NOTE 5. Loans and Allowance for Loan Losses

The composition of loans at March 31, 2019 and December 31, 2018 was as follows:



	March 31,			December 31,
	2019			2018
	(in thousands)
Mortgage loans on real estate:
Construction and land development	$	59,707		$	54,675
Secured by farmland	8,921			7,251
Secured by 1-4 family residential properties	226,672			221,861
Multifamily	9,485			7,923
Commercial	263,857			265,595
Commercial and industrial loans	34,798			33,086
Consumer installment loans	8,056			8,470
All other loans	8,116			8,454
Total loans	$	619,612		$	607,315
Net deferred loan fees	(404		)	(488		)
Allowance for loan losses	(5,685		)	(5,456		)
Net Loans	$	613,523		$	601,371

Changes in the allowance for loan losses for the three months ended March 31, 2019 and 2018 and the year ended December 31, 2018 were as follows:



	Three Months Ended			Year Ended			Three Months Ended
	March 31,			December 31,			March 31,
	2019			2018			2018
				(in thousands)
Balance, beginning	$	5,456		$	4,411		$	4,411
Provision for loan losses	194			777			205
Recoveries added to the allowance	45			504			52
Loan losses charged to the allowance	(10		)	(236		)	(138		)
Balance, ending	$	5,685		$	5,456		$	4,530

Nonaccrual and past due loans by class at March 31, 2019 and December 31, 2018 were as follows:



	March 31, 2019
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Days Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	126	$	35	$	—	$	161	$	34,637	$	34,798	$	—	$	1,011
Commercial Real Estate:
Owner Occupied	—		809		—		809		135,090		135,899		—		—
Non-owner occupied	—		—		—		—		127,958		127,958		—		356
Construction and Farmland:
Residential	—		—		—		—		6,361		6,361		—		—
Commercial	280		—		—		280		61,987		62,267		—		—
Consumer:
Installment	11		—		—		11		8,045		8,056		—		—
Residential:
Equity Lines	—		—		—		—		33,621		33,621		—		86
Single family	2,594		127		1,253		3,974		189,077		193,051		—		1,817
Multifamily	—		—		—		—		9,485		9,485		—		—
All Other Loans	—		—		—		—		8,116		8,116		—		—
Total	$	3,011	$	971	$	1,253	$	5,235	$	614,377	$	619,612	$	—	$	3,270



	December 31, 2018
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	127	$	—	$	—	$	127	$	32,959	$	33,086	$	—	$	1,081
Commercial Real Estate:
Owner Occupied	—		—		—		—		136,309		136,309		—		—
Non-owner occupied	—		—		—		—		129,286		129,286		—		364
Construction and Farmland:
Residential	—		—		—		—		6,706		6,706		—		—
Commercial	—		—		—		—		55,220		55,220		—		—
Consumer:
Installment	4		—		—		4		8,466		8,470		—		—
Residential:
Equity Lines	—		—		—		—		32,815		32,815		—		92
Single family	960		196		900		2,056		186,990		189,046		695		581
Multifamily	—		—		—		—		7,923		7,923		—		—
All Other Loans	—		—		—		—		8,454		8,454		—		—
Total	$	1,091	$	196	$	900	$	2,187	$	605,128	$	607,315	$	695	$	2,118

Allowance for loan losses by segment at March 31, 2019 and December 31, 2018 were as follows:



	As of and for the Three Months Ended
	March 31, 2019
	(in thousands)
	Construction and Farmland		Residential		Commercial Real Estate			Commercial - Non Real Estate			Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	583	$	1,788	$	1,988		$	919		$	53		$	97		$	28	$	5,456
Charge-Offs	—		—		—			—			(2		)	(8		)	—		(10		)
Recoveries	2		13		6			13			10			1			—		45
Provision for (recovery of) loan losses	58		74		(35		)	(49		)	(13		)	1			158		194
Ending balance	$	643	$	1,875	$	1,959		$	883		$	48		$	91		$	186	$	5,685
Ending balance: Individually evaluated for impairment	$	—	$	95	$	182		$	600		$	—		$	—		$	—	$	877
Ending balance: collectively evaluated for impairment	$	643	$	1,780	$	1,777		$	283		$	48		$	91		$	186	$	4,808
Loans:
Ending balance	$	68,628	$	236,157	$	263,857		$	34,798		$	8,056		$	8,116		$	—	$	619,612
Ending balance individually evaluated for impairment	$	272	$	4,213	$	2,806		$	1,236		$	—		$	—		$	—	$	8,527
Ending balance collectively evaluated for impairment	$	68,356	$	231,944	$	261,051		$	33,562		$	8,056		$	8,116		$	—	$	611,085



	As of and for the Twelve Months Ended
	December 31, 2018
	(in thousands)
	Construction and Farmland			Residential			Commercial Real Estate		Commercial - Non Real Estate			Consumer			All Other Loans			Unallocated			Total
Allowance for credit losses:
Beginning Balance	$	332		$	1,754		$	1,627	$	570		$	69		$	29		$	30		$	4,411
Charge-Offs	—			(24		)	—		(139		)	(33		)	(40		)	—			(236		)
Recoveries	266			28			78		100			19			13			—			504
Provision for (recovery of) loan losses	(15		)	30			283		388			(2		)	95			(2		)	777
Ending balance	$	583		$	1,788		$	1,988	$	919		$	53		$	97		$	28		$	5,456
Ending balance: Individually evaluated for impairment	$	—		$	119		$	193	$	650		$	—		$	—		$	—		$	962
Ending balance: collectively evaluated for impairment	$	583		$	1,669		$	1,795	$	269		$	53		$	97		$	28		$	4,494
Loans:
Ending balance	$	61,926		$	229,784		$	265,595	$	33,086		$	8,470		$	8,454		$	—		$	607,315
Ending balance individually evaluated for impairment	$	280		$	4,044		$	2,919	$	1,316		$	—		$	—		$	—		$	8,559
Ending balance collectively evaluated for impairment	$	61,646		$	225,740		$	262,676	$	31,770		$	8,470		$	8,454		$	—		$	598,756

Impaired loans by class as of and for the periods ended March 31, 2019 and December 31, 2018 were as follows:



	As of and for the Three Months Ended
	March 31, 2019
	(in thousands)
	Unpaid Principal Balance		Recorded Investment (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	530	$	327	$	—	$	346	$	5
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	452		394		—		398		1
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	324		273		—		277		6
Consumer:
Installment	—		—		—		—		—
Residential:
Equity lines	468		86		—		86		—
Single family	2,512		2,381		—		2,396		17
Multifamily	379		380		—		382		5
Other Loans	—		—		—		—		—
	$	4,665	$	3,841	$	—	$	3,885	$	34
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	935	$	910	$	600	$	922	$	—
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	2,413		2,420		182		2,423		26
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	—		—		—		—		—
Consumer:
Installment	—		—		—		—		—
Residential:
Equity lines	—		—		—		—		—
Single family	1,433		1,376		95		1,380		11
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	4,781	$	4,706	$	877	$	4,725	$	37
Total:
Commercial	$	1,465	$	1,237	$	600	$	1,268	$	5
Commercial Real Estate	2,865		2,814		182		2,821		27
Construction and Farmland	324		273		—		277		6
Consumer	—		—		—		—		—
Residential	4,792		4,223		95		4,244		33
Other	—		—		—		—		—
Total	$	9,446	$	8,547	$	877	$	8,610	$	71

(1) Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, net deferred loan fees or costs, and any partial charge-offs. Accrued interest and net deferred loan fees or costs totaled $20 thousand at March 31, 2019.



	As of and for the Twelve Months End
	December 31, 2018
	(in thousands)
	Unpaid Principal Balance		Recorded Investment (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	564	$	356	$	—	$	422	$	25
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	558		501		—		511		4
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	332		281		—		297		27
Consumer:
Installment	—		—		—		—		—
Residential:
Equity lines	468		92		—		93		—
Single family	2,616		2,499		—		2,565		101
Multifamily	284		286		—		289		14
Other Loans	—		—		—		—		—
	$	4,822	$	4,015	$	—	$	4,177	$	171
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	971	$	960	$	650	$	1,063	$	60
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	2,418		2,425		193		2,454		101
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	—		—		—		—		—
Consumer:
Installment	—		—		—		—		—
Residential:
Equity lines	—		—		—		—		—
Single family	1,242		1,190		119		1,204		51
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	4,631	$	4,575	$	962	$	4,721	$	212
Total:
Commercial	$	1,535	$	1,316	$	650	$	1,485	$	85
Commercial Real Estate	2,976		2,926		193		2,965		105
Construction and Farmland	332		281		—		297		27
Consumer	—		—		—		—		—
Residential	4,610		4,067		119		4,151		166
Other	—		—		—		—		—
Total	$	9,453	$	8,590	$	962	$	8,898	$	383

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.

The Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Consumer loans are evaluated for collection based on payment performance. Descriptions of these ratings are as follows:



Pass	Pass loans exhibit acceptable history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.

Pass Monitored	Pass monitored loans may be experiencing income and cash volatility, inconsistent operating trends, nominal liquidity and/or a leveraged balance sheet. A higher level of supervision is required for these loans as the potential for a negative event could impact the borrower’s ability to repay the loan.

Special Mention	Special mention loans exhibit negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt.

Substandard	Substandard loans exhibit well defined weaknesses resulting in a higher probability of default. The borrowers exhibit adverse financial trends and a diminishing ability or willingness to service debt.

Doubtful	Doubtful loans exhibit all of the characteristics inherent in substandard loans; however given the severity of weaknesses, the collection of 100% of the principal is unlikely under current conditions.

Loss	Loss loans are considered uncollectible over a reasonable period of time and of such little value that its continuance as a bankable asset is not warranted.

Credit quality information by class at March 31, 2019 and December 31, 2018 was as follows:



	As of
	March 31, 2019
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	30,323	$	2,941	$	505	$	1,029	$	—	$	—	$	34,798
Commercial Real Estate:
Owner Occupied	113,775		17,649		4,437		38		—		—		135,899
Non-owner occupied	104,592		15,703		5,677		1,986		—		—		127,958
Construction and Farmland:
Residential	4,999		1,362		—		—		—		—		6,361
Commercial	20,788		25,140		16,001		338		—		—		62,267
Residential:
Equity Lines	32,299		1,236		—		16		70		—		33,621
Single family	176,708		11,433		1,840		2,927		143		—		193,051
Multifamily	8,635		471		—		379		—		—		9,485
All other loans	8,097		19		—		—		—		—		8,116
Total	$	500,216	$	75,954	$	28,460	$	6,713	$	213	$	—	$	611,556



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	8,045	$	11



	As of
	December 31, 2018
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	28,699	$	2,292	$	995	$	1,100	$	—	$	—	$	33,086
Commercial Real Estate:
Owner Occupied	110,418		16,665		9,187		39		—		—		136,309
Non-owner occupied	106,658		17,139		3,397		2,092		—		—		129,286
Construction and Farm land:
Residential	2,295		1,120		3,291		—		—		—		6,706
Commercial	16,682		22,533		15,658		347		—		—		55,220
Residential:
Equity Lines	31,813		910		—		16		76		—		32,815
Single family	172,360		11,567		2,704		2,270		145		—		189,046
Multifamily	7,160		479		—		284		—		—		7,923
All other loans	8,435		19		—		—		—		—		8,454
Total	$	484,520	$	72,724	$	35,232	$	6,148	$	221	$	—	$	598,845



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	8,466	$	4