7. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

Loan Portfolio Classification

The following table presents the loan portfolio by class at December 31, 2019 and 2018.


(Dollars in thousands)
	December 31, 2019		December 31, 2018
Commercial, financial and agricultural	$	51,785	$	46,563
Real estate - commercial		126,613		141,295
Real estate - construction		46,459		36,688
Real estate - mortgage		150,538		163,548
Obligations of states and political subdivisions		16,377		19,129
Personal		8,818		10,408
Total	$	400,590	$	417,631

The following tables summarize loans and the activity in the allowance for loan losses by loan class, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of and for the years ended December 31, 2019 and 2018:


(Dollars in thousands)							Obligations
	Commercial,						of states
	financial and		Real estate-		Real estate-		and political		Real estate-
	agricultural		commercial		construction		subdivisions		mortgage		Personal		Total
Year Ended
December 31, 2019
Balance, beginning of period	$	275	$	1,074	$	558	$	20	$	1,035	$	72	$	3,034
Provision for loan losses		45		(619)		(135)		(3)		105		34		(573)
Charge-offs		(2)		(15)		—		—		(66)		(54)		(137)
Recoveries		3		314		295		—		7		18		637
Balance, end of period	$	321	$	754	$	718	$	17	$	1,081	$	70	$	2,961
December 31, 2018
Balance, beginning of period	$	273	$	1,022	$	288	$	—	$	1,285	$	71	$	2,939
Provision for loan losses		(8)		107		270		20		(79)		27		337
Charge-offs		—		(60)		—		—		(183)		(42)		(285)
Recoveries		10		5		—		—		12		16		43
Balance, end of period	$	275	$	1,074	$	558	$	20	$	1,035	$	72	$	3,034


(Dollars in thousands)							Obligations
	Commercial,						of states
	financial and		Real estate-		Real estate-		and political		Real estate-
	agricultural		commercial		construction		subdivisions		mortgage		Personal		Total
December 31, 2019
Loans allocated by:
individually evaluated for impairment	$	—	$	1,206	$	—	$	—	$	1,296	$	14	$	2,516
acquired with credit deterioration		—		366		—		—		704		—		1,070
collectively evaluated for impairment		51,785		125,041		46,459		16,377		148,538		8,804		397,004
	$	51,785	$	126,613	$	46,459	$	16,377	$	150,538	$	8,818	$	400,590
Allowance for loan losses allocated by:
individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
acquired with credit deterioration		—		—		—		—		—		—		—
collectively evaluated for impairment		321		754		718		17		1,081		70		2,961
	$	321	$	754	$	718	$	17	$	1,081	$	70	$	2,961
December 31, 2018
Loans allocated by:
individually evaluated for impairment	$	—	$	909	$	27	$	—	$	1,180	$	17	$	2,133
acquired with credit deterioration		—		544		—		—		971		—		1,515
collectively evaluated for impairment		46,563		139,842		36,661		19,129		161,397		10,391		413,983
	$	46,563	$	141,295	$	36,688	$	19,129	$	163,548	$	10,408	$	417,631
Allowance for loan losses allocated by:
individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
acquired with credit deterioration		—		—		—		—		—		—		—
collectively evaluated for impairment		275		1,074		558		20		1,035		72		3,034
	$	275	$	1,074	$	558	$	20	$	1,035	$	72	$	3,034

The following tables summarize information regarding impaired loans by portfolio class as of December 31, 2019 and December 31, 2018:


(Dollars in thousands)	As of December 31, 2019						As of December 31, 2018
	Recorded		Unpaid Principal		Related		Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans
With no related allowance recorded:
Real estate - commercial	$	1,206	$	1,304	$	—	$	909	$	1,303	$	—
Acquired with credit deterioration		366		395		—		544		592		—
Real estate – construction		—		1,054		—		27		1,123		—
Real estate - mortgage		1,296		2,006		—		1,180		1,912		—
Acquired with credit deterioration		704		840		—		971		1,061		—
Personal		14		14		—		17		17		—
Total:
Real estate - commercial	$	1,206	$	1,304	$	—	$	909	$	1,303	$	—
Acquired with credit deterioration		366		395		—		544		592		—
Real estate - construction		—		1,054		—		27		1,123		—
Real estate – mortgage		1,296		2,006		—		1,180		1,912		—
Acquired with credit deterioration		704		840		—		971		1,061		—
Personal		14		14		—		17		17		—
	$	3,586	$	5,613	$	—	$	3,648	$	6,008	$	—


(Dollars in thousands)	Year Ended December 31, 2019						Year Ended December 31, 2018
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Income		Investment		Recognized		Income
Impaired Loans
With no related allowance recorded:
Commercial, financial and agricultural	$	549	$	22	$	15	$	234	$	—	$	—
Real estate - commercial		1,058		45		28		2,970		—		—
Acquired with credit deterioration		455		—		—		368		—		—
Real estate - construction		14		—		—		14		—		—
Real estate - mortgage		1,238		17		45		1,706		19		33
Acquired with credit deterioration		838		—		—		654		—		—
Personal		16		—		—		9		—		—
Total:
Commercial, financial and agricultural	$	549	$	22	$	15	$	234	$	—	$	—
Real estate - commercial		1,058		45		28		2,970		—		—
Acquired with credit deterioration		455		—		—		368		—		—
Real estate - construction		14		—		—		14		—		—
Real estate - mortgage		1,238		17		45		1,706		19		33
Acquired with credit deterioration		838		—		—		654		—		—
Personal		16		—		—		9		—		—
	$	4,168	$	84	$	88	$	5,955	$	19	$	33

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.

The following table presents non-accrual loans by classes of the loan portfolio as of December 31, 2019 and December 31, 2018:


(Dollars in thousands)
	December 31, 2019		December 31, 2018
Non-accrual loans:
Real estate - commercial	$	903	$	908
Real estate - construction		—		29
Real estate - mortgage		902		753
Personal		14		17
Total	$	1,819	$	1,707

Interest income not recorded based on the original contractual terms of the loans for non-accrual loans was $130,000 and $311,000 in 2019 and 2018, respectively. The decline in unrecorded interest income on non-accrual loans in 2019 compared to 2018 was due to the payoff of a large non-accrual loan in April 2019 and the paydown of another large loan during the year ended December 31, 2019. These two loans combined for $175,000 of the total $311,000 in unrecorded interest income on non-accrual loans reported for 2018.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2019 and December 31, 2018:


													Loans
													Past Due
													Greater
(Dollars in thousands)							Greater						than 89
			30‑59 Days		60‑89 Days		than 89		Total Past				Days and
	Current		Past Due(2)		Past Due		Days		Due		Total Loans		Accruing(1)
As of December 31, 2019
Commercial, financial and agricultural	$	51,725	$	60	$	—	$	—	$	60	$	51,785	$	—
Real estate - commercial		126,180		19		—		48		67		126,247		—
Real estate - construction		46,172		287		—		—		287		46,459		—
Real estate - mortgage		148,366		348		149		971		1,468		149,834		359
Obligations of states and political subdivisions		16,377		—		—		—		—		16,377		—
Personal		8,725		55		—		38		93		8,818		24
Subtotal		397,545		769		149		1,057		1,975		399,520		383
Loans acquired with credit deterioration
Real estate - commercial		366		—		—		—		—		366		—
Real estate - mortgage		330		371		—		3		374		704		3
Subtotal		696		371		—		3		374		1,070		3
	$	398,241	$	1,140	$	149	$	1,060	$	2,349	$	400,590	$	386


													Loans
													Past Due
													Greater
(Dollars in thousands)							Greater						than 89
			30‑59 Days		60‑89 Days		than 89		Total Past				Days and
	Current		Past Due(2)		Past Due		Days		Due		Total Loans		Accruing(1)
As of December 31, 2018
Commercial, financial and agricultural	$	46,557	$	6	$	—	$	—	$	6	$	46,563	$	—
Real estate - commercial		139,890		—		—		1,214		1,214		141,104		306
Real estate - construction		36,627		32		—		29		61		36,688		—
Real estate - mortgage		161,651		824		561		175		1,560		163,211		23
Obligations of states and political subdivisions		19,129		—		—		—		—		19,129		—
Personal		10,352		24		15		17		56		10,408		—
Subtotal		414,206		886		576		1,435		2,897		417,103		329
Loans acquired with credit deterioration
Real estate - commercial		51		140		—		—		140		191		—
Real estate - mortgage		71		259		—		7		266		337		7
Subtotal		122		399		—		7		406		528		7
	$	414,328	$	1,285	$	576	$	1,442	$	3,303	$	417,631	$	336

(1)

These loans are guaranteed, or well secured, and there is an effective means of collection in process.

(2)

Loans are considered past due when the borrower is in arrears on two or more monthly payments.

Troubled Debt Restructurings

As of December 31, 2019 and 2018, the Company had a recorded investment in troubled debt restructurings of $703,000 and $445,000, respectively. There were no specific reserves for those loans at December 31, 2019 and 2018. There were also no commitments to lend additional amounts in December 31, 2019 and 2018.

The modification of the terms of the residential real estate - mortgage and real estate - commercial loans performed during the year ended December 31, 2019 included extensions to the maturity date of 1.2 and 5.5 years, respectively. The modification of the terms of the residential real estate - mortgage loan performed during the year ended December 31, 2018 included an extension of 5.3 years to the maturity date at a stated rate of interest lower than the current market rate.

As of December 31, 2019, one accruing restructured loan for $36,000 was in default because it was delinquent in excess of 30 days with respect to the terms of the restructuring. There were no defaults of troubled debt restructurings within 12 months of restructure during 2019 or 2018.

The following tables summarize loans whose terms were modified, resulting in troubled debt restructurings during 2019 and 2018.


(Dollars in thousands)		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
	Contracts	Recorded Investment		Recorded Investment		Recorded Investment
Year ended December 31, 2019
Accruing troubled debt restructurings:
Real estate - commercial	1	$	306	$	326	$	306
Real estate - mortgage	1		9		9		5
	2	$	315	$	335	$	311

The troubled debt restructurings described above had no specific allowance for loan losses and resulted in charge-offs of $16,000 during the year ending December 31, 2019.


(Dollars in thousands)		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
	Contracts	Recorded Investment		Recorded Investment		Recorded Investment
Year ended December 31, 2018
Accruing troubled debt restructurings:
Real estate - mortgage	1	$	153	$	153	$	147
	1	$	153	$	153	$	147

The troubled debt restructurings described above had no specific allowance for loan losses and resulted in no charge-offs during the year ending December 31, 2018.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of 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. This analysis includes loans to commercial customers with an aggregate loan exposure greater than $500,000 and for lines of credit in excess of $50,000. This analysis is performed on a continuing basis with all such loans reviewed annually. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves 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 at some future date. Loans in this category are reviewed no less than quarterly.

Substandard. Loans classified as substandard are 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. Loans in this category are reviewed no less than monthly.

Doubtful. Loans classified as doubtful 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. Loans in this category are reviewed no less than monthly.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2019 and December 31, 2018.


(Dollars in thousands)			Special
As of December 31, 2019	Pass		Mention		Substandard		Doubtful		Total
Commercial, financial and agricultural	$	46,725	$	4,080	$	980	$	—	$	51,785
Real estate - commercial		113,851		5,668		7,046		48		126,613
Real estate - construction		44,954		287		1,218		—		46,459
Real estate - mortgage		148,164		327		1,951		96		150,538
Obligations of states and political subdivisions		16,377		—		—		—		16,377
Personal		8,804		—		14		—		8,818
Total	$	378,875	$	10,362	$	11,209	$	144	$	400,590


(Dollars in thousands)			Special
As of December 31, 2018	Pass		Mention		Substandard		Doubtful		Total
Commercial, financial and agricultural	$	42,757	$	2,992	$	814	$	—	$	46,563
Real estate - commercial		125,352		8,590		6,459		894		141,295
Real estate - construction		34,131		—		2,528		29		36,688
Real estate - mortgage		160,774		24		2,569		181		163,548
Obligations of states and political subdivisions		19,129		—		—		—		19,129
Personal		10,389		—		19		—		10,408
Total	$	392,532	$	11,606	$	12,389	$	1,104	$	417,631