Loans and Related Allowance for Loan Losses | Note 3. Loans and Related Allowance for Loan Losses During the third quarter of 2015, the Company terminated the shared-loss agreement with the FDIC relating to the single family, residential 1-4 family mortgage assets. As a result of this termination, the Company reclassified the purchased credit impaired (PCI) loans related to the shared-loss agreement that expired March 2014, which had been reported as non-covered loans, as PCI loans for all periods presented. Consequently, loans previously referred to as non-covered loans are referred to as loans. See Notes 4 and 5 for more information. The Company’s loans at December 31, 2015 and 2014 were comprised of the following (dollars in thousands): December 31, 2015 December 31, 2014 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1-4 family $194,576 25.99 % $167,171 25.33 % Commercial 317,955 42.47 282,127 42.75 Construction and land development 67,408 9.00 57,027 8.64 Second mortgages 8,378 1.12 5,997 0.91 Multifamily 45,389 6.06 33,812 5.12 Agriculture 6,238 0.83 7,163 1.08 Total real estate loans 639,944 85.47 553,297 83.83 Commercial loans 102,507 13.69 99,783 15.12 Consumer installment loans 4,928 0.66 5,496 0.83 All other loans 1,345 0.18 1,444 0.22 Total loans $748,724 100.00 % $660,020 100.00 % Loans previously reported $664,736 Loans previously reported as PCI (4,716) Total loans $660,020 The Company held $13. 4 million and $18. 3 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at December 31, 2015 and 2014, respectively. As these loans are 100% guaranteed by the USDA, no loan loss provision is required. These loan balances included an unamortized purchase premium of $ 586,000 and $ 922,000 at December 31, 2015 and 2014, respectively. Unamortized purchase premium is recognized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method. At December 31, 2015 and 2014, the Company’s allowance for credit losses was comprised of the following: (i) specific valuation allowances calculated in accordance with FASB ASC 310, Receivables, (ii) general valuation allowances calculated in accordance with FASB ASC 450, Contingencies , based on economic conditions and other qualitative risk factors, and (iii) historical valuation allowances calculated using historical loan loss experience. Management identified loans subject to impairment in accordance with ASC 310. The following table summarizes information related to impaired loans as of December 31, 2015 (dollars in thousands): With an allowance recorded: Recorded Investment (1) Unpaid Principal Balance (2) Related Allowance Mortgage loans on real estate: Residential 1-4 family $ 2,777 $ 3,034 $ 414 Commercial 205 407 35 Construction and land development 4,509 6,179 574 Second mortgages 13 14 2 Total real estate loans 7,504 9,634 1,025 Consumer installment loans 78 84 14 Subtotal impaired loans with a valuation allowance 7,582 9,718 1,039 With no related allowance recorded: Mortgage loans on real estate: Residential 1-4 family 1,785 2,260 — Commercial 1,303 1,500 — Total real estate loans 3,088 3,760 — Subtotal impaired loans without a valuation allowance 3,088 3,760 — Total: Mortgage loans on real estate: Residential 1-4 family 4,562 5,294 414 Commercial 1,508 1,907 35 Construction and land development 4,509 6,179 574 Second mortgages 13 14 2 Total real estate loans 10,592 13,394 1,025 Consumer installment loans 78 84 14 Total impaired loans $ 10,670 $ 13,478 $ 1,039 (1) The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment (2) The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs The following table summarizes information related to impaired loans as of December 31, 2014 (dollars in thousands): With an allowance recorded: Recorded Investment (1) Unpaid Principal Balance (2) Related Allowance Mortgage loans on real estate: Residential 1-4 family $ 2,754 $ 2,895 $ 463 Commercial 308 470 53 Construction and land development 4,903 7,643 627 Second mortgages 61 63 11 Total real estate loans 8,026 11,071 1,154 Commercial loans 7,521 8,721 520 Consumer installment loans 118 120 20 Subtotal impaired loans with a valuation allowance 15,665 19,912 1,694 With no related allowance recorded: Mortgage loans on real estate: Residential 1-4 family 588 626 — Commercial 418 550 — Construction and land development 179 212 — Total real estate loans 1,185 1,388 — Consumer installment loans 2 3 — Subtotal impaired loans without a valuation allowance 1,187 1,391 — Total: Mortgage loans on real estate: Residential 1-4 family 3,342 3,521 463 Commercial 726 1,020 53 Construction and land development 5,082 7,855 627 Second mortgages 61 63 11 Total real estate loans 9,211 12,459 1,154 Commercial loans 7,521 8,721 520 Consumer installment loans 120 123 20 Total impaired loans $ 16,852 $ 21,303 $ 1,694 (1) The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment (2) The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs The following table summarizes the average recorded investment of impaired loans for the years ended December 31, 2015, 2014 and 2013 (dollars in thousands): 2015 2014 2013 Mortgage loans on real estate: Residential 1-4 family $3,952 $4,008 $5,607 Commercial 1,117 1,680 4,225 Construction and land development 4,795 5,482 7,436 Second mortgages 37 143 198 Agriculture — 102 227 Total real estate loans 9,901 11,415 17,693 Commercial loans 3,761 3,824 318 Consumer installment loans 100 89 72 Total impaired loans $13,762 $15,328 $18,083 The majority of impaired loans were also nonaccruing for which no interest income was recognized during each of the years ended December 31, 2015, 2014 and 2013. No significant amounts of interest income were recognized on accruing impaired loans for each of the years ended December 31, 2015, 2014 and 2013. Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. Cash basis income of $465,000 and $612,000 was recognized during the year ended December 31, 2015 and 2014, respectively. There were no significant amounts recognized during the year ended December 31, 2013. For the years ended December 31, 2015, 2014 and 2013, estimated interest income of $734,000 , $890,000 and $980,000 , respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. The following table presents nonaccrual loans, excluding PCI loans, by loan category as of December 31, 2015 and 2014 (dollars in thousands): December 31, 2015 December 31, 2014 Mortgage loans on real estate: Residential 1-4 family $4,562 $3,342 Commercial 1,508 607 Construction and land development 4,509 4,920 Second mortgages 13 61 Total real estate loans 10,592 8,930 Commercial loans — 7,521 Consumer installment loans 78 120 Total loans $10,670 $16,571 Troubled debt restructures and some special mention loans still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. All impaired loans at December 31, 2015 were also nonaccrual loans. Impaired loans of $16.9 million at December 31, 2014 consisted of $16.6 million in nonaccrual loans, in addition to $118,000 in troubled debt restructures and $163,000 in special mention loans, both of which were still accruing. The following tables present an age analysis of past due status of loans, excluding PCI loans, by category as of December 31, 2015 and 2014 (dollars in thousands): December 31, 2015 30-89 Days Past Due 90 Days Past Due Total Past Due Current Total Loans Receivable Recorded Investment 90 Days Past Due and Accruing Mortgage loans on real estate: Residential 1-4 family $ 811 $ 4,562 $ 5,373 $ 189,203 $ 194,576 $ — Commercial 1,471 1,508 2,979 314,976 317,955 — Construction and land development 51 4,509 4,560 62,848 67,408 — Second mortgages 135 13 148 8,230 8,378 — Multifamily — — — 45,389 45,389 — Agriculture — — — 6,238 6,238 — Total real estate loans 2,468 10,592 13,060 626,884 639,944 — Commercial loans 16 — 16 102,491 102,507 — Consumer installment loans 10 78 88 4,840 4,928 — All other loans 33 — 33 1,312 1,345 — Total loans $ 2,527 $ 10,670 $ 13,197 $ 735,527 $ 748,724 $ — December 31, 2014 30-89 Days Past Due 90 Days Past Due Total Past Due Current Total Loans Receivable Recorded Investment 90 Days Past Due and Accruing Mortgage loans on real estate: Residential 1-4 family $ 298 $ 3,342 $ 3,640 $ 163,531 $ 167,171 $ — Commercial 200 607 807 281,320 282,127 — Construction and land development 128 4,920 5,048 51,979 57,027 — Second mortgages 26 61 87 5,910 5,997 — Multifamily — — — 33,812 33,812 — Agriculture — — — 7,163 7,163 — Total real estate loans 652 8,930 9,582 543,715 553,297 — Commercial loans 66 7,521 7,587 92,196 99,783 — Consumer installment loans 10 120 130 5,366 5,496 — All other loans — — — 1,444 1,444 — Total loans $ 728 $ 16,571 $ 17,299 $ 642,721 $ 660,020 $ — Activity in the allowance for loan losses on loans, excluding PCI loans, by segment for the years ended December 31, 2015, 2014 and 2013 is presented in the following tables (dollars in thousands): December 31, 2014 Provision Allocation Charge-offs Recoveries December 31, 2015 Mortgage loans on real estate: Residential 1-4 family $ 3,100 $ 348 $ (490) $ 83 $ 3,041 Commercial 2,618 1,371 — 33 4,022 Construction and land development 1,930 (114) (593) 130 1,353 Second mortgages 63 43 (100) 97 103 Multifamily 136 42 — — 178 Agriculture 66 (39) — — 27 Total real estate loans 7,913 1,651 (1,183) 343 8,724 Commercial loans 1,242 (1,723) (3) 1,211 727 Consumer installment loans 85 88 (174) 98 97 All other loans 27 (16) — — 11 Total loans $ 9,267 $ — $ (1,360) $ 1,652 $ 9,559 December 31, 2013 Provision Allocation Charge-offs Recoveries December 31, 2014 Mortgage loans on real estate: Residential 1-4 family $ 3,853 $ (98) $ (733) $ 78 $ 3,100 Commercial 2,333 636 (446) 95 2,618 Construction and land development 2,252 (323) — 1 1,930 Second mortgages 101 (42) — 4 63 Multifamily 151 (15) — — 136 Agriculture 81 (15) — — 66 Total real estate loans 8,771 143 (1,179) 178 7,913 Commercial loans 1,546 (152) (1,217) 1,065 1,242 Consumer installment loans 101 8 (134) 110 85 All other loans 26 1 — — 27 Total loans $ 10,444 $ — $ (2,530) $ 1,353 $ 9,267 December 31, 2012 Provision Allocation Charge-offs Recoveries December 31, 2013 Mortgage loans on real estate: Residential 1-4 family $ 3,985 $ 244 $ (432) $ 56 $ 3,853 Commercial 2,482 1,411 (1,580) 20 2,333 Construction and land development 3,773 (1,338) (877) 694 2,252 Second mortgages 142 16 (105) 48 101 Multifamily 303 (152) — — 151 Agriculture 61 (14) (5) 39 81 Total real estate loans 10,746 167 (2,999) 857 8,771 Commercial loans 1,961 (172) (325) 82 1,546 Consumer installment loans 195 (3) (167) 76 101 All other loans 18 8 — — 26 Total loans $ 12,920 $ — $ (3,491) $ 1,015 $ 10,444 Included in charge-offs for the year ended December 31, 2013 was a $500,000 writedown arising from the transfer of a loan from loans to loans held for sale. The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of December 31, 2015 and 2014 (dollars in thousands): December 31, 2015 Allowance for Loan Losses Recorded Investment in Loans Individually Evaluated for Impairment (1) Collectively Evaluated for Impairment Total Individually Evaluated for Impairment (1) Collectively Evaluated for Impairment Total Mortgage loans on real estate: Residential 1-4 family $ 450 $ 2,591 $ 3,041 $ 6,972 $ 187,604 $ 194,576 Commercial 55 3,967 4,022 6,362 311,593 317,955 Construction and land development 564 789 1,353 4,509 62,899 67,408 Second mortgages 2 101 103 13 8,365 8,378 Multifamily — 178 178 — 45,389 45,389 Agriculture — 27 27 — 6,238 6,238 Total real estate loans 1,071 7,653 8,724 17,856 622,088 639,944 Commercial loans — 727 727 58 102,449 102,507 Consumer installment loans 12 85 97 78 4,850 4,928 All other loans — 11 11 — 1,345 1,345 Total loans $ 1,083 $ 8,476 $ 9,559 $ 17,992 $ 730,732 $ 748,724 December 31, 2014 Allowance for Loan Losses Recorded Investment in Loans Individually Evaluated for Impairment (1) Collectively Evaluated for Impairment Total Individually Evaluated for Impairment (1) Collectively Evaluated for Impairment Total Mortgage loans on real estate: Residential 1-4 family $ 598 $ 2,502 $ 3,100 $ 7,307 $ 159,864 $ 167,171 Commercial 54 2,564 2,618 5,122 277,005 282,127 Construction and land development 628 1,302 1,930 5,096 51,931 57,027 Second mortgages 11 52 63 61 5,936 5,997 Multifamily — 136 136 — 33,812 33,812 Agriculture — 66 66 — 7,163 7,163 Total real estate loans 1,291 6,622 7,913 17,586 535,711 553,297 Commercial loans 529 713 1,242 7,757 92,026 99,783 Consumer installment loans 20 65 85 124 5,372 5,496 All other loans — 27 27 — 1,444 1,444 Total loans $ 1,840 $ 7,427 $ 9,267 $ 25,467 $ 634,553 $ 660,020 (1) The category “Individually Evaluated for Impairment” includes loans individually evaluated for impairment and determined not to be impaired. These loans totalled $7. 3 million and $8. 6 million at December 31, 2015 and 2014, respectively. The allowance for loans losses allocated to these loans was $44,000 and $146,000 at December 31, 2015 and 2014, respectively. Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows: Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $13.4 million and $18.3 million at December 31, 2015 and 2014, respectively. Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification. Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the possibility of loss if the deficiencies are not corrected. Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. The possibility of loss is extremely high. The following tables present the composition of loans, excluding PCI loans, by credit quality indicator at December 31, 2015 and 2014 (dollars in thousands): December 31, 2015 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 182,394 $ 6,612 $ 5,570 $ — $ 194,576 Commercial 306,267 8,520 3,168 — 317,955 Construction and land development 62,391 434 4,583 — 67,408 Second mortgages 7,126 1,239 13 — 8,378 Multifamily 45,389 — — — 45,389 Agriculture 6,113 125 — — 6,238 Total real estate loans 609,680 16,930 13,334 — 639,944 Commercial loans 98,159 4,290 58 — 102,507 Consumer installment loans 4,593 256 79 — 4,928 All other loans 1,345 — — — 1,345 Total loans $ 713,777 $ 21,476 $ 13,471 $ — $ 748,724 December 31, 2014 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 153,699 $ 7,540 $ 5,932 $ — $ 167,171 Commercial 268,391 10,363 3,373 — 282,127 Construction and land development 51,473 620 4,934 — 57,027 Second mortgages 4,636 1,300 61 — 5,997 Multifamily 33,812 — — — 33,812 Agriculture 7,163 — — — 7,163 Total real estate loans 519,174 19,823 14,300 — 553,297 Commercial loans 90,035 1,991 7,757 — 99,783 Consumer installment loans 5,351 21 124 — 5,496 All other loans 1,444 — — — 1,444 Total loans $ 616,004 $ 21,835 $ 22,181 $ — $ 660,020 In accordance with FASB ASU 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 17 loans for each of the years ended December 31, 2015 and 2014 that met the definition of a TDR. During the year ended December 31, 2015, the Company modified one residential 1-4 family loan that was considered to be a TDR. The Company extended the terms and lowered the interest rate for this loan, which had a pre - and post-modification balance of $68,000 . During the year ended December 31, 2014, the Company modified one commercial real estate loan that was considered to be a TDR. The Company extended the terms and lowered the interest rate for this loan, which had a pre - and post-modification balance of $69,000 . During the year ended December 31, 2013, the Company modified one residential 1-4 family loan and one commercial real estate loan that were considered to be TDR ’s. The Company extended the terms and lowered the interest rate for these loans , which had a pre-and post -modification balance of $863,000 . A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured during the previous 12 months that resulted in default during the year ended December 31, 2015 and 2014. There was one TDR that had been restructured during the previous 12 months that resulted in default during the year ended December 31, 2013. This residential 1-4 family loan had a recorded investment of $173,000 . In the determination of the allowance for loan losses, management considers TDRs and subsequent defaults in these restructures by reviewing for impairment in accordance with FASB ASC 310-10-35, Receivables, Subsequent Measurement . At December 31, 2015 the Company had 1-4 family mortgages in the amount of $141.0 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $123. 5 million. |