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,
	2019		2018
Cash, Securities and Other	$	146,622	$	114,165
Construction and Development		42,059		31,897
1-4 Family Residential		366,238		350,852
Non-Owner Occupied CRE		138,753		173,741
Owner Occupied CRE		119,497		108,480
Commercial and Industrial		111,187		113,660
Total loans		924,356		892,795
Deferred costs, net		2,230		1,171
Allowance for loan losses		(7,675)		(7,451)
Loans, net	$	918,911	$	886,515

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, 2019 and December 31, 2018 (in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
September 30, 2019	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	339	$	—	$	—	$	339	$	146,283	$	146,622
Construction and Development		—		—		—		—		42,059		42,059
1-4 Family Residential		—		—		1,213		1,213		365,025		366,238
Non-Owner Occupied CRE		902		—		—		902		137,851		138,753
Owner Occupied CRE		—		—		—		—		119,497		119,497
Commercial and Industrial		4,599		—		—		4,599		106,588		111,187
Total	$	5,840	$	—	$	1,213	$	7,053	$	917,303	$	924,356


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
December 31, 2018	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	331	$	—	$	11,252	$	11,583	$	102,582	$	114,165
Construction and Development		—		—		—		—		31,897		31,897
1-4 Family Residential		—		—		1,217		1,217		349,635		350,852
Non-Owner Occupied CRE		567		—		—		567		173,174		173,741
Owner Occupied CRE		—		—		—		—		108,480		108,480
Commercial and Industrial		—		—		1,735		1,735		111,925		113,660
Total	$	898	$	—	$	14,204	$	15,102	$	877,693	$	892,795

At September 30, 2019 and December 31, 2018, the Company had a 1‑4 Family Residential loan totaling $1.2 million, which was more than 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,
	2019		2018
Cash, Securities and Other	$	5,264	$	11,252
Construction and Development		—		—
1-4 Family Residential		—		—
Non-Owner Occupied CRE		—		—
Owner Occupied CRE		—		—
Commercial and Industrial		1,035		1,735
Total	$	6,299	$	12,987

Non-accrual loans classified as TDR accounted for $6.1 million of the recorded investment at September 30, 2019 and $13.0 million at December 31, 2018, respectively. Non‑accrual loans are classified as impaired loans and individually evaluated for impairment.

The following presents a summary of the unpaid principal balance of loans classified as TDRs by loan type and delinquency status as of the dates noted (in thousands):


	September 30,		December 31,		September 30,
	2019		2018		2018
Accruing
Commercial and Industrial	$	6,468	$	4,848	$	—
Nonaccrual
Cash, Securities, and Other		5,017		11,252		—
Commercial and Industrial		1,035		1,735		1,835

Allowance for loan associated with TDR		(693)		(940)		(1,040)
Net recorded investment	$	11,827	$	16,895	$	795

At September 30, 2019, the Company extended an additional $1.0 million to a Commercial and Industrial borrower with a loan classified as a TDR for operational needs as allowed under the commitment. The majority owner for this borrower provided $1.5 million of pledged cash as collateral in exchange for this additional funding. At December 31, 2018, the Company had not committed any additional funds to a borrower with a loan classified as a TDR.

One Cash, Securities and Other loan, which was modified resulting in TDR status in the previous twelve months, has defaulted on the modified terms of the agreement one time in the three and nine months ended September 30, 2019.

The Company did not modify any loans into a TDR for the three and nine months ended September 30, 2019. The Company modified two loans into a TDR for the year ended December 31, 2018. The modification of two loans in TDR performed during the year ended December 31, 2018 included an extension of the maturity dates at the same rates as before that the Company would not have otherwise considered as a result of the Borrowers’ financial difficulties. The extensionson the modified loans ranged from three months to a year.

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 table presents impaired loans by portfolio and related valuation allowance as of the periods presented (in thousands):


	September 30, 2019						December 31, 2018
			Unpaid		Allowance				Unpaid		Allowance
	Total		Contractual		for		Total		Contractual		for
	Recorded		Principal		Loan		Recorded		Principal		Loan
	Investment		Balance		Losses		Investment		Balance		Losses
Impaired loans with a valuation allowance:
Commercial and Industrial	$	1,035	$	1,035	$	693	$	1,735	$	1,735	$	940
Cash, Securities, and Other		247		247		247		—		—		—
Total	$	1,282	$	1,282	$	940	$	1,735	$	1,735	$	940

Impaired loans with no related valuation allowance:
Commercial and Industrial	$	6,468	$	6,468	$	—	$	4,848	$	4,848	$	—
Cash, Securities, and Other		5,017		5,017		—		11,252		11,252		—
1-4 Family Residential		1,213		1,213		—		—		—		—
Total	$	12,698	$	12,698	$	—	$	16,100	$	16,100	$	—

Total impaired loans:
Commercial and Industrial	$	7,503	$	7,503	$	693	$	6,583	$	6,583	$	940
Cash, Securities, and Other		5,264		5,264		247		11,252		11,252		—
1-4 Family Residential		1,213		1,213		—		—		—		—
Total	$	13,980	$	13,980	$	940	$	17,835	$	17,835	$	940

The recorded investment in loans in the previous tables excludes accrued interest and deferred loan fees and costs which are not material. Interest income, if any, was recognized on the cash basis on non-accrual loans.

The average balance of impaired loans and interest income recognized on impaired loans during the three months ended September 30, 2019 and 2018 are included in the table below (in thousands):


	Three Months Ended September 30,
	2019				2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Commercial and Industrial	$	1,035	$	—	$	1,835	$	—
Cash, Securities, and Other		185		—		—		—
Total	$	1,220	$	—	$	1,835	$	—

Impaired loans with no related valuation allowance:
Commercial and Industrial	$	5,958	$	138	$	—	$	—
Cash, Securities, and Other		5,062		—		11,277		—
1-4 Family Residential		1,213		26		—		—
Total	$	12,233	$	164	$	11,277	$	—

Total impaired loans:
Commercial and Industrial	$	6,993	$	138	$	1,835	$	—
Cash, Securities, and Other		5,247		—		11,277		—
1-4 Family Residential		1,213		26		—		—
Total	$	13,453	$	164	$	13,112	$	—

The average balance of impaired loans and interest income recognized on impaired loans during the nine months ended September 30, 2019 and 2018 are included in the table below (in thousands):


	Nine Months Ended September 30,
	2019				2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Commercial and Industrial	$	1,310	$	—	$	1,835	$	—
Cash, Securities, and Other		185		—		—		—
Total	$	1,495	$	—	$	1,835	$	—

Impaired loans with no related valuation allowance:
Commercial and Industrial	$	5,463	$	326	$	—	$	—
Cash, Securities, and Other		8,088		—		11,388		—
1-4 Family Residential		1,213		77		—		—
Total	$	14,764	$	403	$	11,388	$	—

Total impaired loans:
Commercial and Industrial	$	6,773	$	326	$	1,835	$	—
Cash, Securities, and Other		8,273		—		11,388		—
1-4 Family Residential		1,213		77		—		—
Total	$	16,259	$	403	$	13,223	$	—

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, 2019
Beginning balance	$	1,049	$	290	$	2,650	$	1,086	$	800	$	1,700	$	7,575
Provision for (recovery of) credit losses		258		18		27		(68)		76		(211)		100
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	1,307	$	308	$	2,677	$	1,018	$	876	$	1,489	$	7,675

Changes in allowance for loan losses for the nine months ended September 30, 2019
Beginning balance	$	764	$	232	$	2,552	$	1,264	$	789	$	1,850	$	7,451
Provision for (recovery of) credit losses		535		76		125		(246)		87		(361)		216
Charge-offs		—		—		—		—		—		—		—
Recoveries		8		—		—		—		—		—		8
Ending balance	$	1,307	$	308	$	2,677	$	1,018	$	876	$	1,489	$	7,675

Allowance for loan losses at September 30, 2019 allocated to loans evaluated for impairment:
Individually	$	247	$	—	$	—	$	—	$	—	$	693	$	940
Collectively		1,060		308		2,677		1,018		876		796		6,735
Ending balance	$	1,307	$	308	$	2,677	$	1,018	$	876	$	1,489	$	7,675

Loans at September 30, 2019, evaluated for impairment:
Individually	$	5,264	$	—	$	1,213	$	—	$	—	$	7,503	$	13,980
Collectively		141,358		42,059		365,025		138,753		119,497		103,684		910,376
Ending balance	$	146,622	$	42,059	$	366,238	$	138,753	$	119,497	$	111,187	$	924,356


	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 December 31, 2018 allocated to loans evaluated for impairment:
Individually	$	—	$	—	$	—	$	—	$	—	$	940	$	940
Collectively		764		232		2,552		1,264		789		910		6,511
Ending balance	$	764	$	232	$	2,552	$	1,264	$	789	$	1,850	$	7,451

Loans at December 31, 2018, evaluated for impairment:
Individually	$	11,252	$	—	$	—	$	—	$	—	$	6,583	$	17,835
Collectively		102,913		31,897		350,852		173,741		108,480		107,077		874,960
Ending balance	$	114,165	$	31,897	$	350,852	$	173,741	$	108,480	$	113,660	$	892,795

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 Company 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, 2019 and December 31, 2018 (in thousands):


			Special
September 30, 2019	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	141,358	$	—	$	5,264	$	146,622
Construction and Development		42,059		—		—		42,059
1-4 Family Residential		359,030		—		7,208		366,238
Non-Owner Occupied CRE		137,582		1,171		—		138,753
Owner Occupied CRE		119,497		—		—		119,497
Commercial and Industrial		95,371		—		15,816		111,187
Total	$	894,897	$	1,171	$	28,288	$	924,356


			Special
December 31, 2018	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	102,913	$	—	$	11,252	$	114,165
Construction and Development		31,897		—		—		31,897
1-4 Family Residential		349,635		—		1,217		350,852
Non-Owner Occupied CRE		165,164		8,117		460		173,741
Owner Occupied CRE		108,480		—		—		108,480
Commercial and Industrial		100,929		—		12,731		113,660
Total	$	859,018	$	8,117	$	25,660	$	892,795

The Company had no loans graded doubtful as of September 30, 2019 and December 31, 2018.