NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans at December 31, 2019 and 2018 are summarized as follows:


	December 31,
(Dollars in thousands)	2019		2018
Construction and development	$	31,739	$	42,718
Commercial real estate		424,950		396,598
Commercial and industrial		53,105		33,100
Residential real estate		651,645		670,341
Consumer and other		1,768		2,957
Total loans receivable		1,163,207		1,145,714
Unearned income		(2,045)		(2,139)
Allowance for loan losses		(6,839)		(6,645)
Loans, net	$	1,154,323	$	1,136,930

In the normal course of business, the Company may sell and purchase loan participations to and from other financial institutions and related parties. Loan participations are typically sold to comply with the legal lending limits per borrower as imposed by regulatory authorities. The participations are sold without recourse and the Company imposes no transfer or ownership restrictions on the purchaser.

A summary of changes in the allowance for loan losses by portfolio segment for years ended December 31, 2019, 2018 and 2017 is as follows:


	Year Ended December 31, 2019
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	235	$	2,601	$	380	$	3,042	$	387	$	—	$	6,645
Charge-offs		—		(237)		(14)		—		(525)		—		(776)
Recoveries		—		752		—		—		218		—		970
Provision		(104)		(796)		82		415		11		392		—
Ending balance	$	131	$	2,320	$	448	$	3,457	$	91	$	392	$	6,839


	Year Ended December 31, 2018
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	127	$	2,135	$	261	$	3,048	$	1,170	$	184	$	6,925
Charge-offs		—		(88)		(39)		—		(1,939)		—		(2,066)
Recoveries		—		22		—		—		527		—		549
Provision		108		532		158		(6)		629		(184)		1,237
Ending balance	$	235	$	2,601	$	380	$	3,042	$	387	$	—	$	6,645


	Year Ended December 31, 2017
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	116	$	2,854	$	257	$	1,656	$	5	$	582	$	5,470
Charge-offs		—		(131)		—		—		(1,513)		—		(1,644)
Recoveries		—		41		—		—		—		—		41
Provision		11		(629)		4		1,392		2,678		(398)		3,058
Ending balance	$	127	$	2,135	$	261	$	3,048	$	1,170	$	184	$	6,925

The following tables present, by portfolio segment, the balance in the allowance for loan losses disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans as of December 31, 2019 and 2018.


	December 31, 2019
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	716	$	30	$	—	$	—	$	—	$	746
Collectively evaluated for impairment		131		1,604		418		3,457		9		392		6,011
Acquired with deteriorated credit quality		—		—		—		—		82		—		82
Total ending allowance balance	$	131	$	2,320	$	448	$	3,457	$	91	$	392	$	6,839
Loans:
Individually evaluated for impairment	$	1,360	$	7,527	$	957	$	7,936	$	—	$	—	$	17,780
Collectively evaluated for impairment		30,076		415,773		52,056		643,709		958		—		1,142,572
Acquired with deteriorated credit quality		—		—		—		—		810		—		810
Total ending loans balance	$	31,436	$	423,300	$	53,013	$	651,645	$	1,768	$	—	$	1,161,162


	December 31, 2018
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	117	$	872	$	110	$	—	$	—	$	—	$	1,099
Collectively evaluated for impairment		118		1,729		270		3,042		3		—		5,162
Acquired with deteriorated credit quality		—		—		—		—		384		—		384
Total ending allowance balance	$	235	$	2,601	$	380	$	3,042	$	387	$	—	$	6,645
Loans:
Individually evaluated for impairment	$	1,360	$	8,144	$	986	$	1,722	$	—	$	—	$	12,212
Collectively evaluated for impairment		40,928		386,819		32,040		668,619		316		—		1,128,722
Acquired with deteriorated credit quality		—		—		—		—		2,641		—		2,641
Total ending loans balance	$	42,288	$	394,963	$	33,026	$	670,341	$	2,957	$	—	$	1,143,575

Impaired loans as of December 31, 2019 and 2018, by portfolio segment, are as follows:


	Unpaid		Recorded		Recorded
	Total		Investment		Investment		Total
(Dollars in thousands)	Principal		With No		With		Recorded		Related
December 31, 2019	Balance		Allowance		Allowance		Investment		Allowance
Construction and development	$	1,360	$	1,360	$	—	$	1,360	$	—
Commercial real estate		7,527		4,716		2,882		7,598		716
Commercial and industrial		957		925		39		964		30
Residential real estate		7,936		7,936		—		7,936		—
Total	$	17,780	$	14,937	$	2,921	$	17,858	$	746


	Unpaid		Recorded		Recorded
	Total		Investment		Investment		Total
(Dollars in thousands)	Principal		With No		With		Recorded		Related
December 31, 2018	Balance		Allowance		Allowance		Investment		Allowance
Construction and development	$	1,360	$	—	$	1,360	$	1,360	$	117
Commercial real estate		8,144		5,312		2,967		8,279		872
Commercial and industrial		986		302		684		986		110
Residential real estate		1,722		1,722		—		1,722		—
Total	$	12,212	$	7,336	$	5,011	$	12,347	$	1,099

The average recorded investment in impaired loans and interest income recognized on the cash and accrual basis for the years ended December 31, 2019, 2018 and 2017, by portfolio segment, are summarized in the tables below.


	Years Ended December 31,
	2019				2018				2017
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized
Construction and development	$	1,360	$	6	$	1,922	$	68	$	2,610	$	95
Commercial real estate		8,057		629		7,474		653		6,972		431
Commercial and industrial		966		33		1,165		25		900		34
Residential real estate		6,278		104		1,705		99		—		—
Total	$	16,661	$	772	$	12,266	$	845	$	10,482	$	560

A primary credit quality indicator for financial institutions is delinquent balances. Delinquencies are updated on a daily basis and are continuously monitored. Loans are placed on nonaccrual status as needed based on repayment status and consideration of accounting and regulatory guidelines. Nonaccrual balances are updated and reported on a daily basis. Following are the delinquent amounts, by portfolio segment, as of December 31, 2019 and 2018:


					Accruing		Total				Total
(Dollars in thousands)					Greater than		Accruing				Financing
December 31, 2019	Current		30-89 Days		90 Days		Past Due		Nonaccrual		Receivables
Construction and development	$	30,076	$	—	$	—	$	—	$	1,360	$	31,436
Commercial real estate		419,406		973		—		973		2,921		423,300
Commercial and industrial		52,936		58		—		58		19		53,013
Residential real estate		625,222		18,487		—		18,487		7,936		651,645
Consumer and other		1,768		—		—		—		—		1,768
Total	$	1,129,408	$	19,518	$	—	$	19,518	$	12,236	$	1,161,162


					Accruing		Total				Total
(Dollars in thousands)					Greater than		Accruing				Financing
December 31, 2018	Current		30-89 Days		90 Days		Past Due		Nonaccrual		Receivables
Construction and development	$	42,288	$	—	$	—	$	—	$	—	$	42,288
Commercial real estate		390,601		1,102		—		1,102		3,260		394,963
Commercial and industrial		32,315		26		—		26		685		33,026
Residential real estate		651,439		17,180		—		17,180		1,722		670,341
Consumer and other		2,957		—		—		—		—		2,957
Total	$	1,119,600	$	18,308	$	—	$	18,308	$	5,667	$	1,143,575

The Company utilizes a ten grade loan rating system for its loan portfolio as follows:

Loans rated Pass – Loans in these categories have low to average risk.

Loans rated Special Mention – Loans do not presently expose the Company to a sufficient degree of risk to warrant adverse classification, but does possess deficiencies deserving close attention.

Loans rated Substandard – Loans are inadequately protected by the current sound worth and paying capability of the obligor or of the collateral pledged, if any.

Loans rated Doubtful – Loans which have all the weaknesses inherent in loans classified Substandard, with the added characteristic that the weaknesses make collections or liquidation in full, or on the basis of currently known facts, conditions and values, highly questionable or improbable.

Loans rated Loss – Loans classified Loss are considered uncollectible and such little value that there continuance as bankable assets is not warranted.

Loan grades are monitored regularly and updated as necessary based upon review of repayment status and consideration of periodic updates regarding the borrower’s financial condition and capacity to meet contractual requirements.

The following presents the Company’s loans, included purchased loans, by risk rating based on the most recent information available:


	Construction
(Dollars in thousands)	and		Commercial		Commercial		Residential		Consumer
December 31, 2019	Development		Real Estate		and Industrial		Real Estate		and Other		Total
Rating:
Pass	$	30,076	$	416,183	$	52,033	$	641,544	$	1,768	$	1,141,604
Special Mention		—		800		—		—		—		800
Substandard		1,360		6,317		980		10,101		—		18,758
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	31,436	$	423,300	$	53,013	$	651,645	$	1,768	$	1,161,162


	Construction
(Dollars in thousands)	and		Commercial		Commercial		Residential		Consumer
December 31, 2018	Development		Real Estate		and Industrial		Real Estate		and Other		Total
Rating:
Pass	$	40,928	$	383,857	$	32,040	$	667,249	$	2,957	$	1,127,031
Special Mention		—		5,112		—		—		—		5,112
Substandard		1,360		5,994		986		3,092		—		11,432
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	42,288	$	394,963	$	33,026	$	670,341	$	2,957	$	1,143,575

Purchased Credit Impaired Loans:

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. Loans are recorded under the scope of ASC 310‑30 when it is deemed probable at acquisition that all contractually required payments will not be collected.

Loans within the scope of ASC 310‑30 are initially recorded at fair value and are evaluated for impairment on an ongoing basis. As of December 31, 2019 and 2018, the Company had auto loan pools included within the consumer segment of loans outstanding that are accounted for under ASC 310‑30 with a carrying value of $810,000 and $2.6 million, respectively. At December 31, 2019 and 2018, there was no remaining accretable yield for these loans. At December 31, 2019 and 2018, the allowance for loan losses allocated on these loans was $82,000 and $384,000, respectively, as these loans are collectively evaluated for impairment. Interest income recognized on these loans was $118,000, $509,000 and $2.1 million for the year ended December 31, 2019, 2018 and 2017, respectively.

Troubled Debt Restructures:

In this current real estate environment it has become more common to restructure or modify the terms of certain loans under certain conditions (i.e. troubled debt restructures or “TDRs”). In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable real estate market. When we have modified the terms of a loan, we usually either reduce or defer payments for a period of time. We have not forgiven any material principal amounts on any loan modifications to date. Nonperforming TDRs are generally placed on non-accrual under the same criteria as all other loans.

TDRs as of December 31, 2019 and 2018 quantified by loan type classified separately as accrual and nonaccrual are presented in the table below.


(Dollars in thousands)
December 31, 2019	Accruing		Nonaccrual		Total
Commercial real estate	$	2,437	$	482	$	2,919
Commercial and industrial		22		5		27
Total	$	2,459	$	487	$	2,946


(Dollars in thousands)
December 31, 2018	Accruing		Nonaccrual		Total
Commercial real estate	$	3,298	$	—	$	3,298
Commercial and industrial		—		13		13
Total	$	3,298	$	13	$	3,311

Our policy is to return nonaccrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. Our policy also considers payment history of the borrower, but is not dependent upon a specific number of payments. The Company recorded a specific reserve of $344,000 and $523,000, as of December 31, 2019 and 2018, respectively, and recognized no partial charge offs on the TDR loans presented above during the years ended December 31, 2019 and 2018. TDR commercial real estate loans totaling $482,000 defaulted during the year ended December 31, 2019. These defaults did not have a material impact on the Company’s allowance for loan loss. There were no TDRs which defaulted during the year ended December 31, 2018.

During year ended December 31, 2019, we modified one commercial and industrial loan. The total recorded investment in this modified loan was $25,000 as of December 31, 2019. During the year ended December 31, 2018, we modified one commercial real estate loan. The total recorded investment in the modified loan as of December 31, 2018 was $503,000. The modification of these loans did not result in a permanent reduction of the recorded investment in the loan, but did result in a payment deferment period on the loans. At December 31, 2019 and 2018, the Company did not have any commitments to lend additional funds to debtors whose terms have been modified in troubled restructurings.

Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either defer, or decrease monthly payments for a temporary period of time. A summary of the types of concessions for loans classified as troubled debt restructurings are presented in the table below:


(Dollars in thousands)	December 31,		December 31,
Type of Concession	2019		2018
Deferral of payments	$	22	$	482
Extension of maturity date		2,924		2,829
Total TDR loans	$	2,946	$	3,311

The following table presents loans by portfolio segment modified as TDRs and the corresponding recorded investment, which includes accrued interest and fees, as of December 31, 2019 and 2018:


	December 31, 2019			December 31, 2018
(Dollars in thousands)	Number of	Recorded		Number of	Recorded
Type	Loans	Investment		Loans	Investment
Commercial real estate	4	$	2,923	6	$	3,527
Commercial and industrial	2		31	1		116
Total	6	$	2,954	7	$	3,643

Related Party Loans:

The Company conducts transactions with its directors and executive officers, including companies in which such officers or directors have beneficial interests. None of the related party loans were classified as nonaccrual, past due, restructured, or potential problem loans at December 31, 2019 or 2018.

The following table summarizes aggregate loan transactions with related parties for the years ended December 31, 2019 and 2018:


	December 31,
(Dollars in thousands)	2019		2018
Beginning balance	$	5,540	$	5,970
New loans and principal advances		1,925		54
Repayments		(1,083)		(484)
Transactions due to changes in related parties		—		—
Ending balance	$	6,382	$	5,540