Loans and Allowance for Loan Losses | NOTE 5. Loans and Allowance for Loan Losses The composition of loans at September 30, 2018 and December 31, 2017 was as follows: September 30, December 31, 2018 2017 (in thousands) Mortgage loans on real estate: Construction and land development $ 56,168 $ 43,786 Secured by farmland 6,394 8,568 Secured by 1-4 family residential properties 221,848 223,210 Multifamily 7,482 4,095 Commercial 252,539 239,915 Commercial and industrial loans 36,549 37,427 Consumer installment loans 9,367 10,187 All other loans 8,552 2,050 Total loans $ 598,899 $ 569,238 Net deferred loan fees (432 ) (421 ) Allowance for loan losses (4,713 ) (4,411 ) Net Loans $ 593,754 $ 564,406 Changes in the allowance for loan losses for the nine months ended September 30, 2018 and 2017 and the year ended December 31, 2017 were as follows: Nine Months Ended Year Ended Nine Months Ended September 30, December 31, September 30, 2018 2017 2017 (in thousands) Balance, beginning $ 4,411 $ 4,505 $ 4,505 Provision for (recovery of) loan losses 248 (625 ) (759 ) Recoveries added to the allowance 240 901 908 Loan losses charged to the allowance (186 ) (370 ) (210 ) Balance, ending $ 4,713 $ 4,411 $ 4,444 Nonaccrual and past due loans by class at September 30, 2018 and December 31, 2017 were as follows: September 30, 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 Days Past Due Still Accruing Nonaccrual Loans Commercial - Non Real Estate: Commercial & Industrial $ 17 $ — $ — $ 17 $ 36,532 $ 36,549 $ — $ 135 Commercial Real Estate: Owner Occupied — 91 — 91 131,569 131,660 — — Non-owner occupied — — — — 120,879 120,879 — 373 Construction and Farmland: Residential — — — — 8,482 8,482 — — Commercial 283 — — 283 53,797 54,080 — — Consumer: Installment 4 3 — 7 9,360 9,367 — 1 Residential: Equity Lines — — — — 32,981 32,981 — 99 Single family 1,904 129 220 2,253 186,614 188,867 — 537 Multifamily — — — — 7,482 7,482 — — All Other Loans — — — — 8,552 8,552 — — Total $ 2,208 $ 223 $ 220 $ 2,651 $ 596,248 $ 598,899 $ — $ 1,145 December 31, 2017 (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 $ 75 $ 10 $ 142 $ 227 $ 37,200 $ 37,427 $ — $ 594 Commercial Real Estate: Owner Occupied — — — — 127,018 127,018 — — Non-owner occupied — 368 — 368 112,529 112,897 — 767 Construction and Farmland: Residential — — — — 3,214 3,214 — — Commercial 187 — — 187 48,953 49,140 — — Consumer: Installment 17 — 2 19 10,168 10,187 — 13 Residential: Equity Lines 18 — — 18 32,820 32,838 — 44 Single family 829 572 4,060 5,461 184,911 190,372 — 4,921 Multifamily — — — — 4,095 4,095 — — All Other Loans — — — — 2,050 2,050 — — Total $ 1,126 $ 950 $ 4,204 $ 6,280 $ 562,958 $ 569,238 $ — $ 6,339 Allowance for loan losses by segment at September 30, 2018 and December 31, 2017 were as follows: As of and for the Nine Months Ended September 30, 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 — (3 ) — (122 ) (28 ) (33 ) — (186 ) Recoveries 28 24 75 85 16 12 — 240 (Recovery of) provision for loan losses 256 51 77 (213 ) 5 102 (30 ) 248 Ending balance $ 616 $ 1,826 $ 1,779 $ 320 $ 62 $ 110 $ — $ 4,713 Ending balance: Individually evaluated for impairment $ — $ 158 $ 55 $ — $ — $ — $ — $ 213 Ending balance: collectively evaluated for impairment $ 616 $ 1,668 $ 1,724 $ 320 $ 62 $ 110 $ — $ 4,500 Loans: Ending balance $ 62,562 $ 229,330 $ 252,539 $ 36,549 $ 9,367 $ 8,552 $ — $ 598,899 Ending balance individually evaluated for impairment $ 290 $ 4,425 $ 1,266 $ 379 $ 1 $ — $ — $ 6,361 Ending balance collectively evaluated for impairment $ 62,272 $ 224,905 $ 251,273 $ 36,170 $ 9,366 $ 8,552 $ — $ 592,538 As of and for the Twelve Months Ended December 31, 2017 (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 $ 450 $ 1,992 $ 1,522 $ 235 $ 69 $ 22 $ 215 $ 4,505 Charge-Offs (19 ) (55 ) (1 ) (187 ) (59 ) (49 ) — (370 ) Recoveries 535 212 65 44 40 5 — 901 (Recovery of) provision for loan losses (634 ) (395 ) 41 478 19 51 (185 ) (625 ) Ending balance $ 332 $ 1,754 $ 1,627 $ 570 $ 69 $ 29 $ 30 $ 4,411 Ending balance: Individually evaluated for impairment $ — $ 195 $ 59 $ 195 $ 9 $ — $ — $ 458 Ending balance: collectively evaluated for impairment $ 332 $ 1,559 $ 1,568 $ 375 $ 60 $ 29 $ 30 $ 3,953 Loans: Ending balance $ 52,354 $ 227,305 $ 239,915 $ 37,427 $ 10,187 $ 2,050 $ — $ 569,238 Ending balance individually evaluated for impairment $ 315 $ 8,315 $ 1,904 $ 858 $ 34 $ — $ — $ 11,426 Ending balance collectively evaluated for impairment $ 52,039 $ 218,990 $ 238,011 $ 36,569 $ 10,153 $ 2,050 $ — $ 557,812 Beginning with the quarter ended September 30, 2018, the Company changed its allowance methodology for the look-back period used in calculating the loss history portion of the general reserves assigned to unimpaired credits. During this quarter, management determined it necessary to extend the loss history period utilized in the calculation from five years to seven years in light of current trends for growth and asset quality, as well as the ongoing economic cycle and the Bank's overall lending environment. The Company believes that the expanded loss history is more indicative of the losses and risks inherent in the portfolio. The following table represents the effect on the loan loss provision for the nine months ended September 30, 2018 as a result of the change in allowance methodology from that used in prior periods. (in thousands) Calculated Provision Based on Current Methodology Calculated Provision Based on Prior Methodology Difference Portfolio Segment: Construction and Farmland $ 256 $ 47 $ 209 Residential Real Estate 51 (121 ) 172 Commercial Real Estate 77 (64 ) 141 Commercial (213 ) (279 ) 66 Consumer 5 (1 ) 6 All Other Loans 102 92 10 Total, excluding unallocated $ 278 $ (326 ) $ 604 Impaired loans by class as of and for the periods ended September 30, 2018 and December 31, 2017 were as follows: As of and for the Nine Months Ended September 30, 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 $ 594 $ 380 $ — $ 432 $ 20 Commercial Real Estate: Owner Occupied — — — — — Non-owner occupied 526 474 — 479 — Construction and Farmland: Residential — — — — — Commercial 340 290 — 301 21 Consumer: Installment 1 1 — 1 — Residential: Equity lines 251 59 — 60 — Single family 3,081 2,856 — 2,912 87 Multifamily 287 288 — 290 10 Other Loans — — — — — $ 5,080 $ 4,348 $ — $ 4,475 $ 138 With an allowance recorded: Commercial - Non Real Estate: Commercial & Industrial $ — $ — $ — $ — $ — Commercial Real Estate: Owner Occupied — — — — — Non-owner occupied 793 794 55 801 27 Construction and Farmland: Residential — — — — — Commercial — — — — — Consumer: Installment — — — — — Residential: Equity lines 217 40 40 40 — Single family 1,248 1,194 118 1,205 41 Multifamily — — — — — Other Loans — — — — — $ 2,258 $ 2,028 $ 213 $ 2,046 $ 68 Total: Commercial $ 594 $ 380 $ — $ 432 $ 20 Commercial Real Estate 1,319 1,268 55 1,280 27 Construction and Farmland 340 290 — 301 21 Consumer 1 1 — 1 — Residential 5,084 4,437 158 4,507 138 Other — — — — — Total $ 7,338 $ 6,376 $ 213 $ 6,521 $ 206 (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 $15 thousand at September 30, 2018 . As of and for the Twelve Months End December 31, 2017 (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 $ 626 $ 304 $ — $ 342 $ 23 Commercial Real Estate: Owner Occupied 330 331 — 336 15 Non-owner occupied 805 767 — 785 20 Construction and Farmland: Residential — — — — — Commercial 362 316 — 330 28 Consumer: Installment 25 25 — 27 1 Residential: Equity lines — — — — — Single family 7,371 6,985 — 7,069 124 Multifamily — — — — — Other Loans — — — — — $ 9,519 $ 8,728 $ — $ 8,889 $ 211 With an allowance recorded: Commercial - Non Real Estate: Commercial & Industrial $ 595 $ 556 $ 195 $ 567 $ 17 Commercial Real Estate: Owner Occupied — — — — — Non-owner occupied 806 809 59 817 37 Construction and Farmland: Residential — — — — — Commercial — — — — — Consumer: Installment 9 9 9 9 — Residential: Equity lines 217 44 44 45 — Single family 1,349 1,299 151 1,315 57 Multifamily — — — — — Other Loans — — — — — $ 2,976 $ 2,717 $ 458 $ 2,753 $ 111 Total: Commercial $ 1,221 $ 860 $ 195 $ 909 $ 40 Commercial Real Estate 1,941 1,907 59 1,938 72 Construction and Farmland 362 316 — 330 28 Consumer 34 34 9 36 1 Residential 8,937 8,328 195 8,429 181 Other — — — — — Total $ 12,495 $ 11,445 $ 458 $ 11,642 $ 322 (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 $19 thousand at December 31, 2017 . The average recorded investment for impaired loans for the three months ended September 30, 2018 was $6.4 million . The interest income recognized on impaired loans for the three months ended September 30, 2018 was $68 thousand . 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 September 30, 2018 and December 31, 2017 was as follows: As of September 30, 2018 (in thousands) INTERNAL RISK RATING GRADES Pass Pass Monitored Special Mention Substandard Doubtful Loss Total Commercial - Non Real Estate: Commercial & Industrial $ 31,496 $ 2,646 $ 2,251 $ 156 $ — $ — $ 36,549 Commercial Real Estate: Owner Occupied 111,853 10,614 9,153 40 — — 131,660 Non-owner occupied 98,573 16,828 3,363 2,115 — — 120,879 Construction and Farmland: Residential 6,339 2,143 — — — — 8,482 Commercial 17,925 22,549 13,248 358 — — 54,080 Residential: Equity Lines 32,296 586 — 17 82 — 32,981 Single family 173,083 10,231 3,157 2,249 147 — 188,867 Multifamily 6,709 486 — 287 — — 7,482 All other loans 8,533 19 — — — — 8,552 Total $ 486,807 $ 66,102 $ 31,172 $ 5,222 $ 229 $ — $ 589,532 Performing Nonperforming Consumer Credit Exposure by Payment Activity $ 9,360 $ 7 As of December 31, 2017 (in thousands) INTERNAL RISK RATING GRADES Pass Pass Monitored Special Mention Substandard Doubtful Loss Total Commercial - Non Real Estate: Commercial & Industrial $ 33,279 $ 1,788 $ 1,748 $ 612 $ — $ — $ 37,427 Commercial Real Estate: Owner Occupied 112,649 10,893 3,146 330 — — 127,018 Non-owner occupied 82,050 17,992 12,088 767 — — 112,897 Construction and Farm land: Residential 2,614 600 — — — — 3,214 Commercial 30,093 17,069 1,663 315 — — 49,140 Residential: Equity Lines 32,495 299 — — 44 — 32,838 Single family 177,829 5,869 155 6,327 192 — 190,372 Multifamily 3,588 — 507 — — — 4,095 All other loans 2,050 — — — — — 2,050 Total $ 476,647 $ 54,510 $ 19,307 $ 8,351 $ 236 $ — $ 559,051 Performing Nonperforming Consumer Credit Exposure by Payment Activity $ 10,168 $ 19 |