Loans and Related Allowance for Loan Losses | Note 3. Loans and Related Allowance for Loan Losses The Company’s loans, net of deferred fees and costs, at March 31, 2016 and December 31, 2015 were comprised of the following (dollars in thousands): March 31, 2016 December 31, 2015 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1-4 family $ 197,337 25.78 % $ 194,576 25.99 % Commercial 320,473 41.87 317,955 42.47 Construction and land development 72,882 9.52 67,408 9.00 Second mortgages 8,170 1.07 8,378 1.12 Multifamily 47,852 6.25 45,389 6.06 Agriculture 6,068 0.79 6,238 0.83 Total real estate loans 652,782 85.28 639,944 85.47 Commercial loans 106,354 13.89 102,507 13.69 Consumer installment loans 5,007 0.65 4,928 0.66 All other loans 1,342 0.18 1,345 0.18 Total loans $ 765,485 100.00 % $ 748,724 100.00 % The Company held $13. 2 million and $13. 4 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 March 31, 2016 and December 31, 2015, 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 $ 538,000 and $ 586,000 at March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015, the Company’s allowance for credit losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB ASC 310, Receivables, (ii) a general valuation component calculated in accordance with FASB Accounting Standards Codification (ASC) 450, Contingencies , based on historical loan loss experience, economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses . Management identified loans subject to impairment in accordance with ASC 310. The following table summarizes information related to impaired loans as of March 31, 2016 (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 $ 3,152 $ 3,779 $ 320 Commercial 534 763 77 Construction and land development 4,496 6,166 560 Second mortgages 148 150 21 Total real estate loans 8,330 10,858 978 Commercial loans 54 54 8 Consumer installment loans 80 87 12 Subtotal impaired loans with a valuation allowance 8,464 10,999 998 With no related allowance recorded: Mortgage loans on real estate: Residential 1-4 family 1,203 1,312 — Commercial 1,265 1,499 — Total real estate loans 2,468 2,811 — Subtotal impaired loans without a valuation allowance 2,468 2,811 — Total: Mortgage loans on real estate: Residential 1-4 family 4,355 5,091 320 Commercial 1,799 2,262 77 Construction and land development 4,496 6,166 560 Second mortgages 148 150 21 Total real estate loans 10,798 13,669 978 Commercial loans 54 54 8 Consumer installment loans 80 87 12 Total impaired loans $ 10,932 $ 13,810 $ 998 (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, 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 the average recorded investment of impaired loans for the three months ended March 31, 2016 and 2015 (dollars in thousands): Three months ended March 31, 2016 March 31, 2015 Mortgage loans on real estate: Residential 1-4 family $4,458 $3,199 Commercial 1,654 1,279 Construction and land development 4,502 4,915 Second mortgages 81 61 Total real estate loans 10,695 9,454 Commercial loans 27 7,465 Consumer installment loans 79 105 Total impaired loans $10,801 $17,024 During each of the three months ended March 31, 2016 and 2015, all of the impaired loans were also nonaccruing for which no interest income was recognized . Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the three months ended March 31, 2016. Cash basis income of $168,000 was recognized during the three months ended March 31, 2015. For the three months ended March 31, 2016, and 2015, estimated interest income of $204,000 and $326,000 , 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 by loan category as of March 31, 2016 and December 31, 2015 (dollars in thousands): March 31, 2016 December 31, 2015 Mortgage loans on real estate: Residential 1-4 family $ 4,355 $ 4,562 Commercial 1,799 1,508 Construction and land development 4,496 4,509 Second mortgages 148 13 Total real estate loans 10,798 10,592 Commercial loans 54 — Consumer installment loans 80 78 Total loans $ 10,932 $ 10,670 The following tables present an age analysis of past due status of loans by category as of March 31, 2016 and December 31, 2015 (dollars in thousands): March 31, 2016 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 $ 798 $ 4,355 $ 5,153 $ 192,184 $ 197,337 $ — Commercial 1,647 1,799 3,446 317,027 320,473 — Construction and land development 1,023 4,496 5,519 67,363 72,882 — Second mortgages — 148 148 8,022 8,170 — Multifamily — — — 47,852 47,852 — Agriculture — — — 6,068 6,068 — Total real estate loans 3,468 10,798 14,266 638,516 652,782 — Commercial loans 60 54 114 106,240 106,354 — Consumer installment loans 7 80 87 4,920 5,007 — All other loans 35 — 35 1,307 1,342 — Total loans $ 3,570 $ 10,932 $ 14,502 $ 750,983 $ 765,485 $ — 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 $ — Activity in the allowance for loan losses on loans by segment for the three months ended March 31, 2016 and 2015 is presented in the following tables (dollars in thousands): December 31, 2015 Provision Allocation Charge-offs Recoveries March 31, 2016 Mortgage loans on real estate: Residential 1-4 family $ 3,041 $ (409) $ (19) $ 98 $ 2,711 Commercial 4,022 (473) (37) 12 3,524 Construction and land development 1,353 330 — 1 1,684 Second mortgages 103 7 — 4 114 Multifamily 178 184 — — 362 Agriculture 27 (11) — — 16 Total real estate loans 8,724 (372) (56) 115 8,411 Commercial loans 727 357 — — 1,084 Consumer installment loans 97 19 (82) 58 92 All other loans 11 (4) — — 7 Total loans $ 9,559 $ — $ (138) $ 173 $ 9,594 December 31, 2014 Provision Allocation Charge-offs Recoveries March 31, 2015 Mortgage loans on real estate: Residential 1-4 family $ 3,100 $ 12 $ (300) $ 49 $ 2,861 Commercial 2,618 (53) — 6 2,571 Construction and land development 1,930 (438) — 11 1,503 Second mortgages 63 (10) — 2 55 Multifamily 136 39 — — 175 Agriculture 66 4 — — 70 Total real estate loans 7,913 (446) (300) 68 7,235 Commercial loans 1,242 402 — 6 1,650 Consumer installment loans 85 42 (62) 32 97 All other loans 27 2 — — 29 Total loans $ 9,267 $ — $ (362) $ 106 $ 9,011 The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of March 31, 2016 and December 31, 2015 (dollars in thousands): March 31, 2016 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 $ 385 $ 2,326 $ 2,711 $ 6,609 $ 190,728 $ 197,337 Commercial 89 3,435 3,524 6,500 313,973 320,473 Construction and land development 560 1,124 1,684 4,497 68,385 72,882 Second mortgages 21 93 114 148 8,022 8,170 Multifamily — 362 362 — 47,852 47,852 Agriculture — 16 16 — 6,068 6,068 Total real estate loans 1,055 7,356 8,411 17,754 635,028 652,782 Commercial loans 8 1,076 1,084 96 106,258 106,354 Consumer installment loans 12 80 92 328 4,679 5,007 All other loans — 7 7 — 1,342 1,342 Total loans $ 1,075 $ 8,519 $ 9,594 $ 18,178 $ 747,307 $ 765,485 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 (1) The category “Individually Evaluated for Impairment” includes loans individually evaluated for impairment and determined not to be impaired. These loans totalled $7. 2 million and $7. 3 million at March 31, 2016 and December 31, 2015, respectively. The allowance for loan losses allocated to these loans was $77,000 and $44,000 at March 31, 2016 and December 31, 2015, 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 $13.2 million and $13.4 million at March 31, 2016 and December 31, 2015, 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 distinct 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 by credit quality indicator at March 31, 2016 and December 31, 2015 (dollars in thousands): March 31, 2016 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 185,005 $ 7,127 $ 5,205 $ — $ 197,337 Commercial 313,959 3,115 3,399 — 320,473 Construction and land development 66,587 1,799 4,496 — 72,882 Second mortgages 7,368 654 148 — 8,170 Multifamily 47,852 — — — 47,852 Agriculture 5,946 122 — — 6,068 Total real estate loans 626,717 12,817 13,248 — 652,782 Commercial loans 102,465 3,793 96 — 106,354 Consumer installment loans 4,895 31 81 — 5,007 All other loans 1,342 — — — 1,342 Total loans $ 735,419 $ 16,641 $ 13,425 $ — $ 765,485 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 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 and 18 loans that met the definition of a TDR at March 30, 2016 and 2015, respectively. During the three months ended March 31, 2016, the Company modified one consumer installment 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 $248,000 . During the three months ended March 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 . 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 either of the three months ended March 31, 2016 and 2015. 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 March 31, 2016, the Company had 1-4 family mortgages in the amount of $140.4 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $125.1 million. |