Allowance for Loan Losses

Changes in the allowance for loan losses for the years December 31, 2013, 2012 and 2011 were as follows:



	December 31,
	2013			2012			2011
				(in thousands)
Balance, beginning	$	6,577		$	8,743		$	7,111
Provision charged to operating expense	—			1,660			3,750
Recoveries added to the allowance	233			337			848
Loan losses charged to the allowance	(1,322		)	(4,163		)	(2,966		)
Balance, ending	$	5,488		$	6,577		$	8,743

Nonaccrual and past due loans by class at December 31, 2013 and December 31, 2012 were as follows:



	December 31, 2013
	(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	$	143	$	—	$	1,162	$	1,305	$	19,560	$	20,865	$	—	$	1,288
Commercial Real Estate:
Owner Occupied	364		—		1,270		1,634		90,811		92,445		—		1,269
Non-owner occupied	99		185		—		284		55,437		55,721		—		185
Construction and Farmland:
Residential	—		—		—		—		7,860		7,860		—		—
Commercial	—		—		—		—		29,073		29,073		—		157
Consumer:
Installment	95		9		11		115		13,670		13,785		11		6
Residential:
Equity Lines	202		25		—		227		31,997		32,224		—		179
Single family	1,995		180		693		2,868		183,541		186,409		—		1,328
Multifamily	—		—		—		—		2,850		2,850		—		—
All Other Loans	—		—		—		—		3,041		3,041		—		—
Total	$	2,898	$	399	$	3,136	$	6,433	$	437,840	$	444,273	$	11	$	4,412



	December 31, 2012
	(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	$	822	$	225	$	—	$	1,047	$	20,593	$	21,640	$	—	$	230
Commercial Real Estate:
Owner Occupied	610		374		90		1,074		84,090		85,164		—		90
Non-owner occupied	234		582		—		816		38,402		39,218		—		209
Construction and Farmland:
Residential	—		—		—		—		9,706		9,706		—		—
Commercial	93		44		—		137		28,033		28,170		—		131
Consumer:
Installment	116		10		9		135		13,172		13,307		9		—
Residential:
Equity Lines	109		—		—		109		31,593		31,702		—		287
Single family	4,059		733		524		5,316		177,601		182,917		199		1,467
Multifamily	—		—		—		—		2,808		2,808		—		—
All Other Loans	—		—		—		—		3,465		3,465		—		—
Total	$	6,043	$	1,968	$	623	$	8,634	$	409,463	$	418,097	$	208	$	2,414

Allowance for loan losses by segment at December 31, 2013 and December 31, 2012 were as follows:



	As of and for the Twelve Months Ended
	December 31, 2013
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate			Commercial			Consumer			All Other Loans			Unallocated			Total
Allowance for credit losses:
Beginning Balance	$	1,280		$	2,820		$	1,182		$	880		$	107		$	122		$	186		$	6,577
Charge-Offs	(20		)	(507		)	(289		)	(403		)	(85		)	(18		)	—			(1,322		)
Recoveries	5			109			7			47			54			11			—			233
Provision	(233		)	(197		)	437			31			26			(33		)	(31		)	—
Ending balance	$	1,032		$	2,225		$	1,337		$	555		$	102		$	82		$	155		$	5,488
Ending balance: Individually evaluated for impairment	$	218		$	627		$	299		$	334		$	—		$	—		$	—		$	1,478
Ending balance: collectively evaluated for impairment	$	814		$	1,598		$	1,038		$	221		$	102		$	82		$	155		$	4,010
Financing receivables:
Ending balance	$	36,933		$	221,483		$	148,166		$	20,865		$	13,785		$	3,041		$	—		$	444,273
Ending balance individually evaluated for impairment	$	2,674		$	4,922		$	4,750		$	1,347		$	—		$	6		$	—		$	13,699
Ending balance collectively evaluated for impairment	$	34,259		$	216,561		$	143,416		$	19,518		$	13,785		$	3,035		$	—		$	430,574



	As of and for the Twelve Months Ended
	December 31, 2012
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate			Commercial			Consumer			All Other Loans			Unallocated			Total
Allowance for credit losses:
Beginning Balance	$	2,618		$	3,544		$	1,057		$	1,077		$	131		$	123		$	193		$	8,743
Charge-Offs	(1,313		)	(1,381		)	(1,118		)	(207		)	(116		)	(28		)	—			(4,163		)
Recoveries	4			67			146			36			73			11			—			337
Provision	(29		)	590			1,097			(26		)	19			16			(7		)	1,660
Ending balance	$	1,280		$	2,820		$	1,182		$	880		$	107		$	122		$	186		$	6,577
Ending balance: Individually evaluated for impairment	$	141		$	1,176		$	305		$	737		$	—		$	—		$	—		$	2,359
Ending balance: collectively evaluated for impairment	$	1,139		$	1,644		$	877		$	143		$	107		$	122		$	186		$	4,218
Financing receivables:
Ending balance	$	37,876		$	217,427		$	124,382		$	21,640		$	13,307		$	3,465		$	—		$	418,097
Ending balance individually evaluated for impairment	$	1,326		$	7,695		$	5,246		$	985		$	—		$	—		$	—		$	15,252
Ending balance collectively evaluated for impairment	$	36,550		$	209,732		$	119,136		$	20,655		$	13,307		$	3,465		$	—		$	402,845

Impaired loans by class at December 31, 2013 and December 31, 2012 were as follows:



	As of and for the Year Ended
	December 31, 2013
	(in thousands)
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	126	$	145	$	—	$	329	$	8
Commercial Real Estate:
Owner Occupied	2,246		2,273		—		2,512		118
Non-owner occupied	1,396		1,398		—		1,498		91
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	2,392		2,401		—		2,420		97
Residential:
Equity lines	289		290		—		460		16
Single family	3,060		3,100		—		3,531		146
Multifamily	—		—		—		—		—
Other Loans	6		6		—		7		1
	$	9,515	$	9,613	$	—	$	10,757	$	477
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	1,221	$	1,221	$	334	$	1,271	$	59
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	1,108		1,111		299		1,126		49
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	282		283		218		308		18
Residential:
Equity lines	74		74		74		217		7
Single family	1,499		1,508		553		1,530		71
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	4,184	$	4,197	$	1,478	$	4,452	$	204
Total:
Commercial	$	1,347	$	1,366	$	334	$	1,600	$	67
Commercial Real Estate	4,750		4,782		299		5,136		258
Construction and Farmland	2,674		2,684		218		2,728		115
Residential	4,922		4,972		627		5,738		240
Other	6		6		—		7		1
Total	$	13,699	$	13,810	$	1,478	$	15,209	$	681



	As of and for the Year Ended
	December 31, 2012
	(in thousands)
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Owner Occupied	1,632		1,636		—		2,323		130
Non-owner occupied	2,290		2,296		—		2,378		147
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	1,102		1,103		—		1,159		18
Residential:
Equity lines	287		287		—		469		1
Single family	4,406		4,417		—		5,683		210
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	9,717	$	9,739	$	—	$	12,012	$	506
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	985	$	994	$	737	$	1,062	$	53
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	1,324		1,327		305		1,337		38
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	224		225		141		227		9
Residential:
Equity lines	358		359		252		366		12
Single family	2,644		2,652		924		2,674		125
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	5,535	$	5,557	$	2,359	$	5,666	$	237
Total:
Commercial	$	985	$	994	$	737	$	1,062	$	53
Commercial Real Estate	5,246		5,259		305		6,038		315
Construction and Farmland	1,326		1,328		141		1,386		27
Residential	7,695		7,715		1,176		9,192		348
Other	—		—		—		—		—
Total	$	15,252	$	15,296	$	2,359	$	17,678	$	743

Recorded investment is defined as the summation of the principal balance, accrued interest, and net deferred loan fees or costs. For the year ended December 31, 2011, the average recorded investment of impaired loans was $20.9 million. The interest income recognized on impaired loans was $846 thousand in 2011.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.

The Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Descriptions of these ratings are as follows:




Pass		Pass loans exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.

Watch		Watch loans exhibit income volatility, negative operating trends, and a highly 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 a potential weakness, if left uncorrected, may negatively affect the borrower’s ability to repay its debt obligation. The risk of default is not imminent and the borrower still demonstrates sufficient cash flow to support the loan.

Substandard		Substandard loans exhibit well defined weaknesses and have a high probability of default. The borrowers exhibit adverse financial trends but still have the ability to service debt obligations.

Doubtful		Doubtful loans exhibit all of the characteristics inherent in substandard loans but the weaknesses make collection or full liquidation highly questionable.

Loss		Loss loans are considered uncollectible and of such little value that its continuance as a bankable asset is not warranted.

Credit quality information by class at December 31, 2013 and December 31, 2012 was as follows:



	As of
	December 31, 2013
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	16,565	$	2,820	$	86	$	106	$	1,288	$	—	$	20,865
Commercial Real Estate:
Owner Occupied	73,998		12,036		3,322		1,820		1,269		—		92,445
Non-owner occupied	31,484		14,922		5,557		3,758		—		—		55,721
Construction and Farmland:
Residential	7,738		122		—		—		—		—		7,860
Commercial	24,252		1,353		1,196		2,186		86		—		29,073
Residential:
Equity Lines	30,458		708		415		480		163		—		32,224
Single family	157,273		11,505		11,046		5,775		810		—		186,409
Multifamily	1,946		904		—		—		—		—		2,850
All other loans	3,041		—		—		—		—		—		3,041
Total	$	346,755	$	44,370	$	21,622	$	14,125	$	3,616	$	—	$	430,488



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	13,670	$	115



	As of
	December 31, 2012
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	16,132	$	2,289	$	1,099	$	1,891	$	229	$	—	$	21,640
Commercial Real Estate:
Owner Occupied	72,916		6,503		1,737		3,918		90		—		85,164
Non-owner occupied	22,810		5,303		4,332		6,773		—		—		39,218
Construction and Farm land:
Residential	9,548		158		—		—		—		—		9,706
Commercial	21,155		1,777		854		4,384		—		—		28,170
Residential:
Equity Lines	30,165		426		172		843		96		—		31,702
Single family	148,904		12,048		10,672		10,780		513		—		182,917
Multifamily	1,905		903		—		—		—		—		2,808
All other loans	3,465		—		—		—		—		—		3,465
Total	$	327,000	$	29,407	$	18,866	$	28,589	$	928	$	—	$	404,790



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	13,172	$	135

One consumer loan was rated as special mention for $3 thousand and one consumer loan was rated as doubtful for $6 thousand at December 31, 2013. One consumer loan was rated as substandard for $8 thousand at December 31, 2012.