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 September 30, 2016 and December 31, 2015 were comprised of the following (dollars in thousands): September 30, 2016 December 31, 2015 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1-4 family $ 207,422 25.55 % $ 194,576 25.99 % Commercial 331,120 40.79 317,955 42.47 Construction and land development 88,543 10.91 67,408 9.00 Second mortgages 8,378 1.03 8,378 1.12 Multifamily 43,137 5.31 45,389 6.06 Agriculture 7,910 0.98 6,238 0.83 Total real estate loans 686,510 84.57 639,944 85.47 Commercial loans 118,770 14.63 102,507 13.69 Consumer installment loans 5,226 0.64 4,928 0.66 All other loans 1,292 0.16 1,345 0.18 Total loans $ 811,798 100.00 % $ 748,724 100.00 % The Company held $14.9 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 September 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 $ 681,000 and $ 586,000 at September 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 September 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 September 30, 2016 (dollars in thousands): Three months ended Nine months ended September 30, 2016 September 30, 2016 September 30, 2016 With no related allowance recorded: Recorded Investment (1) Unpaid Principal Balance (2) Related Allowance Average Investment Interest Recognized Average Investment Interest Recognized Mortgage loans on real estate: Residential 1-4 family $ 1,843 $ 2,056 $ — $ 2,410 $ 5 $ 2,433 $ 13 Commercial 4,159 4,661 — 4,198 39 4,247 117 Construction and land development — — — — — — — Second mortgages 135 135 — 135 — 68 — Total real estate loans 6,137 6,852 — 6,743 44 6,748 130 Commercial loans — — — — — — — Consumer installment loans — — — 122 — 123 — Subtotal impaired loans with no valuation allowance 6,137 6,852 — 6,865 44 6,871 130 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 3,267 3,714 335 2,825 15 3,113 46 Commercial 456 814 54 475 2 478 6 Construction and land development 5,684 7,350 764 5,694 — 5,098 — Second mortgages — — — — — 40 — Total real estate loans 9,407 11,878 1,153 8,994 17 8,729 52 Commercial loans 53 53 7 54 — 40 — Consumer installment loans 316 325 43 200 1 140 4 Subtotal impaired loans with a valuation allowance 9,776 12,256 1,203 9,248 18 8,909 56 Total: Mortgage loans on real estate: Residential 1-4 family 5,110 5,770 335 5,235 20 5,546 59 Commercial 4,615 5,475 54 4,673 41 4,725 123 Construction and land development 5,684 7,350 764 5,694 — 5,098 — Second mortgages 135 135 — 135 — 108 — Total real estate loans 15,544 18,730 1,153 15,737 61 15,477 182 Commercial loans 53 53 7 54 — 40 — Consumer installment loans 316 325 43 322 1 263 4 Total impaired loans $ 15,913 $ 19,108 $ 1,203 $ 16,113 $ 62 $ 15,780 $ 186 (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): Three months ended Nine months ended December 31, 2015 September 30, 2015 September 30, 2015 With no related allowance recorded: Recorded Investment (1) Unpaid Principal Balance (2) Related Allowance Average Investment Interest Recognized Average Investment Interest Recognized Mortgage loans on real estate: Residential 1-4 family $ 2,749 $ 3,274 $ — $ 1,768 $ 11 $ 1,892 $ 34 Commercial 4,327 4,814 — 4,420 40 4,583 119 Construction and land development — — — 197 — 186 — Second mortgages — — — — — — — Total real estate loans 7,076 8,088 — 6,385 51 6,661 153 Commercial loans — — — — — — — Consumer installment loans — — — — — 1 — Subtotal impaired loans with no valuation allowance 7,076 8,088 — 6,385 51 6,662 153 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 3,215 3,619 490 3,895 7 3,314 21 Commercial 375 699 64 438 4 371 11 Construction and land development 4,508 6,179 574 4,435 — 4,587 — Second mortgages 13 14 2 37 — 49 — Total real estate loans 8,111 10,511 1,130 8,805 11 8,321 32 Commercial loans — — — 2 — 3,734 — Consumer installment loans 79 84 14 83 — 93 — Subtotal impaired loans with a valuation allowance 8,190 10,595 1,144 8,890 11 12,148 32 Total: Mortgage loans on real estate: Residential 1-4 family 5,964 6,893 490 5,663 18 5,206 55 Commercial 4,702 5,513 64 4,858 44 4,954 130 Construction and land development 4,508 6,179 574 4,632 — 4,773 — Second mortgages 13 14 2 37 — 49 — Total real estate loans 15,187 18,599 1,130 15,190 62 14,982 185 Commercial loans — — — 2 — 3734 — Consumer installment loans 79 84 14 83 — 94 — Total impaired loans $ 15,266 $ 18,683 $ 1,144 $ 15,275 $ 62 $ 18,810 $ 185 (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 Troubled debt restructures 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. A reconciliation of impaired loans to nonaccrual loans at September 30, 2016 and December 31, 2015, is set forth in the table below (dollars in thousands): September 30, 2016 December 31, 2015 Nonaccruals $ 11,213 $ 10,670 Trouble debt restructures still accruing 4,700 4,596 Total impaired $ 15,913 $ 15,266 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 September 30, 2016 and 2015, and the nine months ended September 3 0 , 2016. Cash basis income of $487,000 was recognized during the nine months ended September 3 0 , 2015. For the three months ended September 3 0 , 2016 and 2015, estimated interest income of $198,000 and $224,000 , respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the nine months ended September 3 0 , 2016 and 2015, estimated interest income of $588,000 and $548,000 , 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 September 30, 2016 and December 31, 2015 (dollars in thousands): September 30, 2016 30-89 Days Past Due Nonaccrual Total Past Due Current Total Loans Receivable Mortgage loans on real estate: Residential 1-4 family $ 761 $ 3,665 $ 4,426 $ 202,996 $ 207,422 Commercial 1,791 1,599 3,390 327,730 331,120 Construction and land development 26 5,684 5,710 82,833 88,543 Second mortgages 13 135 148 8,230 8,378 Multifamily 5,256 — 5,256 37,881 43,137 Agriculture — — — 7,910 7,910 Total real estate loans 7,847 11,083 18,930 667,580 686,510 Commercial loans — 53 53 118,717 118,770 Consumer installment loans 3 77 80 5,146 5,226 All other loans — — — 1,292 1,292 Total loans $ 7,850 $ 11,213 $ 19,063 $ 792,735 $ 811,798 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 nine months ended September 30, 2016 and 2015 is presented in the following tables (dollars in thousands): Three months ended September 30, 2016 June 30, 2016 Provision Allocation Charge-offs Recoveries September 30, 2016 Mortgage loans on real estate: Residential 1-4 family $ 2,470 $ 949 $ (202) $ 13 $ 3,230 Commercial 3,611 (721) — 21 2,911 Construction and land development 1,587 (67) (15) 1 1,506 Second mortgages 47 (15) — 2 34 Multifamily 299 341 — — 640 Agriculture 26 5 — — 31 Total real estate loans 8,040 492 (217) 37 8,352 Commercial loans 1,280 (282) — — 998 Consumer installment loans 103 43 (31) 7 122 All other loans 11 (3) — — 8 Total loans $ 9,434 $ 250 $ (248) $ 44 $ 9,480 Three Months Ended September 30, 2015 June 30, 2015 Provision Allocation Charge-offs Recoveries September 30, 2015 Mortgage loans on real estate: Residential 1-4 family $ 3,612 $ 82 $ (25) $ 6 $ 3,675 Commercial 3,559 (432) — 9 3,136 Construction and land development 1,639 195 (138) 1 1,697 Second mortgages 56 21 — 3 80 Multifamily 251 (59) — — 192 Agriculture 77 (44) — — 33 Total real estate loans 9,194 (237) (163) 19 8,813 Commercial loans 561 200 (3) — 758 Consumer installment loans 78 54 (43) 27 116 All other loans 31 (17) — — 14 Total loans $ 9,864 $ — $ (209) $ 46 $ 9,701 Nine months ended September 30, 2016 December 31, 2015 Provision Allocation Charge-offs Recoveries September 30, 2016 Mortgage loans on real estate: Residential 1-4 family $ 3,041 $ 592 $ (527) $ 124 $ 3,230 Commercial 4,022 (1,049) (112) 50 2,911 Construction and land development 1,353 165 (15) 3 1,506 Second mortgages 103 (77) — 8 34 Multifamily 178 462 — — 640 Agriculture 27 4 — — 31 Total real estate loans 8,724 97 (654) 185 8,352 Commercial loans 727 260 — 11 998 Consumer installment loans 97 96 (147) 76 122 All other loans 11 (3) — — 8 Total loans $ 9,559 $ 450 $ (801) $ 272 $ 9,480 Nine Months Ended September 30, 2015 December 31, 2014 Provision Allocation Charge-offs Recoveries September 30, 2015 Mortgage loans on real estate: Residential 1-4 family $ 3,100 $ 837 $ (325) $ 63 $ 3,675 Commercial 2,618 494 — 24 3,136 Construction and land development 1,930 341 (593) 19 1,697 Second mortgages 63 (79) — 96 80 Multifamily 136 56 — — 192 Agriculture 66 (33) — — 33 Total real estate loans 7,913 1,616 (918) 202 8,813 Commercial loans 1,242 (1,689) (3) 1,208 758 Consumer installment loans 85 86 (139) 84 116 All other loans 27 (13) — — 14 Total loans $ 9,267 $ — $ (1,060) $ 1,494 $ 9,701 The Company recorded a provision for loan losses in the amounts of $250,000 and $450,000 for the three and nine months ended September 30, 2016, respectively, 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 September 30, 2016 and December 31, 2015 (dollars in thousands): September 30, 2016 Allowance for Loan Losses Recorded Investment in Loans Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Mortgage loans on real estate: Residential 1-4 family $ 335 $ 2,895 $ 3,230 $ 5,110 $ 202,312 $ 207,422 Commercial 54 2,857 2,911 4,615 326,505 331,120 Construction and land development 764 742 1,506 5,684 82,859 88,543 Second mortgages — 34 34 135 8,243 8,378 Multifamily — 640 640 — 43,137 43,137 Agriculture — 31 31 — 7,910 7,910 Total real estate loans 1,153 7,199 8,352 15,544 670,966 686,510 Commercial loans 7 991 998 53 118,717 118,770 Consumer installment loans 43 79 122 316 4,910 5,226 All other loans — 8 8 — 1,292 1,292 Total loans $ 1,203 $ 8,277 $ 9,480 $ 15,913 $ 795,885 $ 811,798 December 31, 2015 Allowance for Loan Losses Recorded Investment in Loans Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Mortgage loans on real estate: Residential 1-4 family $ 490 $ 2,551 $ 3,041 $ 5,964 $ 188,612 $ 194,576 Commercial 64 3,958 4,022 4,702 313,253 317,955 Construction and land development 574 779 1,353 4,508 62,900 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 1,130 7,594 8,724 15,187 624,757 639,944 Commercial loans — 727 727 — 102,507 102,507 Consumer installment loans 14 83 97 79 4,849 4,928 All other loans — 11 11 — 1,345 1,345 Total loans $ 1,144 $ 8,415 $ 9,559 $ 15,266 $ 733,458 $ 748,724 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 $14.9 million and $13.4 million at September 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 September 30, 2016 and December 31, 2015 (dollars in thousands): September 30, 2016 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 197,736 $ 5,597 $ 4,089 $ — $ 207,422 Commercial 322,525 3,382 5,213 — 331,120 Construction and land development 82,623 236 5,684 — 88,543 Second mortgages 7,775 468 135 — 8,378 Multifamily 35,645 2,633 4,859 — 43,137 Agriculture 7,793 117 — — 7,910 Total real estate loans 654,097 12,433 19,980 — 686,510 Commercial loans 114,551 2,910 1,309 — 118,770 Consumer installment loans 5,130 19 77 — 5,226 All other loans 1,292 — — — 1,292 Total loans $ 775,070 $ 15,362 $ 21,366 $ — $ 811,798 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 September 30, 2016 and 2015 , respectively . The Company had no loan modifications considered to be TDRs during the three months ended September 30, 2016. During the nine months ended September 3 0 , 2016, the Company modified one residential 1-4 family loan and one consumer installment loan that w ere considered to be TDR s . 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 . The Company had no loan modifications considered to be TDRs during the three months ended September 30, 2015. During the nine months ended September 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 nine months ended September 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 September 3 0 , 2016, the Company had 1-4 family mortgages in the amount of $151.1 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $137.3 million. |