LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The Company’s loan portfolio is broken down into segments to an appropriate level of disaggregation to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. Consistent with ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the segments were further broken down into classes, to allow for differing risk characteristics within a segment.

The risks associated with lending activities differ among the various loan classes, and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact the borrower’s ability to repay its loans, and impact the associated collateral.

The Company has various types of commercial real estate loans which have differing levels of credit risk associated with them. Owner-occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.

Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner-occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships as compared to owner occupied loans mentioned above in its loan pricing.

Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, including the guarantors of the project or other collateral securing the loan.

Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business, real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy, as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the credit worthiness of the borrower and to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending.

Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its customers for a specific utility.

The Company originates loans to its retail customers, including fixed-rate and adjustable first lien mortgage loans with the underlying 1-4 family owner-occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the credit worthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.

Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 90% of the value of the real estate taken as collateral. The credit worthiness of the borrower is considered including credit scores and debt-to-income ratios, which generally cannot exceed 43%.

Installment and other loans’ credit risk are mitigated through conservative underwriting standards, including the evaluation of the credit worthiness of the borrower through credit scores and debt-to-income ratios, and if secured, the collateral value of the assets. As these loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, they typically present a greater risk to the Company than 1-4 family residential loans.

The loan portfolio, excluding residential loans held for sale, broken out by classes, as of June 30, 2015 and December 31, 2014 was as follows:



(Dollars in thousands)	June 30, 2015		December 31, 2014
Commercial real estate:
Owner-occupied	$	112,419	$	100,859
Non-owner occupied	149,022		144,301
Multi-family	25,376		27,531
Non-owner occupied residential	51,585		49,315
Acquisition and development:
1-4 family residential construction	6,961		5,924
Commercial and land development	33,721		24,237
Commercial and industrial	60,286		48,995
Municipal	59,366		61,191
Residential mortgage:
First lien	123,775		126,491
Home equity - term	18,952		20,845
Home equity - lines of credit	103,187		89,366
Installment and other loans	6,880		5,891
	$	751,530	$	704,946

In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including special mention, substandard, doubtful or loss. The “Special Mention” category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. “Substandard” loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. “Substandard” loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A “Doubtful” loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification of loss is deferred. “Loss” assets are considered uncollectible, as the underlying borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as “Loss,” there is little prospect of collecting the loan’s principal or interest and it is generally written off.

The Bank has a loan review policy and program which is designed to identify and manage risk in the lending function. The Enterprise Risk Management (“ERM”) Committee, comprised of senior officers and credit department personnel, is charged with the oversight of overall credit quality and risk exposure of the Bank’s loan portfolio. This includes the monitoring of the lending activities of all Bank personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. The loan review program provides the Bank with an independent review of the Bank’s loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the “Pass” categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.

Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1,000,000, which includes confirmation of risk rating by the Credit Administration department. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed by the ERM Committee on a quarterly basis, with reaffirmation of the rating as approved by the Bank’s Problem Loan Committee.

The following summarizes the Bank’s ratings based on its internal risk rating system as of June 30, 2015 and December 31, 2014:



(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
June 30, 2015
Commercial real estate:
Owner-occupied	$	103,197	$	1,233	$	5,551	$	2,438	$	0	$	112,419
Non-owner occupied	128,046		12,616		7,356		1,004		0		149,022
Multi-family	22,085		1,524		1,295		472		0		25,376
Non-owner occupied residential	47,019		1,853		1,875		838		0		51,585
Acquisition and development:
1-4 family residential construction	6,961		0		0		0		0		6,961
Commercial and land development	31,924		228		1,327		242		0		33,721
Commercial and industrial	57,495		933		1,050		808		0		60,286
Municipal	59,366		0		0		0		0		59,366
Residential mortgage:
First lien	119,111		0		0		4,664		0		123,775
Home equity - term	18,775		0		0		177		0		18,952
Home equity - lines of credit	102,170		275		141		601		0		103,187
Installment and other loans	6,859		0		0		21		0		6,880
	$	703,008	$	18,662	$	18,595	$	11,265	$	0	$	751,530
December 31, 2014
Commercial real estate:
Owner-occupied	$	89,815	$	2,686	$	5,070	$	3,288	$	0	$	100,859
Non-owner occupied	120,829		20,661		1,131		1,680		0		144,301
Multi-family	24,803		1,086		1,322		320		0		27,531
Non-owner occupied residential	43,020		2,968		1,827		1,500		0		49,315
Acquisition and development:
1-4 family residential construction	5,924		0		0		0		0		5,924
Commercial and land development	22,261		233		1,333		410		0		24,237
Commercial and industrial	43,794		850		1,914		2,437		0		48,995
Municipal	61,191		0		0		0		0		61,191
Residential mortgage:
First lien	121,160		9		0		5,290		32		126,491
Home equity - term	20,775		0		0		70		0		20,845
Home equity - lines of credit	88,164		630		93		479		0		89,366
Installment and other loans	5,865		0		0		26		0		5,891
	$	647,601	$	29,123	$	12,690	$	15,500	$	32	$	704,946

Classified loans may also be evaluated for impairment. For commercial real estate, acquisition and development and commercial and industrial loans, a loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Generally, loans that are more than 90 days past due are deemed impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if the loan should be placed on nonaccrual status. Nonaccrual loans in the commercial and commercial real estate portfolios and any TDRs are, by definition, deemed to be impaired. Impairment is measured on a loan-by-loan basis for commercial, construction and restructured loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are deemed to be impaired for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. The updated fair values are incorporated into the impairment analysis as of the next reporting period.

Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value; the loan has been identified as uncollectible; and it is deemed to be a confirmed loss. Typically, impaired loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into two, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve on it after the partial charge-off, if factors warrant.

As of June 30, 2015 and December 31, 2014, nearly all of the Company’s impaired loans’ extent of impairment was measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All restructured loan impairments were determined based on discounted cash flows for those loans classified as TDRs and still accruing interest. For real estate loans, collateral generally consists of commercial real estate, but in the case of commercial and industrial loans, it would also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.

According to policy, updated appraisals are required annually for classified loans in excess of $250,000. The “as is value” provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances dictate that another value provided by the appraiser is more appropriate.

Generally, impaired loans secured by real estate are measured at fair value using certified real estate appraisals that had been completed within the last year. Appraised values are further discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for impairment, fair values are based on one or a combination of the following approaches. In those situations in which a combination of approaches is considered, the factor that carries the most consideration will be the one management believes is warranted. The approaches are as follows:

•

Original appraisal – if the original appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the original certified appraised value may be used. Discounts as deemed appropriate for selling costs are factored into the appraised value in arriving at fair value.


•	Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.

Collateral on certain impaired loans is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable agings or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.

The Company distinguishes substandard loans on both an impaired and non-impaired basis, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A “Substandard” classification does not automatically meet the definition of “impaired.” A substandard loan is one that is inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Extensions of credit so classified have well-defined weaknesses which may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as "Substandard." As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development and commercial and industrial loans rated “Substandard” to be collectively evaluated for impairment as opposed to evaluating these loans individually for impairment. Although we believe these loans have well defined weaknesses and meet the definition of “Substandard,” they are generally performing and management has concluded that it is likely it will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The following table summarizes impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required as of June 30, 2015 and December 31, 2014. The recorded investment in loans excludes accrued interest receivable due to insignificance. Allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and the partial charge-off will be recorded when final information is received.



	Impaired Loans with a Specific Allowance						Impaired Loans with No Specific Allowance
(Dollars in thousands)	Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
June 30, 2015
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,438	$	3,647
Non-owner occupied	0		0		0		1,004		3,251
Multi-family	385		394		144		87		122
Non-owner occupied residential	0		0		0		838		1,044
Acquisition and development:
Commercial and land development	0		0		0		242		871
Commercial and industrial	0		0		0		808		883
Residential mortgage:
First lien	1,129		1,157		117		3,535		4,180
Home equity - term	0		0		0		177		178
Home equity - lines of credit	0		0		0		601		711
Installment and other loans	9		10		9		12		36
	$	1,523	$	1,561	$	270	$	9,742	$	14,923
December 31, 2014
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	3,288	$	4,558
Non-owner occupied	0		0		0		1,680		3,420
Multi-family	0		0		0		320		356
Non-owner occupied residential	198		203		2		1,302		1,570
Acquisition and development:
Commercial and land development	0		0		0		410		1,077
Commercial and industrial	0		0		0		2,437		2,500
Residential mortgage:
First lien	982		982		149		4,340		4,968
Home equity - term	0		0		0		70		71
Home equity - lines of credit	24		40		24		455		655
Installment and other loans	13		13		13		13		36
	$	1,217	$	1,238	$	188	$	14,315	$	19,211

The following tables summarize the average recorded investment in impaired loans and related interest income recognized on loans deemed impaired, generally on a cash basis, for the three and six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,
	2015				2014
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,793	$	0	$	4,069	$	8
Non-owner occupied	1,403		0		9,641		91
Multi-family	537		0		260		0
Non-owner occupied residential	919		0		2,139		2
Acquisition and development:
Commercial and land development	313		3		1,360		11
Commercial and industrial	978		0		2,004		2
Residential mortgage:
First lien	4,856		9		3,964		30
Home equity - term	164		0		90		0
Home equity - lines of credit	587		0		59		0
Installment and other loans	22		0		2		0
	$	12,572	$	12	$	23,588	$	144



	Six Months Ended June 30,
	2015				2014
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,941	$	0	$	4,233	$	18
Non-owner occupied	1,515		0		8,800		95
Multi-family	502		0		280		1
Non-owner occupied residential	1,132		0		2,923		10
Acquisition and development:
Commercial and land development	354		5		1,966		13
Commercial and industrial	1,583		0		2,003		5
Residential mortgage:
First lien	5,037		18		3,768		31
Home equity - term	124		0		96		0
Home equity - lines of credit	546		0		99		0
Installment and other loans	24		0		1		0
	$	13,758	$	23	$	24,169	$	173

The following table presents impaired loans that are TDRs, with the recorded investment as of June 30, 2015 and December 31, 2014.



	June 30, 2015			December 31, 2014
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:
Acquisition and development:
Commercial and land development	1	$	201	1	$	287
Residential mortgage:
First lien	8	803		8	813
	9	1,004		9	1,100
Nonaccruing:
Residential mortgage:
First lien	14	1,627		13	1,715
Installment and other loans	1	11		1	13
	15	1,638		14	1,728
	24	$	2,642	23	$	2,828

The loans presented above were considered TDRs as the result of the Company agreeing to below market interest rates for the risk of the transaction, allowing the loan to remain on interest only status, or a reduction in interest rates, in order to give the borrowers an opportunity to improve their cash flows. For TDRs in default of their modified terms, impairment is generally determined on a collateral-dependent approach, except for accruing residential mortgage TDRs, which are generally on the discounted cash flow approach.

The following table presents the number of loans modified, and their pre-modification and post-modification investment balances for the three and six months ended June 30, 2015 and 2014:



	2015					2014
(Dollars in thousands)	Number of Contracts	Pre- Modification Recorded Investment		Post Modification Recorded Investment		Number of Contracts	Pre- Modification Recorded Investment		Post Modification Recorded Investment
Three Months Ended June 30,
Residential mortgage:
First lien	0	$	0	$	0	14	$	1,523	$	1,456
	0	$	0	$	0	14	$	1,523	$	1,456
Six Months Ended June 30,
Residential mortgage:
First lien	1	$	59	$	59	14	$	1,523	$	1,456
	1	$	59	$	59	14	$	1,523	$	1,456

The following table presents restructured loans, included in nonaccrual status, that were modified as TDRs within the previous 12 months and for which there was a payment default during the three and six months ended June 30, 2015 and 2014:



	2015			2014
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Three Months Ended June 30,
Commercial real estate:
Non-owner occupied	0	$	0	1	$	3,495
Residential mortgage:
First lien	3	249		1	111
	3	$	249	2	$	3,606
Six Months Ended June 30,
Commercial real estate:
Non-owner occupied	0	$	0	1	$	3,495
Residential mortgage:
First lien	4	308		1	111
	4	$	308	2	$	3,606

No additional commitments have been made to borrowers whose loans are considered TDRs.

Management further monitors the performance and credit quality of the loan portfolio by analyzing the average length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of June 30, 2015 and December 31, 2014:



			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
June 30, 2015
Commercial real estate:
Owner-occupied	$	109,961	$	20	$	0	$	0	$	20	$	2,438	$	112,419
Non-owner occupied	148,018		0		0		0		0		1,004		149,022
Multi-family	24,904		0		0		0		0		472		25,376
Non-owner occupied residential	50,583		164		0		0		164		838		51,585
Acquisition and development:
1-4 family residential construction	6,961		0		0		0		0		0		6,961
Commercial and land development	33,660		20		0		0		20		41		33,721
Commercial and industrial	59,206		272		0		0		272		808		60,286
Municipal	59,366		0		0		0		0		0		59,366
Residential mortgage:
First lien	118,874		869		0		171		1,040		3,861		123,775
Home equity - term	18,468		301		6		0		307		177		18,952
Home equity - lines of credit	102,277		309		0		0		309		601		103,187
Installment and other loans	6,836		14		9		0		23		21		6,880
	$	739,114	$	1,969	$	15	$	171	$	2,155	$	10,261	$	751,530
December 31, 2014
Commercial real estate:
Owner-occupied	$	97,571	$	0	$	0	$	0	$	0	$	3,288	$	100,859
Non-owner occupied	142,621		0		0		0		0		1,680		144,301
Multi-family	27,211		0		0		0		0		320		27,531
Non-owner occupied residential	47,706		109		0		0		109		1,500		49,315
Acquisition and development:
1-4 family residential construction	5,924		0		0		0		0		0		5,924
Commercial and land development	24,114		0		0		0		0		123		24,237
Commercial and industrial	46,558		0		0		0		0		2,437		48,995
Municipal	61,191		0		0		0		0		0		61,191
Residential mortgage:
First lien	120,806		776		400		0		1,176		4,509		126,491
Home equity - term	20,640		135		0		0		135		70		20,845
Home equity - lines of credit	88,745		142		0		0		142		479		89,366
Installment and other loans	5,815		41		9		0		50		26		5,891
	$	688,902	$	1,203	$	409	$	0	$	1,612	$	14,432	$	704,946

The Company maintains the allowance for loan losses at a level believed to be adequate by management for probable incurred credit losses. The allowance is established and maintained through a provision for loan losses charged to earnings. Quarterly, management assesses the adequacy of the allowance for loan losses utilizing a defined methodology, which considers specific credit evaluation of impaired loans as discussed above, past loan loss historical experience, and qualitative factors. Management believes the approach properly addresses the requirements of ASC Subtopic 310-10-35 for loans individually identified as impaired, and ASC Subtopic 450-20 for loans collectively evaluated for impairment, and other bank regulatory guidance.

In connection with its quarterly evaluation of the adequacy of the allowance for loan losses, management continually reviews its methodology to determine if it continues to properly address the risk in the loan portfolio. For each loan class presented above, general allowances are provided for loans that are collectively evaluated for impairment, which is based on quantitative factors, principally historical loss trends for the respective loan class, adjusted for qualitative factors. In addition, an adjustment to the historical loss factors is made to account for delinquency and other potential risk not elsewhere defined within the Allowance for Loan and Lease Loss methodology.

The look-back period for historical losses is 12 quarters, weighted one-half for the most recent four quarters, and one quarter for each of the two previous four quarter periods in order to appropriately capture the loss history in the loan segment. Management considers current economic and real estate conditions, and the trends in historical charge-off percentages that resulted from applying partial charge-offs to impaired loans, and the impact of distressed loan sales during the year in determining the look back period.

In addition to the quantitative analysis, adjustments to the reserve requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors. As of June 30, 2015 and December 31, 2014, the qualitative factors used by management to adjust the historical loss percentage to the anticipated loss allocation, which may range from a minus 150 basis points to a positive 150 basis points per factor, include:

Nature and Volume of Loans – Loan growth in the current and subsequent quarters based on the Bank’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture, and the number of exceptions to loan policy and supervisory loan to value exceptions, etc.

Concentrations of Credit and Changes within Credit Concentrations – Factors considered include the composition of the Bank’s overall portfolio and management’s evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.

Underwriting Standards and Recovery Practices – Factors considered include changes to underwriting standards and perceived impact on anticipated losses, trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.

Delinquency Trends – Factors considered include the delinquency percentages noted in the portfolio relative to economic conditions, severity of the delinquencies, and whether the ratios are trending upwards or downwards.

Classified Loans Trends – Factors considered include the internal loan ratings of the portfolio, the severity of the ratings, and whether the loan segment’s ratings show a more favorable or less favorable trend, and underlying market conditions and their impact on the collateral values securing the loans.

Experience, Ability and Depth of Management/Lending staff – Factors considered include the years of experience of senior and middle management and the lending staff and turnover of the staff, and instances of repeat criticisms of ratings.

Quality of Loan Review – Factors include the years of experience of the loan review staff, in-house versus outsourced provider of review, turnover of staff and the perceived quality of their work in relation to other external information.

National and Local Economic Conditions – Ratios and factors considered include trends in the consumer price index (CPI), unemployment rates, housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition.

Activity in the allowance for loan losses for the three months ended June 30, 2015 and 2014 was as follows:



	Commercial															Consumer
(Dollars in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Municipal			Total			Residential Mortgage			Installment and Other			Total			Unallocated			Total
June 30, 2015
Balance, beginning of period	$	9,346		$	588		$	665		$	121		$	10,720		$	2,567		$	116		$	2,683		$	1,058		$	14,461
Provision for loan losses	(750		)	132			188			(2		)	(432		)	479			74			553			(121		)	0
Charge-offs	(475		)	0			(24		)	0			(499		)	(151		)	(9		)	(160		)	0			(659		)
Recoveries	11			0			15			0			26			23			1			24			0			50
Balance, end of period	$	8,132		$	720		$	844		$	119		$	9,815		$	2,918		$	182		$	3,100		$	937		$	13,852
June 30, 2014
Balance, beginning of period	$	13,719		$	474		$	919		$	244		$	15,356		$	3,112		$	126		$	3,238		$	1,903		$	20,497
Provision for loan losses	645			407			(224		)	(66		)	762			(741		)	81			(660		)	(102		)	0
Charge-offs	(415		)	(34		)	(55		)	0			(504		)	(16		)	(54		)	(70		)	0			(574		)
Recoveries	104			5			353			0			462			7			33			40			0			502
Balance, end of period	$	14,053		$	852		$	993		$	178		$	16,076		$	2,362		$	186		$	2,548		$	1,801		$	20,425

Activity in the allowance for loan losses for the six months ended June 30, 2015 and 2014 was as follows:



	Commercial															Consumer
(Dollars in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Municipal			Total			Residential Mortgage			Installment and Other			Total			Unallocated			Total
June 30, 2015
Balance, beginning of period	$	9,462		$	697		$	806		$	183		$	11,148		$	2,262		$	119		$	2,381		$	1,218		$	14,747
Provision for loan losses	(813		)	45			51			(64		)	(781		)	973			89			1,062			(281		)	0
Charge-offs	(541		)	(22		)	(50		)	0			(613		)	(352		)	(29		)	(381		)	0			(994		)
Recoveries	24			0			37			0			61			35			3			38			0			99
Balance, end of period	$	8,132		$	720		$	844		$	119		$	9,815		$	2,918		$	182		$	3,100		$	937		$	13,852
June 30, 2014
Balance, beginning of period	$	13,215		$	670		$	864		$	244		$	14,993		$	3,780		$	124		$	3,904		$	2,068		$	20,965
Provision for loan losses	1,383			211			(164		)	(66		)	1,364			(1,222		)	125			(1,097		)	(267		)	0
Charge-offs	(674		)	(34		)	(64		)	0			(772		)	(209		)	(121		)	(330		)	0			(1,102		)
Recoveries	129			5			357			0			491			13			58			71			0			562
Balance, end of period	$	14,053		$	852		$	993		$	178		$	16,076		$	2,362		$	186		$	2,548		$	1,801		$	20,425

The following table summarizes the ending loan balances individually evaluated for impairment based upon loan segment, as well as the related allowance for loan losses allocation for each at June 30, 2015 and December 31, 2014:



	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
June 30, 2015
Loans allocated by:
Individually evaluated for impairment	$	4,752	$	242	$	808	$	0	$	5,802	$	5,442	$	21	$	5,463	$	0	$	11,265
Collectively evaluated for impairment	333,650		40,440		59,478		59,366		492,934		240,472		6,859		247,331		0		740,265
	$	338,402	$	40,682	$	60,286	$	59,366	$	498,736	$	245,914	$	6,880	$	252,794	$	0	$	751,530
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	144	$	0	$	0	$	0	$	144	$	117	$	9	$	126	$	0	$	270
Collectively evaluated for impairment	7,988		720		844		119		9,671		2,801		173		2,974		937		13,582
	$	8,132	$	720	$	844	$	119	$	9,815	$	2,918	$	182	$	3,100	$	937	$	13,852
December 31, 2014
Loans allocated by:
Individually evaluated for impairment	$	6,788	$	410	$	2,437	$	0	$	9,635	$	5,871	$	26	$	5,897	$	0	$	15,532
Collectively evaluated for impairment	315,218		29,751		46,558		61,191		452,718		230,831		5,865		236,696		0		689,414
	$	322,006	$	30,161	$	48,995	$	61,191	$	462,353	$	236,702	$	5,891	$	242,593	$	0	$	704,946
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	2	$	0	$	0	$	0	$	2	$	173	$	13	$	186	$	0	$	188
Collectively evaluated for impairment	9,460		697		806		183		11,146		2,089		106		2,195		1,218		14,559
	$	9,462	$	697	$	806	$	183	$	11,148	$	2,262	$	119	$	2,381	$	1,218	$	14,747