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 June 30, 2016 and December 31, 2015 were comprised of the following (dollars in thousands): June 30, 2016 December 31, 2015 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1-4 family $ 204,639 26.07 % $ 194,576 25.99 % Commercial 325,394 41.45 317,955 42.47 Construction and land development 79,826 10.17 67,408 9.00 Second mortgages 8,212 1.05 8,378 1.12 Multifamily 44,585 5.68 45,389 6.06 Agriculture 7,988 1.02 6,238 0.83 Total real estate loans 670,644 85.44 639,944 85.47 Commercial loans 107,953 13.75 102,507 13.69 Consumer installment loans 5,125 0.65 4,928 0.66 All other loans 1,294 0.16 1,345 0.18 Total loans $ 785,016 100.00 % $ 748,724 100.00 % The Company held $15.0 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 June 3 0 , 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 a purchase premium of $ 731,000 and $ 586,000 at June 3 0 , 2016 and December 31, 2015, respectively. The purchase premium is amortized 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 June 3 0 , 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 June 30, 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 $ 2,011 $ 2,608 $ 229 Commercial 348 513 50 Construction and land development 5,556 7,193 771 Total real estate loans 7,915 10,314 1,050 Commercial loans 54 54 8 Consumer installment loans 83 91 11 Subtotal impaired loans with a valuation allowance 8,052 10,459 1,069 With no related allowance recorded: Mortgage loans on real estate: Residential 1-4 family 1,965 2,129 — Commercial 1,354 1,742 — Construction and land development 149 182 — Second mortgages 135 135 — Total real estate loans 3,603 4,188 — Subtotal impaired loans without a valuation allowance 3,603 4,188 — Total: Mortgage loans on real estate: Residential 1-4 family 3,976 4,737 229 Commercial 1,702 2,255 50 Construction and land development 5,705 7,375 771 Second mortgages 135 135 — Total real estate loans 11,518 14,502 1,050 Commercial loans 54 54 8 Consumer installment loans 83 91 11 Total impaired loans $ 11,655 $ 14,647 $ 1,069 (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 and six months ended June 30, 2016 and 2015 (dollars in thousands): Three months ended Six months ended June 30, 2016 June 30, 2015 June 30, 2016 June 30, 2015 Mortgage loans on real estate: Residential 1-4 family $ 4,166 $ 3,475 $ 4,269 $ 3,617 Commercial 1,751 1,786 1,605 1,232 Construction and land development 5,101 4,750 5,107 4,917 Second mortgages 142 61 74 61 Total real estate loans 11,160 10,072 11,055 9,827 Commercial loans 54 3,706 27 3,762 Consumer installment loans 82 87 81 103 Total impaired loans $ 11,296 $ 13,865 $ 11,163 $ 13,692 During each of the three and six months ended June 3 0 , 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 and six months ended June 3 0 , 2016. Cash basis income of $260,000 and $465,000 was recognized during the three and six months ended June 3 0 , 2015 , respectively . For the three months ended June 3 0 , 2016, and 2015, estimated interest income of $219,000 and $225,000 , respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the six months ended June 3 0 , 2016, and 2015, estimated interest income of $409,000 and $420,000 , respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. The following tables present an age analysis of past due status of loans by category as of June 30, 2016 and December 31, 2015 (dollars in thousands): June 30, 2016 30-89 Days Past Due Nonaccrual Total Past Due Current Total Loans Receivable Mortgage loans on real estate: Residential 1-4 family $ 632 $ 3,976 $ 4,608 $ 200,031 $ 204,639 Commercial 310 1,702 2,012 323,382 325,394 Construction and land development — 5,705 5,705 74,121 79,826 Second mortgages 25 135 160 8,052 8,212 Multifamily — — — 44,585 44,585 Agriculture — — — 7,988 7,988 Total real estate loans 967 11,518 12,485 658,159 670,644 Commercial loans 235 54 289 107,664 107,953 Consumer installment loans 23 83 106 5,019 5,125 All other loans 34 — 34 1,260 1,294 Total loans $ 1,259 $ 11,655 $ 12,914 $ 772,102 $ 785,016 December 31, 2015 30-89 Days Past Due Nonaccrual Total Past Due Current Total Loans Receivable 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 and six months ended June 30, 2016 and 2015 is presented in the following tables (dollars in thousands): Three months ended June 30, 2016 March 31, 2016 Provision Allocation Charge-offs Recoveries June 30, 2016 Mortgage loans on real estate: Residential 1-4 family $ 2,711 $ 50 $ (305) $ 14 $ 2,470 Commercial 3,524 145 (75) 17 3,611 Construction and land development 1,684 (98) — 1 1,587 Second mortgages 114 (68) — 1 47 Multifamily 362 (63) — — 299 Agriculture 16 10 — — 26 Total real estate loans 8,411 (24) (380) 33 8,040 Commercial loans 1,084 186 — 10 1,280 Consumer installment loans 92 34 (34) 11 103 All other loans 7 4 — — 11 Total loans $ 9,594 $ 200 $ (414) $ 54 $ 9,434 Three months ended June 30, 2015 March 31, 2015 Provision Allocation Charge-offs Recoveries June 30, 2015 Mortgage loans on real estate: Residential 1-4 family $ 2,861 $ 743 $ — $ 8 $ 3,612 Commercial 2,571 979 — 9 3,559 Construction and land development 1,503 584 (455) 7 1,639 Second mortgages 55 (90) — 91 56 Multifamily 175 76 — — 251 Agriculture 70 7 — — 77 Total real estate loans 7,235 2,299 (455) 115 9,194 Commercial loans 1,650 (2,291) — 1,202 561 Consumer installment loans 97 (10) (34) 25 78 All other loans 29 2 — — 31 Total loans $ 9,011 $ — $ (489) $ 1,342 $ 9,864 Six months ended June 30, 2016 December 31, 2015 Provision Allocation Charge-offs Recoveries June 30, 2016 Mortgage loans on real estate: Residential 1-4 family $ 3,041 $ (357) $ (325) $ 111 $ 2,470 Commercial 4,022 (328) (112) 29 3,611 Construction and land development 1,353 232 — 2 1,587 Second mortgages 103 (62) — 6 47 Multifamily 178 121 — — 299 Agriculture 27 (1) — — 26 Total real estate loans 8,724 (395) (437) 148 8,040 Commercial loans 727 542 — 11 1,280 Consumer installment loans 97 53 (116) 69 103 All other loans 11 — — — 11 Total loans $ 9,559 $ 200 $ (553) $ 228 $ 9,434 Six months ended June 30, 2015 December 31, 2014 Provision Allocation Charge-offs Recoveries June 30, 2015 Mortgage loans on real estate: Residential 1-4 family $ 3,100 $ 755 $ (300) $ 57 $ 3,612 Commercial 2,618 926 — 15 3,559 Construction and land development 1,930 146 (455) 18 1,639 Second mortgages 63 (100) — 93 56 Multifamily 136 115 — — 251 Agriculture 66 11 — — 77 Total real estate loans 7,913 1,853 (755) 183 9,194 Commercial loans 1,242 (1,889) — 1,208 561 Consumer installment loans 85 32 (96) 57 78 All other loans 27 4 — — 31 Total loans $ 9,267 $ — $ (851) $ 1,448 $ 9,864 The Company recorded a $200,000 provision for the three and six months ended June 30, 2016 as additional general reserves to support current period loan growth. The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of June 30, 2016 and December 31, 2015 (dollars in thousands): June 30, 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 $ 289 $ 2,181 $ 2,470 $ 5,760 $ 198,879 $ 204,639 Commercial 77 3,534 3,611 6,353 319,041 325,394 Construction and land development 771 816 1,587 5,705 74,121 79,826 Second mortgages — 47 47 135 8,077 8,212 Multifamily — 299 299 — 44,585 44,585 Agriculture — 26 26 — 7,988 7,988 Total real estate loans 1,137 6,903 8,040 17,953 652,691 670,644 Commercial loans 8 1,272 1,280 95 107,858 107,953 Consumer installment loans 12 91 103 327 4,798 5,125 All other loans — 11 11 — 1,294 1,294 Total loans $ 1,157 $ 8,277 $ 9,434 $ 18,375 $ 766,641 $ 785,016 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 $6.7 million and $7. 3 million at June 30, 2016 and December 31, 2015, respectively. The allowance for loan losses allocated to these loans was $88,000 and $44,000 at June 30, 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 $15.0 million and $13.4 million at June 3 0 , 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 June 30, 2016 and December 31, 2015 (dollars in thousands): June 30, 2016 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 193,784 $ 6,474 $ 4,381 $ — $ 204,639 Commercial 318,883 3,188 3,323 — 325,394 Construction and land development 73,901 220 5,705 — 79,826 Second mortgages 7,551 526 135 — 8,212 Multifamily 37,059 7,526 — — 44,585 Agriculture 7,866 122 — — 7,988 Total real estate loans 639,044 18,056 13,544 — 670,644 Commercial loans 104,903 2,955 95 — 107,953 Consumer installment loans 5,021 21 83 — 5,125 All other loans 1,294 — — — 1,294 Total loans $ 750,262 $ 21,032 $ 13,722 $ — $ 785,016 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 18 and 1 9 loans that met the definition of a TDR at June 30, 2016 and 2015, respectively. During the three months ended June 3 0 , 2016, the Company modified one residential 1-4 family loan that w as considered to be a TDR. The Company extended the terms for this loan, which had a pre- and post-modification balance of $81,000 and $97,000 , respectively . During the six months ended June 3 0 , 2016, the Company modified one residential 1-4 family loan and one consumer installment loan that w as considered to be a TDR. The Company extended the terms for the residential 1-4 family loan, which had a pre- and post-modification balance of $81,000 and $97,000 , respectively. The Company extended the terms and lowered the interest rate for the consumer installment loan, which had a pre - and post-modification balance of $248,000 . During the three and six months ended June 3 0 , 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 and six months ended June 3 0 , 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 June 3 0 , 2016, the Company had 1-4 family mortgages in the amount of $149.5 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $134.9 million. |