LOANS AND ALLOWANCE FOR LOAN LOSSES

The Company’s loan portfolio is grouped into classes 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 are 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 associated collateral.

The Company has various types of commercial real estate loans which have differing levels of credit risk. 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.

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 rate 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 generally 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 prudent 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 following table presents the loan portfolio, excluding residential LHFS, broken out by classes at June 30, 2017 and December 31, 2016.



(Dollars in thousands)	June 30, 2017		December 31, 2016
Commercial real estate:
Owner-occupied	$	116,419	$	112,295
Non-owner occupied	217,070		206,358
Multi-family	48,637		47,681
Non-owner occupied residential	68,621		62,533
Acquisition and development:
1-4 family residential construction	8,036		4,663
Commercial and land development	28,481		26,085
Commercial and industrial	97,913		88,465
Municipal	51,381		53,741
Residential mortgage:
First lien	150,173		139,851
Home equity - term	13,019		14,248
Home equity - lines of credit	127,262		120,353
Installment and other loans	7,370		7,118
	$	934,382	$	883,391

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 such 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 loans 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 Company has a loan review policy and program which is designed to identify and manage risk in the lending function. The ERM Committee, comprised of executive officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Company’s loan portfolio. This includes the monitoring of the lending activities of all Company 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 Company's loan review program provides the Company with an independent review of the 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 negative credit event.

Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $500,000, which includes confirmation of risk rating by an independent credit officer. Credit Administration also reviews loans in excess of $1,000,000. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Company's Problem Loan Committee, with subsequent reporting to the ERM Committee.

The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at June 30, 2017 and December 31, 2016.



(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
June 30, 2017
Commercial real estate:
Owner-occupied	$	111,737	$	1,814	$	1,959	$	909	$	0	$	116,419
Non-owner occupied	206,823		196		10,051		0		0		217,070
Multi-family	43,526		4,159		770		182		0		48,637
Non-owner occupied residential	66,024		1,062		1,117		418		0		68,621
Acquisition and development:
1-4 family residential construction	8,036		0		0		0		0		8,036
Commercial and land development	27,849		7		625		0		0		28,481
Commercial and industrial	95,124		2,384		29		376		0		97,913
Municipal	49,392		1,989		0		0		0		51,381
Residential mortgage:
First lien	146,200		0		0		3,973		0		150,173
Home equity - term	12,994		0		0		25		0		13,019
Home equity - lines of credit	126,648		81		61		472		0		127,262
Installment and other loans	7,361		0		0		9		0		7,370
	$	901,714	$	11,692	$	14,612	$	6,364	$	0	$	934,382
December 31, 2016
Commercial real estate:
Owner-occupied	$	103,652	$	5,422	$	2,151	$	1,070	$	0	$	112,295
Non-owner occupied	190,726		4,791		10,105		736		0		206,358
Multi-family	42,473		4,222		787		199		0		47,681
Non-owner occupied residential	59,982		949		1,150		452		0		62,533
Acquisition and development:
1-4 family residential construction	4,560		103		0		0		0		4,663
Commercial and land development	25,435		10		639		1		0		26,085
Commercial and industrial	87,588		251		32		594		0		88,465
Municipal	53,741		0		0		0		0		53,741
Residential mortgage:
First lien	135,558		0		0		4,293		0		139,851
Home equity - term	14,155		0		0		93		0		14,248
Home equity - lines of credit	119,681		82		61		529		0		120,353
Installment and other loans	7,112		0		0		6		0		7,118
	$	844,663	$	15,830	$	14,925	$	7,973	$	0	$	883,391

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 Company 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 of 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 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 it 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.

At June 30, 2017 and December 31, 2016, 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 generally required every 18 months 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, other than performing TDRs, are measured at fair value using certified real estate appraisals that have been completed within the last 18 months. 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:

•

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 nonimpaired 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 classified as Substandard 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 Company 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, 2017 and December 31, 2016. The recorded investment in loans excludes accrued interest receivable due to insignificance. Related 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, 2017
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	909	$	2,098
Multi-family	0		0		0		182		360
Non-owner occupied residential	0		0		0		418		688
Commercial and industrial	0		0		0		376		508
Residential mortgage:
First lien	553		553		40		3,420		4,101
Home equity - term	0		0		0		25		29
Home equity - lines of credit	0		0		0		472		613
Installment and other loans	5		5		5		4		33
	$	558	$	558	$	45	$	5,806	$	8,430
December 31, 2016
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	1,070	$	2,236
Non-owner occupied	0		0		0		736		1,323
Multi-family	0		0		0		199		368
Non-owner occupied residential	0		0		0		452		706
Acquisition and development:
Commercial and land development	0		0		0		1		16
Commercial and industrial	0		0		0		594		715
Residential mortgage:
First lien	643		643		43		3,650		4,399
Home equity - term	0		0		0		93		103
Home equity - lines of credit	0		0		0		529		659
Installment and other loans	0		0		0		6		34
	$	643	$	643	$	43	$	7,330	$	10,559

The following tables summarize the average recorded investment in impaired loans and related interest income recognized on loans deemed impaired for the three and six months ended June 30, 2017 and 2016.



	2017				2016
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Three Months Ended June 30,
Commercial real estate:
Owner-occupied	$	979	$	5	$	1,954	$	0
Non-owner occupied	0		0		7,251		0
Multi-family	186		0		221		0
Non-owner occupied residential	427		0		699		0
Acquisition and development:
Commercial and land development	0		0		3		0
Commercial and industrial	404		0		514		0
Residential mortgage:
First lien	4,192		21		4,618		8
Home equity – term	78		0		98		0
Home equity - lines of credit	503		1		499		0
Installment and other loans	6		0		14		0
	$	6,775	$	27	$	15,871	$	8
Six Months Ended June 30,
Commercial real estate:
Owner-occupied	$	1,036	$	5	$	2,012	$	0
Non-owner occupied	276		0		7,511		0
Multi-family	191		0		225		0
Non-owner occupied residential	437		0		787		0
Acquisition and development:
Commercial and land development	0		0		4		0
Commercial and industrial	458		0		619		0
Residential mortgage:
First lien	4,272		29		4,697		17
Home equity - term	87		0		100		0
Home equity - lines of credit	513		1		544		0
Installment and other loans	6		0		16		0
	$	7,276	$	35	$	16,515	$	17

The following table presents impaired loans that are TDRs, with the recorded investment at June 30, 2017 and December 31, 2016.



	June 30, 2017			December 31, 2016
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:
Commercial real estate:
Owner-occupied	1	$	56	0	$	0
Residential mortgage:
First lien	11	1,116		8	896
Home equity - lines of credit	1	32		1	34
	13	1,204		9	930
Nonaccruing:
Commercial real estate:
Owner-occupied	1	61		0	0
Residential mortgage:
First lien	8	746		12	1,035
Installment and other loans	1	4		1	6
	10	811		13	1,041
	23	$	2,015	22	$	1,971

The following table presents the number of loans modified, and their pre-modification and post-modification investment balances.



	2017					2016
(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,
Commercial real estate:
Owner-occupied	1	$	56	$	56	0	$	0	$	0
Six Months Ended June 30,
Commercial real estate:
Owner-occupied	2	$	119	$	119	0	$	0	$	0
Residential mortgage:
First lien	0	0		0		1	257		257
	2	$	119	$	119	1	$	257	$	257

There were no restructured loans for the three or six months ended June 30, 2017 and 2016 that were modified as TDRs within the previous twelve months which were in payment default.

The loans presented above were considered TDRs as the result of the Company agreeing to below-market interest rates given the risk of the transaction, allowing the loan to remain on interest-only status, or agreeing to a reduction in interest rates, in order to give the borrowers an opportunity to improve their cash flows. For TDRs in default of their original terms, impairment is generally determined on a collateral-dependent approach, except for accruing residential mortgage TDRs, which are generally determined on the discounted cash flow approach. Certain loans modified during a period may no longer be outstanding at the end of the period if the loan was paid off.

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 their delinquencies. The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans at June 30, 2017 and December 31, 2016.



			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
June 30, 2017
Commercial real estate:
Owner-occupied	$	115,561	$	5	$	0	$	0	$	5	$	853	$	116,419
Non-owner occupied	217,070		0		0		0		0		0		217,070
Multi-family	48,455		0		0		0		0		182		48,637
Non-owner occupied residential	68,203		0		0		0		0		418		68,621
Acquisition and development:
1-4 family residential construction	8,036		0		0		0		0		0		8,036
Commercial and land development	28,418		63		0		0		63		0		28,481
Commercial and industrial	97,507		30		0		0		30		376		97,913
Municipal	51,381		0		0		0		0		0		51,381
Residential mortgage:
First lien	146,712		583		21		0		604		2,857		150,173
Home equity - term	12,964		30		0		0		30		25		13,019
Home equity - lines of credit	126,497		288		37		0		325		440		127,262
Installment and other loans	7,349		8		4		0		12		9		7,370
	$	928,153	$	1,007	$	62	$	0	$	1,069	$	5,160	$	934,382
December 31, 2016
Commercial real estate:
Owner-occupied	$	111,225	$	0	$	0	$	0	$	0	$	1,070	$	112,295
Non-owner occupied	205,622		0		0		0		0		736		206,358
Multi-family	47,482		0		0		0		0		199		47,681
Non-owner occupied residential	62,081		0		0		0		0		452		62,533
Acquisition and development:
1-4 family residential construction	4,548		115		0		0		115		0		4,663
Commercial and land development	26,084		0		0		0		0		1		26,085
Commercial and industrial	87,871		0		0		0		0		594		88,465
Municipal	53,741		0		0		0		0		0		53,741
Residential mortgage:
First lien	135,499		628		328		0		956		3,396		139,851
Home equity - term	14,155		0		0		0		0		93		14,248
Home equity - lines of credit	119,733		125		0		0		125		495		120,353
Installment and other loans	7,090		20		2		0		22		6		7,118
	$	875,131	$	888	$	330	$	0	$	1,218	$	7,042	$	883,391

The Company maintains the ALL at a level believed to be adequate by management for probable incurred credit losses. The ALL is established and maintained through a provision for loan losses charged to earnings. Quarterly, management assesses the adequacy of the ALL 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 ALL, 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 ALL methodology.

In addition to this quantitative analysis, adjustments to the ALL requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors, including:

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

Concentrations of Credit and Changes within Credit Concentrations – Factors considered include the composition of the Company’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, 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, turnover of the staff, and instances of repeat criticisms of ratings.

Quality of Loan Review – Factors considered 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 – Factors considered include ratios and factors considered include trends in the consumer price index, unemployment rates, housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition.

The following table presents the activity in the ALL for the three and six months ended June 30, 2017 and 2016.



	Commercial															Consumer
(Dollars in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Municipal			Total			Residential Mortgage			Installment and Other			Total			Unallocated			Total
Three Months Ended
June 30, 2017
Balance, beginning of period	$	6,963		$	513		$	1,218		$	106		$	8,800		$	3,229		$	127		$	3,356		$	512		$	12,668
Provision for loan losses	(214		)	65			69			11			(69		)	198			13			211			(42		)	100
Charge-offs	0			0			0			0			0			(51		)	(27		)	(78		)	0			(78		)
Recoveries	28			1			4			0			33			10			18			28			0			61
Balance, end of period	$	6,777		$	579		$	1,291		$	117		$	8,764		$	3,386		$	131		$	3,517		$	470		$	12,751
June 30, 2016
Balance, beginning of period	$	7,996		$	739		$	1,030		$	62		$	9,827		$	2,677		$	179		$	2,856		$	664		$	13,347
Provision for loan losses	(12		)	(152		)	112			(1		)	(53		)	66			26			92			(39		)	0
Charge-offs	(26		)	0			0			0			(26		)	(80		)	(48		)	(128		)	0			(154		)
Recoveries	175			0			6			0			181			43			23			66			0			247
Balance, end of period	$	8,133		$	587		$	1,148		$	61		$	9,929		$	2,706		$	180		$	2,886		$	625		$	13,440
Six Months Ended
June 30, 2017
Balance, beginning of period	$	7,530		$	580		$	1,074		$	54		$	9,238		$	2,979		$	144		$	3,123		$	414		$	12,775
Provision for loan losses	(738		)	(3		)	267			63			(411		)	441			14			455			56			100
Charge-offs	(45		)	0			(55		)	0			(100		)	(51		)	(56		)	(107		)	0			(207		)
Recoveries	30			2			5			0			37			17			29			46			0			83
Balance, end of period	$	6,777		$	579		$	1,291		$	117		$	8,764		$	3,386		$	131		$	3,517		$	470		$	12,751
June 30, 2016
Balance, beginning of period	$	7,883		$	850		$	1,012		$	58		$	9,803		$	2,870		$	121		$	2,991		$	774		$	13,568
Provision for loan losses	21			(263		)	149			3			(90		)	111			128			239			(149		)	0
Charge-offs	(26		)	0			(21		)	0			(47		)	(324		)	(112		)	(436		)	0			(483		)
Recoveries	255			0			8			0			263			49			43			92			0			355
Balance, end of period	$	8,133		$	587		$	1,148		$	61		$	9,929		$	2,706		$	180		$	2,886		$	625		$	13,440

The following table summarizes the ending loan balance individually evaluated for impairment based upon loan segment, as well as the related ALL allocation for each at June 30, 2017 and December 31, 2016:



	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, 2017
Loans allocated by:
Individually evaluated for impairment	$	1,509	$	0	$	376	$	0	$	1,885	$	4,470	$	9	$	4,479	$	0	$	6,364
Collectively evaluated for impairment	449,238		36,517		97,537		51,381		634,673		285,984		7,361		293,345		0		928,018
	$	450,747	$	36,517	$	97,913	$	51,381	$	636,558	$	290,454	$	7,370	$	297,824	$	0	$	934,382
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	40	$	5	$	45	$	0	$	45
Collectively evaluated for impairment	6,777		579		1,291		117		8,764		3,346		126		3,472		470		12,706
	$	6,777	$	579	$	1,291	$	117	$	8,764	$	3,386	$	131	$	3,517	$	470	$	12,751
December 31, 2016
Loans allocated by:
Individually evaluated for impairment	$	2,457	$	1	$	594	$	0	$	3,052	$	4,915	$	6	$	4,921	$	0	$	7,973
Collectively evaluated for impairment	426,410		30,747		87,871		53,741		598,769		269,537		7,112		276,649		0		875,418
	$	428,867	$	30,748	$	88,465	$	53,741	$	601,821	$	274,452	$	7,118	$	281,570	$	0	$	883,391
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	43	$	0	$	43	$	0	$	43
Collectively evaluated for impairment	7,530		580		1,074		54		9,238		2,936		144		3,080		414		12,732
	$	7,530	$	580	$	1,074	$	54	$	9,238	$	2,979	$	144	$	3,123	$	414	$	12,775