NOTE 6: ALLOWANCE FOR LOAN LOSSES

For purposes of determining the allowance for loan losses, the Company considers the loans in its portfolio by segment, class and risk grade. Management uses judgment to determine the estimation method that fits the credit risk characteristics of each portfolio segment or class. To facilitate the assessment of risk, management reviews reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. The Company utilizes an independent third-party loan review service to review the credit risk assigned to loans on a periodic basis and the results are presented to management for review.

The following tables present a detail of the activity in the allowance for loan losses segregated by loan class for the years ended December 31, 2017, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


			Real Estate
	Commercial				Construction
	and		Commercial		and		1-4 family		Multi-family
(Dollars in thousands)	industrial		real estate		development		residential		residential		Consumer		Agriculture		Other		Total
December 31, 2017
Beginning balance	$	6,409	$	10,770	$	4,598	$	1,286	$	916	$	353	$	79	$	595	$	25,006
Provision (recapture) for loan loss		642		(284)		(1,116)		35		503		263		(63)		(318)		(338)
Charge-offs		(904)		(120)		—		(8)		—		(93)		—		—		(1,125)
Recoveries		1,110		9		—		13		—		43		52		8		1,235
Net (charge-offs) recoveries		206		(111)		—		5		—		(50)		52		8		110
Ending balance	$	7,257	$	10,375	$	3,482	$	1,326	$	1,419	$	566	$	68	$	285	$	24,778
Period-end amount allocated to:
Specific reserve	$	852	$	64	$	—	$	119	$	—	$	—	$	—	$	—	$	1,035
General reserve		6,405		10,311		3,482		1,207		1,419		566		68		285		23,743
Total	$	7,257	$	10,375	$	3,482	$	1,326	$	1,419	$	566	$	68	$	285	$	24,778


			Real Estate
	Commercial				Construction
	and		Commercial		and		1-4 family		Multi-family
(Dollars in thousands)	industrial		real estate		development		residential		residential		Consumer		Agriculture		Other		Total
December 31, 2016
Beginning balance	$	4,746	$	7,058	$	4,504	$	2,295	$	762	$	363	$	93	$	5,494	$	25,315
Provision (recapture) for loan loss		5,537		4,193		94		(1,012)		154		222		227		(4,840)		4,575
Charge-offs		(4,884)		(589)		—		(3)		—		(277)		(267)		(59)		(6,079)
Recoveries		1,010		108		—		6		—		45		26		—		1,195
Net (charge-offs) recoveries		(3,874)		(481)		—		3		—		(232)		(241)		(59)		(4,884)
Ending balance	$	6,409	$	10,770	$	4,598	$	1,286	$	916	$	353	$	79	$	595	$	25,006
Period-end amount allocated to:
Specific reserve	$	462	$	206	$	—	$	—	$	—	$	—	$	—	$	—	$	668
General reserve		5,947		10,564		4,598		1,286		916		353		79		595		24,338
Total	$	6,409	$	10,770	$	4,598	$	1,286	$	916	$	353	$	79	$	595	$	25,006


			Real Estate
	Commercial				Construction
	and		Commercial		and		1-4 family		Multi-family
(Dollars in thousands)	industrial		real estate		development		residential		residential		Consumer		Agriculture		Other		Total
December 31, 2015
Beginning balance	$	7,160	$	6,985	$	2,991	$	1,843	$	500	$	423	$	118	$	4,932	$	24,952
Provision (recapture) for loan loss		4,272		(189)		1,513		573		262		(18)		(25)		562		6,950
Charge-offs		(7,210)		(27)		—		(263)		—		(102)		—		—		(7,602)
Recoveries		524		289		—		142		—		60		—		—		1,015
Net (charge-offs) recoveries		(6,686)		262		—		(121)		—		(42)		—		—		(6,587)
Ending balance	$	4,746	$	7,058	$	4,504	$	2,295	$	762	$	363	$	93	$	5,494	$	25,315
Period-end amount allocated to:
Specific reserve	$	357	$	—	$	26	$	—	$	—	$	6	$	—	$	—	$	389
General reserve		4,389		7,058		4,478		2,295		762		357		93		5,494		24,926
Total	$	4,746	$	7,058	$	4,504	$	2,295	$	762	$	363	$	93	$	5,494	$	25,315

In addition to the amounts indicated in the table above, the Company has an accumulated reserve for loan losses on unfunded commitments of $378,000 and $366,000 recorded in other liabilities as of December 31, 2017 and 2016, respectively.

Risk Grading

As part of the on‑going monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for loan losses, management assigns and tracks loan grades to be used as credit quality indicators. The following is a general description of the loan grades used as of December 31, 2017 and 2016.

Pass—Credits in this category are considered “pass” which indicates prudent underwriting and a normal amount of risk. The range of risk within these credits can vary from little to no risk with cash securing a credit, to a level of risk that requires a strong secondary source of repayment on the debt. Pass credits with a higher level of risk may be to borrowers that are higher leveraged, less well capitalized or in an industry or economic area that is known to carry a higher level of risk, volatility, or susceptibility to weaknesses in the economy. This higher risk grade may be assigned due to out of date credit information, as well as collateral information, which may need to be updated for current market value in order to allow a credit quality analysis of the credit.

Special Mention—Credits in this category contain more than the normal amount of risk and are referred to as “special mention” in accordance with regulatory guidelines. These credits possess clearly identifiable temporary weaknesses or trends that, if not corrected or revised, may result in a condition that exposes the Company to higher level of risk of loss.

Substandard—Credits in this category are “substandard” in accordance with regulatory guidelines and of unsatisfactory credit quality with well‑defined weaknesses or weaknesses that jeopardize the liquidation of the debt. Credits in this category are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. These credits are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Often, the assets in this category will have a valuation allowance representative of management’s estimated loss that is probable to be incurred. Substandard loans may also be placed on nonaccrual status as deemed appropriate by management. Loans substandard and on nonaccrual status are considered impaired and are evaluated for impairment.

Doubtful—Credits in this category are considered “doubtful” in accordance with regulatory guidelines, are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near‑term event which lacks certainty. Generally, these credits will have a valuation allowance based upon management’s best estimate of the losses probable to occur in the liquidation of the debt.

Loss—Credits in this category are considered “loss” in accordance with regulatory guidelines and are considered uncollectible and of such little value as to question their continued existence as assets on the Company’s financial statements. Such credits are to be charged off or charged down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. This category does not intend to imply that the debt or some portion of it will never be paid, nor does it in any way imply that the debt will be forgiven.

The following tables present loans by risk grades and loan class at December 31, 2017 and 2016. The Company had no loans graded Loss or Doubtful at December 31, 2017 and 2016.


			Special
(Dollars in thousands)	Pass		Mention		Substandard		Total Loans
December 31, 2017
Commercial and industrial	$	535,589	$	8,403	$	15,371	$	559,363
Real estate:
Commercial real estate		722,503		2,951		12,839		738,293
Construction and development		448,124		565		522		449,211
1-4 family residential		252,317		—		6,267		258,584
Multi-family residential		212,899		7,406		—		220,305
Consumer		40,144		246		43		40,433
Agriculture		11,223		—		33		11,256
Other		33,109		—		7,235		40,344
Total loans	$	2,255,908	$	19,571	$	42,310	$	2,317,789


			Special
(Dollars in thousands)	Pass		Mention		Substandard		Total Loans
December 31, 2016
Commercial and industrial	$	483,399	$	2,207	$	25,948	$	511,554
Real estate:
Commercial real estate		674,445		7,731		15,618		697,794
Construction and development		485,823		933		4,870		491,626
1-4 family residential		234,473		797		1,612		236,882
Multi-family residential		125,553		7,650		7		133,210
Consumer		39,684		10		—		39,694
Agriculture		11,033		—		73		11,106
Other		29,335		—		8,845		38,180
Total loans	$	2,083,745	$	19,328	$	56,973	$	2,160,046

Loan Impairment Assessment

The Company’s recorded investment in impaired loans, as of December 31, 2017 and 2016, by loan class and disaggregated on the basis of the Company’s impairment methodology is as follows:


	Unpaid		Recorded								Average
	contractual		investment		Recorded		Total				recorded
	principal		with no		investment		recorded		Related		investment
(Dollars in thousands)	balance		allowance		with allowance		investment		allowance		year-to-date
December 31, 2017
Commercial and industrial	$	11,921	$	6,100	$	1,192	$	7,292	$	852	$	12,090
Real estate:
Commercial real estate		9,646		8,626		667		9,293		64		9,438
Construction and development		296		251		—		251		—		323
1-4 family residential		5,003		3,050		1,874		4,924		119		3,369
Multi-family residential		—		—		—		—		—		2
Consumer		—		—		—		—		—		21
Agriculture		—		—		—		—		—		1
Other		7,152		7,152		—		7,152		—		7,616
Total loans	$	34,018	$	25,179	$	3,733	$	28,912	$	1,035	$	32,860


	Unpaid		Recorded								Average
	contractual		investment		Recorded		Total				recorded
	principal		with no		investment		recorded		Related		investment
(Dollars in thousands)	balance		allowance		with allowance		investment		allowance		year-to-date
December 31, 2016
Commercial and industrial	$	16,483	$	8,088	$	4,227	$	12,315	$	462	$	15,550
Real estate:
Commercial real estate		6,454		4,398		1,866		6,264		206		5,903
Construction and development		506		476		—		476		—		754
1-4 family residential		1,781		1,712		—		1,712		—		1,403
Multi-family residential		13		7		—		7		—		10
Consumer		—		—		—		—		—		8
Agriculture		307		36		—		36		—		34
Other		8,849		8,845		—		8,845		—		5,540
Total loans	$	34,393	$	23,562	$	6,093	$	29,655	$	668	$	29,202

Interest income earned on impaired loans was $1.1 million, $648,000 and $201,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company’s recorded investment in loans as of December 31, 2017 and 2016 by loan class and the basis of the Company’s impairment methodology is as follows:


			Real Estate
	Commercial				Construction
	and		Commercial		and		1-4 family		Multi-family
(Dollars in thousands)	industrial		real estate		development		residential		residential		Consumer		Agriculture		Other		Total
December 31, 2017
Loans individually evaluated for impairment	$	7,292	$	9,293	$	251	$	4,924	$	—	$	—	$	—	$	7,152	$	28,912
Loans collectively evaluated for impairment		552,071		729,000		448,960		253,660		220,305		40,433		11,256		33,192		2,288,877
Total	$	559,363	$	738,293	$	449,211	$	258,584	$	220,305	$	40,433	$	11,256	$	40,344	$	2,317,789
December 31, 2016
Loans individually evaluated for impairment	$	12,315	$	6,264	$	476	$	1,712	$	7	$	—	$	36	$	8,845	$	29,655
Loans collectively evaluated for impairment		499,239		691,530		491,150		235,170		133,203		39,694		11,070		29,335		2,130,391
Total	$	511,554	$	697,794	$	491,626	$	236,882	$	133,210	$	39,694	$	11,106	$	38,180	$	2,160,046

An impairment analysis is performed for all loans graded substandard and placed on nonaccrual status. If management determines a loan is impaired, the loan is written down to its estimated realizable value through a charge to the allowance for loan losses. At December 31, 2017 and 2016, the allowance allocated to specific reserves for loans individually evaluated for impairment was $1.0 million and $668,000, respectively.