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, 2017 and December 31, 2016 were comprised of the following (dollars in thousands): September 30, 2017 December 31, 2016 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1-4 family $ 229,745 25.82 % $ 207,863 24.86 % Commercial 345,759 38.85 339,804 40.63 Construction and land development 102,594 11.53 98,282 11.75 Second mortgages 7,399 0.83 7,911 0.95 Multifamily 53,642 6.03 39,084 4.67 Agriculture 7,588 0.85 7,185 0.86 Total real estate loans 746,727 83.91 700,129 83.72 Commercial loans 136,643 15.35 129,300 15.46 Consumer installment loans 5,331 0.60 5,627 0.67 All other loans 1,279 0.14 1,243 0.15 Total loans $ 889,980 100.00 % $ 836,299 100.00 % The Company held $16.7 million and $15.8 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 30, 2017 and December 31, 2016, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $ 752,000 and $ 749,000 at September 30, 2017 and December 31, 2016, 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 30, 2017 and December 31, 2016, 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, 2017 (dollars in thousands): Three months ended Nine months ended September 30, 2017 September 30, 2017 September 30, 2017 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 $ 1,929 $ 2,257 $ — $ 1,935 $ 7 $ 1,941 $ 21 Commercial 3,905 4,510 — 3,802 39 4,582 114 Agriculture — — — 129 — 65 — Total real estate loans 5,834 6,767 — 5,866 46 6,588 135 Commercial loans 1,248 1,248 — 624 — 612 — Subtotal impaired loans with no valuation allowance 7,082 8,015 — 6,490 46 7,200 135 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 2,379 2,831 307 2,373 20 2,426 59 Commercial 2,510 2,920 119 2,653 2 1,580 6 Construction and land development 4,283 5,542 456 4,290 — 4,595 — Agriculture 66 68 8 33 — 16 — Total real estate loans 9,238 11,361 890 9,349 22 8,617 65 Commercial loans 1,640 1,923 72 1,570 1 869 3 Consumer installment loans 30 33 4 20 — 91 — Subtotal impaired loans with a valuation allowance 10,908 13,317 966 10,939 23 9,577 68 Total: Mortgage loans on real estate: Residential 1-4 family 4,308 5,088 307 4,308 27 4,367 80 Commercial 6,415 7,430 119 6,455 41 6,162 120 Construction and land development 4,283 5,542 456 4,290 — 4,595 — Agriculture 66 68 8 162 — 81 — Total real estate loans 15,072 18,128 890 15,215 68 15,205 200 Commercial loans 2,888 3,171 72 2,194 1 1,481 3 Consumer installment loans 30 33 4 20 — 91 — Total impaired loans $ 17,990 $ 21,332 $ 966 $ 17,429 $ 69 $ 16,777 $ 203 (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 or valuation allowances The following table summarizes information related to impaired loans as of December 31, 2016 and the three and nine months ended September 30, 2016 (dollars in thousands): Three months ended Nine months ended December 31, 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 $ 1,704 $ 1,931 $ — $ 2,410 $ 5 $ 2,433 $ 13 Commercial 6,570 7,078 — 4,198 39 4,247 117 Second mortgages — — — 135 — 68 — Total real estate loans 8,274 9,009 — 6,743 44 6,748 130 Commercial loans 1,200 1,200 — — — — — Consumer installment loans — — — 122 — 123 — Subtotal impaired loans with no valuation allowance 9,474 10,209 — 6,865 44 6,871 130 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 2,621 3,062 283 2,825 15 3,113 46 Commercial 617 1,051 73 475 2 478 6 Construction and land development 5,495 6,746 730 5,694 — 5,098 — Second mortgages — — — — — 40 — Total real estate loans 8,733 10,859 1,086 8,994 17 8,729 52 Commercial loans 53 53 7 54 — 40 — Consumer installment loans 281 285 37 200 1 140 4 Subtotal impaired loans with a valuation allowance 9,067 11,197 1,130 9,248 18 8,909 56 Total: Mortgage loans on real estate: Residential 1-4 family 4,325 4,993 283 5,235 20 5,546 59 Commercial 7,187 8,129 73 4,673 41 4,725 123 Construction and land development 5,495 6,746 730 5,694 — 5,098 — Second mortgages — — — 135 — 108 — Total real estate loans 17,007 19,868 1,086 15,737 61 15,477 182 Commercial loans 1,253 1,253 7 54 — 40 — Consumer installment loans 281 285 37 322 1 263 4 Total impaired loans $ 18,541 $ 21,406 $ 1,130 $ 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 or valuation allowances Troubled debt restructures and some substandard 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. A reconciliation of impaired loans to nonaccrual loans at September 30, 2017 and December 31, 2016, is set forth in the table below (dollars in thousands): September 30, 2017 December 31, 2016 Nonaccruals $ 12,677 $ 10,243 Trouble debt restructure and still accruing 5,313 4,653 Substandard and still accruing — 3,645 Total impaired $ 17,99 0 $ 18,541 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 nine months ended September 30, 2017 and 2016. For the three months ended September 30, 2017 and 2016, estimated interest income of $224,000 and $198,000 , 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 30, 2017 and 2016, estimated interest income of $550,000 and $588,000 , respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. There were no loans greater than 90 days past due and still accruing interest at September 30, 2017 and December 31, 2016. The following tables present an age analysis of past due status of loans by category as of September 30, 2017 and December 31, 2016 (dollars in thousands): September 30, 2017 30-89 Days Past Due Nonaccrual Total Past Due Current Total Loans Receivable Mortgage loans on real estate: Residential 1-4 family $ 579 $ 2,140 $ 2,719 $ 227,026 $ 229,745 Commercial — 3,492 3,492 342,267 345,759 Construction and land development — 4,283 4,283 98,311 102,594 Second mortgages — — — 7,399 7,399 Multifamily 2,545 — 2,545 51,097 53,642 Agriculture — 66 66 7,522 7,588 Total real estate loans 3,124 9,981 13,105 733,622 746,727 Commercial loans 603 2,666 3,269 133,374 136,643 Consumer installment loans 17 30 47 5,284 5,331 All other loans — — — 1,279 1,279 Total loans $ 3,744 $ 12,677 $ 16,421 $ 873,559 $ 889,980 December 31, 2016 30-89 Days Past Due Nonaccrual Total Past Due Current Total Loans Receivable Mortgage loans on real estate: Residential 1-4 family $ 296 $ 2,893 $ 3,189 $ 204,674 $ 207,863 Commercial — 1,758 1,758 338,046 339,804 Construction and land development 54 5,495 5,549 92,733 98,282 Second mortgages — — — 7,911 7,911 Multifamily — — — 39,084 39,084 Agriculture — — — 7,185 7,185 Total real estate loans 350 10,146 10,496 689,633 700,129 Commercial loans — 53 53 129,247 129,300 Consumer installment loans 3 44 47 5,580 5,627 All other loans — — — 1,243 1,243 Total loans $ 353 $ 10,243 $ 10,596 $ 825,703 $ 836,299 Activity in the allowance for loan losses on loans by segment for the three and nine months ended September 30, 2017 and 2016 is presented in the following tables (dollars in thousands): Three Months Ended September 30, 2017 June 30, 2017 Provision Allocation Charge-offs Recoveries September 30, 2017 Mortgage loans on real estate: Residential 1-4 family $ 3,797 $ (444) $ (73) $ 15 $ 3,295 Commercial 1,783 897 (457) 14 2,237 Construction and land development 1,383 (78) (180) — 1,125 Second mortgages 33 9 — 2 44 Multifamily 167 566 — — 733 Agriculture 21 (2) — — 19 Total real estate loans 7,184 948 (710) 31 7,453 Commercial loans 1,457 (193) (265) 2 1,001 Consumer installment loans 111 26 (86) 56 107 All other loans 9 (4) — — 5 Unallocated 728 (627) — — 101 Total loans $ 9,489 $ 150 $ (1,061) $ 89 $ 8,667 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 $ 2,445 $ 739 $ (202) $ 13 $ 2,995 Commercial 3,572 (1,057) — 21 2,536 Construction and land development 1,577 (154) (15) 1 1,409 Second mortgages 46 (24) — 2 24 Multifamily 293 297 — — 590 Agriculture 25 (9) — — 16 Total real estate loans 7,958 (208) (217) 37 7,570 Commercial loans 1,268 (392) — — 876 Consumer installment loans 102 38 (31) 7 116 All other loans 10 (3) — — 7 Unallocated 96 815 — — 911 Total loans $ 9,434 $ 250 $ (248) $ 44 $ 9,480 Nine Months Ended September 30, 2017 December 31, 2016 Provision Allocation Charge-offs Recoveries September 30, 2017 Mortgage loans on real estate: Residential 1-4 family $ 2,769 $ 545 $ (111) $ 92 $ 3,295 Commercial 1,952 703 (457) 39 2,237 Construction and land development 2,195 (939) (194) 63 1,125 Second mortgages 72 (79) — 51 44 Multifamily 260 473 — — 733 Agriculture 15 4 — — 19 Total real estate loans 7,263 707 (762) 245 7,453 Commercial loans 602 779 (385) 5 1,001 Consumer installment loans 135 51 (209) 130 107 All other loans 7 (2) — — 5 Unallocated 1,486 (1,385) — — 101 Total loans $ 9,493 $ 150 $ (1,356) $ 380 $ 8,667 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 $ 2,884 $ 514 $ (527) $ 124 $ 2,995 Commercial 3,769 (1,171) (112) 50 2,536 Construction and land development 1,298 123 (15) 3 1,409 Second mortgages 96 (80) — 8 24 Multifamily 141 449 — — 590 Agriculture 24 (8) — — 16 Total real estate loans 8,212 (173) (654) 185 7,570 Commercial loans 631 234 — 11 876 Consumer installment loans 93 94 (147) 76 116 All other loans 25 (18) — — 7 Unallocated 598 313 — — 911 Total loans $ 9,559 $ 450 $ (801) $ 272 $ 9,480 The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of September 30, 2017 and December 31, 2016 (dollars in thousands): September 30, 2017 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 $ 307 $ 2,988 $ 3,295 $ 4,308 $ 225,437 $ 229,745 Commercial 119 2,118 2,237 6,415 339,344 345,759 Construction and land development 456 669 1,125 4,283 98,311 102,594 Second mortgages — 44 44 — 7,399 7,399 Multifamily — 733 733 — 53,642 53,642 Agriculture 8 11 19 66 7,522 7,588 Total real estate loans 890 6,563 7,453 15,072 731,655 746,727 Commercial loans 72 929 1,001 2,888 133,755 136,643 Consumer installment loans 4 103 107 30 5,301 5,331 All other loans — 5 5 — 1,279 1,279 Unallocated — 101 101 — — — Total loans $ 966 $ 7,701 $ 8,667 $ 17,990 $ 871,990 $ 889,980 December 31, 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 $ 283 $ 2,486 $ 2,769 $ 4,325 $ 203,538 $ 207,863 Commercial 73 1,879 1,952 7,187 332,617 339,804 Construction and land development 730 1,465 2,195 5,495 92,787 98,282 Second mortgages — 72 72 — 7,911 7,911 Multifamily — 260 260 — 39,084 39,084 Agriculture — 15 15 — 7,185 7,185 Total real estate loans 1,086 6,177 7,263 17,007 683,122 700,129 Commercial loans 7 595 602 1,253 128,047 129,300 Consumer installment loans 37 98 135 281 5,346 5,627 All other loans — 7 7 — 1,243 1,243 Unallocated — 1,486 1,486 — — — Total loans $ 1,130 $ 8,363 $ 9,493 $ 18,541 $ 817,758 $ 836,299 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 $16.7 million and $15.8 million at September 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016 (dollars in thousands): September 30, 2017 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 223,878 $ 3,638 $ 2,229 $ — $ 229,745 Commercial 337,645 3,102 5,012 — 345,759 Construction and land development 98,132 179 4,283 — 102,594 Second mortgages 7,292 107 — — 7,399 Multifamily 51,097 — 2,545 — 53,642 Agriculture 7,115 387 86 — 7,588 Total real estate loans 725,159 7,413 14,155 — 746,727 Commercial loans 133,173 769 2,701 — 136,643 Consumer installment loans 5,283 18 30 — 5,331 All other loans 1,279 — — — 1,279 Total loans $ 864,894 $ 8,200 $ 16,886 $ — $ 889,980 December 31, 2016 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 199,973 $ 4,612 $ 3,278 $ — $ 207,863 Commercial 330,851 3,168 5,785 — 339,804 Construction and land development 92,556 234 5,492 — 98,282 Second mortgages 7,474 437 — — 7,911 Multifamily 36,474 — 2,610 — 39,084 Agriculture 7,067 118 — — 7,185 Total real estate loans 674,395 8,569 17,165 — 700,129 Commercial loans 122,129 5,879 1,292 — 129,300 Consumer installment loans 5,563 20 44 — 5,627 All other loans 1,243 — — — 1,243 Total loans $ 803,330 $ 14,468 $ 18,501 $ — $ 836,299 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 23 and 1 7 loans that met the definition of a TDR as of September 30, 2017 and 2016, respectively. During the three months ended September 30, 2017, the Company modified two 1-4 family loans that were considered to be TDRs. The Company lowered the interest rate and extended the ter m for each of the 1-4 family loans, which had a pre- and post -modification balance of $ 354 ,000 . During the nine months ended September 30, 2017, the Company modified three 1-4 family loans and one agriculture loan that were considered to be TDRs. The Company extended the term s for two of the 1-4 family loans and lowered the interest rate for each of these loans , which had a pre- and post -modification balance of $1.1 million. The Company extended the term for the agriculture loan, which had a pre- and post -modification balance of $258,000 . The Company had no loan modifications considered to be TDRs during the three months ended September 30, 2016. During the nine months ended September 30, 2016, the Company modified on e residential 1-4 family loan and one consumer installment loan that were considered to be TDRs. The Company extended the term for the residen tial 1-4 family loan , which had a pre- and post-modification balance of $81,000 and $97,000 , respectively. The Company extended the term and lowered the interest rate for the consumer installment loan, which had a pre- and post -modification balance of $248,000 . 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 30, 2017 and 2016. 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 30, 2017, the Company had 1-4 family mortgages in the amount of $147.4 million pledged to the Federal Home Loan Bank with a lendable collateral value of $124.0 million. |