4. Allowance for Loan Losses

6 Months Ended

Jun. 30, 2017

Allowance For Loan Losses

4. Allowance for Loan Losses

A summary of changes in the allowance for loan losses (dollars in thousands) for June 30, 2017 and December 31, 2016 is as follows:

June 30, 2017	Beginning Balance		Charge-offs		Recoveries		Provision			Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	3,381	$	-	$	-	$	(134	)	$	3,247	$	1,981	$	1,266
Farmland		34		-		-		(7	)		27		-		27
Real Estate		843		-		2		(73	)		772		218		554
Multi-Family		23		-		-		(7	)		16		-		16
Commercial Real Estate		705		-		8		(72	)		641		-		641
Home Equity – closed end		75		6		-		4			73		-		73
Home Equity – open end		470		1		-		(92	)		377		-		377
Commercial & Industrial – Non-Real Estate		586		31		54		(201	)		408		-		408
Consumer		78		23		5		46			106		-		106
Dealer Finance		1,289		941		618		525			1,491		18		1,473
Credit Cards		59		28		16		11			58		-		58
Total	$	7,543	$	1,030	$	703	$	-		$	7,216	$	2,217	$	4,999

December 31, 2016	Beginning Balance		Charge-offs		Recoveries		Provision			Ending Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	4,442	$	356	$	7	$	(712	)	$	3,381	$	1,853	$	1,528
Farmland		95		-		-		(61	)		34		-		34
Real Estate		806		23		4		56			843		221		622
Multi-Family		71		-		-		(48	)		23		-		23
Commercial Real Estate		445		19		135		144			705		-		705
Home Equity – closed end		174		8		-		(91	)		75		-		75
Home Equity – open end		634		370		120		86			470		60		410
Commercial & Industrial – Non-Real Estate		1,055		293		267		(443	)		586		-		586
Consumer		108		37		19		(12	)		78		-		78
Dealer Finance		836		1,081		417		1,117			1,289		20		1,269
Credit Cards		115		74		54		(36	)		59		-		59
Total	$	8,781	$	2,261	$	1,023	$	-		$	7,543	$	2,154	$	5,389

The following table presents the recorded investment in loans (dollars in thousands) based on impairment method as of June 30, 2017 and December 31, 2016:

June 30, 2017	Loan Receivable		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	73,184	$	10,993	$	62,191
Farmland		15,024		1,858		13,166
Real Estate		174,179		1,943		172,236
Multi-Family		8,607		-		8,607
Commercial Real Estate		149,635		100		149,535
Home Equity – closed end		11,392		-		11,392
Home Equity –open end		54,345		-		54,345
Commercial & Industrial – Non-Real Estate		35,708		165		35,543
Consumer		7,387		11		7,376
Dealer Finance		71,221		90		71,131
Credit Cards		2,753		-		2,753
	$	603,435	$	15,160	$	588,275
Total

December 31, 2016	Loan Receivable		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	76,172	$	9,888	$	66,284
Farmland		12,901		-		12,901
Real Estate		172,758		1,974		170,784
Multi-Family		7,605		-		7,605
Commercial Real Estate		150,061		2,910		147,151
Home Equity – closed end		11,453		-		11,453
Home Equity –open end		54,420		-		54,420
Commercial & Industrial – Non-Real Estate		31,306		170		31,136
Consumer		6,643		13		6,630
Dealer Finance		65,495		87		65,408
Credit Cards		2,822		-		2,822
	$	591,636	$	15,042	$	576,594
Total

The following table shows the Company’s loan portfolio broken down by internal loan grade (dollars in thousands) as of June 30, 2107 and December 31, 2016:

June 30, 2017	Grade 1 Minimal Risk		Grade 2 Modest Risk		Grade 3 Average Risk		Grade 4 Acceptable Risk		Grade 5 Marginally Acceptable		Grade 6 Watch		Grade 7 Substandard		Grade 8 Doubtful		Total
Construction/Land Development	$	-	$	602	$	13,683	$	34,210	$	9,709	$	5,588	$	9,392	$	-	$	73,184
Farmland		64		333		3,146		4,336		3,440		1,847		1,858		-		15,024
Real Estate		-		1,104		53,276		91,305		20,840		5,162		2,492		-		174,179
Multi-Family		-		270		4,935		3,221		181		-		-		-		8,607
Commercial Real Estate		-		2,771		38,935		95,832		10,241		1,265		591		-		149,635
Home Equity – closed end		-		283		3,883		4,335		1,457		1,428		6		-		11,392
Home Equity – open end		84		1,962		16,294		31,336		4,046		173		450		-		54,345
Commercial & Industrial (Non-Real Estate)		293		840		13,218		19,125		1,485		735		12		-		35,708
Consumer (excluding dealer)		55		315		2,497		795		1,235		2,031		459		-		7,387
Total	$	496	$	8,480	$	149,867	$	284,495	$	52,634	$	18,229	$	15,260	$	-	$	529,461

	Credit Cards		Dealer Finance
Performing	$	2,752	$	70,984
Non performing		1		237
Total	$	2,753	$	71,221

December 31, 2016	Grade 1 Minimal Risk		Grade 2 Modest Risk		Grade 3 Average Risk		Grade 4 Acceptable Risk		Grade 5 Marginally Acceptable		Grade 6 Watch		Grade 7 Substandard		Grade 8 Doubtful		Total
Construction/Land Development	$	-	$	1,478	$	10,870	$	43,863	$	8,399	$	2,473	$	9,089	$	-	$	76,172
Farmland		65		-		3,073		3,456		4,446		1,861		-		-		12,901
Real Estate		-		1,149		62,168		74,242		28,266		4,680		2,253		-		172,758
Multi-Family		-		311		3,009		4,099		186		-		-		-		7,605
Commercial Real Estate		-		2,793		32,986		91,157		19,181		1,840		2,104		-		150,061
Home Equity – closed end		-		150		3,966		4,139		1,746		1,414		38		-		11,453
Home Equity – open end		124		1,724		16,415		30,974		4,547		125		511		-		54,420
Commercial & Industrial (Non-Real Estate)		1,375		1,267		6,827		19,530		2,198		39		70		-		31,306
Consumer (excluding dealer)		67		174		1,837		607		1,242		2,252		466		-		6,643
Total	$	1,631	$	9,046	$	141,151	$	272,065	$	70,211	$	14,684	$	14,531	$	-	$	523,319

	Credit Cards		Dealer Finance
Performing	$	2,822	$	65,291
Non performing		-		204
Total	$	2,822	$	65,495

Description of internal loan grades:

Grade 1 – Minimal Risk:   Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.

Grade 2 – Modest Risk:  Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.

Grade 3 – Average Risk:  Borrower generates sufficient cash flow to fund debt service.  Employment (or business) is stable with good future trends.  Credit is very good.

Grade 4 – Acceptable Risk:  Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must be covered through additional long term debt.  Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.

Grade 5 – Marginally acceptable:  Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable.  Employment or business stability may be weak or deteriorating.  May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects.  Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.

Grade 6 – Watch:  Loans are currently protected, but are weak due to negative balance sheet or income statement trends.  There may be a lack of effective control over collateral or the existence of documentation deficiencies.  These loans have potential weaknesses that deserve management’s close attention.  Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness.  Existing loans that become 60 or more days past due are placed in this category pending a return to current status.

Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable.  Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt.  Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.

Grade 8 – Doubtful:  The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety.  Cash flow is insufficient to service the debt.  It may be difficult to project the exact amount of loss, but the probability of some loss is great.  Loans are to be placed on non-accrual status when any portion is classified doubtful.

Credit card and dealer finance loans are classified as performing or nonperforming.  A loan is nonperforming when payments of principal and interest are past due 90 days or more.