| Loans and Allowance for Loan Losses | Loans and Allowance for Loan Losses The composition of net loans is as follows: June 30, 2017 December 31, 2016 Real estate secured: Residential 1-4 family $ 181,029 $ 186,695 Multifamily 26,214 22,630 Construction and land loans 13,721 15,978 Commercial, owner occupied 71,341 72,383 Commercial, non-owner occupied 30,471 28,818 Second mortgages 5,547 6,934 Equity lines of credit 26,545 13,395 Farmland 13,111 12,194 Total real estate secured 367,979 359,027 Non-real estate secured Personal 18,408 17,887 Commercial 32,139 29,977 Agricultural 2,408 3,490 Total non-real estate secured 52,955 51,212 Gross loans 420,934 410,381 Less: Allowance for loan losses 4,671 4,829 Net deferred fees 704 714 5,375 5,543 Loans, net $ 415,559 $ 404,838 The following table is an analysis of past due loans as of June 30, 2017 : Past Due 30-89 days 90 days and over Total Current Total > 90 Days and Accruing Real estate secured Residential 1-4 family $ 845 $ 448 $ 1,293 $ 179,736 $ 181,029 $ — Equity lines of credit — — — 26,545 26,545 — Multifamily — — — 26,214 26,214 — Farmland 2 193 195 12,916 13,111 — Construction, land development, other land loans — — — 13,721 13,721 — Commercial real estate: Owner-occupied 13 1,661 1,674 69,667 71,341 — Non-owner-occupied 7 — 7 30,464 30,471 — Second mortgages — — — 5,547 5,547 — Non-real estate secured Personal 52 30 82 18,326 18,408 — Commercial 92 410 502 31,637 32,139 — Agricultural — — — 2,408 2,408 — Total $ 1,011 $ 2,742 $ 3,753 $ 417,181 $ 420,934 $ — The following table is an analysis of past due loans as of December 31, 2016 : Past Due 30-89 days 90 days and over Total Current Total > 90 Days and Accruing Real estate secured Residential 1-4 family $ 1,083 $ 1,000 $ 2,083 $ 184,612 $ 186,695 $ — Equity lines of credit 30 10 40 13,355 13,395 — Multifamily — — — 22,630 22,630 — Farmland 47 564 611 11,583 12,194 — Construction, land development, other land loans 39 — 39 15,939 15,978 — Commercial real estate: Owner-occupied 14 3,868 3,882 68,501 72,383 2,210 Non-owner-occupied — — — 28,818 28,818 — Second mortgages 161 18 179 6,755 6,934 — Non-real estate secured Personal 141 12 153 17,734 17,887 — Commercial 196 462 658 29,319 29,977 — Agricultural 7 — 7 3,483 3,490 — Total $ 1,718 $ 5,934 $ 7,652 $ 402,729 $ 410,381 $ 2,210 Loans are considered delinquent when payments have not been made according to the terms of the contract. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Additionally, in certain instances, loans that have been restructured or modified may also be classified as non-accrual per regulatory guidance until a satisfactory payment history has been established. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. The following is a summary of non-accrual loans at June 30, 2017 and December 31, 2016 : June 30, 2017 December 31, 2016 Real estate secured Residential 1-4 family $ 448 $ 1,275 Commercial real estate: Owner-occupied 1,643 1,658 Non-owner-occupied 343 — Second mortgages — 18 Equity lines of credit — 10 Farmland 193 564 Non-real estate secured Personal 32 12 Commercial 411 462 Total $ 3,070 $ 3,999 The following is a summary of residential real estate currently in the process of foreclosure as well as foreclosed residential real estate as of June 30, 2017 . Number Balance Residential real estate in the process of foreclosure 1 $ 175 Foreclosed residential real estate 5 222 The following tables represent a summary of credit quality indicators of the Company's loan portfolio at June 30, 2017 and December 31, 2016 . The grades are assigned and/or modified by the Company's credit review and credit analysis departments based on the creditworthiness of the borrower and the overall strength of the loan. The following tables provide the credit risk profile by internally assigned grade as of June 30, 2017 and December 31, 2016 : June 30, 2017 Residential 1-4 Family Multifamily Farmland Construction, Land Loans Commercial Real Estate- Owner Occupied Commercial Real Estate Non-Owner Occupied Quality $ 30,002 $ — $ — $ 369 $ 206 $ 96 Satisfactory 106,564 21,684 8,038 6,307 45,142 15,838 Acceptable 37,580 1,690 4,213 5,313 18,426 10,220 Special Mention 3,415 1,864 — — 4,958 125 Substandard 3,468 976 860 1,732 2,609 4,192 Doubtful — — — — — — Total $ 181,029 $ 26,214 $ 13,111 $ 13,721 $ 71,341 $ 30,471 December 31, 2016 Residential 1-4 Family Multifamily Farmland Construction, Land Loans Commercial Real Estate- Owner Occupied Commercial Real Estate Non-Owner Occupied Quality $ 32,054 $ — $ 19 $ 1,941 $ 3,686 $ 387 Satisfactory 106,154 18,335 7,823 5,969 36,806 15,198 Acceptable 41,369 1,410 3,474 5,961 22,767 5,119 Special Mention 3,399 1,896 — — 4,435 4,221 Substandard 3,719 989 878 2,107 4,689 3,893 Doubtful — — — — — — Total $ 186,695 $ 22,630 $ 12,194 $ 15,978 $ 72,383 $ 28,818 Explanation of credit grades: Quality --This grade is reserved for the Bank's top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this rating will demonstrate the following characteristics: • Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind). • Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. • Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor. For existing loans, all of the requirements above apply plus all payments have been made as agreed, current financial information on all borrowers and guarantors has been obtained and analyzed, and overall business operating trends are either stable or improving. Satisfactory- This grade is given to performing loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this rating will demonstrate the following characteristics: • General conformity to the Bank's policy requirements, product guidelines and underwriting standards. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors. • Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. • Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor. For existing loans, all of the requirements outlined above will apply, plus all payments have been made as agreed, current financial information on all borrowers and guarantors has been obtained and analyzed, and overall business operating trends are stable with any declines considered minor and temporary. Acceptable- This grade is given to loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this rating may demonstrate some or all of the following characteristics: • Additional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors. • Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance. • Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor. For existing loans, payments have generally been made as agreed with only minor and isolated delinquencies. Special Mention -This grade is given to Watch List loans that include the following characteristics: • Loans with underwriting guideline tolerances and/or exceptions with no identifiable mitigating factors. • Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices. • Loans where adverse economic conditions that develop subsequent to the loan origination do not jeopardize liquidation of the debt, but do substantially increase the level of risk may also warrant this rating. Substandard- Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. The weaknesses may include, but are not limited to: • High debt to worth ratios and or declining or negative earnings trends • Declining or inadequate liquidity • Improper loan structure or questionable repayment sources • Lack of well-defined secondary repayment source, and • Unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals. Doubtful -Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are: • Injection of capital • Alternative financing • Liquidation of assets or the pledging of additional collateral. Credit Risk Profile based on payment activity as of June 30, 2017 : Consumer - Non Real Estate Equity Line of Credit /Second Mortgages Commercial - Non Real Estate Agricultural - Non Real Estate Performing $ 18,378 $ 32,092 $ 31,729 $ 2,408 Nonperforming (>90 days past due) 30 — 410 — Total $ 18,408 $ 32,092 $ 32,139 $ 2,408 Credit Risk Profile based on payment activity as of December 31, 2016 : Consumer - Non Real Estate Equity Line of Credit /Second Mortgages Commercial - Non Real Estate Agricultural - Non Real Estate Performing $ 17,875 $ 20,301 $ 29,515 $ 3,490 Nonperforming (>90 days past due) 12 28 462 — Total $ 17,887 $ 20,329 $ 29,977 $ 3,490 The following tables reflect the Bank's impaired loans at June 30, 2017 : June 30, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance Real estate secured Residential 1-4 family $ 5,313 $ 5,313 — $ 5,081 $ 145 Equity lines of credit — — — 13 — Multifamily 976 976 — 983 28 Farmland 575 575 — 630 21 Construction, land development, other land loans 1,700 1,700 — 1,721 61 Commercial real estate- owner occupied 547 547 — 3,175 11 Commercial real estate- non owner occupied 325 325 — 1,104 11 Second mortgages 64 64 — 125 2 Non-real estate secured Personal — — — 7 — Commercial and agricultural — — — 22 — Total $ 9,500 $ 9,500 — $ 12,861 $ 279 June 30, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With an allowance recorded Real estate secured Residential 1-4 family $ 388 $ 388 $ 16 $ 424 $ 12 Equity lines of credit — — — — — Multifamily — — — — — Farmland 217 217 19 205 7 Construction, land development, other land loans — — — 183 12 Commercial real estate- owner occupied 4,544 4,544 1,496 2,842 98 Commercial real estate- non owner occupied 4,399 4,399 1,081 3,204 92 Second mortgages — — — 9 — Non-real estate secured Personal — — — — — Commercial and agricultural 350 350 294 518 2 Total $ 9,898 $ 9,898 $ 2,906 $ 7,385 $ 223 The following tables reflect the Bank's impaired loans at December 31, 2016 : December 31, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance Real estate secured Residential 1-4 family $ 4,848 $ 4,848 — $ 5,963 $ 200 Equity lines of credit 25 25 — 38 1 Multifamily 989 989 — 1,005 1 Farmland 685 685 — 750 24 Construction, land development, other land loans 1,741 1,741 — 1,643 114 Commercial real estate- owner occupied 5,802 5,802 — 5,685 390 Commercial real estate- non owner occupied 1,883 1,883 — 941 39 Second mortgages 186 186 — 292 8 Non real estate secured Personal 14 14 — 41 1 Commercial and agricultural 43 43 — 179 3 Total $ 16,216 $ 16,216 — $ 16,537 $ 781 December 31, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With an allowance recorded Real estate secured Residential 1-4 family $ 460 $ 460 $ 36 $ 1,153 $ 14 Equity lines of credit — — — — — Multifamily — — — — — Farmland 192 192 16 96 11 Construction, land development, other land loans 366 366 20 406 22 Commercial real estate- owner occupied 1,139 2,139 558 1,629 — Commercial real estate- non owner occupied 2,009 2,009 314 1,947 41 Second mortgages 18 18 9 18 — Non real estate secured Personal 51 51 29 82 3 Commercial and agricultural 634 634 365 652 16 Total $ 4,869 $ 5,869 $ 1,347 $ 5,983 $ 107 The following tables present the balance in the allowance for loan losses and the recorded investment in loans by loan category and is segregated by impairment evaluation method as of and for the three and six month periods ended June 30, 2017 and June 30, 2016 . Six months ended June 30, 2017 Residential 1-4 Family Multifamily Construction and Land Loans Commercial Owner Occupied Commercial Non-Owner Occupied Second Mortgages Equity Line of Credit Farmland Personal and Overdrafts Commercial and Agricultural Unallocated Total Allowance for Loan Losses: Balance at December 31, 2016 $ 371 — $ 21 $ 1,339 $ 445 $ 15 $ 27 $ 16 $ 802 $ 535 $ 1,258 $ 4,829 Provision for credit losses (63 ) — (23 ) 640 669 (13 ) 5 2 (217 ) 145 (1,093 ) 52 Charge-offs 36 — — — — — — — 126 193 — 355 Recoveries (23 ) — (2 ) — (2 ) — — (1 ) (63 ) (54 ) — (145 ) Net charge-offs 13 — (2 ) — (2 ) — — (1 ) 63 139 — 210 Balance at June 30, 2017 $ 295 $ — $ — $ 1,979 $ 1,116 $ 2 $ 32 $ 19 $ 522 $ 541 $ 165 $ 4,671 Allowance allocated by impairment method: Individually evaluated $ 16 $ — $ — $ 1,496 $ 1,081 $ — $ — $ 19 $ — $ 294 $ — $ 2,906 Collectively evaluated 279 — — 483 35 2 32 — 522 247 165 1,765 Loan balances by impairment method used: Individually evaluated $ 6,282 $ — $ 1,750 $ 5,239 $ 4,192 $ 294 $ — $ 860 $ 144 $ 637 $ — $ 19,398 Collectively evaluated 174,747 26,214 11,971 66,102 26,279 5,253 26,545 12,251 18,264 33,910 — 401,536 Balance at June 30, 2017 $ 181,029 $ 26,214 $ 13,721 $ 71,341 $ 30,471 $ 5,547 $ 26,545 $ 13,111 $ 18,408 $ 34,547 — $ 420,934 Three months ended June 30, 2017 Residential 1-4 Family Multifamily Construction and Land Loans Commercial Owner Occupied Commercial Non-Owner Occupied Second Mortgages Equity Line of Credit Farmland Personal and Overdrafts Commercial and Agricultural Unallocated Total Allowance for Loan Losses: Balance at March 31, 2017 $ 344 — $ 21 $ 1,689 $ 849 $ 4 $ 31 $ 54 $ 952 $ 380 $ 404 $ 4,728 Provision for credit losses (47 ) — (23 ) 290 267 (2 ) 1 (35 ) (421 ) 244 (239 ) 35 Charge-offs 22 — — — 1 — — — 47 134 — 203 Recoveries (20 ) — (2 ) — (1 ) — — — (38 ) (51 ) — (111 ) Net Charge-offs 2 — (2 ) — — — — — 9 83 — 92 Balance at June 30, 2017 $ 295 $ — $ — $ 1,979 $ 1,116 $ 2 $ 32 $ 19 $ 522 $ 541 $ 165 $ 4,671 Six months ended June 30, 2016 Residential 1-4 Family Multifamily Construction and Land Loans Commercial Owner Occupied Commercial Non-Owner Occupied Second Mortgages Equity Line of Credit Farmland Personal and Overdrafts Commercial and Agricultural Unallocated Total Allowance for Loan Losses: Balance at December 31, 2015 $ 654 — $ 37 $ 1,012 $ 748 $ 43 $ 20 $ 7 $ 704 $ 886 $ 1,543 $ 5,654 Provision for credit losses (88 ) — (1 ) 1,560 (145 ) 27 (8 ) 86 760 (302 ) (576 ) 1,313 Charge-offs 54 — 9 1,200 — — — — 749 34 — 2,046 Recoveries (2 ) — (4 ) — (8 ) — (1 ) (1 ) (156 ) (109 ) — (281 ) Net charge-offs 52 — 5 1,200 (8 ) — (1 ) (1 ) 593 (75 ) — 1,765 Balance at June 30, 2016 $ 514 $ — $ 31 $ 1,372 $ 611 $ 70 $ 13 $ 94 $ 871 $ 659 $ 967 $ 5,202 Allowance allocated by impairment method: Individually evaluated $ 217 $ — $ 31 $ 558 $ 330 $ 57 $ — $ 18 $ 51 $ 528 $ — $ 1,790 Collectively evaluated 297 — — 814 281 13 13 76 820 131 967 3,412 Loan balances by impairment method used: Individually evaluated $ 5,814 $ 999 $ 1,962 $ 5,026 $ 3,919 $ 409 $ 57 $ 887 $ 136 $ 806 $ — $ 20,015 Collectively evaluated 187,768 21,827 15,376 63,780 29,249 7,602 5,738 11,023 19,941 35,386 — 397,690 Balance at June 30, 2016 $ 193,582 $ 22,826 $ 17,338 $ 68,806 $ 33,168 $ 8,011 $ 5,795 $ 11,910 $ 20,077 $ 36,192 — $ 417,705 Three months ended June 30, 2016 Residential 1-4 Family Multifamily Construction and Land Loans Commercial Owner Occupied Commercial Non-Owner Occupied Second Mortgages Equity Line of Credit Farmland Personal and Overdrafts Commercial and Agricultural Unallocated Total Allowance for Loan Losses: Balance at March 31, 2016 $ 595 — $ 21 $ 1,109 $ 618 $ 83 $ 18 $ 6 $ 602 $ 924 $ 1,849 $ 5,825 Provision for credit losses (55 ) — 17 1,463 (15 ) (13 ) (5 ) 87 854 (362 ) (882 ) 1,089 Charge-offs 27 — 9 1,200 — — — — 610 11 — 1,857 Recoveries (1 ) — (2 ) — (8 ) — — (1 ) (25 ) (108 ) — (145 ) Net Charge-offs 26 — 7 1,200 (8 ) — — (1 ) 585 (97 ) — 1,712 Balance at June 30, 2016 $ 514 $ — $ 31 $ 1,372 $ 611 $ 70 $ 13 $ 94 $ 871 $ 659 $ 967 $ 5,202 The Company's credit administration personnel and senior financial officers are responsible for tracking, coding, and monitoring loans that become Troubled Debt Restructurings ("TDRs"). Concessions are made to existing borrowers in the form of modified interest rates and / or payment terms. The loans are segregated for regulatory and external reporting. Each specific TDR is reviewed to determine if the accrual of interest should be discontinued and also reviewed for impairment. The Company's senior credit officer performs this analysis on a quarterly basis in addition to determining any other loans that are impaired within the loan portfolio. The Company had a total of $11,773 and $12,660 of loans categorized as troubled debt restructurings as of June 30, 2017 and December 31, 2016 , respectively. Interest is accrued on TDRs if the loan is otherwise not impaired and the full collection of principal and interest under the modified terms is still deemed probable. In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance calculation. Additionally, specific reserves may be established on restructured loans evaluated individually. There were no new TDRs in the three- or six-month periods ended June 30, 2017 . The following tables summarize the troubled debt restructurings identified during the first six months of 2016 . Troubled Debt Restructurings –Three months ended March 31, 2017 Interest only Number of Contracts Pre- Modification Outstanding Recorded Investment Post - Modification Recorded Investment Troubled Debt Restructurings Below Market Rate Number of Contracts Pre- Modification Outstanding Recorded Investment Post - Modification Recorded Investment Troubled Debt Restructurings Loan term extension Number of Contracts Pre- Modification Outstanding Recorded Investment Post - Modification Recorded Investment Troubled Debt Restructurings That Subsequently Defaulted Number of Contracts Pre- Modification Outstanding Recorded Investment Post - Modification Recorded Investment June 30, 2016 Interest only Number Pre-Modification Recorded Investment Post-Modification Recorded Investment Real Estate Secured Farmland 1 $ 57 $ 57 Commercial Real Estate- Owner Occupied 1 92 92 Total interest only 2 149 149 Below Market Rate Real Estate Secured Residential 1-4 family 1 848 848 Total below market rate 1 848 848 Total restructurings 3 $ 997 $ 997 There were no defaults in the six month periods ending June 30, 2017 and June 30, 2016 of TDRs modified in the previous 12 months. The loan review function seeks to identify weaknesses within the loan portfolio by conducting annual reviews on loan relationships that are greater than $500 . The relationship reviews consider collateral, repayment history, guarantor(s) financial position, and debt service coverage on an individual and global level. These reviews are based primarily upon federal tax returns for cash flow determination, internally prepared interim statements and personal financial statements. Debt service coverage (DSC) is calculated on each individual customer, or guarantor, as well as the aggregate or global DSC. The DSC is discounted to determine a "stressed" DSC. Collateral evaluation includes an inspection of the collateral file to determine if the Bank is indeed properly securitized. Collateral is discounted, when appropriate, to determine a "stressed" loan to value (LTV) ratio. In addition to annual loan relationship reviews, quarterly reviews on all loan relationships over $100 that are graded Substandard, Doubtful and Loss are also completed. The quarterly review process is a shortened version of the full relationship review. These quarterly reviews include a discussion on personal credit management, DSC and LTV. In addition to these quarterly reviews of non-pass watch list relationships, a semi-annual review is conducted on all Special Mention loan relationships that are on the watch list. These reviews are prepared in the same manner as the quarterly non-pass relationship reviews. The appropriateness of the risk rating of each relationship is assessed, with changes to the risk rating being made by the Senior Credit Officer or the individual Loan Officer, when deemed appropriate. The Company also seeks to identify potential problem relationships through a monthly watch list review, which includes a review of past due loans, as well as any other information that might be presented by loan officers, regarding a particular loan relationship that is exhibiting stress. Watch list relationships display distinct characteristics including, but not limited to, late payments greater than 60 days , a low DSC calculation, bankruptcy filings, casualty losses, or other issues that would cause a perceived increase in the risk of loss to the Bank. The final segment of the loan review process involves special reviews. These reviews target specific risk categories of the loan portfolio, such as credit cards, equity lines, consumer loans, construction loans, and other specific segments of the loan portfolio. Currently, the primary emphasis of the loan review function is loan relationship reviews and watch list management. The segments of the Company's loan portfolio are disaggregated to a level that allows management to monitor risk and performance. In reviewing risk, management has determined there to be several different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) the commercial loan portfolio; (ii) the commercial real estate loan portfolio; (iii) the construction loan portfolio; (iv) the consumer loan portfolio; and, (v) the residential loan portfolio. The commercial real estate ("CRE") loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include multifamily structures and owner-occupied commercial structures. The construction loan segment is further disaggregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. Commercial construction loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. Construction lending is generally considered to involve a higher degree of credit risk than long-term permanent financing. The following describes the Company's basic methodology for computing its ALLL. On a quarterly basis, the ALLL methodology begins with the identification of loans subject to ASC 310. All loans that are rated "7" (Doubtful) are assessed as impaired based on the expectation that the full collection of principal and interest is in doubt. All loans that are rated "6" (Substandard) or are expected to be downgraded to "6", require additional analysis to determine whether they may be impaired under ASC 310. All loans that are rated "5" (Special Mention) are presumed not to be impaired. However, "5" rated loans, together with any Troubled Debt Restructured (TDR) loan, may warrant further analysis before completing an assessment of impairment. A loan is considered impaired and an allowance for loan losses is established on loans for which it is probable that the full collection of principal and interest is in doubt. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value based on recent appraisal and /or tax assessment value, liquidation value and/or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2017 and December 31, 2016 , all of the total impaired loans were evaluated based on either the fair value of the collateral or the discounted cash flows. For ASC 310 loans that are individually evaluated and found to be impaired (primarily those designated as Substandard and Doubtful), the associated ALLL will be based upon one of the three impairment measurement methods specified within ASC 310: (1) Present value of expected future cash flows discounted at the loan's effective interest rate; (2) Loan's observable market price; or (3) Fair value of the collateral. To determine the amount of loan loss exposure for the impaired ASC 310 loans, the value of collateral for secured loans is evaluated to determine the current value and potential exposure. The collateral value is adjusted for its age and condition, and, for real estate, adjusted for condition, location, and age of the most current appraisal. If the adjusted value of the collateral is less than the current principal balance, the difference is designated as direct exposure for loan loss calculations. The total balance of unsecured loans is considered as direct exposure. ASC 450 Loan Loss : For all other loans, including individual loans determined not to be impaired under ASC 310, the associated ALLL is calculated in accordance with ASC 450 that provides for estimated credit losses likely to be realized on groups of loans with similar risk characteristics. The Company uses standard call report categories to segregate loans into groups with similar risk characteristics. Estimated credit losses reflect significant factors that affect the collectability of the portfolio as of the evaluation date. Key factors that influence risk within the Company's loan portfolio are divided into three major categories: (1) Historical Loss Factor: To calculate the anticipated loan loss in each call report category for ASC 450 loans, the Company begins with the net loss in each category for each of the last twelve quarters. The Company uses a rolling twelve quarter weighted historical loss average where the most recent quarters are weighted heavier than the earlier quarters so that the calculation reflects current risk trends within the portfolio. The weighting used by the Company is similar to the Rule of 78's with the net losses of the most recent quarter weighted at 12/78ths and those in the first quarter in the twelve quarter period weighted at 1/78th. Therefore, the net losses of the most recent year represent approximately 54% of the calculation compared with 33% if a simple average of losses over the three -year period was used. The total of weighted factors for each call report category is applied to the current outstanding loan balance in each category to calculate expected loss based on historical data for a group of loans with similar risk characteristics. The same weighting is applied to all loan types . (2)External economic factors: Economic conditions have a significant impact on Company's loan portfolio because deteriorating conditions can adversely impact both collateral values and the customer's ability to service debt. Management has selected the following external factors as indicators of economic conditions: a. National GDP growth rate b. Local unemployment rates c. Prime interest rate The values for external factors are updated on a quarterly basis based on current economic data. (3)Internal process factors: Internal factors that influence loss rates as a result of risk management and control practices include the following: d. Past-due loans e. Non-accrual loans f. Commercial real estate concentrations f. Loan volume g. Level and trend of classified loans The values for internal factors are updated on a quarterly basis based on current portfolio metrics. Once the quarterly ALLL is computed, the calculations are reviewed by the Company's Senior Loan Officer, CEO, CFO, and Senior Lending Officers, including Credit Review personnel. The Company's controller also performs a detailed review of the computations, estimates, etc. included in the ALLL calculation. The ALLL is then reviewed and approved by the Board of Directors. Loans Held for Sale The Company's mortgage division, Highlands Home Mortgage, originates certain single family, residential first mortgage loans for sale on a presold basis. Loan sale activity is summarized below. This division began operations in the second quarter of 2016. Loans are typically sold to one of the various investors within 20 days of closing. Management feels the carrying amounts approximate the fair values of loans held for sale. Six months ended June 30, 2017 2016 Loans held for sale at end of period $ 5,912 $ 1,637 Proceeds from sales of mortgage loans originated for sale 16,449 193 Gain on sales of mortgage loans originated for sale 952 — |
