Allowance for Loan Losses

Changes in the allowance for loan losses for the years December 31, 2016, 2015 and 2014 were as follows:



	December 31,
	2016			2015			2014
				(in thousands)
Balance, beginning	$	4,959		$	5,080		$	5,488
(Recovery of) provision for loan losses	(188		)	(227		)	350
Recoveries added to the allowance	341			562			725
Loan losses charged to the allowance	(607		)	(456		)	(1,483		)
Balance, ending	$	4,505		$	4,959		$	5,080

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



	December 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	$	69	$	49	$	—	$	118	$	30,223	$	30,341	$	—	$	278
Commercial Real Estate:
Owner Occupied	150		384		—		534		114,820		115,354		—		431
Non-owner occupied	—		54		135		189		92,982		93,171		—		1,066
Construction and Farmland:
Residential	50		—		—		50		4,627		4,677		—		—
Commercial	499		—		—		499		26,615		27,114		—		—
Consumer:
Installment	23		2		11		36		12,641		12,677		8		8
Residential:
Equity Lines	66		—		—		66		31,240		31,306		—		132
Single family	444		51		166		661		195,999		196,660		—		5,076
Multifamily	—		—		—		—		3,566		3,566		—		—
All Other Loans	—		—		—		—		2,076		2,076		—		—
Total	$	1,301	$	540	$	312	$	2,153	$	514,789	$	516,942	$	8	$	6,991



	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 December 31, 2016, December 31, 2015 and December 31, 2014 were as follows:



	As of and for the Twelve Months Ended
	December 31, 2016
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate		Commercial		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	—			(535		)	—		—		(30		)	(42		)	—			(607		)
Recoveries	144			124			8		11		49			5			—			341
Provision (recovery)	(469		)	81			246		13		(59		)	6			(6		)	(188		)
Ending balance	$	450		$	1,992		$	1,522	$	235	$	69		$	22		$	215		$	4,505
Ending balance: Individually evaluated for impairment	$	—		$	268		$	102	$	15	$	—		$	—		$	—		$	385
Ending balance: collectively evaluated for impairment	$	450		$	1,724		$	1,420	$	220	$	69		$	22		$	215		$	4,120
Loans:
Ending balance	$	31,791		$	231,532		$	208,525	$	30,341	$	12,677		$	2,076		$	—		$	516,942
Ending balance individually evaluated for impairment	$	1,320		$	8,608		$	2,864	$	581	$	7		$	—		$	—		$	13,380
Ending balance collectively evaluated for impairment	$	30,471		$	222,924		$	205,661	$	29,760	$	12,670		$	2,076		$	—		$	503,562



	As of and for the Twelve Months Ended
	December 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	(166		)	(152		)	(47		)	—			(66		)	(25		)	—		(456		)
Recoveries	75			142			115			181			33			16			—		562
Provision (recovery)	(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



	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 (recovery)	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

Beginning with the quarter ended December 31, 2015, the Company changed its allowance methodology for the risk scale used in calculating the environmental factors portion of the general reserves assigned to unimpaired credits. During this quarter, management determined it necessary to adjust each of the risk scores assigned to all nine current environmental factors due to changes that had occurred both internally and outside of the Company that have an impact on payment defaults, collateral values, risk ratings, etc. The Company believes that the revised risk scale is more indicative of the losses and risks inherent in the portfolio.

The following table represents the effect on the loan loss provision for the year ended December 31, 2015 as a result of the change in allowance methodology from that used in prior periods. No similar changes to the methodology were made in the current period.



(in thousands)	Calculated Provision Based on Current Methodology			Calculation Provision Based on Prior Methodology			Difference
Portfolio Segment:
Construction and Farmland	$	(85	)	$	(118	)	$	33
Residential Real Estate	355			173			182
Commercial Real Estate	(147		)	(280		)	133
Commercial	(434		)	(457		)	23
Consumer	39			28			11
All Other Loans	20			19			1
Total, excluding unallocated	$	(252	)	$	(635	)	$	383

Impaired loans by class at December 31, 2016 and December 31, 2015 were as follows:



	As of and for the Year Ended
	December 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	$	311	$	299	$	—	$	356	$	21
Commercial Real Estate:
Owner Occupied	869		772		—		778		15
Non-owner occupied	1,298		1,066		—		1,137		13
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	1,320		1,324		—		1,358		75
Consumer:
Installment	8		8		—		9		—
Residential:
Equity lines	17		17		—		18		—
Single family	7,072		6,849		—		6,930		170
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	10,895	$	10,335	$	—	$	10,586	$	294
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	283	$	283	$	15	$	298	$	14
Commercial Real Estate:
Owner Occupied	203		203		37		205		10
Non-owner occupied	824		826		65		834		37
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	—		—		—		—		—
Residential:
Equity lines	458		115		56		120		—
Single family	1,678		1,638		212		1,676		60
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	3,446	$	3,065	$	385	$	3,133	$	121
Total:
Commercial	$	594	$	582	$	15	$	654	$	35
Commercial Real Estate	3,194		2,867		102		2,954		75
Construction and Farmland	1,320		1,324		—		1,358		75
Consumer	8		8		—		9		—
Residential	9,225		8,619		268		8,744		230
Other	—		—		—		—		—
Total	$	14,341	$	13,400	$	385	$	13,719	$	415

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



	As of and for the Year Ended
	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, and any partial charge-offs.

For the year ended December 31, 2014, the average recorded investment of impaired loans was $19.1 million. The interest income recognized on impaired loans was $454 thousand in 2014.

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 December 31, 2016 and December 31, 2015 was as follows:



	As of
	December 31, 2016
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	25,951	$	3,858	$	170	$	362	$	—	$	—	$	30,341
Commercial Real Estate:
Owner Occupied	99,365		13,050		1,766		742		431		—		115,354
Non-owner occupied	60,259		30,515		891		1,506		—		—		93,171
Construction and Farmland:
Residential	4,627		50		—		—		—		—		4,677
Commercial	21,105		5,349		314		346		—		—		27,114
Residential:
Equity Lines	30,791		382		—		17		116		—		31,306
Single family	182,404		6,850		724		6,533		149		—		196,660
Multifamily	3,032		534		—		—		—		—		3,566
All other loans	2,076		—		—		—		—		—		2,076
Total	$	429,610	$	60,588	$	3,865	$	9,506	$	696	$	—	$	504,265



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	12,641	$	36



	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 Farmland:
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

One consumer loan totaling $5 thousand was rated below Pass at December 31, 2016. No consumer loans were rated below Pass at December 31, 2015.