NOTE 5. Allowance for Loan Losses

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



	Nine Months Ended			Year Ended			Nine Months Ended
	September 30,			December 31,			September 30,
	2017			2016			2016
				(in thousands)
Balance, beginning	$	4,505		$	4,959		$	4,959
(Recovery of) provision for loan losses	(759		)	(188		)	(46		)
Recoveries added to the allowance	908			341			217
Loan losses charged to the allowance	(210		)	(607		)	(472		)
Balance, ending	$	4,444		$	4,505		$	4,658

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



	September 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	$	—	$	—	$	—	$	—	$	35,925	$	35,925	$	—	$	217
Commercial Real Estate:
Owner Occupied	—		—		—		—		127,603		127,603		—		—
Non-owner occupied	229		—		—		229		109,887		110,116		—		408
Construction and Farmland:
Residential	—		—		—		—		2,527		2,527		—		—
Commercial	—		—		19		19		34,124		34,143		19		—
Consumer:
Installment	28		3		—		31		11,571		11,602		—		3
Residential:
Equity Lines	24		—		46		70		32,203		32,273		—		103
Single family	1,132		40		4,201		5,373		186,523		191,896		—		4,355
Multifamily	—		—		—		—		4,309		4,309		—		—
All Other Loans	—		—		—		—		1,766		1,766		—		—
Total	$	1,413	$	43	$	4,266	$	5,722	$	546,438	$	552,160	$	19	$	5,086



	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 September 30, 2017 and December 31, 2016 were as follows:



	As of and for the Nine Months Ended
	September 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	—			(50		)	—		(58		)	(58		)	(44		)	—			(210		)
Recoveries	522			233			93		28			28			4			—			908
(Recovery of) provision for loan losses	(789		)	(253		)	77		176			32			46			(48		)	(759		)
Ending balance	$	183		$	1,922		$	1,692	$	381		$	71		$	28		$	167		$	4,444
Ending balance: Individually evaluated for impairment	$	—		$	201		$	58	$	9		$	—		$	—		$	—		$	268
Ending balance: collectively evaluated for impairment	$	183		$	1,721		$	1,634	$	372		$	71		$	28		$	167		$	4,176
Loans:
Ending balance	$	36,670		$	228,478		$	237,719	$	35,925		$	11,602		$	1,766		$	—		$	552,160
Ending balance individually evaluated for impairment	$	323		$	8,243		$	1,552	$	475		$	3		$	—		$	—		$	10,596
Ending balance collectively evaluated for impairment	$	36,347		$	220,235		$	236,167	$	35,450		$	11,599		$	1,766		$	—		$	541,564



	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 September 30, 2017 and December 31, 2016 were as follows:



	As of and for the Nine Months Ended
	September 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	$	204	$	1	$	—	$	16	$	9
Commercial Real Estate:
Owner Occupied	333		333		—		337		11
Non-owner occupied	442		408		—		415		7
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	369		324		—		334		21
Consumer:
Installment	3		3		—		4		—
Residential:
Equity lines	234		57		—		61		—
Single family	6,958		6,770		—		6,825		89
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	8,543	$	7,896	$	—	$	7,992	$	137
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	510	$	476	$	9	$	515	$	9
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	811		813		58		819		28
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	—		—		—		—		—
Residential:
Equity lines	217		46		46		46		—
Single family	1,448		1,384		155		1,398		42
Multifamily	—		—		—		—		—
Other Loans	—		—		—		—		—
	$	2,986	$	2,719	$	268	$	2,778	$	79
Total:
Commercial	$	714	$	477	$	9	$	531	$	18
Commercial Real Estate	1,586		1,554		58		1,571		46
Construction and Farmland	369		324		—		334		21
Consumer	3		3		—		4		—
Residential	8,857		8,257		201		8,330		131
Other	—		—		—		—		—
Total	$	11,529	$	10,615	$	268	$	10,770	$	216

(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 September 30, 2017 was $10.7 million. The interest income recognized on impaired loans for the three months ended September 30, 2017 was $67 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 September 30, 2017 and December 31, 2016 was as follows:



	As of
	September 30, 2017
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	32,247	$	3,438	$	15	$	225	$	—	$	—	$	35,925
Commercial Real Estate:
Owner Occupied	114,632		9,859		2,779		333		—		—		127,603
Non-owner occupied	79,399		21,354		8,955		408		—		—		110,116
Construction and Farmland:
Residential	2,081		446		—		—		—		—		2,527
Commercial	22,165		11,348		308		322		—		—		34,143
Residential:
Equity Lines	31,789		381		—		—		103		—		32,273
Single family	179,184		5,932		401		6,238		141		—		191,896
Multifamily	3,795		514		—		—		—		—		4,309
All other loans	1,766		—		—		—		—		—		1,766
Total	$	467,058	$	53,272	$	12,458	$	7,526	$	244	$	—	$	540,558



	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	11,571	$	31



	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