Loans and Allowance for Loan Losses | NOTE 5. Loans and Allowance for Loan Losses The composition of loans at June 30, 2019 and December 31, 2018 was as follows: June 30, December 31, 2019 2018 (in thousands) Mortgage loans on real estate: Construction and land development $ 48,137 $ 54,675 Secured by farmland 10,549 7,251 Secured by 1-4 family residential properties 228,814 221,861 Multifamily 9,460 7,923 Commercial 280,334 265,595 Commercial and industrial loans 46,077 33,086 Consumer installment loans 8,123 8,470 All other loans 8,386 8,454 Total loans $ 639,880 $ 607,315 Net deferred loan fees (684 ) (488 ) Allowance for loan losses (5,035 ) (5,456 ) Net Loans $ 634,161 $ 601,371 Changes in the allowance for loan losses for the six months ended June 30, 2019 and 2018 and the year ended December 31, 2018 were as follows: Six Months Ended Year Ended Six Months Ended June 30, December 31, June 30, 2019 2018 2018 (in thousands) Balance, beginning $ 5,456 $ 4,411 $ 4,411 Provision for loan losses 450 777 108 Recoveries added to the allowance 99 504 197 Loan losses charged to the allowance (970 ) (236 ) (168 ) Balance, ending $ 5,035 $ 5,456 $ 4,548 Nonaccrual and past due loans by class at June 30, 2019 and December 31, 2018 were as follows: June 30, 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 $ — $ 87 $ — $ 87 $ 45,990 $ 46,077 $ — $ 432 Commercial Real Estate: Owner Occupied 877 — 635 1,512 135,940 137,452 — 868 Non-owner occupied 161 — — 161 142,721 142,882 — 349 Construction and Farmland: Residential — — — — 9,787 9,787 — — Commercial — — — — 48,899 48,899 — — Consumer: Installment 9 2 — 11 8,112 8,123 — 10 Residential: Equity Lines — — — — 34,084 34,084 — 56 Single family 1,154 — 2,057 3,211 191,519 194,730 68 2,664 Multifamily — — — — 9,460 9,460 — — All Other Loans — — — — 8,386 8,386 — — Total $ 2,201 $ 89 $ 2,692 $ 4,982 $ 634,898 $ 639,880 $ 68 $ 4,379 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 June 30, 2019 and December 31, 2018 were as follows: As of and For the Six Months Ended June 30, 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 — (382 ) — (550 ) (3 ) (35 ) — (970 ) Recoveries 4 38 9 26 15 7 — 99 Provision for (recovery of) loan losses (36 ) 411 10 89 (17 ) 21 (28 ) 450 Ending balance $ 551 $ 1,855 $ 2,007 $ 484 $ 48 $ 90 $ — $ 5,035 Ending balance: Individually evaluated for impairment $ — $ 46 $ 179 $ — $ — $ — $ — $ 225 Ending balance: collectively evaluated for impairment $ 551 $ 1,809 $ 1,828 $ 484 $ 48 $ 90 $ — $ 4,810 Loans: Ending balance $ 58,686 $ 238,274 $ 280,334 $ 46,077 $ 8,123 $ 8,386 $ — $ 639,880 Ending balance individually evaluated for impairment $ 264 $ 4,992 $ 3,655 $ 648 $ 10 $ — $ — $ 9,569 Ending balance collectively evaluated for impairment $ 58,422 $ 233,282 $ 276,679 $ 45,429 $ 8,113 $ 8,386 $ — $ 630,311 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 June 30, 2019 and December 31, 2018 were as follows: As of and for the Six Months Ended June 30, 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 $ 1,434 $ 648 $ — $ 714 $ 11 Commercial Real Estate: Owner Occupied 906 905 — 906 8 Non-owner occupied 412 349 — 353 — Construction and Farmland: Residential — — — — — Commercial 317 265 — 273 13 Consumer: Installment 10 10 — 10 — Residential: Equity lines 259 56 — 56 — Single family 4,697 3,886 — 3,919 44 Multifamily 374 375 — 379 10 Other Loans — — — — — $ 8,409 $ 6,494 $ — $ 6,610 $ 86 With an allowance recorded: Commercial - Non Real Estate: Commercial & Industrial $ — $ — $ — $ — $ — Commercial Real Estate: Owner Occupied — — — — — Non-owner occupied 2,401 2,409 179 2,419 51 Construction and Farmland: Residential — — — — — Commercial — — — — — Consumer: Installment — — — — — Residential: Equity lines — — — — — Single family 739 683 46 687 16 Multifamily — — — — — Other Loans — — — — — $ 3,140 $ 3,092 $ 225 $ 3,106 $ 67 Total: Commercial $ 1,434 $ 648 $ — $ 714 $ 11 Commercial Real Estate 3,719 3,663 179 3,678 59 Construction and Farmland 317 265 — 273 13 Consumer 10 10 — 10 — Residential 6,069 5,000 46 5,041 70 Other — — — — — Total $ 11,549 $ 9,586 $ 225 $ 9,716 $ 153 (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 $17 thousand at June 30, 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 (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 $31 thousand at December 31, 2018 . The average recorded investment for impaired loans for the three months ended June 30, 2019 was $9.6 million . The interest income recognized on impaired loans for the three months ended June 30, 2019 was $71 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 June 30, 2019 and December 31, 2018 was as follows: As of June 30, 2019 (in thousands) INTERNAL RISK RATING GRADES Pass Pass Monitored Special Mention Substandard Doubtful Loss Total Commercial - Non Real Estate: Commercial & Industrial $ 42,109 $ 3,177 $ 343 $ 448 $ — $ — $ 46,077 Commercial Real Estate: Owner Occupied 104,788 18,767 12,992 905 — — 137,452 Non-owner occupied 113,499 10,228 17,183 1,972 — — 142,882 Construction and Farmland: Residential 7,554 2,233 — — — — 9,787 Commercial 18,539 27,351 2,681 328 — — 48,899 Residential: Equity Lines 32,697 1,331 — 25 31 — 34,084 Single family 174,675 15,413 756 3,746 140 — 194,730 Multifamily 7,295 603 1,188 374 — — 9,460 All other loans 8,359 27 — — — — 8,386 Total $ 509,515 $ 79,130 $ 35,143 $ 7,798 $ 171 $ — $ 631,757 Performing Nonperforming Consumer Credit Exposure by Payment Activity $ 8,112 $ 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 |