LOANS

The loan portfolio consisted of the following (in thousands):



	June 30, 2019			December 31, 2018
Commercial, financial and agricultural	$	226,871		$	267,340
Real estate – construction	77,482			87,506
Real estate – commercial	409,694			368,449
Real estate – residential	126,043			132,435
Consumer and other	39,476			43,506
Lease financing receivable	471			549
Total loans	880,037			899,785
Allowance for loan and lease losses	(28,129		)	(17,430		)
Total loans, net	$	851,908		$	882,355

The Company monitors loan concentrations and evaluates individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity for each major standard industry classification segment. At June 30, 2019, one industry segment concentration, the oil and gas industry, constituted more than 10% of the loan portfolio. The Company’s exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately $113.0 million, or 12.8% of total loans, with $3.0 million in nonaccrual oil and gas loans.

Allowance for Loan Losses

The allowance for loan losses is a valuation account available to absorb probable losses on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries are credited to the allowance for loan losses at the time of recovery. Quarterly, the probable level of losses in the existing portfolio is estimated through consideration of various quantitative and qualitative factors. As such, some of the factors considered in determining provisions include estimated losses relative to specific credits; known deterioration in concentrations of credit; historical loss experience; trends in nonperforming assets; volume, maturity and composition of the loan portfolio; off–balance sheet credit risk; lending policies and control systems; national and local economic conditions; the experience, ability and depth of lending management; and the results of examinations of the loan portfolio by regulatory agencies and others. Based on these estimates, the allowance for loan losses is increased by charges to earnings and decreased by charge‑offs (net of recoveries).

The allowance is composed of general reserves and specific reserves. General reserves are determined by applying loss percentages to segments of the portfolio. The loss percentages are based on each segment’s historical loss experience, generally over the past three to five years, and adjustment factors derived from conditions in the Company’s internal and external environment. All loans considered to be impaired are evaluated on an individual basis to determine specific reserve allocations in accordance with GAAP. Loans for which specific reserves are provided are excluded from the calculation of general reserves.

The Company has an internal loan review department that is independent of the lending function to challenge and corroborate the loan grade assigned by the lender and to provide additional analysis in determining the adequacy of the allowance for loan losses. Additionally, the Company utilizes the services of a third party to supplement its loan review efforts.

A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans as of and for the six months ended June 30, 2019 and 2018 is as follows (in thousands):



	June 30, 2019
				Real Estate
	Coml, Fin, and Agric			Construction		Commercial		Residential			Consumer and other			Lease financing receivable			Total
Allowance for loan losses:	and Agric
Beginning balance	$	10,633		$	140	$	4,913	$	1,156		$	585		$	3		$	17,430
Charge-offs	(1,775		)	—		—		—			(167		)	—			(1,942		)
Recoveries	184			—		30		1			67			—			282
Provision	11,654			402		557		(215		)	(36		)	(3		)	12,359
Ending balance	$	20,696		$	542	$	5,500	$	942		$	449		$	—		$	28,129
Ending balance: individually evaluated for impairment	$	10,680		$	—	$	74	$	—		$	—		$	—		$	10,754
Ending balance: collectively evaluated for impairment	$	10,016		$	542	$	5,426	$	942		$	449		$	—		$	17,375

Loans:
Ending balance	$	226,871		$	77,482	$	409,694	$	126,043		$	39,476		$	471		$	880,037
Ending balance: individually evaluated for impairment	$	15,934		$	424	$	4,807	$	—		$	—		$	—		$	21,165
Ending balance: collectively evaluated for impairment	$	210,937		$	77,058	$	404,887	$	126,043		$	39,476		$	471		$	858,872



	June 30, 2018
				Real Estate
	Coml, Fin, and Agric			Construction			Commercial			Residential			Consumer and other			Lease financing receivable		Total
Allowance for loan losses:
Beginning balance	$	20,577		$	596		$	3,918		$	837		$	957		$	3	$	26,888
Charge-offs	(1,524		)	(2		)	(86		)	(3		)	(221		)	—		(1,836		)
Recoveries	276			—			6			1			36			—		319
Provision	(264		)	159			(105		)	64			146			—		—
Ending balance	$	19,065		$	753		$	3,733		$	899		$	918		$	3	$	25,371
Ending balance: individually evaluated for impairment	$	5,968		$	94		$	76		$	20		$	6		$	—	$	6,164
Ending balance: collectively evaluated for impairment	$	13,097		$	659		$	3,657		$	879		$	912		$	3	$	19,207

Loans:
Ending balance	$	401,048		$	94,679		$	444,277		$	145,671		$	50,888		$	692	$	1,137,255
Ending balance: individually evaluated for impairment	$	55,092		$	192		$	26,005		$	2,088		$	50		$	—	$	83,427
Ending balance: collectively evaluated for impairment	$	345,956		$	94,487		$	418,272		$	143,583		$	50,838		$	692	$	1,053,828

Non-Accrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the probability of collection of interest is deemed insufficient to warrant further accrual. For loans placed on non-accrual status, the accrual of interest is discontinued and subsequent payments received are applied to the principal balance. Interest income is recorded after principal has been satisfied and as payments are received. Non-accrual loans may be returned to accrual status if all principal and interest amounts contractually owed are reasonably assured of repayment within a reasonable period and there is a period of at least six months to one year of repayment performance by the borrower depending on the contractual payment terms.

An age analysis of past due loans (including both accruing and non-accruing loans) is as follows (in thousands):



	June 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans >90 Days Past Due and Still Accruing
Commercial, financial and agricultural	$	559	$	11,506	$	3,726	$	15,791	$	211,080	$	226,871	$	—
Real estate – construction	4,097		—		262		4,359		73,123		77,482		—
Real estate – commercial	2,044		—		1,455		3,499		406,195		409,694		—
Real estate – residential	617		73		1,108		1,798		124,245		126,043		—
Consumer and other	129		60		27		216		39,260		39,476		—
Lease financing receivable	—		—		—		—		471		471		—
	$	7,446	$	11,639	$	6,578	$	25,663	$	854,374	$	880,037	$	—

	December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans >90 Days Past Due and Still Accruing
Commercial, financial and agricultural	$	385	$	902	$	2,173	$	3,460	$	263,880	$	267,340	$	—
Real estate – construction	47		—		117		164		87,342		87,506		—
Real estate – commercial	435		—		771		1,206		367,243		368,449		—
Real estate – residential	695		31		1,407		2,133		130,302		132,435		—
Consumer and other	176		28		56		260		43,246		43,506		—
Lease financing receivable	—		—		—		—		549		549		—
	$	1,738	$	961	$	4,524	$	7,223	$	892,562	$	899,785	$	—

Non-accrual loans are as follows (in thousands):



	June 30, 2019		December 31, 2018
Commercial, financial, and agricultural	$	15,630	$	3,599
Real estate - construction	468		278
Real estate - commercial	4,854		2,977
Real estate - residential	2,308		2,008
Consumer and other	27		58
	$	23,287	$	8,920

Impaired Loans

Loans are considered impaired when, based upon current information, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans classified as special mention, substandard, or doubtful, based on credit risk rating factors, are reviewed to determine whether impairment testing is appropriate. All loan relationships with an outstanding commitment balance above a specified threshold are evaluated for potential impairment. All loan relationships with an outstanding commitment balance below the specified threshold are assigned an allowance allocation percentage that is determined by management and adjusted periodically based on certain factors. An allowance for each impaired loan is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. All impaired loans are reviewed, at a minimum, on a quarterly basis. Existing valuations are reviewed to determine if additional discounts or new appraisals are required. After this review, when comparing the resulting collateral valuation to the outstanding loan balance, if the discounted collateral value exceeds the loan balance, no specific allocation is reserved.

The following table presents loans that are individually evaluated for impairment (in thousands). Interest income recognized represents interest on accruing loans modified in a troubled debt restructuring (TDR).



	June 30, 2019						December 31, 2018
	Recorded Investment⁽¹⁾		Unpaid Principal Balance		Related Allowance ⁽¹⁾		Recorded Investment ⁽¹⁾		Unpaid Principal Balance		Related Allowance ⁽¹⁾
With no related allowance recorded:
Commercial, financial, and agricultural	$	3,589	$	5,278	$	—	$	2,924	$	3,011	$	—
Real estate - construction	424		424		—		117		117		—
Real estate - commercial	4,676		5,835		—		3,395		3,395		—
Real estate - residential	—		—		—		—				—
Consumer and other	—		—		—		—		—		—
Subtotal:	8,689		11,537		—		6,436		6,523		—
With an allowance recorded:
Commercial, financial, and agricultural	12,345		12,488		10,680		1,025		1,025		470
Real estate - construction	—		—		—		131		131		4
Real estate - commercial	131		131		74		—		—		—
Real estate - residential	—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—
Subtotal:	12,476		12,619		10,754		1,156		1,156		474
Total impaired loans	21,165		24,156		10,754		7,592		7,679		474

⁽¹⁾ Troubled debt restructurings totaling $1.6 million and $1.3 million are included in the recorded investment of impaired loans as of June 30, 2019 and December 31, 2018.

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired are presented below for the periods indicated (in thousands).



	June 30, 2019				June 30, 2018
	Average Recorded Investment		Interest Income Recognized During Impairment		Average Recorded Investment		Interest Income Recognized During Impairment
Commercial, financial, and agricultural	$	16,396	$	—	$	46,935	$	18
Real estate - construction	451		—		129		—
Real estate - commercial	7,126		—		18,567		—
Real estate - residential	—		—		1,353		—
Consumer and other	—		—		—		—
Total	$	23,973	$	—	$	66,984	$	18

Credit Quality

The Company manages credit risk by observing written underwriting standards and the lending policy established by the Board of Directors and management to govern all lending activities. The risk management program requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan. These efforts are supplemented by independent reviews performed by a loan review officer and other validations performed by the internal audit department. The results of the reviews are reported directly to the Credit Risk Committee of the Board of Directors.

Loans are categorized into risk categories based on relevant information about the ability of borrowers to serve their debt, such as: current financial information, historical payment experience, credit documentation, public information, current economic trends, and other factors. Loans are analyzed individually and classified according to their credit risk. This analysis is performed on a continuous basis. The following definitions are used for risk ratings:

Special Mention: Weakness exists that could cause future impairment, including the deterioration of financial ratios, past due status, and questionable management capabilities. Collateral values generally afford adequate coverage but may not be immediately marketable.

Substandard: Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. Currently the borrower maintains the capacity to service the debt. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

Doubtful: Specific weaknesses characterized as Substandard exist that are severe enough to make collection in full unlikely. There is no reliable secondary source of full repayment. Loans classified as Doubtful will usually be placed on non-accrual status. The probability of some loss is extremely high but because of certain important and reasonably specific factors, the amount of loss cannot be determined.

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 tables present the classes of loans by risk rating (in thousands):



			Special
	Pass		Mention		Substandard		Doubtful		Total
June 30, 2019
Commercial, financial and agricultural	$	194,672	$	10,727	$	21,472	$	—	$	226,871
Real estate – construction	70,963		1,463		5,047		9		77,482
Real estate – commercial	366,939		21,554		21,201		—		409,694
Real estate – residential	116,599		1,581		7,176		687		126,043
Consumer and other	39,399		—		64		13		39,476
Lease financing receivable	471		—		—		—		471
Total loans	$	789,043	$	35,325	$	54,960	$	709	$	880,037

December 31, 2018
Commercial, financial and agricultural	$	240,232	$	20,259	$	6,849	$	—	$	267,340
Real estate – construction	83,240		3,910		356		—		87,506
Real estate – commercial	329,213		23,475		15,761		—		368,449
Real estate – residential	125,984		1,955		4,496		—		132,435
Consumer and other	43,416		5		85		—		43,506
Lease financing receivable	549		—		—		—		549
Total loans	$	822,634	$	49,604	$	27,547	$	—	$	899,785

Troubled Debt Restructurings

A TDR is a restructuring of a debt made by the Company to a debtor for economic or legal reasons related to the debtor’s financial difficulties that it would not otherwise consider. The Company grants the concession in an attempt to protect as much of its investment as possible.

The following tables present information about TDRs that were modified during the periods presented by portfolio segment (in thousands):



	Three months ended
	June 30, 2019			June 30, 2018
	Number of loans	Pre-modification recorded investment		Number of loans	Pre-modification recorded investment
Commercial, financial and agricultural ⁽¹⁾	—	$	—	—	$	—

	Six months ended
	June 30, 2019			June 30, 2018
	Number of loans	Pre-modification recorded investment		Number of loans	Pre-modification recorded investment
Commercial, financial and agricultural ⁽¹⁾	3	$	1,983	—	$	—

⁽¹⁾The pre-modification and post-modification recorded investment amount represent the recorded investment on the date of the loan modification. Since the modification of these loans were payment modifications, not principal reductions, the pre-modification and post-modification recorded investment amount is the same.

During the six months ended ending June 30, 2019 and 2018, TDRs that had a payment default during the twelve-month periods and that were modified within the previous 12 months was $713,000 and $0, respectively. The Company defines a payment default as any loan that is greater than 30 days past due or was past due greater than 30 days at any point during the reporting period, or since the date of modification, whichever is shorter.

A troubled debt restructuring by definition is an impaired loan, as such all TDRs that meet the dollar threshold are reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology. If it is determined an impairment exists, either because of a delinquency or other credit related issues, a specific reserve is recorded for the loan. There are no specific reserves on TDRs as of June 30, 2019 and 2018.