NOTE 5 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The following presents a summary of the Company’s loans as of the dates noted (in thousands):


	December 31,		December 31,
	2019		2018
Cash, Securities and Other	$	146,701	$	114,165
Construction and Development		28,120		31,897
1-4 Family Residential		400,134		350,852
Non-Owner Occupied CRE		165,179		173,741
Owner Occupied CRE		127,968		108,480
Commercial and Industrial		128,457		113,660
Total loans		996,559		892,795
Deferred costs, net		1,448		1,171
Allowance for loan losses		(7,875)		(7,451)
Loans, net	$	990,132	$	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 December 31, 2019 and December 31, 2018 (in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
December 31, 2019	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	525	$	—	$	—	$	525	$	146,176	$	146,701
Construction and Development		—		—		—		—		28,120		28,120
1-4 Family Residential		5,688		—		—		5,688		394,446		400,134
Non-Owner Occupied CRE		—		—		—		—		165,179		165,179
Owner Occupied CRE		—		—		—		—		127,968		127,968
Commercial and Industrial		—		3,110		907		4,017		124,440		128,457
Total	$	6,213	$	3,110	$	907	$	10,230	$	986,329	$	996,559


	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 December 31, 2018, the Company had a 1‑4 family residential loan totaling $1.2 million which was more than 90 days delinquent, accruing interest, and in the process of collection. The Company foreclosed on this loan in 2019 and prior to taking possession of the assets the balance was paid in full.

Non‑Accrual Loans and Troubled Debt Restructurings

The following presents the recorded investment in non‑accrual loans by class as of the dates noted (in thousands):


	December 31,		December 31,
	2019		2018
Cash, Securities and Other	$	2,803	$	11,252
Construction and Development		—		—
1-4 Family Residential		—		—
Non-Owner Occupied CRE		—		—
Owner Occupied CRE		—		—
Commercial and Industrial		4,412		1,735
Total	$	7,215	$	12,987

At December 31, 2019, the non-accrual loans listed above included four loans classified as a TDR with a recorded investment totaling $7.2 million. At December 31, 2018, the non-accrual loans listed above included two loans classified as a TDR with a recorded investment totaling $13.0 million. 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 as of the dates noted (in thousands):


	December 31,		December 31,
	2019		2018
Accruing
Commercial and Industrial	$	5,055	$	4,848
Non-accrual
Cash, Securities, and Other		2,803		11,252
Commercial and Industrial		4,412		1,735

Allowance for loan associated with TDR		(833)		(940)
Net recorded investment	$	11,437	$	16,895

At December 31, 2019, the Company extended an additional $0.2 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.

The Company modified one borrower relationship with two loans into a TDR during the year ended December 31, 2019. The borrower, who has loans that are classified as Commercial and Industrial, was not making payments in accordance with the original contract terms. Both loans were placed on non-accrual and classified as a TDR at December 31, 2019. The modification of one loan included an extension of maturity date that the Company would not have otherwise considered as a result of the Borrower’s difficulties. The extension of maturity was for a period of approximately nine months.

The Company modified two loans into a TDR during 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 extensions ranged from three months to a year.

Two of the loans classified as TDRs have defaulted on the modified terms of the agreements during the year ended December 31, 2019. All loans classified as TDRs were making payments in accordance with their modified terms during the year ended December 31, 2018.

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):


	December 31, 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	$	4,412	$	4,412	$	833	$	1,735	$	1,735	$	940
Total	$	4,412	$	4,412	$	833	$	1,735	$	1,735	$	940

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	2,803	$	2,803	$	—	$	11,252	$	11,252	$	—
Commercial and Industrial		5,055		5,055		—		4,848		4,848		—
Total	$	7,858	$	7,858	$	—	$	16,100	$	16,100	$	—

Total impaired loans:
Cash, Securities, and Other	$	2,803	$	2,803	$	—	$	11,252	$	11,252	$	—
Commercial and Industrial		9,467		9,467		833		6,583		6,583		940
Total	$	12,270	$	12,270	$	833	$	17,835	$	17,835	$	940

The recorded investment in loans in the previous tables excludes accrued interest and deferred loan fees and costs due to their immateriality.

The average balance of impaired loans and interest income recognized on impaired loans during the years ended December 31, 2019 and 2018 are included in the table below (in thousands):


	Year Ended December 31,
	2019				2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Commercial and Industrial	$	1,686	$	—	$	922	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	6,217	$	—	$	4,506	$	—
Commercial and Industrial		4,499		427		970		34
Total	$	10,716	$	427	$	5,476	$	34

Total impaired loans:
Cash, Securities, and Other	$	6,217	$	—	$	4,506	$	—
Commercial and Industrial		6,185		427		1,892		34
Total	$	12,402	$	427	$	6,398	$	34

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 year ended December 31, 2019
Beginning balance	$	764	$	232	$	2,552	$	1,264	$	789	$	1,850	$	7,451
Provision for (recovery of) loan losses		532		(32)		298		(88)		122		(170)		662
Charge-offs		(248)		—		—		—		—		—		(248)
Recoveries		10		—		—		—		—		—		10
Ending balance	$	1,058	$	200	$	2,850	$	1,176	$	911	$	1,680	$	7,875

Allowance for loan losses at December 31, 2019 allocated to loans evaluated for impairment:
Individually	$	—	$	—	$	—	$	—	$	—	$	833	$	833
Collectively		1,058		200		2,850		1,176		911		847		7,042
Ending balance	$	1,058	$	200	$	2,850	$	1,176	$	911	$	1,680	$	7,875

Loans at December 31, 2019, evaluated for impairment:
Individually	$	2,803	$	—	$	—	$	—	$	—	$	9,467	$	12,270
Collectively		143,898		28,120		400,134		165,179		127,968		118,990		984,289
Ending balance	$	146,701	$	28,120	$	400,134	$	165,179	$	127,968	$	128,457	$	996,559


	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 year ended December 31, 2018
Beginning balance	$	1,066	$	202	$	2,283	$	1,433	$	751	$	1,552	$	7,287
Provision for (recovery of) loan losses		(286)		30		269		(169)		38		298		180
Charge-offs		(16)		—		—		—		—		—		(16)
Recoveries		—		—		—		—		—		—		—
Ending balance	$	764	$	232	$	2,552	$	1,264	$	789	$	1,850	$	7,451

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


			Special
December 31, 2019	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	143,898	$	—	$	2,803	$	146,701
Construction and Development		28,120		—		—		28,120
1-4 Family Residential		395,224		—		4,910		400,134
Non-Owner Occupied CRE		164,021		1,158		—		165,179
Owner Occupied CRE		127,968		—		—		127,968
Commercial and Industrial		114,241		—		14,216		128,457
Total	$	973,472	$	1,158	$	21,929	$	996,559


			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