NOTE 5. Loans and Allowance for Loan Losses

The composition of loans at June 30, 2018 and December 31, 2017 was as follows:



	June 30,			December 31,
	2018			2017
	(in thousands)
Mortgage loans on real estate:
Construction and land development	$	52,101		$	43,786
Secured by farmland	6,769			8,568
Secured by 1-4 family residential properties	221,581			223,210
Multifamily	4,100			4,095
Commercial	244,253			239,915
Commercial and industrial loans	39,875			37,427
Consumer installment loans	9,484			10,187
All other loans	9,119			2,050
Total loans	$	587,282		$	569,238
Net deferred loan fees	(444		)	(421		)
Allowance for loan losses	(4,548		)	(4,411		)
Net Loans	$	582,290		$	564,406

Changes in the allowance for loan losses for the six months ended June 30, 2018 and 2017 and the year ended December 31, 2017 were as follows:



	Six Months Ended			Year Ended			Six Months Ended
	June 30,			December 31,			June 30,
	2018			2017			2017
				(in thousands)
Balance, beginning	$	4,411		$	4,505		$	4,505
Provision for (recovery of) loan losses	108			(625		)	(757		)
Recoveries added to the allowance	197			901			799
Loan losses charged to the allowance	(168		)	(370		)	(140		)
Balance, ending	$	4,548		$	4,411		$	4,407

Nonaccrual and past due loans by class at June 30, 2018 and December 31, 2017 were as follows:



	June 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	$	—	$	10	$	—	$	10	$	39,865	$	39,875	$	—	$	148
Commercial Real Estate:
Owner Occupied	210		—		—		210		135,186		135,396		—		—
Non-owner occupied	674		—		—		674		108,183		108,857		—		383
Construction and Farmland:
Residential	—		—		—		—		7,601		7,601		—		—
Commercial	—		12		—		12		51,257		51,269		—		—
Consumer:
Installment	17		—		—		17		9,467		9,484		—		1
Residential:
Equity Lines	—		—		—		—		31,126		31,126		—		89
Single family	334		69		152		555		189,900		190,455		—		478
Multifamily	—		—		—		—		4,100		4,100		—		—
All Other Loans	—		—		—		—		9,119		9,119		—		—
Total	$	1,235	$	91	$	152	$	1,478	$	585,804	$	587,282	$	—	$	1,099



	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 June 30, 2018 and December 31, 2017 were as follows:



	As of and For the Six Months Ended
	June 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	—		—			—			(122		)	(24		)	(22		)	—		(168		)
Recoveries	20		15			73			72			11			6			—		197
(Recovery of) provision for loan losses	29		(79		)	(43		)	(149		)	1			91			258		108
Ending balance	$	381	$	1,690		$	1,657		$	371		$	57		$	104		$	288	$	4,548
Ending balance: Individually evaluated for impairment	$	—	$	162		$	57		$	—		$	—		$	—		$	—	$	219
Ending balance: collectively evaluated for impairment	$	381	$	1,528		$	1,600		$	371		$	57		$	104		$	288	$	4,329
Loans:
Ending balance	$	58,870	$	225,681		$	244,253		$	39,875		$	9,484		$	9,119		$	—	$	587,282
Ending balance individually evaluated for impairment	$	298	$	3,767		$	1,505		$	383		$	1		$	—		$	—	$	5,954
Ending balance collectively evaluated for impairment	$	58,572	$	221,914		$	242,748		$	39,492		$	9,483		$	9,119		$	—	$	581,328



	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

Impaired loans by class as of and for the periods ended June 30, 2018 and December 31, 2017 were as follows:



	As of and for the Six Months Ended
	June 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	$	604	$	384	$	—	$	601	$	13
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	430		383		—		426		—
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	347		298		—		347		14
Consumer:
Installment	1		1		—		2		—
Residential:
Equity lines	234		48		—		48		—
Single family	3,031		2,814		—		2,913		56
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	4,647	$	3,928	$	—	$	4,337	$	83
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	797		799		57		804		18
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	—		—		—		—		—
Consumer:
Installment	—		—		—		—		—
Residential:
Equity lines	217		41		41		41		—
Single family	1,255		1,202		121		1,246		28
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	2,269	$	2,042	$	219	$	2,091	$	46
Total:
Commercial	$	604	$	384	$	—	$	601	$	13
Commercial Real Estate	1,227		1,182		57		1,230		18
Construction and Farmland	347		298		—		347		14
Consumer	1		1		—		2		—
Residential	4,737		4,105		162		4,248		84
Other	—		—		—		—		—
Total	$	6,916	$	5,970	$	219	$	6,428	$	129

(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 $16 thousand at June 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

The average recorded investment for impaired loans for the three months ended June 30, 2018 was $6.4 million. The interest income recognized on impaired loans for the three months ended June 30, 2018 was $62 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, 2018 and December 31, 2017 was as follows:



	As of
	June 30, 2018
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	35,631	$	2,202	$	1,889	$	153	$	—	$	—	$	39,875
Commercial Real Estate:
Owner Occupied	119,469		8,795		7,132		—		—		—		135,396
Non-owner occupied	94,906		10,454		3,114		383		—		—		108,857
Construction and Farmland:
Residential	6,277		1,324		—		—		—		—		7,601
Commercial	21,020		29,951		—		298		—		—		51,269
Residential:
Equity Lines	30,888		149		—		—		89		—		31,126
Single family	177,376		8,716		2,011		2,202		150		—		190,455
Multifamily	3,607		493		—		—		—		—		4,100
All other loans	9,099		20		—		—		—		—		9,119
Total	$	498,273	$	62,104	$	14,146	$	3,036	$	239	$	—	$	577,798



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	9,467	$	17



	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