NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the three months ended March 31, 2016 and 2015 and the year ended December 31, 2015 were as follows:



	Three Months Ended			Year Ended			Three Months Ended
	March 31,			December 31,			March 31,
	2016			2015			2015
				(in thousands)
Balance, beginning	$	4,959		$	5,080		$	5,080
Provision for (recovery of) loan losses	79			(227		)	133
Recoveries added to the allowance	38			562			90
Loan losses charged to the allowance	(73		)	(456		)	(131		)
Balance, ending	$	5,003		$	4,959		$	5,172

Nonaccrual and past due loans by class at March 31, 2016 and December 31, 2015 were as follows:



	March 31, 2016
	(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	$	111	$	75	$	—	$	186	$	32,661	$	32,847	$	—	$	294
Commercial Real Estate:
Owner Occupied	849		—		—		849		114,092		114,941		—		1,065
Non-owner occupied	775		—		—		775		75,271		76,046		—		931
Construction and Farmland:
Residential	50		—		—		50		8,622		8,672		—		—
Commercial	25		—		—		25		31,350		31,375		—		299
Consumer:
Installment	62		11		—		73		13,137		13,210		—		—
Residential:
Equity Lines	407		19		24		450		33,661		34,111		24		291
Single family	6,588		338		791		7,717		185,550		193,267		—		1,576
Multifamily	—		—		—		—		3,928		3,928		—		—
All Other Loans	—		—		—		—		2,636		2,636		—		—
Total	$	8,867	$	443	$	815	$	10,125	$	500,908	$	511,033	$	24	$	4,456



	December 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 Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	1	$	—	$	—	$	1	$	29,365	$	29,366	$	—	$	475
Commercial Real Estate:
Owner Occupied	623		142		—		765		108,942		109,707		—		1,614
Non-owner occupied	—		55		746		801		64,664		65,465		—		948
Construction and Farmland:
Residential	50		—		—		50		8,509		8,559		—		—
Commercial	356		72		—		428		32,582		33,010		—		310
Consumer:
Installment	43		3		—		46		13,484		13,530		—		—
Residential:
Equity Lines	175		—		—		175		34,246		34,421		—		276
Single family	2,123		209		1,296		3,628		191,602		195,230		307		1,662
Multifamily	—		—		—		—		3,975		3,975		—		—
All Other Loans	—		—		—		—		2,310		2,310		—		—
Total	$	3,371	$	481	$	2,042	$	5,894	$	489,679	$	495,573	$	307	$	5,285

Allowance for loan losses by segment at March 31, 2016 and December 31, 2015 were as follows:



	As of and for the Three Months Ended
	March 31, 2016
	(in thousands)
	Construction and Farmland			Residential			Commercial Real Estate		Commercial - Non Real Estate		Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	775		$	2,322		$	1,268	$	211	$	109		$	53		$	221	$	4,959
Charge-Offs	—			(60		)	—		—		(5		)	(8		)	—		(73		)
Recoveries	13			2			2		5		15			1			—		38
Provision	(176		)	5			193		18		(20		)	21			38		79
Ending balance	$	612		$	2,269		$	1,463	$	234	$	99		$	67		$	259	$	5,003
Ending balance: Individually evaluated for impairment	$	13		$	385		$	143	$	5	$	—		$	—		$	—	$	546
Ending balance: collectively evaluated for impairment	$	599		$	1,884		$	1,320	$	229	$	99		$	67		$	259	$	4,457
Loans:
Ending balance	$	40,047		$	231,306		$	190,987	$	32,847	$	13,210		$	2,636		$	—	$	511,033
Ending balance individually evaluated for impairment	$	1,374		$	6,724		$	3,974	$	647	$	—		$	—		$	—	$	12,719
Ending balance collectively evaluated for impairment	$	38,673		$	224,582		$	187,013	$	32,200	$	13,210		$	2,636		$	—	$	498,314



	As of and for the Twelve Months Ended
	December 31, 2015
	(in thousands)
	Construction and Farmland			Residential			Commercial Real Estate			Commercial - Non Real Estate			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	(166		)	(152		)	(47		)	—			(66		)	(25		)	—		(456		)
Recoveries	75			142			115			181			33			16			—		562
Provision	(85		)	355			(147		)	(434		)	39			20			25		(227		)
Ending balance	$	775		$	2,322		$	1,268		$	211		$	109		$	53		$	221	$	4,959
Ending balance: Individually evaluated for impairment	$	10		$	423		$	141		$	2		$	—		$	—		$	—	$	576
Ending balance: collectively evaluated for impairment	$	765		$	1,899		$	1,127		$	209		$	109		$	53		$	221	$	4,383
Loans:
Ending balance	$	41,569		$	233,626		$	175,172		$	29,366		$	13,530		$	2,310		$	—	$	495,573
Ending balance individually evaluated for impairment	$	1,392		$	7,209		$	4,555		$	847		$	—		$	—		$	—	$	14,003
Ending balance collectively evaluated for impairment	$	40,177		$	226,417		$	170,617		$	28,519		$	13,530		$	2,310		$	—	$	481,570

Impaired loans by class as of and for the periods ended March 31, 2016 and December 31, 2015 were as follows:



	As of and for the Three Months Ended
	March 31, 2016
	(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	$	396	$	343	$	—	$	383	$	3
Commercial Real Estate:
Owner Occupied	1,527		1,412		—		1,420		4
Non-owner occupied	1,165		1,075		—		1,079		3
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	401		369		—		373		2
Residential:
Equity lines	149		143		—		143		—
Single family	3,725		3,613		—		3,627		29
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	7,363	$	6,955	$	—	$	7,025	$	41
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	305	$	305	$	5	$	310	$	3
Commercial Real Estate:
Owner Occupied	206		207		38		207		2
Non-owner occupied	1,282		1,286		105		1,290		16
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	1,005		1,009		13		1,012		10
Residential:
Equity lines	549		213		83		213		1
Single family	2,799		2,772		302		2,781		21
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	6,146	$	5,792	$	546	$	5,813	$	53
Total:
Commercial	$	701	$	648	$	5	$	693	$	6
Commercial Real Estate	4,180		3,980		143		3,996		25
Construction and Farmland	1,406		1,378		13		1,385		12
Residential	7,222		6,741		385		6,764		51
Other	—		—		—		—		—
Total	$	13,509	$	12,747	$	546	$	12,838	$	94

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



	As of and for the Twelve Months End
	December 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	$	747	$	534	$	—	$	749	$	18
Commercial Real Estate:
Owner Occupied	2,146		1,964		—		1,999		19
Non-owner occupied	1,174		1,093		—		1,108		15
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	337		310		—		325		—
Residential:
Equity lines	149		145		—		145		5
Single family	4,407		4,288		—		4,245		126
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	8,960	$	8,334	$	—	$	8,571	$	183
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	313	$	313	$	2	$	328	$	15
Commercial Real Estate:
Owner Occupied	207		208		39		210		10
Non-owner occupied	1,291		1,295		102		1,311		69
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	1,081		1,085		10		1,109		48
Residential:
Equity lines	551		216		86		221		3
Single family	2,596		2,575		337		2,600		76
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	6,039	$	5,692	$	576	$	5,779	$	221
Total:
Commercial	$	1,060	$	847	$	2	$	1,077	$	33
Commercial Real Estate	4,818		4,560		141		4,628		113
Construction and Farmland	1,418		1,395		10		1,434		48
Residential	7,703		7,224		423		7,211		210
Other	—		—		—		—		—
Total	$	14,999	$	14,026	$	576	$	14,350	$	404

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

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, 2016 and December 31, 2015 was as follows:



	As of
	March 31, 2016
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	28,946	$	3,524	$	19	$	358	$	—	$	—	$	32,847
Commercial Real Estate:
Owner Occupied	91,337		14,226		7,537		1,388		453		—		114,941
Non-owner occupied	51,053		22,373		1,238		1,382		—		—		76,046
Construction and Farmland:
Residential	8,672		—		—		—		—		—		8,672
Commercial	19,278		11,705		—		392		—		—		31,375
Residential:
Equity Lines	30,479		3,342		—		162		128		—		34,111
Single family	167,011		17,872		3,959		4,006		419		—		193,267
Multifamily	3,899		—		29		—		—		—		3,928
All other loans	2,595		41		—		—		—		—		2,636
Total	$	403,270	$	73,083	$	12,782	$	7,688	$	1,000	$	—	$	497,823



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	13,137	$	73



	As of
	December 31, 2015
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	25,375	$	3,175	$	335	$	364	$	117	$	—	$	29,366
Commercial Real Estate:
Owner Occupied	90,230		12,553		4,521		1,416		987		—		109,707
Non-owner occupied	42,988		21,072		—		1,405		—		—		65,465
Construction and Farm land:
Residential	8,559		—		—		—		—		—		8,559
Commercial	20,391		10,886		1,395		338		—		—		33,010
Residential:
Equity Lines	30,267		3,878		—		145		131		—		34,421
Single family	170,168		19,086		950		4,600		426		—		195,230
Multifamily	3,975		—		—		—		—		—		3,975
All other loans	2,265		45		—		—		—		—		2,310
Total	$	394,218	$	70,695	$	7,201	$	8,268	$	1,661	$	—	$	482,043



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	13,484	$	46