NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the six months ended June 30, 2017 and 2016 and the year ended December 31, 2016 were as follows:



	Six Months Ended			Year Ended			Six Months Ended
	June 30,			December 31,			June 30,
	2017			2016			2016
				(in thousands)
Balance, beginning	$	4,505		$	4,959		$	4,959
(Recovery of) provision for loan losses	(757		)	(188		)	79
Recoveries added to the allowance	799			341			90
Loan losses charged to the allowance	(140		)	(607		)	(155		)
Balance, ending	$	4,407		$	4,505		$	4,973

Nonaccrual and past due loans by class at June 30, 2017 and December 31, 2016 were as follows:



	June 30, 2017
	(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	$	—	$	—	$	—	$	—	$	35,678	$	35,678	$	—	$	237
Commercial Real Estate:
Owner Occupied	415		—		—		415		125,014		125,429		—		415
Non-owner occupied	49		—		—		49		112,968		113,017		—		183
Construction and Farmland:
Residential	—		—		—		—		3,519		3,519		—		—
Commercial	—		—		—		—		32,259		32,259		—		—
Consumer:
Installment	28		2		6		36		12,507		12,543		—		16
Residential:
Equity Lines	67		—		—		67		32,409		32,476		—		108
Single family	699		197		4,283		5,179		187,896		193,075		—		4,642
Multifamily	—		—		—		—		4,367		4,367		—		—
All Other Loans	—		—		—		—		1,816		1,816		—		—
Total	$	1,258	$	199	$	4,289	$	5,746	$	548,433	$	554,179	$	—	$	5,601



	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 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

Allowance for loan losses by segment at June 30, 2017 and December 31, 2016 were as follows:



	As of and For the Six Months Ended
	June 30, 2017
	(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	$	450		$	1,992		$	1,522		$	235		$	69		$	22		$	215	$	4,505
Charge-Offs	—			(33		)	—			(58		)	(24		)	(25		)	—		(140		)
Recoveries	504			163			93			14			23			2			—		799
(Recovery of) provision for loan losses	(547		)	(296		)	(33		)	93			(3		)	23			6		(757		)
Ending balance	$	407		$	1,826		$	1,582		$	284		$	65		$	22		$	221	$	4,407
Ending balance: Individually evaluated for impairment	$	—		$	205		$	64		$	2		$	—		$	—		$	—	$	271
Ending balance: collectively evaluated for impairment	$	407		$	1,621		$	1,518		$	282		$	65		$	22		$	221	$	4,136
Loans:
Ending balance	$	35,778		$	229,918		$	238,446		$	35,678		$	12,543		$	1,816		$	—	$	554,179
Ending balance individually evaluated for impairment	$	331		$	8,571		$	1,748		$	504		$	16		$	—		$	—	$	11,170
Ending balance collectively evaluated for impairment	$	35,447		$	221,347		$	236,698		$	35,174		$	12,527		$	1,816		$	—	$	543,009



	As of and for the Twelve Months Ended
	December 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	—			(535		)	—		—		(30		)	(42		)	—			(607		)
Recoveries	144			124			8		11		49			5			—			341
(Recovery of) provision for loan losses	(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

Impaired loans by class as of and for the periods ended June 30, 2017 and December 31, 2016 were as follows:



	As of and for the Six Months Ended
	June 30, 2017
	(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	$	258	$	237	$	—	$	266	$	7
Commercial Real Estate:
Owner Occupied	865		750		—		753		7
Non-owner occupied	215		184		—		185		—
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	331		331		—		338		14
Consumer:
Installment	17		16		—		17		—
Residential:
Equity lines	236		60		—		62		—
Single family	7,273		7,083		—		7,172		60
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	9,195	$	8,661	$	—	$	8,793	$	88
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	267	$	267	$	2	$	276	$	6
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	815		817		64		821		18
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	—		—		—		—		—
Residential:
Equity lines	218		48		48		48		—
Single family	1,400		1,392		157		1,401		31
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	2,700	$	2,524	$	271	$	2,546	$	55
Total:
Commercial	$	525	$	504	$	2	$	542	$	13
Commercial Real Estate	1,895		1,751		64		1,759		25
Construction and Farmland	331		331		—		338		14
Consumer	17		16		—		17		—
Residential	9,127		8,583		205		8,683		91
Other	—		—		—		—		—
Total	$	11,895	$	11,185	$	271	$	11,339	$	143

(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, 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, net deferred loan fees or costs, and any partial charge-offs.

The average recorded investment for impaired loans for the three months ended June 30, 2017 was $11.3 million. The interest income recognized on impaired loans for the three months ended June 30, 2017 was $75 thousand.

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. Consumer loans are evaluated for collection based on payment performance. 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 June 30, 2017 and December 31, 2016 was as follows:



	As of
	June 30, 2017
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	31,883	$	3,435	$	113	$	247	$	—	$	—	$	35,678
Commercial Real Estate:
Owner Occupied	109,982		13,675		1,022		335		415		—		125,429
Non-owner occupied	81,629		29,556		1,416		416		—		—		113,017
Construction and Farmland:
Residential	3,430		89		—		—		—		—		3,519
Commercial	21,976		9,952		—		331		—		—		32,259
Residential:
Equity Lines	31,917		451		—		—		108		—		32,476
Single family	179,100		6,757		525		6,549		144		—		193,075
Multifamily	4,367		—		—		—		—		—		4,367
All other loans	1,816		—		—		—		—		—		1,816
Total	$	466,100	$	63,915	$	3,076	$	7,878	$	667	$	—	$	541,636



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	12,507	$	36



	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 Farm land:
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