NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the three months ended March 31, 2015 and 2014 and the year ended December 31, 2014 were as follows:



	Three Months Ended			Year Ended			Three Months Ended
	March 31,			December 31,			March 31,
	2015			2014			2014
				(in thousands)
Balance, beginning	$	5,080		$	5,488		$	5,488
Provision charged to operating expense	133			350			283
Recoveries added to the allowance	90			725			37
Loan losses charged to the allowance	(131		)	(1,483		)	(91		)
Balance, ending	$	5,172		$	5,080		$	5,717

Nonaccrual and past due loans by class at March 31, 2015 and December 31, 2014 were as follows:



	March 31, 2015
	(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	$	70	$	25	$	52	$	147	$	28,634	$	28,781	$	63	$	1,006
Commercial Real Estate:
Owner Occupied	1,395		—		—		1,395		92,404		93,799		—		1,915
Non-owner occupied	324		156		837		1,317		60,016		61,333		—		1,204
Construction and Farmland:
Residential	170		—		—		170		5,491		5,661		—		—
Commercial	1,531		408		—		1,939		27,410		29,349		—		408
Consumer:
Installment	50		12		—		62		13,047		13,109		—		—
Residential:
Equity Lines	288		52		—		340		31,862		32,202		—		477
Single family	1,561		1,110		198		2,869		188,963		191,832				1,583
Multifamily	—		—		—		—		3,133		3,133		—		—
All Other Loans	—		—		—		—		2,194		2,194		—		—
Total	$	5,389	$	1,763	$	1,087	$	8,239	$	453,154	$	461,393	$	63	$	6,593



	December 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 Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	28	$	—	$	—	$	28	$	28,104	$	28,132	$	—	$	2,106
Commercial Real Estate:
Owner Occupied	2,191		—		—		2,191		97,516		99,707		—		2,591
Non-owner occupied	56		210		808		1,074		60,518		61,592		—		1,231
Construction and Farmland:
Residential	—		52		—		52		5,149		5,201		—		—
Commercial	—		—		57		57		31,231		31,288		—		787
Consumer:
Installment	50		15		6		71		13,803		13,874		6		—
Residential:
Equity Lines	132		41		185		358		30,763		31,121		—		331
Single family	1,243		440		644		2,327		191,246		193,573		—		3,660
Multifamily	—		—		—		—		3,016		3,016		—		—
All Other Loans	—		—		—		—		2,316		2,316		—		—
Total	$	3,700	$	758	$	1,700	$	6,158	$	463,662	$	469,820	$	6	$	10,706

Allowance for loan losses by segment at March 31, 2015 and December 31, 2014 were as follows:



	As of and for the Three Months Ended
	March 31, 2015
	(in thousands)
	Construction and Farmland		Residential Real Estate			Commercial Real Estate			Commercial		Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	951	$	1,977		$	1,347		$	464	$	103		$	42		$	196	$	5,080
Charge-Offs	—		(91		)	—			—		(33		)	(7		)	—		(131		)
Recoveries	8		38			27			4		10			3			—		90
Provision	126		86			(137		)	9		11			5			33		133
Ending balance	$	1,085	$	2,010		$	1,237		$	477	$	91		$	43		$	229	$	5,172
Ending balance: Individually evaluated for impairment	$	249	$	347		$	159		$	36	$	—		$	—		$	—	$	791
Ending balance: collectively evaluated for impairment	$	836	$	1,663		$	1,078		$	441	$	91		$	43		$	229	$	4,381
Loans:
Ending balance	$	35,010	$	227,167		$	155,132		$	28,781	$	13,109		$	2,194		$	—	$	461,393
Ending balance individually evaluated for impairment	$	2,591	$	7,015		$	6,108		$	1,092	$	—		$	—		$	—	$	16,806
Ending balance collectively evaluated for impairment	$	32,419	$	220,152		$	149,024		$	27,689	$	13,109		$	2,194		$	—	$	444,587



	As of and for the Twelve Months Ended
	December 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	(482		)	(808		)	(83		)	—			(86		)	(24		)	—		(1,483		)
Recoveries	26			63			381			164			87			4			—		725
Provision	375			497			(288		)	(255		)	—			(20		)	41		350
Ending balance	$	951		$	1,977		$	1,347		$	464		$	103		$	42		$	196	$	5,080
Ending balance: Individually evaluated for impairment	$	93		$	303		$	203		$	44		$	—		$	—		$	—	$	643
Ending balance: collectively evaluated for impairment	$	858		$	1,674		$	1,144		$	420		$	103		$	42		$	196	$	4,437
Loans:
Ending balance	$	36,489		$	227,710		$	161,299		$	28,132		$	13,874		$	2,316		$	—	$	469,820
Ending balance individually evaluated for impairment	$	2,665		$	6,550		$	5,716		$	2,106		$	—		$	—		$	—	$	17,037
Ending balance collectively evaluated for impairment	$	33,824		$	221,160		$	155,583		$	26,026		$	13,874		$	2,316		$	—	$	452,783

Impaired loans by class as of and for the periods ended March 31, 2015 and December 31, 2014 were as follows:



	As of and for the Three Months Ended
	March 31, 2015
	(in thousands)
	Unpaid Principal Balance		Recorded Investment (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	1,186	$	1,006	$	—	$	1,580	$	34
Commercial Real Estate:
Owner Occupied	3,271		2,929		—		3,302		50
Non-owner occupied	2,661		2,528		—		2,676		35
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	1,522		1,520		—		1,527		18
Residential:
Equity lines	401		226		—		402		2
Single family	4,776		4,424		—		4,803		49
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	13,817	$	12,633	$	—	$	14,290	$	188
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	285	$	86	$	36	$	288	$	5
Commercial Real Estate:
Owner Occupied	681		676		159		685		8
Non-owner occupied	—		—		—		—		—
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	1,110		1,078		249		1,119		9
Residential:
Equity lines	403		251		86		403		2
Single family	2,129		2,131		261		2,141		22
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	4,608	$	4,222	$	791	$	4,636	$	46
Total:
Commercial	$	1,471	$	1,092	$	36	$	1,868	$	39
Commercial Real Estate	6,613		6,133		159		6,663		93
Construction and Farmland	2,632		2,598		249		2,646		27
Residential	7,709		7,032		347		7,749		75
Other	—		—		—		—		—
Total	$	18,425	$	16,855	$	791	$	18,926	$	234

(1) Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and net deferred loan fees or costs.



	As of and for the Twelve Months End
	December 31, 2014
	(in thousands)
	Unpaid Principal Balance		Recorded Investment (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	2,159	$	2,013	$	—	$	2,256	$	19
Commercial Real Estate:
Owner Occupied	2,824		2,473		—		2,857		48
Non-owner occupied	2,675		2,560		—		2,796		86
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	2,319		2,319		—		2,362		68
Residential:
Equity lines	252		78		—		252		—
Single family	5,634		5,218		—		5,719		149
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	15,863	$	14,661	$	—	$	16,242	$	370
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	289	$	94	$	44	$	289	$	—
Commercial Real Estate:
Owner Occupied	689		689		203		704		33
Non-owner occupied	—		—		—		—		—
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	385		350		93		393		5
Residential:
Equity lines	403		253		95		403		5
Single family	1,007		1,008		208		1,020		41
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	2,773	$	2,394	$	643	$	2,809	$	84
Total:
Commercial	$	2,448	$	2,107	$	44	$	2,545	$	19
Commercial Real Estate	6,188		5,722		203		6,357		167
Construction and Farmland	2,704		2,669		93		2,755		73
Residential	7,296		6,557		303		7,394		195
Other	—		—		—		—		—
Total	$	18,636	$	17,055	$	643	$	19,051	$	454

(1) Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and net deferred loan fees or costs.

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 history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.

Pass Monitored	Pass monitored loans may be experiencing income and cash volatility, inconsistent operating trends, nominal liquidity and/or a 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 negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt.

Substandard	Substandard loans exhibit well defined weaknesses resulting in a higher probability of default. The borrowers exhibit adverse financial trends and a diminishing ability or willingness to service debt.

Doubtful	Doubtful loans exhibit all of the characteristics inherent in substandard loans; however given the severity of weaknesses, the collection of 100% of the principal is unlikely under current conditions.

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

Credit quality information by class at March 31, 2015 and December 31, 2014 was as follows:



	As of
	March 31, 2015
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	25,827	$	2,181	$	—	$	623	$	150	$	—	$	28,781
Commercial Real Estate:
Owner Occupied	73,446		16,784		180		2,334		1,055		—		93,799
Non-owner occupied	44,789		14,685		—		1,812		47		—		61,333
Construction and Farmland:
Residential	5,473		188		—		—		—		—		5,661
Commercial	19,136		7,976		1,035		1,202		—		—		29,349
Residential:
Equity Lines	29,326		2,398		—		335		143		—		32,202
Single family	161,606		25,313		69		4,472		372		—		191,832
Multifamily	3,133		—		—		—		—		—		3,133
All other loans	2,139		55		—		—		—		—		2,194
Total	$	364,875	$	69,580	$	1,284	$	10,778	$	1,767	$	—	$	448,284



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	13,047	$	62



	As of
	December 31, 2014
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	24,579	$	1,775	$	21	$	701	$	1,056	$	—	$	28,132
Commercial Real Estate:
Owner Occupied	77,979		17,401		—		3,189		1,138		—		99,707
Non-owner occupied	42,630		14,779		1,402		2,733		48		—		61,592
Construction and Farm land:
Residential	5,112		89		—		—		—		—		5,201
Commercial	23,192		5,184		2,083		750		79		—		31,288
Residential:
Equity Lines	29,440		1,429		—		185		67		—		31,121
Single family	165,932		21,011		—		6,062		568		—		193,573
Multifamily	2,144		872		—		—		—		—		3,016
All other loans	2,316		—		—		—		—		—		2,316
Total	$	373,324	$	62,540	$	3,506	$	13,620	$	2,956	$	—	$	455,946



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	13,803	$	71