LOANS AND ALLOWANCE FOR LOAN LOSSES | LOANS AND ALLOWANCE FOR LOAN LOSSES Loans at June 30, 2019 and December 31, 2018 were comprised as follows: June 30, 2019 December 31, 2018 Commercial, Industrial and Agricultural $ 233,312 $ 213,850 Real Estate 1-4 Family Residential 233,229 225,863 1-4 Family HELOC 94,436 88,112 Multi-family and Commercial 481,973 447,840 Construction, Land Development and Farmland 237,421 220,801 Consumer 18,881 20,495 Other 13,338 14,106 Total 1,312,590 1,231,067 Less Deferred loan fees (cost) (95 ) (9 ) Allowance for possible loan losses 11,666 10,892 Loans, net $ 1,301,019 $ 1,220,184 NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) Activity in the allowance for loan losses by portfolio segment was as follows for the six months ended June 30, 2019 : Commercial Industrial and Agricultural Multi-family and Commercial Real Estate Construction Land Development and Farmland 1-4 Family Residential Real Estate Beginning balance $ 1,751 $ 4,429 $ 2,500 $ 1,333 Charge-offs (168 ) — — (17 ) Recoveries 294 59 201 216 Provision 4 225 6 (77 ) Ending balance $ 1,881 $ 4,713 $ 2,707 $ 1,455 1-4 Family HELOC Consumer Other Total Beginning balance $ 656 $ 184 $ 39 $ 10,892 Charge-offs — (21 ) (13 ) (219 ) Recoveries 11 12 — 793 Provision 19 13 10 200 Ending balance $ 686 $ 188 $ 36 $ 11,666 Activity in the allowance for loan losses by portfolio segment was as follows for the six months ended June 30, 2018 : Commercial Industrial and Agricultural Multi-family and Commercial Real Estate Construction Land Development and Farmland 1-4 Family Residential Real Estate Beginning balance $ 2,538 $ 3,166 $ 2,434 $ 773 Charge-offs (308 ) — (140 ) (8 ) Recoveries 425 3 44 11 Provision (970 ) 692 177 469 Ending balance $ 1,685 $ 3,861 $ 2,515 $ 1,245 1-4 Family HELOC Consumer Other Total Beginning balance $ 595 $ 183 $ 42 $ 9,731 Charge-offs (6 ) (24 ) (22 ) (508 ) Recoveries 5 18 3 509 Provision 42 15 12 437 Ending balance $ 636 $ 192 $ 35 $ 10,169 NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2019 was as follows: Commercial Industrial and Agricultural Multi-family and Commercial Real Estate Construction Land Development and Farmland 1-4 Family Residential Real Estate Allowance for loan losses Individually evaluated for impairment $ 72 $ — $ 17 $ — Acquired with credit impairment — — — — Collectively evaluated for impairment 1,809 4,713 2,690 1,455 Total $ 1,881 $ 4,713 $ 2,707 $ 1,455 Loans Individually evaluated for impairment $ 903 $ 3,017 $ 1,069 $ 1,218 Acquired with credit impairment — 222 829 253 Collectively evaluated for impairment 232,409 478,734 235,523 231,758 Total $ 233,312 $ 481,973 $ 237,421 $ 233,229 1-4 Family HELOC Consumer Other Total Allowance for loan losses Individually evaluated for impairment $ — $ — $ — $ 89 Acquired with credit impairment — — — — Collectively evaluated for impairment 686 188 36 11,577 Total $ 686 $ 188 $ 36 $ 11,666 Loans Individually evaluated for impairment $ 296 $ — $ — $ 6,503 Acquired with credit impairment — — — 1,304 Collectively evaluated for impairment 94,140 18,881 13,338 1,304,783 Total $ 94,436 $ 18,881 $ 13,338 $ 1,312,590 NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2018 was as follows: Commercial Industrial and Agricultural Multi-family and Commercial Real Estate Construction Land Development and Farmland 1-4 Family Residential Real Estate Allowance for loan losses Individually evaluated for impairment $ 38 $ — $ 17 $ — Acquired with credit impairment — — — — Collectively evaluated for impairment 1,713 4,429 2,483 1,333 Total $ 1,751 $ 4,429 $ 2,500 $ 1,333 Loans Individually evaluated for impairment $ 978 $ 1,160 $ 1,780 $ 1,246 Acquired with credit impairment 40 232 1,751 262 Collectively evaluated for impairment 212,832 446,448 217,270 224,355 Total $ 213,850 $ 447,840 $ 220,801 $ 225,863 1-4 Family HELOC Consumer Other Total Allowance for loan losses Individually evaluated for impairment $ — $ — $ — $ 55 Acquired with credit impairment — — — — Collectively evaluated for impairment 656 184 39 10,837 Total $ 656 $ 184 $ 39 $ 10,892 Loans Individually evaluated for impairment $ — $ 12 $ — $ 5,176 Acquired with credit impairment — 11 — 2,296 Collectively evaluated for impairment 88,112 20,472 14,106 1,223,595 Total $ 88,112 $ 20,495 $ 14,106 $ 1,231,067 Risk characteristics relevant to each portfolio segment are as follows: Commercial, industrial and agricultural: The commercial, industrial and agricultural loan portfolio segment includes loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial, industrial and agricultural loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) Multi-family and commercial real estate: Multi-family and commercial real estate and multi-family loans are subject to underwriting standards and processes similar to commercial, industrial and agricultural loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property. Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. 1-4 family residential real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value ("LTV"), minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) 1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans. Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV on secured consumer loans, minimum credit scores, and maximum debt to income. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years . These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle, or other large personal items, or for consolidating debt. These loans may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures. Non-accrual loans by class of loan were as follows at June 30, 2019 and December 31, 2018 : June 30, 2019 December 31, 2018 Commercial, Industrial and Agricultural $ 314 $ 279 Multi-family and Commercial Real Estate 811 — Construction, Land Development and Farmland 387 1,294 1-4 Family Residential Real Estate 1,187 2,556 1-4 Family HELOC 296 — Consumer 50 65 Total $ 3,045 $ 4,194 Performing non-accrual loans totaled $1,578 and $2,010 at June 30, 2019 and December 31, 2018 , respectively. NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) Individually impaired loans by class of loans were as follows at June 30, 2019 : Unpaid Principal Balance Recorded Investment with no Allowance Recorded Recorded Investment with Allowance Recorded Total Recorded Investment Related Allowance Commercial, Industrial and Agricultural $ 904 $ 589 $ 314 $ 903 $ 72 Multi-family and Commercial Real Estate 3,513 3,239 — 3,239 — Construction, Land Development and Farmland 2,214 1,726 172 1,898 17 1-4 Family Residential Real Estate 1,685 1,471 — 1,471 — 1-4 Family HELOC 298 296 — 296 — Total $ 8,614 $ 7,321 $ 486 $ 7,807 $ 89 Individually impaired loans by class of loans were as follows at December 31, 2018 : Unpaid Principal Balance Recorded Investment with no Allowance Recorded Recorded Investment with Allowance Recorded Total Recorded Investment Related Allowance Commercial, Industrial and Agricultural $ 1,247 $ 765 $ 253 $ 1,018 $ 38 Multi-family and Commercial Real Estate 1,670 1,392 — 1,392 — Construction, Land Development and Farmland 3,920 3,359 172 3,531 17 1-4 Family Residential Real Estate 2,243 1,508 — 1,508 — Consumer 29 23 — 23 — Total $ 9,109 $ 7,047 $ 425 $ 7,472 $ 55 The average balances of impaired loans for the six months ended June 30, 2019 and 2018 was as follows: 2019 2018 Commercial, Industrial and Agricultural $ 791 $ 3,040 Multi-family and Commercial Real Estate 2,548 3,010 Construction, Land Development and Farmland 2,747 5,083 1-4 Family Residential Real Estate 1,639 2,774 1-4 Family HELOC 99 90 Consumer 11 88 Total $ 7,835 $ 14,085 NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) The Company utilizes a risk grading system to monitor the credit quality of the Company’s commercial loan portfolio which consists of commercial, industrial and agricultural, commercial real estate and construction loans. Loans are graded on a scale of 1 to 9. Grades 1 to 5 are pass credits, grade 6 is special mention, grade 7 is substandard, grade 8 is doubtful and grade 9 is loss. A description of the risk grades are as follows: Grade 1 - Minimal Risk (Pass) This grade includes loans to borrowers with a strong financial position and history of profits and cash flows sufficient to service the debt. These borrowers have well defined sources of primary/secondary repayment, conservatively leveraged balance sheets and the ability to access a wide range of financing alternatives. Collateral securing these loans is negotiable, of sufficient value and in possession of the Company. Risk of loss is unlikely. Grade 2 - High Quality (Pass) This grade includes loans to borrowers with a strong financial condition reflecting dependable net profits and cash flows. The borrower has verifiable liquid net worth providing above average asset protection. An identifiable market exists for the collateral. Risk of loss is unlikely. Grade 3 - Above Average (Pass) This grade includes loans to borrowers with a balance sheet that reflects a comfortable degree of leverage and liquidity. Borrowers are profitable and have a sustained record of servicing debt. An identifiable market exists for the collateral, but liquidation could take up to one year. Risk of loss is unlikely. Grade 4 - Average (Pass) This grade includes loans to borrowers with a financial condition that is satisfactory and comparable to industry standards. The borrower has verifiable net worth, providing over time, average asset protection. Borrower's cash flows are sufficient to satisfy debt service requirements. Risk of loss is below average. Grade 5 - Acceptable (Management Attention) (Pass) This grade includes loans to borrowers whose loans are performing, but sources of repayment are not documented by the current credit analysis. There are some declining trends in margins, ratios and/or cash flow. Guarantor(s) have strong net worth(s), but assets may be concentrated in real estate or other illiquid investments. Risk of loss is average. Grade 6 - Special Mention Special mention assets have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a substandard classification. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons for rating a credit exposure special mention include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices. The special mention rating is designed to identify a specific level of risk and concern about asset quality . Although a special mention asset has a higher probability of default than a pass asset, its default is not imminent. NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) Grade 7 - Substandard A ‘‘substandard’’ extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified should have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard. Substandard assets have a high probability of payment default, or they have other well-defined weaknesses. They require more intensive supervision by Company management. Substandard assets are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigation. Grade 8 - Doubtful An extension of credit classified ‘‘doubtful’’ has all the weaknesses inherent in one classified 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. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral, or refinancing plans. Generally, the doubtful classification should not extend for a long period of time because in most cases the pending factors or events that warranted the doubtful classification should be resolved either positively or negatively in a reasonable period of time. Grade 9 - Loss Extensions of credit classified ‘‘loss’’ are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. Amounts classified loss should be promptly charged off. The Company will not attempt long term recoveries while the credit remains on the Company’s books. Losses should be taken in the period in which they surface as uncollectible. With loss assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified loss, there is little prospect of collecting either its principal or interest. Non-commercial purpose loans are initially assigned a default loan grade of 99 (Pass) and are risk graded (Grade 6, 7, or 8) according to delinquency status when applicable. Credit quality indicators by class of loan were as follows at June 30, 2019 : Pass Special Mention Substandard Total Commercial, Industrial and Agricultural $ 231,448 $ 266 $ 1,598 $ 233,312 1-4 Family Residential Real Estate 231,538 — 1,691 233,229 1-4 Family HELOC 93,974 — 462 94,436 Multi-family and Commercial Real Estate 476,858 — 5,115 481,973 Construction, Land Development and Farmland 236,508 — 913 237,421 Consumer 18,624 — 257 18,881 Other 13,338 — — 13,338 Total $ 1,302,288 $ 266 $ 10,036 $ 1,312,590 NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) Credit quality indicators by class of loan were as follows at December 31, 2018 : Pass Special Mention Substandard Total Commercial, Industrial and Agricultural $ 212,761 $ — $ 1,089 $ 213,850 1-4 Family Residential Real Estate 221,546 1,125 3,192 225,863 1-4 Family HELOC 88,112 — — 88,112 Multi-family and Commercial Real Estate 442,127 3,135 2,578 447,840 Construction, Land Development and Farmland 218,053 579 2,169 220,801 Consumer 20,236 — 259 20,495 Other 14,106 — — 14,106 Total $ 1,216,941 $ 4,839 $ 9,287 $ 1,231,067 Past due status by class of loan was as follows at June 30, 2019 : 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Total Past Due Current Total Loans Commercial, Industrial and Agricultural $ 170 $ — $ 301 $ 471 $ 232,841 $ 233,312 1-4 Family Residential Real Estate 680 516 67 1,263 231,966 233,229 1-4 Family HELOC 120 — — 120 94,316 94,436 Multi-family and Commercial Real Estate 1,064 — — 1,064 480,909 481,973 Construction, Land Development and Farmland 1 — 171 172 237,249 237,421 Consumer 12 10 7 29 18,852 18,881 Other — — — — 13,338 13,338 Total $ 2,047 $ 526 $ 546 $ 3,119 $ 1,309,471 $ 1,312,590 Past due status by class of loan was as follows at December 31, 2018 : 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Total Past Due Current Total Loans Commercial, Industrial and Agricultural $ 22 $ 153 $ 279 $ 454 $ 213,396 $ 213,850 1-4 Family Residential Real Estate 1,104 335 1,203 2,642 223,221 225,863 1-4 Family HELOC 50 — — 50 88,062 88,112 Multi-family and Commercial Real Estate — 104 — 104 447,736 447,840 Construction, Land Development and Farmland 214 — 171 385 220,416 220,801 Consumer 11 30 46 87 20,408 20,495 Other — — — — 14,106 14,106 Total $ 1,401 $ 622 $ 1,699 $ 3,722 $ 1,227,345 $ 1,231,067 NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) There were two loans totaling $22 past due 90 days or more and still accruing interest at June 30, 2019 . There was one loan totaling $6 past due 90 days or more and still accruing interest at December 31, 2018 . During the six months ended June 30, 2019, there were no loans that were modified to troubled debt restructurings. One previously disclosed troubled debt restructuring with a principal balance of $89 , was paid in full during the six months ended June 30, 2019. The following table presents loans by class modified as troubled debt restructurings that occurred during the first six months of 2018 : Number of Contracts Pre-Modification Outstanding Recorded Investments Post-Modification Outstanding Recorded Investments June 30, 2018 1-4 Family Residential 1 $ 1,254 $ 1,254 Total 1 $ 1,254 $ 1,254 The modification that occurred during the six months ended June 30, 2018, consisted of an interest only monthly payment restructure and had no effect on the allowance for loan losses or interest income. The Company has acquired 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. The outstanding balance and carrying amount of the purchased credit impaired loans were as follows at June 30, 2019 and December 31, 2018 : June 30, 2019 December 31, 2018 Commercial, Industrial and Agricultural $ — $ 63 Multi-family and Commercial Real Estate 224 233 Construction, Land Development and Farmland 1,037 1,958 1-4 Family Residential Real Estate 315 324 Consumer — 18 Total outstanding balance 1,576 2,596 Less remaining purchase discount 272 300 Allowance for loan losses — — Carrying amount, net of allowance $ 1,304 $ 2,296 NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the quarters and six months ended June 30, 2019 and 2018 : 2019 2018 Balance at January 1, $ 110 $ — New loans purchased — 260 Loan charge offs — — Accretion income — (38 ) Balance at March 31, 110 222 New loans purchased — — Loan payoffs — (67 ) Loan charge offs (7 ) — Accretion income — (95 ) Balance at June 30, $ 103 $ 60 |