		17		4		—		991
Ending balance	$	690	$	1,321	$	692	$	4,496	$	1,586	$	612	$	—	$	9,397

(1)	Includes loans secured by farmland and multi-family residential loans.

(2)	Includes home equity lines of credit.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019 and 2018 (in thousands):


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
December 31, 2019	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	957	$	85	$	—	$	—	$	1,042
Collectively evaluated for impairment		810		1,720		683		4,461		1,181		190		174		9,219
Total ending allowance	$	810	$	1,720	$	683	$	5,418	$	1,266	$	190	$	174	$	10,261

Loans:
Individually evaluated for impairment	$	6,890	$	3,120	$	345	$	7,544	$	1,443	$	—	$	—	$	19,342
Collectively evaluated for impairment		407,589		655,752		150,405		213,903		712,340		26,304		—		2,166,293
Total ending loan balances	$	414,479	$	658,872	$	150,750	$	221,447	$	713,783	$	26,304	$	—	$	2,185,635

December 31, 2018
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	600	$	—	$	—	$	—	$	600
Collectively evaluated for impairment		802		1,669		821		6,497		1,106		224		564		11,683
Total ending allowance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283

Loans:
Individually evaluated for impairment	$	2,795	$	171	$	—	$	6,076	$	1,591	$	—	$	—	$	10,633
Collectively evaluated for impairment		404,236		644,009		146,654		249,365		691,717		32,347		—		2,168,328
Total ending loan balances	$	407,031	$	644,180	$	146,654	$	255,441	$	693,308	$	32,347	$	—	$	2,178,961

(1)	Includes loans secured by farmland and multi-family residential loans.

(2)	Includes home equity lines of credit.

Troubled Debt Restructurings

A modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rates for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.

Credit Quality Indicators

Through its system of internal controls, Southern National evaluates and segments loan portfolio credit quality on a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified. Southern National had no loans classified Doubtful at December 31, 2019 or 2018.

Special Mention loans are loans that have a potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position.

Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligor or of 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 institution will sustain some loss if the deficiencies are not corrected.

Doubtful loans 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 existing facts, conditions, and values, highly questionable and improbable. Southern National had no loans classified Doubtful at December 31, 2019 or 2018.

As of December 31, 2019 and 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):


	Total Loans
	Special
December 31, 2019	Mention		Substandard (3)		Pass		Total
Commercial real estate - owner occupied	$	3,821	$	3,975	$	406,683	$	414,479
Commercial real estate - non-owner occupied (1)		4,193		176		654,503		658,872
Construction and land development		—		690		150,060		150,750
Commercial loans		3,432		4,462		213,553		221,447
Residential 1-4 family (2)		666		1,194		711,923		713,783
Other consumer loans		122		—		26,182		26,304
Total	$	12,234	$	10,497	$	2,162,904	$	2,185,635


	Total Loans
	Special
December 31, 2018	Mention		Substandard (3)		Pass		Total
Commercial real estate - owner occupied	$	6,611	$	2,810	$	397,610	$	407,031
Commercial real estate - non-owner occupied (1)		4,382		189		639,609		644,180
Construction and land development		—		—		146,654		146,654
Commercial loans		2,373		2,689		250,379		255,441
Residential 1-4 family (2)		395		1,982		690,931		693,308
Other consumer loans		142		—		32,205		32,347
Total	$	13,903	$	7,670	$	2,157,388	$	2,178,961

(1)	Includes loans secured by farmland and multi-family residential loans.

(2)	Includes home equity lines of credit.

(3)	Includes SBA guarantees of $4.1 million and $3.4 million as of December 31, 2019 and 2018, respectively.

The amount of foreclosed residential real estate property held at December 31, 2019 and 2018 was $1.4 million and $1.2 million, respectively. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $1.9 million and $1.5 million at December 31, 2019 and 2018, respectively.

Purchased Loans

The following table presents the carrying amount of purchased impaired and non-impaired loans from the acquisitions as of December 31, 2019 and 2018 (in thousands):


	December 31, 2019						December 31, 2018
	Purchased		Purchased				Purchased		Purchased
	Impaired		Non-impaired				Impaired		Non-impaired
	Loans		Loans		Total		Loans		Loans		Total
Commercial real estate (1)	$	3,978	$	307,289	$	311,267	$	4,387	$	379,889	$	384,276
Construction and land development		26		21,111		21,137		358		47,466		47,824
Commercial loans		2,354		34,729		37,083		3,050		71,146		74,196
Residential 1-4 family (2)		2,841		232,887		235,728		3,654		275,527		279,181
Other consumer loans		—		15,153		15,153		—		21,731		21,731
Total	$	9,199	$	611,169	$	620,368	$	11,449	$	795,759	$	807,208

(1)	Includes owner occupied and non-owner occupied as well as loans secured by farmland and multi-family residential loans.

(2)	Includes home equity lines of credit.

The FDIC indemnification on the GAB residential mortgages and home equity lines of credit expired on December 31, 2019.

Changes in the carrying amount and accretable yield for purchased impaired and non-impaired loans from the acquisitions were as follows for the years ended December 31, 2019 and 2018 (in thousands):


	December 31, 2019								December 31, 2018
	Purchased Impaired				Purchased Non-impaired				Purchased Impaired				Purchased Non-impaired
			Carrying				Carrying				Carrying				Carrying
	Accretable		Amount		Accretable		Amount		Accretable		Amount		Accretable		Amount
	Yield		of Loans		Discount		of Loans		Yield		of Loans		Discount		of Loans
Balance at beginning of the period	$	174	$	11,449	$	13,474	$	795,759	$	315	$	13,614	$	17,460	$	1,011,801
Additions		—		—		—		—		—		—		—		—
Accretion		(72)		72		(3,549)		3,549		(141)		141		(4,196)		4,196
Reclassifications from nonaccretable balance		—		—		—		—		—		—		210		—
Adjustment-transfer to OREO		—		—		—		—		—		—		—		—
Payments received		—		(2,322)		—		(188,139)		—		(2,306)		—		(220,238)
Balance at end of the period	$	102	$	9,199	$	9,925	$	611,169	$	174	$	11,449	$	13,474	$	795,759