NOTE 5. Loans and Allowance for Loan Losses

The composition of loans at March 31, 2020 and December 31, 2019 was as follows:



	March 31,			December 31,
	2020			2019
	(in thousands)
Mortgage loans on real estate:
Construction and land development	$	35,755		$	42,561
Secured by farmland	16,326			13,917
Secured by 1-4 family residential properties	225,839			219,580
Multifamily	13,884			14,415
Commercial	301,799			286,600
Commercial and industrial loans	53,611			46,543
Consumer installment loans	13,923			9,541
All other loans	11,810			12,050
Total loans	$	672,947		$	645,207
Net deferred loan costs (fees)	1,085			(447		)
Allowance for loan losses	(5,387		)	(4,973		)
Net Loans	$	668,645		$	639,787

Changes in the allowance for loan losses for the three months ended March 31, 2020 and 2019 and the year ended December 31, 2019 were as follows:



	Three Months Ended			Year Ended			Three Months Ended
	March 31,			December 31,			March 31,
	2020			2019			2019
				(in thousands)
Balance, beginning	$	4,973		$	5,456		$	5,456
(Recovery of) provision for loan losses	(97		)	629			194
Recoveries added to the allowance	578			201			45
Loan losses charged to the allowance	(67		)	(1,313		)	(10		)
Balance, ending	$	5,387		$	4,973		$	5,685

Nonaccrual and past due loans by class at March 31, 2020 and December 31, 2019 were as follows:



	March 31, 2020
	(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	$	16	$	—	$	—	$	16	$	53,595	$	53,611	$	—	$	—
Commercial Real Estate:
Owner Occupied	594		1,495		—		2,089		151,495		153,584		—		212
Non-owner occupied	3,038		—		—		3,038		145,177		148,215		—		248
Construction and Farmland:
Residential	—		—		—		—		7,838		7,838		—		—
Commercial	2,411		—		187		2,598		41,645		44,243		—		187
Consumer:
Installment	74		—		—		74		13,849		13,923		—		8
Residential:
Equity Lines	—		149		—		149		32,232		32,381		—		58
Single family	924		578		393		1,895		191,563		193,458		—		984
Multifamily	—		—		—		—		13,884		13,884		—		—
All Other Loans	—		—		—		—		11,810		11,810		—		—
Total	$	7,057	$	2,222	$	580	$	9,859	$	663,088	$	672,947	$	—	$	1,697



	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 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

Allowance for loan losses by segment at March 31, 2020 and December 31, 2019 were as follows:



	As of and for the Three Months Ended
	March 31, 2020
	(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	$	446		$	1,601	$	1,991	$	565		$	54		$	120		$	196	$	4,973
Charge-Offs	—			—		—		(49		)	(6		)	(12		)	—		(67		)
Recoveries	2			52		40		472			10			2			—		578
Provision for (recovery of) loan losses	(11		)	92		201		(417		)	28			10			—		(97		)
Ending balance	$	437		$	1,745	$	2,232	$	571		$	86		$	120		$	196	$	5,387
Ending balance: Individually evaluated for impairment	$	100		$	39	$	142	$	—		$	—		$	—		$	—	$	281
Ending balance: collectively evaluated for impairment	$	337		$	1,706	$	2,090	$	571		$	86		$	120		$	196	$	5,106
Loans:
Ending balance	$	52,081		$	239,723	$	301,799	$	53,611		$	13,923		$	11,810		$	—	$	672,947
Ending balance individually evaluated for impairment	$	230		$	3,020	$	2,855	$	186		$	8		$	—		$	—	$	6,299
Ending balance collectively evaluated for impairment	$	51,851		$	236,703	$	298,944	$	53,425		$	13,915		$	11,810		$	—	$	666,648



	As of and for the Twelve Months Ended
	December 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	—			(406		)	—			(850		)	(5		)	(52		)	—		(1,313		)
Recoveries	8			72			20			52			26			23			—		201
Provision for (recovery of) loan losses	(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

Impaired loans by class as of and for the periods ended March 31, 2020 and December 31, 2019 were as follows:



	As of and for the Three Months Ended
	March 31, 2020
	(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	$	313	$	186	$	—	$	198	$	4
Commercial Real Estate:
Owner Occupied	260		247		—		252		1
Non-owner occupied	331		248		—		277		—
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	51		43		—		44		1
Consumer:
Installment	8		8		—		8		—
Residential:
Equity lines	276		57		—		58		—
Single family	2,568		2,170		—		2,447		15
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	3,807	$	2,959	$	—	$	3,284	$	21
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	2,360		2,364		142		2,368		28
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	187		187		100		187		—
Consumer:
Installment	—		—		—		—		—
Residential:
Equity lines	—		—		—		—		—
Single family	874		817		39		820		9
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	3,421	$	3,368	$	281	$	3,375	$	37
Total:
Commercial	$	313	$	186	$	—	$	198	$	4
Commercial Real Estate	2,951		2,859		142		2,897		29
Construction and Farmland	238		230		100		231		1
Consumer	8		8		—		8		—
Residential	3,718		3,044		39		3,325		24
Other	—		—		—		—		—
Total	$	7,228	$	6,327	$	281	$	6,659	$	58

(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 $28 thousand at March 31, 2020.



	As of and for the Twelve Months End
	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

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, 2020 and December 31, 2019 was as follows:



	As of
	March 31, 2020
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	49,524	$	3,875	$	201	$	11	$	—	$	—	$	53,611
Commercial Real Estate:
Owner Occupied	118,346		26,353		8,638		247		—		—		153,584
Non-owner occupied	102,378		33,908		10,085		1,844		—		—		148,215
Construction and Farmland:
Residential	5,362		2,476		—		—		—		—		7,838
Commercial	18,612		20,127		5,213		291		—		—		44,243
Residential:
Equity Lines	31,987		336		—		41		17		—		32,381
Single family	167,032		17,829		6,397		2,065		135		—		193,458
Multifamily	8,001		1,917		3,966		—		—		—		13,884
All other loans	11,734		30		46		—		—		—		11,810
Total	$	512,976	$	106,851	$	34,546	$	4,499	$	152	$	—	$	659,024



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	13,849	$	74



	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 Farm land:
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