Allowance for Loan Losses

Changes in the allowance for loan losses for the years December 31, 2019, 2018 and 2017 were as follows:



	December 31,
	2019			2018			2017
				(in thousands)
Balance, beginning	$	5,456		$	4,411		$	4,505
Provision for (recovery of) loan losses	629			777			(625		)
Recoveries added to the allowance	201			504			901
Loan losses charged to the allowance	(1,313		)	(236		)	(370		)
Balance, ending	$	4,973		$	5,456		$	4,411

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



	December 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	$	47	$	—	$	32	$	79	$	46,464	$	46,543	$	—	$	32
Commercial Real Estate:
Owner Occupied	1,078		—		—		1,078		147,879		148,957		—		320
Non-owner occupied	—		—		—		—		137,643		137,643		—		329
Construction and Farmland:
Residential	—		—		—		—		7,867		7,867		—		—
Commercial	—		—		187		187		48,424		48,611		—		187
Consumer:
Installment	55		6		—		61		9,480		9,541		—		8
Residential:
Equity Lines	121		—		—		121		33,127		33,248		—		65
Single family	471		541		1,251		2,263		184,069		186,332		—		1,244
Multifamily	—		—		—		—		14,415		14,415		—		—
All Other Loans	—		—		—		—		12,050		12,050		—		—
Total	$	1,772	$	547	$	1,470	$	3,789	$	641,418	$	645,207	$	—	$	2,185



	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 December 31, 2019, December 31, 2018 and December 31, 2017 were as follows:



	As of and for the Twelve Months Ended
	December 31, 2019
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate			Commercial			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	—			(406		)	—			(850		)	(5		)	(52		)	—		(1,313		)
Recoveries	8			72			20			52			26			23			—		201
Provision (recovery)	(145		)	147			(17		)	444			(20		)	52			168		629
Ending balance	$	446		$	1,601		$	1,991		$	565		$	54		$	120		$	196	$	4,973
Ending balance: Individually evaluated for impairment	$	100		$	51		$	149		$	—		$	—		$	—		$	—	$	300
Ending balance: collectively evaluated for impairment	$	346		$	1,550		$	1,842		$	565		$	54		$	120		$	196	$	4,673
Loans:
Ending balance	$	56,478		$	233,995		$	286,600		$	46,543		$	9,541		$	12,050		$	—	$	645,207
Ending balance individually evaluated for impairment	$	433		$	3,681		$	3,053		$	228		$	8		$	—		$	—	$	7,403
Ending balance collectively evaluated for impairment	$	56,045		$	230,314		$	283,547		$	46,315		$	9,533		$	12,050		$	—	$	637,804



	As of and for the Twelve Months Ended
	December 31, 2018
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate		Commercial			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 (recovery)	(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



	As of and for the Twelve Months Ended
	December 31, 2017
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate			Commercial			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
Provision (recovery)	(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 at December 31, 2019 and December 31, 2018 were as follows:



	As of and for the Year Ended
	December 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	$	364	$	228	$	—	$	269	$	21
Commercial Real Estate:
Owner Occupied	369		356		—		358		4
Non-owner occupied	407		329		—		335		—
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	301		246		—		263		25
Consumer:
Installment	9		8		—		9		—
Residential:
Equity lines	276		65		—		68		1
Single family	2,854		2,435		—		2,583		80
Multifamily	366		367		—		375		21
Other Loans	—		—		—		—		—
	$	4,946	$	4,034	$	—	$	4,260	$	152
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	2,369		2,377		149		2,405		103
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	187		187		100		187		8
Consumer:
Installment	—		—		—		—		—
Residential:
Equity lines	—		—		—		—		—
Single family	879		822		51		833		38
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	3,435	$	3,386	$	300	$	3,425	$	149
Total:
Commercial	$	364	$	228	$	—	$	269	$	21
Commercial Real Estate	3,145		3,062		149		3,098		107
Construction and Farmland	488		433		100		450		33
Consumer	9		8		—		9		—
Residential	4,375		3,689		51		3,859		140
Other	—		—		—		—		—
Total	$	8,381	$	7,420	$	300	$	7,685	$	301

(1) Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and any partial charge-offs.



	As of and for the Year Ended
	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, and any partial charge-offs.

For the year ended December 31, 2017, the average recorded investment of impaired loans was $11.6 million. The interest income recognized on impaired loans was $322 thousand in 2017.

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. 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 December 31, 2019 and December 31, 2018 was as follows:



	As of
	December 31, 2019
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	42,578	$	3,815	$	105	$	45	$	—	$	—	$	46,543
Commercial Real Estate:
Owner Occupied	103,958		38,989		5,654		356		—		—		148,957
Non-owner occupied	103,909		25,939		5,866		1,929		—		—		137,643
Construction and Farmland:
Residential	5,094		2,773		—		—		—		—		7,867
Commercial	17,018		30,661		437		495		—		—		48,611
Residential:
Equity Lines	32,295		889		—		42		22		—		33,248
Single family	162,195		19,427		2,347		2,225		138		—		186,332
Multifamily	11,714		1,337		998		366		—		—		14,415
All other loans	11,963		40		47		—		—		—		12,050
Total	$	490,724	$	123,870	$	15,454	$	5,458	$	160	$	—	$	635,666



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	9,480	$	61



	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 Farmland:
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