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LOANS

12 Months Ended

Dec. 31, 2019

Note 5—LOANS

Loans summarized by category are as follows:

	December 31,
(Dollars in thousands)	2019		2018
Commercial, financial and agricultural	$	51,805	$	53,933
Real estate:
Construction		73,512		58,440
Mortgage-residential		45,357		52,764
Mortgage-commercial		527,447		513,833
Consumer:
Home equity		28,891		29,583
Other		10,016		9,909
Total	$	737,028	$	718,462

Activity in the allowance for loan losses was as follows:

	Years ended December 31,
(Dollars in thousands)	2019			2018			2017
Balance at the beginning of year	$	6,263		$	5,797		$	5,214
Provision for loan losses		139			346			530
Charged off loans		(145	)		(164	)		(173	)
Recoveries		370			284			226
Balance at end of year	$	6,627		$	6,263		$	5,797

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the years ended December 31, 2019, December 31, 2018 and December 31, 2017 follows:

(Dollars in thousands)	Commercial			Real estate Construction		Real estate Mortgage Residential			Real estate Mortgage Commercial			Consumer Home equity			Consumer Other			Unallocated		Total
2019
Allowance for loan losses:
Beginning balance	$	430		$	89	$	431		$	4,318		$	261		$	88		$	646	$	6,263
Charge-offs		(12	)		—		(12	)		—			(1	)		(120	)		—		(145	)
Recoveries		3			—		—			307			15			45			—		370
Provisions		6			22		(52	)		(23	)		(35	)		84			137		139
Ending balance	$	427		$	111	$	367		$	4,602		$	240		$	97		$	783	$	6,627

Ending balances:
Individually evaluated for impairment	$	—		$	—	$	—		$	6		$	—		$	—		$	—	$	6

Collectively evaluated for impairment		427			111		367			4,596			240			97			783		6,621

Loans receivable:
Ending balance-total	$	51,805		$	73,512	$	45,357		$	527,447		$	28,891		$	10,016		$	—	$	737,028

Ending balances:
Individually evaluated for impairment		400			—		392			3,135			70			—			—		3,997

Collectively evaluated for impairment		51,405			73,512		44,965			524,312			28,821			10,016			—		733,031

(Dollars in thousands)	Commercial		Real estate Construction			Real estate Mortgage Residential			Real estate Mortgage Commercial		Consumer Home equity			Consumer Other			Unallocated			Total
2018
Allowance for loan losses:
Beginning balance	$	221	$	101		$	461		$	3,077	$	308		$	35		$	1,594		$	5,797
Charge-offs		—		—			(1	)		—		(23	)		(140	)		—			(164	)
Recoveries		3		—			4			210		6			61			—			284
Provisions		206		(12	)		(33	)		1,031		(30	)		132			(948	)		346
Ending balance	$	430	$	89		$	431		$	4,318	$	261		$	88		$	646		$	6,263

Ending balances:
Individually evaluated for impairment	$	—	$	—		$	—		$	14	$	—		$	—		$	—		$	14

Collectively evaluated for impairment		430		89			431			4,304		261			88			646			6,249

Loans receivable:
Ending balance-total	$	53,933	$	58,440		$	52,764		$	513,833	$	29,583		$	9,909		$	—		$	718,462

Ending balances:
Individually evaluated for impairment		—		—			322			4,030		29			—			—			4,381

Collectively evaluated for impairment		53,933		58,440			52,442			509,803		29,554			9,909			—			714,081

(Dollars in thousands)	Commercial			Real estate Construction			Real estate Mortgage Residential		Real estate Mortgage Commercial			Consumer Home equity			Consumer Other			Unallocated		Total
2017
Allowance for loan losses:
Beginning balance	$	145		$	104		$	438	$	2,793		$	153		$	127		$	1,454	$	5,214
Charge-offs		(5	)		—			—		(30	)		(7	)		(131	)		—		(173	)
Recoveries		5			—			5		172			24			20			—		226
Provisions		76			(3	)		18		142			138			19			140		530
Ending balance	$	221		$	101		$	461	$	3,077		$	308		$	35		$	1,594	$	5,797

Ending balances:
Individually evaluated for impairment	$	—		$	—		$	2	$	25		$	—		$	—		$	—	$	27

Collectively evaluated for impairment		221			101			459		3,052			308			35			1,594		5,770

Loans receivable:
Ending balance-total	$	51,040		$	45,401		$	46,901	$	460,276		$	32,451		$	10,736		$	—	$	646,805

Ending balances:
Individually evaluated for impairment		—			—			413		4,742			—			—			—		5,155

Collectively evaluated for impairment		51,040			45,401			46,488		455,534			32,451			10,736			—		641,650

At December 31, 2019, $28.0 million of loans acquired in the Cornerstone acquisition were excluded in the evaluation of the adequacy of the allowance for loan losses. These loans were recorded at fair value at acquisition which included a credit component of approximately $1.5 million. Loans acquired prior to 2017 have been included in the evaluation of the allowance for loan losses.

Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability. The following table presents related party loan transactions for the years ended December 31, 2019 and December 31, 2018.

(Dollars in thousands)	For the years ended December 31,
	2019		2018
Balance, beginning of year	$	5,937	$	5,938
New Loans		129		778
Less loan repayments		1,958		779
Balance, end of year	$	4,108	$	5,937

The following table presents at December 31, 2019, 2018 and 2017, loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

	December 31,
(Dollars in thousands)	2019		2018		2017
Total loans considered impaired at year end	$	3,997	$	4,381	$	5,155
Loans considered impaired for which there is a related allowance for loan loss:
Outstanding loan balance	$	256	$	453	$	1,696
Related allowance	$	6	$	14	$	27
Loans considered impaired and previously written down to fair value	$	2,275	$	3,928	$	3,485
Average impaired loans	$	4,431	$	4,128	$	5,513
Amount of interest earned during period of impairment	$	263	$	160	$	132

The following tables are by loan category and present at December 31, 2019, December 31, 2018 and December 31, 2017 loans individually evaluated and considered impaired under FASB ASC 310, “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

(Dollars in thousands)
December 31, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Commercial	$	400	$	400	$	—	$	600	$	49
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		392		460		—		439		19
Mortgage-commercial		2,879		5,539		—		2,961		170
Consumer:
Home Equity		70		73		—		76		2
Other		—		—		—		—		—

With an allowance recorded:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		—		—		—		—		—
Mortgage-commercial		256		256		6		355		23
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		400		400		—		600		49
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		392		460		—		439		19
Mortgage-commercial		3,135		5,795		6		3,316		193
Consumer:
Home Equity		70		73		—		76		2
Other		—		—		—		—		—
	$	3,997	$	6,728	$	6	$	4,431	$	263

(Dollars in thousands)
December 31, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		322		371		—		483		9
Mortgage-commercial		3,577		6,173		—		3,232		128
Consumer:
Home Equity		29		30		—		33		2
Other		—		—		—		—		—

With an allowance recorded:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		—		—		—		—		—
Mortgage-commercial		453		453		14		380		21
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		322		371		—		483		9
Mortgage-commercial		4,030		6,626		14		3,612		149
Consumer:
Home Equity		29		30		—		33		2
Other		—		—		—		—		—
	$	4,381	$	7,027	$	14	$	4,128	$	160

(Dollars in thousands)
December 31, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		371		437		—		399		—
Mortgage-commercial		3,087		5,966		—		3,420		13
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

With an allowance recorded:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		42		42		2		43		2
Mortgage-commercial		1,654		2,261		25		1,652		117
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		413		479		2		442		2
Mortgage-commercial		4,742		8,227		25		5,072		130
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—
	$	5,155	$	8,706	$	27	$	5,514	$	132

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 is performed on a monthly basis. 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. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

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.

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 not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of December 31, 2019 and December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below. As of December 31, 2019 and December 31, 2018, no loans were classified as doubtful.

(Dollars in thousands)
December 31, 2019	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, financial & agricultural	$	51,166	$	239	$	400	$	—	$	51,805
Real estate:
Construction		73,512		—		—		—		73,512
Mortgage – residential		44,221		509		627		—		45,357
Mortgage – commercial		521,072		2,996		3,379		—		527,447
Consumer:
Home Equity		27,450		1,157		284		—		28,891
Other		9,981		35		—		—		10,016
Total	$	727,402	$	4,936	$	4,690	$	—	$	737,028

(Dollars in thousands)
December 31, 2018	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, financial & agricultural	$	53,709	$	224	$	—	$	—	$	53,933
Real estate:
Construction		58,440		—		—		—		58,440
Mortgage – residential		51,286		633		845		—		52,764
Mortgage – commercial		505,493		5,176		3,164		—		513,833
Consumer:
Home Equity		28,071		1,197		315		—		29,583
Other		9,907		—		2		—		9,909
Total	$	706,906	$	7,230	$	4,326	$	—	$	718,462

At December 31, 2019 and 2018, non-accrual loans totaled $2.3 million and $2.5 million, respectively. The gross interest income which would have been recorded under the original terms of the non-accrual loans amounted to $148 thousand and $218 thousand in 2019 and 2018, respectively. Interest recorded on non-accrual loans in 2019 and 2018 amounted to $66 thousand and $38 thousand, respectively.

Troubled debt restructurings (“TDRs”) that are still accruing are included in impaired loans at December 31, 2019 and 2018 amounted to $1.7 million and $2.0 million, respectively. Interest earned during 2019 and 2018 on these loans amounted to $144 thousand and $132 thousand, respectively.

There were loans of $0.3 thousand and $31.2 thousand that were greater than 90 days delinquent and still accruing interest as of December 31, 2019 and December 31, 2018, respectively.

The following tables are by loan category and present loans past due and on non-accrual status as of December 31, 2019 and December 31, 2018:

(Dollars in thousands) December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Commercial	$	—	$	99	$	—	$	400	$	499	$	51,306	$	51,805
Real estate:
Construction		113		—		—		—		113		73,399		73,512
Mortgage-residential		151		—		—		392		543		44,814		45,357
Mortgage-commercial		39		—		—		1,467		1,506		525,941		527,447
Consumer:
Home equity		2		9		—		70		81		28,810		28,891
Other		40		23		—		—		63		9,953		10,016
Total	$	345	$	131	$	—	$	2,329	$	2,805	$	734,223	$	737,028

(Dollars in thousands) December 31, 2018	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Commercial	$	18	$	8	$	—	$	—	$	26	$	53,907	$	53,933
Real estate:
Construction		—		—		—		—		—		58,440		58,440
Mortgage-residential		110		163		—		284		557		52,207		52,764
Mortgage-commercial		1,302		—		—		2,232		3,534		510,299		513,833
Consumer:
Home equity		146		11		31		29		217		29,366		29,583
Other		14		55		—		—		69		9,840		9,909
Total	$	1,590	$	237	$	31	$	2,545	$	4,403	$	714,059	$	718,462

There were no loans determined to be TDR’s during the twelve month period ended December 31, 2019 and December 31, 2018. Additionally, there were no loans determined to be TDRs in the twelve months ended December 31, 2019 and December 31, 2018 that had subsequent payment defaults. Defaulted loans are those loans that are greater than 90 days past due.

In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All non-accrual loans are written down to its corresponding collateral value. All TDR accruing loans where the loan balance exceeds the present value of cash flow will have a specific allocation. All nonaccrual loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the Bank will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, (Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

A summary of changes in the accretable yield for PCI loans for the years ended December 31, 2019, 2018 and 2017 follows:

(Dollars in thousands)	Year Ended December 31, 2019			Year Ended December 31, 2018			Year Ended December 31, 2017
Accretable yield, beginning of period	$	153		$	21		$	34
Additions		—			—			10
Accretion		(30	)		(256	)		(67	)
Reclassification of non-accretable difference due to improvement in expected cash flows		—			284			44
Other changes, net		—			104			—
Accretable yield, end of period	$	123		$	153		$	21

At December 31, 2019 and 2018 the recorded investment in purchased impaired loans was $112 thousand and $112 thousand respectively. The unpaid principal balance was $190 thousand and $205 thousand at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018 these loans were all secured by commercial real estate.