Allowance for Loan Losses

The allowance for loan losses totaled $15.7 million and $16.0 million at September 30, 2017 and December 31, 2016, respectively. The allowance for loan losses was equivalent to 0.80% and 1.53% of total loans held for investment at September 30, 2017 and December 31, 2016, respectively. Adequacy of the allowance is assessed and the allowance is increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified as uncollectible.

The methodology by which we systematically determine the amount of our allowance is set forth by the Board of Directors in our Loan Policy and implemented by management. The results of the analysis are documented, reviewed, and approved by the Board of Directors no less than quarterly.

The level of the allowance for loan losses is determined by management through an ongoing, detailed analysis of historical loss rates and risk characteristics. During each quarter, management evaluates the collectability of all loans in the portfolio and ensures an accurate risk rating is assigned to each loan. The risk rating scale and definitions commonly adopted by the federal banking agencies is contained within the framework prescribed by the Bank’s Loan Policy. Any loan that is deemed to have potential or well defined weaknesses that may jeopardize collection in full is then analyzed to ascertain its level of weakness. If appropriate, the loan may be charged-off or a specific reserve may be assigned if the loan is deemed to be impaired.

During the risk rating verification process, each loan identified as inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged is considered impaired and is placed on non-accrual status. On these loans, management analyzes the potential impairment of the individual loan and may set aside a specific reserve. Any amounts deemed uncollectible during that analysis are charged-off.

For the remaining loans in each segment, the Bank calculates the probability of loss as a group using the risk rating for each of the following loan types: Commercial Real Estate - Owner Occupied, Commercial Real Estate - Non-Owner Occupied, Residential Real Estate, Commercial, Real Estate Construction, and Consumer. Management calculates the historical loss rate in each group by risk rating using a period of at least six years. This historical loss rate may then be adjusted based on management’s assessment of internal and external environmental factors. While management may consider other factors, the analysis generally includes factors such as unemployment, office vacancy rates, and any concentrations that exist within the portfolio. This adjustment is meant to account for changes between the historical economic environment and current conditions and for changes in the ongoing management of the portfolio which affects the loans’ potential losses.

Once complete, management compares the condition of the portfolio using several different characteristics, as well as its experience, to the experience of other banks in its peer group in order to determine if it is directionally consistent with others’ experience in our area and line of business. Based on that analysis, management aggregates the probabilities of loss of the remaining portfolio based on the specific and general allowances and may provide additional amounts to the allowance for loan losses as needed. Since this process involves estimates, the allowance for loan losses may also contain an amount that is non-material which is not allocated to a specific loan or to a group of loans but is deemed necessary to absorb additional losses in the portfolio.

Management and the Board of Directors subject the reserve adequacy and methodology to a review on a regular basis by internal auditors, external auditors and bank regulators, and such reviews have not resulted in any material adjustment to the allowance.

The following tables provide detailed information about the allowance for loan losses as of and for the periods indicated.



	September 30, 2017
(In Thousands)	Real Estate Construction			Commercial Real Estate Owner Occupied		Commercial Real Estate Nonowner Occupied		Residential Real Estate			Commercial			Consumer			Total
Allowance for loan losses, Three months ended September 30, 2017
Balance at June 30, 2017	$	877		$	3,037	$	2,691	$	2,382		$	5,595		$	89		$	14,671
Charge-offs	—			—		—		—			—			—			—
Recoveries	—			—		—		107			14			—			121
Provision	(188		)	670		651		(178		)	(52		)	(3		)	900
Balance at September 30, 2017	$	689		$	3,707	$	3,342	$	2,311		$	5,557		$	86		$	15,692

Allowance for loan losses, Nine months ended September 30, 2017
Balance at December 31, 2016	$	1,277		$	2,943	$	2,145	$	2,510		$	7,053		$	80		$	16,008
Charge-offs	—			—		—		(1		)	(3,828		)	(6		)	(3,835		)
Recoveries	—			18		—		128			171			2			319
Provision	(588		)	746		1,197		(326		)	2,161			10			3,200
Balance at September 30, 2017	$	689		$	3,707	$	3,342	$	2,311		$	5,557		$	86		$	15,692

Ending allowance for loan losses, September 30, 2017
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	223		$	—	$	—	$	—		$	477		$	—		$	700
Collectively evaluated for impairment	466			3,707		3,342		2,311			5,080			86			14,992
Total ending allowance balance	$	689		$	3,707	$	3,342	$	2,311		$	5,557		$	86		$	15,692

Recorded Investment in Loans, September 30, 2017
Individually evaluated for impairment	$	26		$	—	$	—	$	572		$	5,236		$	3		$	5,837
Collectively evaluated for impairment	104,167			442,033		434,261		509,674			444,120			25,078			1,959,333
Purchased impaired loans	—			1,095		920		2,375			94			6			4,490
Total ending loans balance	$	104,193		$	443,128	$	435,181	$	512,621		$	449,450		$	25,087		$	1,969,660



	December 31, 2016
(In Thousands)	Real Estate Construction		Commercial Real Estate Owner Occupied			Commercial Real Estate Nonowner Occupied		Residential Real Estate			Commercial		Consumer			Total
Allowance for loan losses:
Beginning balance, January 1, 2016	$	1,056	$	3,042		$	1,862	$	2,862		$	4,612	$	129		$	13,563
Charge-offs	—		—			—		—			—		—			—
Recoveries	—		—			—		40			285		—			325
Provision	221		(99		)	283		(392		)	2,156		(49		)	2,120
Ending balance, December 31, 2016	$	1,277	$	2,943		$	2,145	$	2,510		$	7,053	$	80		$	16,008
Ending allowance at December 31, 2016:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	221	$	—		$	—	$	—		$	2,805	$	—		$	3,026
Collectively evaluated for impairment	1,056		2,943			2,145		2,510			4,248		80			12,982
Total ending allowance balance	$	1,277	$	2,943		$	2,145	$	2,510		$	7,053	$	80		$	16,008
Loans:
Individually evaluated for impairment	$	940	$	—		$	—	$	431		$	5,551	$	—		$	6,922
Collectively evaluated for impairment	90,882		250,440			184,688		203,982			305,935		6,849			1,042,776
Total ending loans balance	$	91,822	$	250,440		$	184,688	$	204,413		$	311,486	$	6,849		$	1,049,698



	September 30, 2016
(In Thousands)	Real Estate Construction		Commercial Real Estate Owner Occupied			Commercial Real Estate Nonowner Occupied		Residential Real Estate			Commercial		Consumer			Total
Allowance for loan losses, Three months ended September 30, 2016
Balance at June 30, 2016	$	1,178	$	3,142		$	1,969	$	2,854		$	4,574	117			$	13,834
Charge-offs	—		—			—		—			—		—			—
Recoveries	—		—			—		9			103		—			112
Provision	73		(141		)	171		(229		)	909		(33		)	750
Balance at September 30, 2016	$	1,251	$	3,001		$	2,140	$	2,634		$	5,586	$	84		$	14,696

Allowance for loan losses, Nine months ended September 30, 2016
Beginning balance	$	1,056	$	3,042		$	1,862	$	2,862		$	4,612	$	129		$	13,563
Charge-offs	—		—			—		—			—		—			—
Recoveries	—		—			—		30			233		—			263
Provision	195		(41		)	278		(258		)	741		(45		)	870
Ending balance	$	1,251	$	3,001		$	2,140	$	2,634		$	5,586	$	84		$	14,696

Ending allowance for loan losses, September 30, 2016
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	284	$	—		$	—	$	—		$	1,490	$	—		$	1,774
Collectively evaluated for impairment	967		3,001			2,140		2,634			4,096		84			12,922
Total ending allowance balance	$	1,251	$	3,001		$	2,140	$	2,634		$	5,586	$	84		$	14,696

Recorded Investment in Loans, September 30, 2016
Individually evaluated for impairment	$	1,001	$	550		$	—	$	176		$	5,272	$	—		$	6,999
Collectively evaluated for impairment	78,620		237,674			174,342		202,429			259,522		6,959			959,546
Total ending loans balance	$	79,621	$	238,224		$	174,342	$	202,605		$	264,794	$	6,959		$	966,545