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):


	March 31,		December 31,
	2020		2019
Cash, Securities and Other	$	147,157	$	146,701
Construction and Development		25,461		28,120
1-4 Family Residential		412,306		400,134
Non-Owner Occupied CRE		192,350		165,179
Owner Occupied CRE		121,138		127,968
Commercial and Industrial		144,066		128,457
Total loans		1,042,478		996,559
Deferred costs, net		1,473		1,448
Allowance for loan losses		(8,242)		(7,875)
Loans, net	$	1,035,709	$	990,132

The CARES Act created the Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”). The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and began accepting and processing applications for loans under the PPP on April 3, 2020.

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company has offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years. No clients utilized this program during the first quarter of 2020. Recent interagency guidance from Federal Reserve and the Federal Deposit Insurance Corporation confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition.

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 March 31, 2020 and December 31, 2019 (in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
March 31, 2020	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	—	$	31	$	1,493	$	1,524	$	145,633	$	147,157
Construction and Development		—		—		—		—		25,461		25,461
1-4 Family Residential		3,162		202		—		3,364		408,942		412,306
Non-Owner Occupied CRE		—		—		—		—		192,350		192,350
Owner Occupied CRE		—		—		—		—		121,138		121,138
Commercial and Industrial		984		—		4,138		5,122		138,944		144,066
Total	$	4,146	$	233	$	5,631	$	10,010	$	1,032,468	$	1,042,478


	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

At March 31, 2020 and December 31, 2019, the Company did not have any loans which were 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):


	March 31,		December 31,
	2020		2019
Cash, Securities and Other	$	1,493	$	2,803
Construction and Development		—		—
1-4 Family Residential		—		—
Non-Owner Occupied CRE		—		—
Owner Occupied CRE		—		—
Commercial and Industrial		4,138		4,412
Total	$	5,631	$	7,215

Non-accrual loans classified as TDR accounted for $5.6 million of the recorded investment at March 31, 2020 and $7.2 million at December 31, 2019, 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):


	March 31,		December 31,
	2020		2019
Accruing
Commercial and Industrial	$	4,820	$	5,055
Non-accrual
Cash, Securities, and Other		1,493		2,803
Commercial and Industrial		4,138		4,412

Allowance for loan associated with TDR		(683)		(833)
Net recorded investment	$	9,768	$	11,437

At March 31, 2020, the Company had not committed any additional funds to a borrower with a loan classified as a TDR.

At December 31, 2019, the Company had 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. This additional extension was no longer outstanding at March 31, 2020. The majority owner for this borrower provided $1.5 million of pledged cash as collateral in exchange for this additional funding.

The Company did not modify any loans into a TDR for the three months ended March 31, 2020 and 2019. The Company modified one borrower relationship with two loans into a TDR for 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. The modification of one loan included an extension of the 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.

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):


	March 31, 2020						December 31, 2019
			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	$	4,138	$	4,138	$	683	$	4,412	$	4,412	$	833
Total	$	4,138	$	4,138	$	683	$	4,412	$	4,412	$	833

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	1,493	$	1,493	$	—	$	2,803	$	2,803	$	—
Commercial and Industrial		4,820		4,820		—		5,055		5,055		—
Total	$	6,313	$	6,313	$	—	$	7,858	$	7,858	$	—

Total impaired loans:
Cash, Securities, and Other	$	1,493	$	1,493	$	—	$	2,803	$	2,803	$	—
Commercial and Industrial		8,958		8,958		683		9,467		9,467		833
Total	$	10,451	$	10,451	$	683	$	12,270	$	12,270	$	833

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 March 31, 2020 and 2019 are included in the table below (in thousands):


	The three months ended March 31, 2020
	2020				2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Commercial and Industrial	$	4,275	$	—	$	1,585	$	—
Total	$	4,275	$	—	$	1,585	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	2,148	$	—	$	11,114	$	—
Commercial and Industrial		4,937		81		4,968		120
Total	$	7,085	$	81	$	16,082	$	120

Total impaired loans:
Cash, Securities, and Other	$	2,148	$	—	$	11,114	$	—
Commercial and Industrial		9,212		81		6,553		120
Total	$	11,360	$	81	$	17,667	$	120

Allowance for Loan Losses

The provision for loan losses for the three months ended March 31, 2020 was $0.4 million compared to $0.2 million for the same period in 2019, primarily reflecting the strong growth in the loan portfolio and assumptions related to the impact of the COVID-19 pandemic.

An analysis was performed by the credit department during the first quarter 2020 to determine clients who could be more highly effected by the recent COVID-19 pandemic. The analysis reviewed the borrowers in industries we believe may be more impacted by the pandemic and that there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. Caution is exercised by the Bank in lending practices to ensure safe and sound credits and portfolio diversification. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

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 March 31, 2020
Beginning balance	$	1,058	$	200	$	2,850	$	1,176	$	911	$	1,680	$	7,875
Provision for (recovery of) loan losses		34		(14)		158		227		(27)		(11)		367
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	1,092	$	186	$	3,008	$	1,403	$	884	$	1,669	$	8,242

Allowance for loan losses at March 31, 2020 allocated to loans evaluated for impairment:
Individually	$	—	$	—	$	—	$	—	$	—	$	683	$	683
Collectively		1,092		186		3,008		1,403		884		986		7,559
Ending balance	$	1,092	$	186	$	3,008	$	1,403	$	884	$	1,669	$	8,242

Loans at March 31, 2020, evaluated for impairment:
Individually	$	1,493	$	—	$	—	$	—	$	—	$	8,958	$	10,451
Collectively		145,664		25,461		412,306		192,350		121,138		135,108		1,032,027
Ending balance	$	147,157	$	25,461	$	412,306	$	192,350	$	121,138	$	144,066	$	1,042,478


	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 March 31, 2019
Beginning balance	$	764	$	232	$	2,552	$	1,264	$	789	$	1,850	$	7,451
Provision for (recovery of) loan losses		113		34		36		(29)		(9)		49		194
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	877	$	266	$	2,588	$	1,235	$	780	$	1,899	$	7,645

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

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 March 31, 2020 and December 31, 2019 (in thousands):


			Special
March 31, 2020	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	145,444	$	—	$	1,713	$	147,157
Construction and Development		25,461		—		—		25,461
1-4 Family Residential		406,450		—		5,856		412,306
Non-Owner Occupied CRE		191,205		1,145		—		192,350
Owner Occupied CRE		121,138		—		—		121,138
Commercial and Industrial		130,377		—		13,689		144,066
Total	$	1,020,075	$	1,145	$	21,258	$	1,042,478


			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

The Company had no loans graded doubtful as of March 31, 2020 and December 31, 2019.