Note 4. Allowance for Loan Losses

The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors.

The following table summarizes the changes in the Company’s allowance for loan losses for the periods indicated.


	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
	(in thousands)
Allowance for loan losses, beginning of period	$	23,863		$	22,245		$	23,075		$	22,318
Loans charged off		(118	)		(129	)		(298	)		(613	)
Recoveries on loans previously charged-off		93			214			345			425

Net recoveries (charge-offs)		(25	)		85			47			(188	)
Provision charged to expense		375			—			1,175			200
Reclassification to other liabilities*		(5	)		—			(89	)		—

Allowance for loan losses, end of period	$	24,208		$	22,330		$	24,208		$	22,330

*	The reclassification relates to allowance for loan losses allocations on unused commitments that have been reclassified to other liabilities.

Further information pertaining to the allowance for loan losses for the three months ending September 30, 2016 follows:


	Construction and Land Development			Commercial and Industrial		Municipal			Commercial Real Estate			Residential Real Estate		Consumer			Home Equity			Unallocated		Total
	(in thousands)
Allowance for loan losses:
Balance at June 30, 2016	$	2,234		$	5,842	$	1,801		$	10,650		$	1,302	$	608		$	1,158		$	268	$	23,863
Charge-offs		—			—		—			—			—		(91	)		(27	)		—		(118	)
Recoveries		—			24		—			—			2		67			—			—		93
Provision		(3	)		307		(29	)		(752	)		624		5			155			68		375
Reclassification to other liabilities		—			—		—			—			—		—			(5	)		—		(5	)

Ending balance at September 30, 2016	$	2,231		$	6,173	$	1,772		$	9,898		$	1,928	$	589		$	1,281		$	336	$	24,208

Amount of allowance for loan losses for loans deemed to be impaired	$	4		$	9	$	—		$	143		$	7	$	—		$	—		$	—	$	163

Amount of allowance for loan losses for loans not deemed to be impaired	$	2,227		$	6,164	$	1,772		$	9,755		$	1,921	$	589		$	1,281		$	336	$	24,045

Loans:
Ending balance	$	19,522		$	549,290	$	145,063		$	692,778		$	222,881	$	11,474		$	200,085		$	—	$	1,841,093

Loans deemed to be impaired	$	95		$	399	$	—		$	3,707		$	208	$	—		$	—		$	—	$	4,409

Loans not deemed to be impaired	$	19,427		$	548,891	$	145,063		$	689,071		$	222,673	$	11,474		$	200,085		$	—	$	1,836,684

Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2016 follows:


	Construction and Land Development			Commercial and Industrial			Municipal		Commercial Real Estate			Residential Real Estate			Consumer			Home Equity			Unallocated			Total
	(in thousands)
Allowance for loan losses:
Balance at December 31, 2015	$	2,041		$	5,899		$	994	$	10,589		$	1,320		$	644		$	1,077		$	511		$	23,075
Charge-offs		—			—			—		—			—			(271	)		(27	)		—			(298	)
Recoveries		—			115			—		—			5			225			—			—			345
Provision		193			188			778		(680	)		605			(6	)		272			(175	)		1,175
Reclassification to other liabilities		(3	)		(29	)		—		(11	)		(2	)		(3	)		(41	)		—			(89	)

Ending balance at September 30, 2016	$	2,231		$	6,173		$	1,772	$	9,898		$	1,928		$	589		$	1,281		$	336		$	24,208

Amount of allowance for loan losses for loans deemed to be impaired	$	4		$	9		$	—	$	143		$	7		$	—		$	—		$	—		$	163

Amount of allowance for loan losses for loans not deemed to be impaired	$	2,227		$	6,164		$	1,772	$	9,755		$	1,921		$	589		$	1,281		$	336		$	24,045

Loans:
Ending balance	$	19,522		$	549,290		$	145,063	$	692,778		$	222,881		$	11,474		$	200,085		$	—		$	1,841,093

Loans deemed to be impaired	$	95		$	399		$	—	$	3,707		$	208		$	—		$	—		$	—		$	4,409

Loans not deemed to be impaired	$	19,427		$	548,891		$	145,063	$	689,071		$	222,673		$	11,474		$	200,085		$	—		$	1,836,684

During the three and nine months ending September 30, 2016, the Company’s provision was primarily attributable to an increase in loan balances.

Further information pertaining to the allowance for loan losses for the three months ending September 30, 2015 follows:


	Construction and Land Development		Commercial and Industrial			Municipal		Commercial Real Estate			Residential Real Estate		Consumer			Home Equity		Unallocated			Total
	(in thousands)
Allowance for loan losses:
Balance at June 30, 2015	$	1,733	$	4,428		$	1,000	$	11,723		$	722	$	709		$	650	$	1,280		$	22,245
Charge-offs		—		(43	)		—		—			—		(86	)		—		—			(129	)
Recoveries		—		75			—		80			1		58			—		—			214
Provision		126		995			117		(1,086	)		115		(2	)		51		(316	)		—

Ending balance at September 30, 2015	$	1,859	$	5,455		$	1,117	$	10,717		$	838	$	679		$	701	$	964		$	22,330

Amount of allowance for loan losses for loans deemed to be impaired	$	11	$	25		$	—	$	98		$	36	$	—		$	91	$	—		$	261

Amount of allowance for loan losses for loans not deemed to be impaired	$	1,848	$	5,430		$	1,117	$	10,619		$	802	$	679		$	610	$	964		$	22,069

Loans:
Ending balance	$	27,308	$	378,154		$	87,016	$	701,523		$	264,105	$	10,633		$	172,091	$	—		$	1,640,830

Loans deemed to be impaired	$	100	$	539		$	—	$	1,692		$	927	$	—		$	91	$	—		$	3,349

Loans not deemed to be impaired	$	27,208	$	377,615		$	87,016	$	699,831		$	263,178	$	10,633		$	172,000	$	—		$	1,637,481

Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2015 follows:


	Construction and Land Development		Commercial and Industrial			Municipal			Commercial Real Estate			Residential Real Estate		Consumer			Home Equity		Unallocated			Total
	(in thousands)
Allowance for loan losses:
Balance at December 31, 2104	$	1,592	$	4,757		$	1,488		$	11,199		$	776	$	810		$	599	$	1,097		$	22,318
Charge-offs		—		(95	)		—			(298	)		—		(220	)		—		—			(613	)
Recoveries		—		147			—			84			5		189			—		—			425
Provision		267		646			(371	)		(268	)		57		(100	)		102		(133	)		200

Ending balance at September 30, 2015	$	1,859	$	5,455		$	1,117		$	10,717		$	838	$	679		$	701	$	964		$	22,330

Amount of allowance for loan losses for loans deemed to be impaired	$	11	$	25		$	—		$	98		$	36	$	—		$	91	$	—		$	261

Amount of allowance for loan losses for loans not deemed to be impaired	$	1,848	$	5,430		$	1,117		$	10,619		$	802	$	679		$	610	$	964		$	22,069

Loans:
Ending balance	$	27,308	$	378,154		$	87,016		$	701,523		$	264,105	$	10,633		$	172,091	$	—		$	1,640,830

Loans deemed to be impaired	$	100	$	539		$	—		$	1,692		$	927	$	—		$	91	$	—		$	3,349

Loans not deemed to be impaired	$	27,208	$	377,615		$	87,016		$	699,831		$	263,178	$	10,633		$	172,000	$	—		$	1,637,481

The Company utilizes a six grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated 1-3 (Pass):

Loans in this category are considered “pass” rated loans with low to average risk.

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of September 30, 2016 and December 31, 2015.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of September 30, 2016 and December 31, 2015.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of September 30, 2016 and December 31, 2015 and are doubtful for full collection.

Impaired:

Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due.

The following table presents the Company’s loans by risk rating at September 30, 2016.


	Construction and Land Development		Commercial and Industrial		Municipal		Commercial Real Estate		Total
	(in thousands)
Grade:
1-3 (Pass)	$	12,453	$	548,891	$	145,063	$	688,887	$	1,395,294
4 (Monitor)		6,974		—		—		184		7,158
5 (Substandard)		—		—		—		—		—
6 (Doubtful)		—		—		—		—		—
Impaired		95		399		—		3,707		4,201

Total	$	19,522	$	549,290	$	145,063	$	692,778	$	1,406,653

The following table presents the Company’s loans by risk rating at December 31, 2015.


	Construction and Land Development		Commercial and Industrial		Municipal		Commercial Real Estate		Total
	(in thousands)
Grade:
1-3 (Pass)	$	20,281	$	451,774	$	85,685	$	718,911	$	1,276,651
4 (Monitor)		7,042		18		—		917		7,977
5 (Substandard)		—		—		—		—		—
6 (Doubtful)		—		—		—		—		—
Impaired		98		443		—		1,678		2,219

Total	$	27,421	$	452,235	$	85,685	$	721,506	$	1,286,847

The Company has increased its exposure to larger loans to large institutions with publically available credit ratings beginning in 2015. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2016 and are included within the total loan portfolio.

Commercial
and
Industrial

Municipal

Commercial
Real
Estate

Total

(in thousands)

Credit Rating:

Aaa – Aa3

331,240

67,427

6,836

405,503

A1 – A3

139,379

33,510

129,853

302,742

Baa1 – Baa3

—

37,088

130,081

167,169

Ba2

—

3,610

—

3,610

Total

470,619

141,635

266,770

879,024

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2015.


	Commercial and Industrial		Municipal		Commercial Real Estate		Total
	(in thousands)
Credit Rating:
Aaa – Aa3	$	234,733	$	63,865	$	7,547	$	306,145
A1 – A3		140,419		7,400		130,872		278,691
Baa1 – Baa3		—		8,890		167,489		176,379
Ba2		—		4,480		—		4,480

Total	$	375,152	$	84,635	$	305,908	$	765,695

The Company utilized payment performance as credit quality indicators for the loan types listed below. The indicators are depicted in the table “aging of past due loans,” below.

Further information pertaining to the allowance for loan losses at September 30, 2016 follows:


	Accruing 30-89 Days Past Due		Non Accrual		Accruing Greater than 90 Days		Total Past Due		Current Loans		Total
	(in thousands)
Construction and land development	$	—	$	95	$	—	$	95	$	19,427	$	19,522
Commercial and industrial		318		49		—		367		548,923		549,290
Municipal		—		—		—		—		145,063		145,063
Commercial real estate		1,313		156		—		1,469		691,309		692,778
Residential real estate		866		656		—		1,522		221,359		222,881
Consumer and overdrafts		24		2		—		26		11,448		11,474
Home equity		563		—		—		563		199,522		200,085

Total	$	3,084	$	958	$	—	$	4,042	$	1,837,051	$	1,841,093

Further information pertaining to the allowance for loan losses at December 31, 2015 follows:


	Accruing 30-89 Days Past Due		Non Accrual		Accruing Greater than 90 Days		Total Past Due		Current Loans		Total
	(in thousands)
Construction and land development	$	—	$	99	$	—	$	99	$	27,322	$	27,421
Commercial and industrial		—		60		—		60		452,175		452,235
Municipal		—		—		—		—		85,685		85,685
Commercial real estate		1,462		174		—		1,636		719,870		721,506
Residential real estate		596		1,559		—		2,155		253,191		255,346
Consumer and overdrafts		6		—		—		6		11,317		11,323
Home equity		628		444		—		1,072		176,948		178,020

Total	$	2,692	$	2,336	$	—	$	5,028	$	1,726,508	$	1,731,536

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include: the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements contained in the Company’s Annual Report for the fiscal year ended December 31, 2015.

The following is information pertaining to impaired loans for September 30, 2016:


	Carrying Value		Unpaid Principal Balance		Required Reserve		Average Carrying Value for 3 Months Ending 9/30/16		Interest Income Recognized for 3 Months Ending 9/30/16		Average Carrying Value for 9 Months Ending 9/30/16		Interest Income Recognized for 9 Months Ending 9/30/16
	(in thousands)
With no required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		228		414		—		51		2		54		7
Municipal		—		—		—		—		—		—		—
Commercial real estate		593		593		—		594		9		310		30
Residential real estate		97		186		—		101		2		106		6
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—

Total	$	918	$	1,193	$	—	$	746	$	13	$	470	$	43

With required reserve recorded:
Construction and land development	$	95	$	108	$	4	$	96	$	—	$	97	$	—
Commercial and industrial		171		187		9		353		2		367		7
Municipal		—		—		—		—		—		—		—
Commercial real estate		3,114		3,219		143		3,128		31		2,251		64
Residential real estate		111		110		7		111		1		387		4
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		36		—

Total	$	3,491	$	3,624	$	163	$	3,688	$	34	$	3,138	$	75

Total:
Construction and land development	$	95	$	108	$	4	$	96	$	—	$	97	$	—
Commercial and industrial		399		601		9		404		4		421		14
Municipal		—		—		—		—		—		—		—
Commercial real estate		3,707		3,812		143		3,722		40		2,561		94
Residential real estate		208		296		7		212		3		493		10
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		36		—

Total	$	4,409	$	4,817	$	163	$	4,434	$	47	$	3,608	$	118

The following is information pertaining to impaired loans for September 30, 2015:


	Carrying Value		Unpaid Principal Balance		Required Reserve		Average Carrying Value for 3 Months Ending 9/30/15		Interest Income Recognized for 3 Months Ending 9/30/15		Average Carrying Value for 9 Months Ending 9/30/15		Interest Income Recognized for 9 Months Ending 9/30/15
	(in thousands)
With no required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		12		12		—		27		—		36		—
Municipal		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		196		—
Residential real estate		119		204		—		122		2		128		6
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—

Total	$	131	$	216	$	—	$	149	$	2	$	360	$	6

With required reserve recorded:
Construction and land development	$	100	$	108	$	11	$	101	$	—	$	102	$	—
Commercial and industrial		527		728		25		551		5		670		16
Municipal		—		—		—		—		—		—		—
Commercial real estate		1,692		1,789		98		1,700		14		2,809		48
Residential real estate		808		809		36		811		1		817		7
Consumer		—		—		—		—		—		—		—
Home equity		91		91		91		91		—		91		—

Total	$	3,218	$	3,525	$	261	$	3,254	$	20	$	4,489	$	71

Total:
Construction and land development	$	100	$	108	$	11	$	101	$	—	$	102	$	—
Commercial and industrial		539		740		25		578		5		706		16
Municipal		—		—		—		—		—		—		—
Commercial real estate		1,692		1,789		98		1,700		14		3,005		48
Residential real estate		927		1,013		36		933		3		945		13
Consumer		—		—		—		—		—		—		—
Home equity		91		91		91		91		—		91		—

Total	$	3,349	$	3,741	$	261	$	3,403	$	22	$	4,849	$	77

There was one commercial real estate troubled debt restructuring during the nine month period ending September 30, 2016. The pre-modification and post-modification outstanding recorded investment was $2,091,000. The loan was modified for 2016, by reducing the interest rate as well as extending the term on the loan. The financial impact for the modification was $7,000 reduction in principal payments and $2,000 reduction in interest payments for the three month period. The financial impact for the modification was $10,000 reduction in principal payments and $2,000 reduction in interest payments for the nine month period.

There was no troubled debt restructuring during the three and nine month period ended September 30, 2015.

There were no troubled debt restructurings that subsequently defaulted during the three and nine month periods ending September 30, 2016.