Note 8: Allowance for Loan Losses

Loans Evaluated for Impairment

Loan receivables evaluated for impairment individually and collectively by segment as of March 31, 2017 and December 31, 2016 are as follows:


(Dollars in thousands)	Mortgage Loans		Commercial and		Consumer and Other
As of March 31, 2017	on Real Estate		Industrial		Loans		Total
Individually evaluated for impairment	$	9,940	$	92	$	—	$	10,032
Collectively evaluated for impairment		345,383		46,113		3,324		394,820

Total Gross Loans	$	355,323	$	46,205	$	3,324	$	404,852


As of December 31, 2016
Individually evaluated for impairment	$	10,323	$	92	$	—	$	10,415
Collectively evaluated for impairment		328,118		42,932		3,544		374,594

Total Gross Loans	$	338,441	$	43,024	$	3,544	$	385,009

Allowance for Loan Losses

The allowance for loan losses disaggregated based on loan receivables evaluated for impairment individually and collectively by segment as of March 31, 2017 and December 31, 2016 are as follows:


(Dollars in thousands)	Mortgage Loans		Commercial and		Consumer
As of March 31, 2017	on Real Estate		Industrial		Loans		Total
Individually evaluated for impairment	$	694	$	92	$	—	$	786
Collectively evaluated for impairment		2,727		436		44		3,207

Total allowance for loan losses	$	3,421	$	528	$	44	$	3,993


As of December 31, 2016	Mortgage Loans on Real Estate		Commercial and Industrial		Consumer Loans		Total
Individually evaluated for impairment	$	803	$	92	$	—	$	895
Collectively evaluated for impairment		2,515		401		52		2,968

Total allowance for loan losses	$	3,318	$	493	$	52	$	3,863

A disaggregation and an analysis of the change in the allowance for loan losses by segment is shown below.


(Dollars in thousands) For the Three Months Ended March 31, 2017	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer Loans			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	3,318		$	493		$	52		$	3,863
(Charge-offs)		(132	)		—			(8	)		(140	)
Recoveries		78			—			2			80
Provision		157			35			(2	)		190

Ending Balance	$	3,421		$	528		$	44		$	3,993


For the Three Months Ended March 31, 2016	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer Loans			Total
ALLOWANCE FOR LOAN LOSSES:
Beginning Balance	$	3,502		$	599		$	122		$	4,223
(Charge-offs)		(83	)		—			(11	)		(94	)
Recoveries		6			5			2			13
(Recovery) provision		(15	)		(25	)		5			(35	)

Ending Balance	$	3,410		$	579		$	118		$	4,107

Internal Risk Rating Grades

Internal risk rating grades are generally assigned to commercial loans not secured by real estate, commercial mortgages, residential mortgages greater than $1 million, smaller residential mortgages which are impaired, loans to real estate developers and contractors, consumer loans greater than $250,000 with chronic delinquency, and TDRs, as shown in the following table. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Risk grades (refer to Note 3) are evaluated as new information becomes available for each borrowing relationship or at least quarterly.


	Construction,				Commercial		Commercial
	Land and				Mortgages		Mortgages		Commercial
(Dollars in thousands)	Land				(Non-Owner		(Owner		and
As of March 31, 2017	Development		Farmland		Occupied)		Occupied)		Industrial		Total
Grade:
Pass	$	36,423	$	994	$	30,571	$	32,412	$	44,441	$	144,841
Watch		5,762		—		4,375		7,732		1,538		19,407
Special mention		179		—		270		—		40		489
Substandard		1,755		—		248		2,406		186		4,595
Doubtful		—		—		—		—		—		—

Total	$	44,119	$	994	$	35,464	$	42,550	$	46,205	$	169,332


	Construction,				Commercial		Commercial
	Land and				Mortgages		Mortgages		Commercial
	Land				(Non-Owner		(Owner		and
As of December 31, 2016	Development		Farmland		Occupied)		Occupied)		Industrial		Total
Grade:
Pass	$	32,009	$	1,023	$	30,639	$	31,191	$	40,841	$	135,703
Watch		5,795		—		4,184		6,652		1,891		18,522
Special mention		180		—		272		1,453		125		2,030
Substandard		1,834		—		248		2,529		167		4,778
Doubtful		—		—		—		—		—		—

Total	$	39,818	$	1,023	$	35,343	$	41,825	$	43,024	$	161,033

Loans not assigned internal risk rating grades are comprised of smaller residential mortgages and smaller consumer loans. Payment activity of these loans is reviewed monthly by management. However, some of these loans are graded when the borrower’s total exposure to the Bank exceeds the limits noted above. Loans are considered to be nonperforming when they are delinquent by 90 days or more or non-accruing and credit risk is primarily evaluated by delinquency status, as shown in the table below.


			Residential
(Dollars in thousands)	Residential		Revolving
As of March 31, 2017	First		and Junior		Consumer
PAYMENT ACTIVITY STATUS	Mortgages (1)		Mortgages (2)		Loans (3)		Total
Performing	$	203,131	$	26,051	$	3,324	$	232,506
Nonperforming		1,975		1,039		—		3,014

Total	$	205,106	$	27,090	$	3,324	$	235,520


			Residential
	Residential		Revolving
As of December 31, 2016	First		and Junior		Consumer
PAYMENT ACTIVITY STATUS	Mortgages (4)		Mortgages (5)		Loans (6)		Total
Performing	$	191,852	$	26,265	$	3,544	$	221,661
Nonperforming		2,155		160		—		2,315

Total	$	194,007	$	26,425	$	3,544	$	223,976

(1)	Residential First Mortgages which have been assigned a risk rating grade of Substandard totaled $3.1million as of March 31, 2017.

(2)	Residential Revolving and Junior Mortgages which have been assigned a risk rating grade of Substandard totaled $1.9 million as of March 31, 2017.

(3)	No Consumer Loans had been assigned a risk rating grade of Substandard as of March 31, 2017.

(4)	Residential First Mortgages which have been assigned a risk rating grade of Substandard totaled $3.3 million as of December 31, 2016.

(5)	Residential Revolving and Junior Mortgages which have been assigned a risk rating grade of Substandard totaled $1.1 million as of December 31, 2016.

(6)	No Consumer Loans had been assigned a risk rating grade of Substandard as of December 31, 2016.

Impaired Loans

The following tables show the Company’s recorded investment and the customers’ unpaid principal balances for impaired loans, with the associated allowance amount, if applicable, as of March 31, 2017 and December 31, 2016, along with the average recorded investment and interest income recognized for the three months ended March 31, 2017 and 2016, respectively.


	As of March 31, 2017						As of December 31, 2016
(Dollars in thousands) IMPAIRED LOANS	Recorded Investment		Customers’ Unpaid Principal Balance		Related Allowance		Recorded Investment		Customers’ Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction, Land and Land Development	$	1,455	$	1,535	$	—	$	1,531	$	1,539	$	—
Residential First Mortgages		2,104		2,171		—		2,112		2,176		—
Residential Revolving and Junior Mortgages (1)		995		999		—		995		999		—
Commercial Mortgages (Non-owner occupied)		248		248		—		248		248		—
Commercial Mortgages (Owner occupied)		2,030		2,351		—		1,860		2,178		—
Commercial and Industrial		—		—		—		—		—		—

		6,832		7,304		—		6,746		7,140		—

With an allowance recorded:
Construction, Land and Land Development		239		285		140		243		286		145
Residential First Mortgages		1,942		1,942		338		1,951		1,951		367
Residential Revolving and Junior Mortgages (1)		526		528		175		544		546		199
Commercial Mortgages (Non-owner occupied)		—		—		—		—		—		—
Commercial Mortgages (Owner occupied)		401		421		41		839		854		92
Commercial and Industrial		92		101		92		92		101		92

		3,200		3,277		786		3,669		3,738		895

Total Impaired Loans:
Construction, Land and Land Development		1,694		1,820		140		1,774		1,825		145
Residential First Mortgages		4,046		4,113		338		4,063		4,127		367
Residential Revolving and Junior Mortgages (1)		1,521		1,527		175		1,539		1,545		199
Commercial Mortgages (Non-owner occupied)		248		248		—		248		248		—
Commercial Mortgages (Owner occupied)		2,431		2,772		41		2,699		3,032		92
Commercial and Industrial		92		101		92		92		101		92

	$	10,032	$	10,581	$	786	$	10,415	$	10,878	$	895

Notes:

(1)	Junior mortgages include equity lines.


	For the three months ended
	March 31, 2017				March 31, 2016
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction, land and land development	$	1,493	$	13	$	991	$	14
Residential First Mortgages		2,108		5		2,783		26
Residential Revolving and Junior Mortgages (1)		995		10		468		9
Commercial Mortgages (Non-owner occupied)		248		4		256		4
Commercial Mortgages (Owner occupied)		2,159		5		1,090		17
Commercial and Industrial		—		—		—		—

		7,003		37		5,588		70

With an allowance recorded:
Construction, land and land development		241		1		260		1
Residential First Mortgages		1,946		24		2,905		21
Residential Revolving and Junior Mortgages (1)		527		5		309		4
Commercial Mortgages (Non-owner occupied)		—		—		—		—
Commercial Mortgages (Owner occupied)		406		—		2,208		14
Commercial and Industrial		92		—		280		1

		3,212		30		5,962		41

Total
Construction, land and land development		1,734		14		1,251		15
Residential First Mortgages		4,054		29		5,688		47
Residential Revolving and Junior Mortgages (1)		1,522		15		777		13
Commercial Mortgages (Non-owner occupied)		248		4		256		4
Commercial Mortgages (Owner occupied)		2,565		5		3,298		31
Commercial and Industrial		92		—		280		1

	$	10,215	$	67	$	11,550	$	111

(1)	Junior mortgages include equity lines.

Smaller non-accruing loans and non-accruing loans that are not graded because they are included in homogenous pools generally do not meet the criteria for impairment testing, and are therefore excluded from impaired loan disclosures. At March 31, 2017 and December 31, 2016, non-accruing loans excluded from impaired loan disclosure totaled $671 thousand and $465 thousand, respectively. If interest on these non-accruing loans had been accrued, such income would have totaled $6 thousand and $2 thousand during the three months ended March 31, 2017 and 2016, respectively.

Loan Modifications

Loans modified as TDRs are considered impaired and are individually evaluated for the amount of impairment in the ALL. There were no new loans modified as TDRs in the first quarter of 2017 or the first quarter of 2016. In addition, no TDRs subsequently defaulted in the first quarter of 2017 or the first quarter of 2016.

Other Real Estate Owned

The table below details the properties included in other real estate owned (“OREO”) as of March 31, 2017 and December 31, 2016. There were no collateralized consumer residential mortgage loans in the process of foreclosure as of March 31, 2017.


	As of March 31, 2017				As of December 31, 2016
	No. of		Carrying		No. of		Carrying
(Dollars in thousands)	Properties		Value		Properties		Value
Residential		2	$	831		2	$	891
Land lots		7		586		7		547
Convenience store		1		60		1		59
Restaurant		1		55		1		55
Commerical properties		3		904		3		942

Total		14	$	2,436		14	$	2,494

Included in other assets as of March 31, 2017 and December 31, 2016, is one residential property purchased in 2013 from a related party with a value of $708 thousand and a former branch, which was closed April 30, 2015, with a value of $403 thousand.