LOANS AND ALLOWANCE FOR CREDIT LOSSES

Outstanding loans are summarized as follows (in thousands):



Loan Type	December 31, 2018			% of Total loans		December 31, 2017			% of Total loans
Commercial:
Commercial and industrial	$	101,533		11.1	%	$	100,856		11.2	%
Agricultural production	7,998			0.9	%	14,956			1.7	%
Total commercial	109,531			12.0	%	115,812			12.9	%
Real estate:
Owner occupied	183,169			19.9	%	204,452			22.7	%
Real estate construction and other land loans	101,606			11.1	%	96,460			10.7	%
Commercial real estate	305,118			33.2	%	269,254			29.9	%
Agricultural real estate	76,884			8.4	%	76,081			8.4	%
Other real estate	32,799			3.6	%	31,220			3.5	%
	699,576			76.2	%	677,467			75.2	%
Consumer:
Equity loans and lines of credit	69,958			7.6	%	76,404			8.5	%
Consumer and installment	38,038			4.2	%	29,637			3.4	%
Total consumer	107,996			11.8	%	106,041			11.9	%
Net deferred origination costs	1,592					1,359
Total gross loans	918,695			100.0	%	900,679			100.0	%
Allowance for credit losses	(9,104		)			(8,778		)
Total loans	$	909,591				$	891,901

At December 31, 2018 and 2017, loans originated under Small Business Administration (SBA) programs totaling $22,297,000 and $25,925,000, respectively, were included in the real estate and commercial categories. Approximately $447,757,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $286,934,000 as of December 31, 2018. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.

Salaries and employee benefits totaling $2,453,000, $2,593,000, and $2,344,000 have been deferred as loan origination costs for the years ended December 31, 2018, 2017, and 2016, respectively.

Allowance for Credit Losses

The allowance for credit losses (the “allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged-off credits is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.

For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

Changes in the allowance for credit losses were as follows (in thousands):



	Years Ended December 31,
	2018			2017			2016
Balance, beginning of year	$	8,778		$	9,326		$	9,610
Provision (reversal) charged to operations	50			(1,150		)	(5,850		)
Losses charged to allowance	(210		)	(464		)	(883		)
Recoveries	486			1,066			6,449
Balance, end of year	$	9,104		$	8,778		$	9,326

The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2018, 2017, and 2016 by portfolio segment (in thousands):



	Commercial			Real Estate			Consumer			Unallocated			Total
Allowance for credit losses:
Beginning balance, January 1, 2018	$	2,071		$	5,795		$	825		$	87		$	8,778
(Reversal) provision charged to operations	(513		)	642			(60		)	(19		)	50
Losses charged to allowance	(94		)	—			(116		)	—			(210		)
Recoveries	207			102			177			—			486
Ending balance, December 31, 2018	$	1,671		$	6,539		$	826		$	68		$	9,104

Allowance for credit losses:
Beginning balance, January 1, 2017	$	2,180		$	6,200		$	852		$	94		$	9,326
(Reversal) provision charged to operations	(762		)	(449		)	68			(7		)	(1,150		)
Losses charged to allowance	(207		)	(22		)	(235		)	—			(464		)
Recoveries	860			66			140			—			1,066
Ending balance, December 31, 2017	$	2,071		$	5,795		$	825		$	87		$	8,778

Allowance for credit losses:
Beginning balance, January 1, 2016	$	3,562		$	5,204		$	734		$	110		$	9,610
(Reversal) provision charged to operations	(6,048		)	11			203			(16		)	(5,850		)
Losses charged to allowance	(621		)	—			(262		)	—			(883		)
Recoveries	5,287			985			177			—			6,449
Ending balance, December 31, 2016	$	2,180		$	6,200		$	852		$	94		$	9,326

The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2018 and December 31, 2017 (in thousands):



	Commercial		Real Estate		Consumer		Unallocated		Total
Allowance for credit losses:
Ending balance, December 31, 2018	$	1,671	$	6,539	$	826	$	68	$	9,104
Ending balance: individually evaluated for impairment	$	9	$	27	$	54	$	—	$	90
Ending balance: collectively evaluated for impairment	$	1,662	$	6,512	$	772	$	68	$	9,014

Ending balance, December 31, 2017	$	2,071	$	5,795	$	825	$	87	$	8,778
Ending balance: individually evaluated for impairment	$	1	$	1	$	34	$	—	$	36
Ending balance: collectively evaluated for impairment	$	2,070	$	5,794	$	791	$	87	$	8,742

The following table shows the ending balances of loans as of December 31, 2018 and December 31, 2017 by portfolio segment and by impairment methodology (in thousands):



	Commercial		Real Estate		Consumer		Total
Loans:
Ending balance, December 31, 2018	$	109,531	$	699,576	$	107,996	$	917,103
Ending balance: individually evaluated for impairment	$	348	$	4,215	$	1,346	$	5,909
Ending balance: collectively evaluated for impairment	$	109,183	$	695,361	$	106,650	$	911,194

Loans:
Ending balance, December 31, 2017	$	115,812	$	677,467	$	106,041	$	899,320
Ending balance: individually evaluated for impairment	$	377	$	4,846	$	1,143	$	6,366
Ending balance: collectively evaluated for impairment	$	115,435	$	672,621	$	104,898	$	892,954

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2018 (in thousands):



	Pass		Special Mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	86,876	$	12,072	$	2,585	$	—	$	101,533
Agricultural production	5,955		2,043		—		—		7,998
Real Estate:
Owner occupied	179,214		3,056		899		—		183,169
Real estate construction and other land loans	95,301		3,270		3,035		—		101,606
Commercial real estate	298,714		5,268		1,136		—		305,118
Agricultural real estate	57,544		165		19,175		—		76,884
Other real estate	32,799		—		—		—		32,799
Consumer:
Equity loans and lines of credit	68,016		380		1,562		—		69,958
Consumer and installment	38,036		—		2		—		38,038
Total	$	862,455	$	26,254	$	28,394	$	—	$	917,103

The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2017 (in thousands):



	Pass		Special Mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	84,745	$	8,217	$	7,894	$	—	$	100,856
Agricultural production	10,848		206		3,902		—		14,956
Real Estate:
Owner occupied	196,838		4,795		2,819		—		204,452
Real estate construction and other land loans	90,927		1,625		3,908		—		96,460
Commercial real estate	261,746		4,147		3,361		—		269,254
Agricultural real estate	48,274		1,270		26,537		—		76,081
Other real estate	29,867		1,165		188		—		31,220
Consumer:
Equity loans and lines of credit	74,535		483		1,386		—		76,404
Consumer and installment	29,634		—		3		—		29,637
Total	$	827,414	$	21,908	$	49,998	$	—	$	899,320

The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2018 (in thousands):



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days Accruing		Non-accrual
Commercial:
Commercial and industrial	$	255	$	—	$	—	$	255	$	101,278	$	101,533	$	—	$	298
Agricultural production	—		—		—		—		7,998		7,998		—		—
Real estate:	—								—		—
Owner occupied	215		—		—		215		182,954		183,169		—		215
Real estate construction and other land loans	—		—		1,439		1,439		100,167		101,606		—		1,439
Commercial real estate	—		—		—		—		305,118		305,118		—		418
Agricultural real estate	—		—		—		—		76,884		76,884		—		—
Other real estate	—		—		—		—		32,799		32,799		—		—
Consumer:									—		—
Equity loans and lines of credit	953		—		—		953		69,005		69,958		—		370
Consumer and installment	7		—		—		7		38,031		38,038		—		—
Total	$	1,430	$	—	$	1,439	$	2,869	$	914,234	$	917,103	$	—	$	2,740

The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2017 (in thousands):



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days Accruing		Non- accrual
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	100,856	$	100,856	$	—	$	356
Agricultural production	—		—		—		—		14,956		14,956		—		—
Real estate:	—										—
Owner occupied	—		—		—		—		204,452		204,452		—		—
Real estate construction and other land loans	—		—		1,397		1,397		95,063		96,460		—		1,397
Commercial real estate	—		—		—		—		269,254		269,254		—		976
Agricultural real estate	—		—		—		—		76,081		76,081		—		—
Other real estate	—		1,165		—		1,165		30,055		31,220		—		—
Consumer:											—
Equity loans and lines of credit	149		—		—		149		76,255		76,404		—		146
Consumer and installment	26		—		—		26		29,611		29,637		—		—
Total	$	175	$	1,165	$	1,397	$	2,737	$	896,583	$	899,320	$	—	$	2,875

The following table shows information related to impaired loans by class at December 31, 2018 (in thousands):



	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	259	$	493	$	—
Real estate:
Owner occupied	215		215		—
Real estate construction and other land loans	2,613		2,676		—
Commercial real estate	1,182		1,414		—
Total real estate	4,010		4,305		—
Consumer:
Equity loans and lines of credit	248		285		—
Total with no related allowance recorded	4,517		5,083		—

With an allowance recorded:
Commercial:
Commercial and industrial	89		90		9
Real estate:
Commercial real estate	161		162		27
Agricultural real estate	44		44		—
Total real estate	205		206		27
Consumer:
Equity loans and lines of credit	1,098		1,103		54
Total with an allowance recorded	1,392		1,399		90
Total	$	5,909	$	6,482	$	90

The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

The following table shows information related to impaired loans by class at December 31, 2017 (in thousands):



	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	355	$	553	$	—
Real estate:
Real estate construction and other land loans	3,023		3,085		—
Commercial real estate	1,772		2,040		—
Total real estate	4,795		5,125		—
Consumer:
Equity loans and lines of credit	146		206		—
Total with no related allowance recorded	5,296		5,884		—

With an allowance recorded:
Commercial:
Commercial and industrial	22		22		1
Real estate:
Agricultural real estate	51		51		1
Consumer:
Equity loans and lines of credit	997		997		34
Total with an allowance recorded	1,070		1,070		36
Total	$	6,366	$	6,954	$	36

The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2018, 2017, and 2016 (in thousands):



	Year Ended December 31, 2018				Year Ended December 31, 2017				Year Ended December 31, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial	$	311	$	—	$	404	$	—	$	115	$	—
Agricultural production	—		—		—		—		42		—
Total commercial	311		—		404		—		157		—
Real estate:
Owner occupied	17		—		24		—		162		—
Real estate construction and other land loans	2,857		85		1,228		114		2,393		196
Commercial real estate	1,542		51		1,370		53		903		55
Agricultural real estate	1,173		159		—		—		173		—
Other real estate	702		—		—		—		—		—
Total real estate	6,291		295		2,622		167		3,631		251
Consumer:
Equity loans and lines of credit	217		—		132		—		598		—
Consumer and installment	—		—		6		—		41		—
Total consumer	217		—		138		—		639		—
Total with no related allowance recorded	6,819		295		3,164		167		4,427		251
	—
With an allowance recorded:	—
Commercial:											—
Commercial and industrial	55		4		38		1		441		3
Agricultural production	—		—		—		—		104		—
Total commercial	55		4		38		1		545		3
Real estate:			—				—				—
Owner occupied	—		—		—		—		120		—
Real estate construction and other land loans	—		—		1,827		—		171		—
Commercial real estate	200		12		470		—		548		—
Agricultural real estate	49		3		43		3		—		—
Other real estate	86		—		—		—		—		—
Total real estate	335		15		2,340		3		839		—
Consumer:
Equity loans and lines of credit	1,054		57		239		32		203		—
Consumer and installment	3		—		1		—		19		—
Total consumer	1,057		57		240		32		222		—
Total with an allowance recorded	1,447		76		2,618		36		1,606		3
Total	$	8,266	$	371	$	5,782	$	203	$	6,033	$	254

Foregone interest on nonaccrual loans totaled $267,000, $210,000, and $245,000 for the years ended December 31, 2018, 2017, and 2016, respectively. Interest income recognized on cash basis during the years presented above was not considered significant for financial reporting purposes.

Troubled Debt Restructurings:

As of December 31, 2018 and 2017, the Company has a recorded investment in troubled debt restructurings of $3,220,000 and, $3,551,000, respectively. The Company has allocated $50,000 and $36,000 of specific reserves for those loans at December 31, 2018 and 2017, respectively. The Company has committed to lend no additional amounts as of December 31, 2018 to customers with outstanding loans that are classified as troubled debt restructurings.

For the years ended December 31, 2018, 2017, and 2016 the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. During the same periods, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower were forgiven.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2018 (dollars in thousands):



Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification		Post Modification Outstanding Recorded Investment (2)		Outstanding Recorded Investment
Commercial:
Commercial and industrial	1	$	38	$	—	$	38	$	30
Real Estate:
Real Estate - Commercial	1	$	166	$	—	$	166	$	161
Total	2	$	204	$	—	$	204	$	191


(1)	Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.


(2)	Balance outstanding after principal modification, if any borrower reduction to recorded investment.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2017 (dollars in thousands):



Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification		Post Modification Outstanding Recorded Investment (2)		Outstanding Recorded Investment
Real Estate:
Agricultural real estate	1	59		—		59		51
Consumer
Equity loans and line of credit	2	490		—		1,066		1,059
Total	3	$	549	$	—	$	1,125	$	1,110


(1)	Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.


(2)	Balance outstanding after principal modification, if any borrower reduction to recorded investment.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2016 (dollars in thousands):



Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification		Post Modification Outstanding Recorded Investment (2)		Outstanding Recorded Investment
Commercial:
Commercial and Industrial	2	$	45	$	—	$	45	$	40


(1)	Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.


(2)	Balance outstanding after principal modification, if any borrower reduction to recorded investment.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings within 12 months following the modification during the years ended December 31, 2018, 2017, and 2016.