NOTE 4. ALLOWANCE FOR LOAN LOSSES

The table below shows a summary of the activity in the allowance for loan losses for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands).

	December 31,
	2016			2015			2014
Balance, beginning of period	$	6,128		$	4,630		$	3,380
Provision for loan losses		2,079			1,865			1,628
Loans charged-off		(1,228	)		(630	)		(459	)
Recoveries		72			263			81
Balance, end of period	$	7,051		$	6,128		$	4,630

The following tables outline the activity in the allowance for loan losses by collateral type for the years ended December 31, 2016, 2015 and 2014, and show both the allowance and portfolio balances for loans individually and collectively evaluated for impairment as of December 31, 2016, 2015 and 2014 (dollars in thousands).

Allowance for Loan Losses and Recorded Investment in Loans Receivable

	December 31, 2016
	Construction &										Commercial			Commercial &
	Development			Farmland		1-4 Family			Multifamily		Real Estate			Industrial		Consumer			Total
Allowance for loan losses:
Beginning balance	$	644		$	22	$	1,213		$	246	$	2,156		$	513	$	1,334		$	6,128
Charge-offs		(27	)		-		(57	)		-		(526	)		-		(618	)		(1,228	)
Recoveries		14			-		13			-		1			20		24			72
Provision		(52	)		38		208			109		868			226		682			2,079
Ending balance	$	579		$	60	$	1,377		$	355	$	2,499		$	759	$	1,422		$	7,051
Ending allowance balance for loans individually evaluated for impairment	$	-		$	-	$	-		$	-	$	-		$	136	$	287		$	423
Ending allowance balance for loans collectively evaluated for impairment	$	579		$	60	$	1,377		$	355	$	2,499		$	623	$	1,135		$	6,628
Ending allowance balance for loans acquired with deteriorated credit quality	$	-		$	-	$	-		$	-	$	-		$	-	$	-		$	-
Loans receivable:
Balance of loans individually evaluated for impairment	$	645		$	-	$	1,673		$	-	$	608		$	443	$	1,008		$	4,377
Balance of loans collectively evaluated for impairment		90,092			8,207		175,532			42,759		380,108			84,934		107,417		$	889,049
Total period-end balance	$	90,737		$	8,207	$	177,205		$	42,759	$	380,716		$	85,377	$	108,425		$	893,426
Balance of loans acquired with deteriorated credit quality	$	660		$	-	$	494		$	1,022	$	-		$	-	$	-		$	2,176

	December 31, 2015
	Construction &										Commercial		Commercial &
	Development			Farmland		1-4 Family			Multifamily		Real Estate		Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	526		$	18	$	909		$	137	$	1,571	$	390		$	1,079		$	4,630
Charge-offs		(17	)		-		(78	)		-		-		(58	)		(477	)		(630	)
Recoveries		25			-		12			-		1		197			28			263
Provision		110			4		370			109		584		(16	)		704			1,865
Ending balance	$	644		$	22	$	1,213		$	246	$	2,156	$	513		$	1,334		$	6,128
Ending allowance balance for loans individually evaluated for impairment	$	-		$	-	$	-		$	-	$	-	$	-		$	220		$	220
Ending allowance balance for loans collectively evaluated for impairment	$	644		$	22	$	1,213		$	246	$	2,156	$	513		$	1,114		$	5,908
Ending allowance balance for loans acquired with deteriorated credit quality	$	-		$	-	$	-		$	-	$	-	$	-		$	-		$	-
Loans receivable:
Balance of loans individually evaluated for impairment	$	1,242		$	-	$	1,419		$	-	$	630	$	-		$	754		$	4,045
Balance of loans collectively evaluated for impairment		80,621			2,955		154,881			29,694		287,953		69,961			115,331			741,396
Total period-end balance	$	81,863		$	2,955	$	156,300		$	29,694	$	288,583	$	69,961		$	116,085		$	745,441
Balance of loans acquired with deteriorated credit quality	$	737		$	-	$	852		$	1,062	$	-	$	-		$	39		$	2,690

	December 31, 2014
	Construction &									Commercial			Commercial &
	Development		Farmland		1-4 Family			Multifamily		Real Estate			Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance	$	420	$	4	$	567		$	101	$	992		$	397		$	899		$	3,380
Charge-offs		-		-		(123	)		-		(3	)		(16	)		(317	)		(459	)
Recoveries		1		-		4			-		1			17			58			81
Provision		105		14		461			36		581			(8	)		439			1,628
Ending balance	$	526	$	18	$	909		$	137	$	1,571		$	390		$	1,079		$	4,630
Ending allowance balance for loans individually evaluated for impairment	$	-	$	-	$	-		$	-	$	-		$	-		$	70		$	70
Ending allowance balance for loans collectively evaluated for impairment	$	526	$	18	$	909		$	137	$	1,571		$	390		$	1,009		$	4,560
Ending allowance balance for loans acquired with deteriorated credit quality	$	-	$	-	$	-		$	-	$	-		$	-		$	-		$	-
Loans receivable:
Balance of loans individually evaluated for impairment	$	1,543	$	-	$	837		$	-	$	749		$	179		$	260		$	3,568
Balance of loans collectively evaluated for impairment		69,807		2,919		136,682			17,458		224,309			54,008			114,039			619,222
Total period-end balance	$	71,350	$	2,919	$	137,519		$	17,458	$	225,058		$	54,187		$	114,299		$	622,790
Balance of loans acquired with deteriorated credit quality	$	820	$	-	$	858		$	1,054	$	-		$	-		$	46		$	2,778

Impaired Loans

The Company considers a loan to be impaired when, based on current information and events, the Company determines that it will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. Determination of impairment is treated the same across all classes of loans. When the Company identifies a loan as impaired, it measures the impairment based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loans is the operation or liquidation of the collateral. In these cases when foreclosure is probable, the Company uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If the Company determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), the Company recognizes impairment through an allowance estimate or a charge-off to the allowance.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual, contractual interest is credited to interest income when received, under the cash basis method.

The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Also presented is the average recorded investment of the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. The average balances are calculated based on the month-end balances of the loans during the period reported (dollars in thousands).

	As of and for the year ended December 31, 2016
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Construction and development	$	645	$	661	$	-	$	1,024	$	90
1-4 Family		1,673		1,701		-		1,910		66
Commercial real estate		608		623		-		1,742		7
Total mortgage loans on real estate		2,926		2,985		-		4,676		163
Commercial and industrial		15		16		-		1,509		-
Consumer		153		166		-		399		11
Total		3,094		3,167		-		6,584		174

With related allowance recorded:
Commercial and industrial		428		430		136		144		-
Consumer		855		873		287		506		6
Total		1,283		1,303		423		650		6

Total loans:
Construction and development		645		661		-		1,024		90
1-4 Family		1,673		1,701		-		1,910		66
Commercial real estate		608		623		-		1,742		7
Total mortgage loans on real estate		2,926		2,985		-		4,676		163
Commercial and industrial		443		446		136		1,653		-
Consumer		1,008		1,039		287		905		17
Total	$	4,377	$	4,470	$	423	$	7,234	$	180

	As of and for the year ended December 31, 2015
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Construction and development	$	1,242	$	1,241	$	-	$	1,349	$	17
1-4 Family		1,419		1,416		-		1,522		52
Commercial real estate		630		629		-		844		49
Total mortgage loans on real estate		3,291		3,286		-		3,715		118
Commercial and industrial		-		-		-		66		45
Consumer		159		159		-		266		26
Total		3,450		3,445		-		4,047		189

With related allowance recorded:
Consumer		595		595		220		210		15
Total		595		595		220		210		15

Total loans:
Construction and development		1,242		1,241		-		1,349		17
1-4 Family		1,419		1,416		-		1,522		52
Commercial real estate		630		629		-		844		49
Total mortgage loans on real estate		3,291		3,286		-		3,715		118
Commercial and industrial		-		-		-		66		45
Consumer		754		754		220		476		41
Total	$	4,045	$	4,040	$	220	$	4,257	$	204

	As of and for the year ended December 31, 2014
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Construction and development	$	1,543	$	1,542	$	-	$	1,530	$	41
1-4 Family		837		837		-		900		30
Commercial real estate		749		749		-		764		24
Total mortgage loans on real estate		3,129		3,128		-		3,194		95
Commercial and industrial		179		179		-		312		1
Consumer		80		79		-		97		10
Total		3,387		3,386		-		3,603		106

With related allowance recorded:
Consumer		180		180		70		179		4
Total		180		180		70		179		4

Total loans:
Construction and development		1,543		1,542		-		1,530		41
1-4 Family		837		837		-		900		30
Commercial real estate		749		749		-		764		24
Total mortgage loans on real estate		3,129		3,128		-		3,194		95
Commercial and industrial		179		179		-		312		1
Consumer		260		259		70		276		14
Total	$	3,568	$	3,566	$	70	$	3,782	$	110

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”). The Company strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before such loans reach nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that provide for a reduction of either interest or principal, the Company measures any impairment on the restructuring as previously noted for impaired loans.

Loans classified as TDRs, consisting of eighteen credits, totaled approximately $2.4 million at December 31, 2016, compared to eleven credits totaling $2.2 million at December 31, 2015. Sixteen of the eighteen TDRs were acquired. Eight of the restructured loans were considered TDRs due to modification of terms through adjustments to maturity, nine of the restructured loans were considered TDRs due to a reduction in the interest rate to a rate lower than the current market rate, and one restructured loan was considered a TDR due to modification of terms through principal payment forbearance only for a specified period of time. As of December 31, 2016, all restructured loans were performing under their modified terms. As of December 31, 2015, three of the restructured loans with a balance of $0.5 million were in default of their modified terms and included in nonaccrual loans. The Company individually evaluates each TDR for allowance purposes, primarily based on collateral value, and excludes these loans from the loan population that is evaluated by applying qualitative factors.

The table below presents the TDR pre- and post-modification outstanding recorded investments by loan categories for loans modified during the years ended December 31, 2016 and 2015 (dollars in thousands).

	December 31, 2016					December 31, 2015
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
Troubled debt restructurings	Contracts	Investment		Investment		Contracts	Investment		Investment
Construction and development	-	$	-	$	-	1	$	28	$	28
1-4 Family	9		436		436	3		981		981
Commercial real estate	-		-		-	2		630		630
		$	436	$	436		$	1,639	$	1,639

At December 31, 2016 and 2015, there were no loans modified under troubled debt restructurings during the previous twelve month period that subsequently defaulted during the years ended December 31, 2016 and 2015, respectively.

The following is a summary of accruing and nonaccrual TDRs and the related loan losses by portfolio type as of the dates presented (dollars in thousands).

	TDRs

							Related
	Accruing		Nonaccrual		Total		Allowance
December 31, 2016
Construction and development	$	165	$	-	$	165	$	-
1-4 Family		1,626		-		1,626		-
Commercial real estate		608		-		608		-
Total	$	2,399	$	-	$	2,399	$	-

December 31, 2015
Construction and development	$	180	$	-	$	180	$	-
1-4 Family		878		449		1,327		-
Commercial and industrial		532		97		629		-
Consumer		39		-		39
Total	$	1,629	$	546	$	2,175	$	-

The table below includes the average recorded investment and interest income recognized for TDRs for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands).

	TDRs
	Average Recorded Investment		Interest Income Recognized
December 31, 2016
Construction and development	$	171	$	13
1-4 Family		1,614		66
Commercial real estate		617		7
Total	$	2,402	$	86

December 31, 2015
Construction and development	$	181	$	13
1-4 Family		1,240		52
Commercial real estate		371		9
Consumer		42		6
Total	$	1,834	$	80

December 31, 2014
Construction and development	$	187	$	11
Commercial real estate		359		19
Commercial and industrial		2		-
Consumer		48		4
Total	$	596	$	34