NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the three months ended March 31, 2014 and 2013 and the year ended December 31, 2013 were as follows:



	Three Months Ended			Year Ended			Three Months Ended
	March 31,			December 31,			March 31,
	2014			2013			2013
				(in thousands)
Balance, beginning	$	5,488		$	6,577		$	6,577
Provision charged to operating expense	283			—			383
Recoveries added to the allowance	37			233			42
Loan losses charged to the allowance	(91		)	(1,322		)	(42		)
Balance, ending	$	5,717		$	5,488		$	6,960

Nonaccrual and past due loans by class at March 31, 2014 and December 31, 2013 were as follows:



	March 31, 2014
	(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	$	325	$	1,120	$	124	$	1,569	$	21,173	$	22,742	$	—	$	1,829
Commercial Real Estate:
Owner Occupied	939		—		710		1,649		99,726		101,375		—		1,451
Non-owner occupied	226		179		—		405		57,148		57,553		—		1,286
Construction and Farmland:
Residential	—		—		—		—		4,619		4,619		—		—
Commercial	—		192		—		192		30,572		30,764		—		277
Consumer:
Installment	89		6		—		95		12,932		13,027		—		—
Residential:
Equity Lines	296		—		18		314		31,002		31,316		18		159
Single family	2,298		22		207		2,527		185,886		188,413				1,596
Multifamily	—		—		—		—		2,845		2,845		—		—
All Other Loans	—		—		—		—		3,818		3,818		—		—
Total	$	4,173	$	1,519	$	1,059	$	6,751	$	449,721	$	456,472	$	18	$	6,598



	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 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

Allowance for loan losses by segment at March 31, 2014 and December 31, 2013 were as follows:



	As of and for the Three Months Ended
	March 31, 2014
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate		Commercial		Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	1,032		$	2,225		$	1,337	$	555	$	102		$	82		$	155	$	5,488
Charge-Offs	—			(66		)	—		—		(22		)	(3		)	—		(91		)
Recoveries	1			4			4		3		24			1			—		37
Provision	(179		)	(207		)	143		318		(9		)	25			192		283
Ending balance	$	854		$	1,956		$	1,484	$	876	$	95		$	105		$	347	$	5,717
Ending balance: Individually evaluated for impairment	$	203		$	318		$	385	$	600	$	—		$	—		$	—	$	1,506
Ending balance: collectively evaluated for impairment	$	651		$	1,638		$	1,099	$	276	$	95		$	105		$	347	$	4,211
Financing receivables:
Ending balance	$	35,383		$	222,574		$	158,928	$	22,742	$	13,027		$	3,818		$	—	$	456,472
Ending balance individually evaluated for impairment	$	2,662		$	3,612		$	4,549	$	1,831	$	—		$	—		$	—	$	12,654
Ending balance collectively evaluated for impairment	$	32,721		$	218,962		$	154,379	$	20,911	$	13,027		$	3,818		$	—	$	443,818



	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

Impaired loans by class at March 31, 2014 and December 31, 2013 were as follows:



	As of
	March 31, 2014
	(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	2,090		2,095		—		2,340		8
Non-owner occupied	1,153		1,155		—		1,238		12
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	2,384		2,396		—		2,399		21
Residential:
Equity lines	104		104		—		271		—
Single family	2,830		2,837		—		3,186		19
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	8,561	$	8,587	$	—	$	9,434	$	60
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	1,831	$	1,831	$	600	$	2,061	$	9
Commercial Real Estate:
Owner Occupied	200		200		100		189		2
Non-owner occupied	1,106		1,106		285		1,108		12
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	278		278		203		301		—
Residential:
Equity lines	73		73		73		218		—
Single family	605		605		245		612		6
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	4,093	$	4,093	$	1,506	$	4,489	$	29
Total:
Commercial	$	1,831	$	1,831	$	600	$	2,061	$	9
Commercial Real Estate	4,549		4,556		385		4,875		34
Construction and Farmland	2,662		2,674		203		2,700		21
Residential	3,612		3,619		318		4,287		25
Other	—		—		—		—		—
Total	$	12,654	$	12,680	$	1,506	$	13,923	$	89



	As of
	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

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, which 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 potential 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 March 31, 2014 and December 31, 2013 was as follows:



	As of
	March 31, 2014
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	18,083	$	2,779	$	50	$	586	$	1,244	$	—	$	22,742
Commercial Real Estate:
Owner Occupied	83,286		11,027		3,092		2,719		1,251		—		101,375
Non-owner occupied	38,580		10,897		4,338		3,688		50		—		57,553
Construction and Farmland:
Residential	4,497		122		—		—		—		—		4,619
Commercial	24,439		2,453		1,609		2,178		85		—		30,764
Residential:
Equity Lines	29,966		769		422		—		159		—		31,316
Single family	160,040		11,779		11,519		4,451		624		—		188,413
Multifamily	1,938		907		—		—		—		—		2,845
All other loans	3,818		—		—		—		—		—		3,818
Total	$	364,647	$	40,733	$	21,030	$	13,622	$	3,413	$	—	$	443,445



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	12,932	$	95



	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 Farm land:
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