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 3 1 , 201 8 and December 31, 201 7 were comprised of the following (dollars in thousands): March 31, 2018 December 31, 2017 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1-4 family $ 222,717 23.10 % $ 227,542 24.16 % Commercial 371,494 38.52 366,331 38.89 Construction and land development 109,534 11.36 107,814 11.44 Second mortgages 7,689 0.80 8,410 0.89 Multifamily 59,920 6.21 59,024 6.27 Agriculture 7,424 0.77 7,483 0.79 Total real estate loans 778,778 80.76 776,604 82.44 Commercial loans 170,445 17.67 159,024 16.88 Consumer installment loans 13,878 1.44 5,169 0.55 All other loans 1,210 0.13 1,221 0.13 Total loans $ 964,311 100.00 % $ 942,018 100.00 % The Company held $17.7 million and $18.0 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 3 1 , 201 8 and December 31, 201 7 , respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $ 785,000 and $ 824,000 at March 3 1 , 201 8 and December 31, 201 7 , 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 March 3 1 , 201 8 and December 31, 201 7 , the Company’s allowance for credit losses was comprised of the following: (i) a specific valuation component calculated in accordance with Financial Accounting Standards Board ( FASB ) Accounting Standards Codification (ASC) 310, Receivables, (ii) a general valuation component calculated in accordance with FASB ASC 450, Contingencies , based on historical loan loss experience, current 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 3 1 , 201 8 (dollars in thousands): Three months ended March 31, 2018 March 31, 2018 With no related allowance recorded: Recorded Investment (1) Unpaid Principal Balance (2) Related Allowance Average Investment Interest Recognized Mortgage loans on real estate: Residential 1-4 family $ 1,873 $ 2,235 $ — $ 1,888 $ 7 Commercial 3,825 4,467 — 3,844 37 Construction and land development 417 417 — 208 — Agriculture — — — — — Total real estate loans 6,115 7,119 — 5,940 44 Commercial loans 978 978 — 1,043 — Subtotal impaired loans with no valuation allowance 7,093 8,097 — 6,983 44 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 2,253 2,688 296 2,234 19 Commercial 518 955 64 525 2 Construction and land development 5,137 6,401 694 4,707 — Agriculture 67 71 8 68 — Total real estate loans 7,975 10,115 1,062 7,534 21 Commercial loans 250 251 31 287 1 Consumer installment loans 4 4 — 5 — Subtotal impaired loans with a valuation allowance 8,229 10,370 1,093 7,826 22 Total: Mortgage loans on real estate: Residential 1-4 family 4,126 4,923 296 4,122 26 Commercial 4,343 5,422 64 4,369 39 Construction and land development 5,554 6,818 694 4,915 — Agriculture 67 71 8 68 — Total real estate loans 14,090 17,234 1,062 13,474 65 Commercial loans 1,228 1,229 31 1,330 1 Consumer installment loans 4 4 — 5 — Total impaired loans $ 15,322 $ 18,467 $ 1,093 $ 14,809 $ 66 (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, 201 7 and the three months ended March 3 1 , 201 7 (dollars in thousands): Three months ended December 31, 2017 March 31, 2017 With no related allowance recorded: Recorded Investment (1) Unpaid Principal Balance (2) Related Allowance Average Investment Interest Recognized Mortgage loans on real estate: Residential 1-4 family $ 1,901 $ 2,246 $ — $ 1,947 $ 7 Commercial 3,862 4,477 — 5,363 38 Construction and land development — — — — — Agriculture — — — — — Total real estate loans 5,763 6,723 — 7,310 45 Commercial loans 1,108 1,108 — 600 — Consumer installment loans — — — — — Subtotal impaired loans with no valuation allowance 6,871 7,831 — 7,910 45 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 2,216 2,640 290 2,478 12 Commercial 533 958 65 506 2 Construction and land development 4,277 5,537 556 4,900 — Agriculture 68 71 8 — — Total real estate loans 7,094 9,206 919 7,884 14 Commercial loans 325 446 39 168 1 Consumer installment loans 7 7 1 162 — Subtotal impaired loans with a valuation allowance 7,426 9,659 959 8,214 15 Total: Mortgage loans on real estate: Residential 1-4 family 4,117 4,886 290 4,425 19 Commercial 4,395 5,435 65 5,869 40 Construction and land development 4,277 5,537 556 4,900 — Agriculture 68 71 8 — — Total real estate loans 12,857 15,929 919 15,194 59 Commercial loans 1,433 1,554 39 768 1 Consumer installment loans 7 7 1 162 — Total impaired loans $ 14,297 $ 17,490 $ 959 $ 16,124 $ 60 (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 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 March 3 1 , 201 8 and December 31, 201 7 , is set forth in the table below (dollars in thousands): March 31, 2018 December 31, 2017 Nonaccruals $ 10,090 $ 9,026 Trouble debt restructure and still accruing 5,232 5,271 Total impaired $ 15,322 $ 14,297 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 3 1 , 201 8 and 201 7 . For the three months ended March 3 1 , 201 8 and 201 7 , estimated interest income of $160,000 and $163,000 , 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 March 3 1 , 201 8 and December 31, 201 7 . The following tables present an age analysis of past due status of loans by category as of March 3 1 , 201 8 and December 31, 201 7 (dollars in thousands): March 31, 2018 30-89 Days Past Due Nonaccrual Total Past Due Current Total Loans Receivable Mortgage loans on real estate: Residential 1-4 family $ 1,075 $ 1,985 $ 3,060 $ 219,657 $ 222,717 Commercial 1,611 1,466 3,077 368,417 371,494 Construction and land development 62 5,554 5,616 103,918 109,534 Second mortgages — — — 7,689 7,689 Multifamily — — — 59,920 59,920 Agriculture 19 67 86 7,338 7,424 Total real estate loans 2,767 9,072 11,839 766,939 778,778 Commercial loans 98 1,014 1,112 169,333 170,445 Consumer installment loans 9 4 13 13,865 13,878 All other loans — — — 1,210 1,210 Total loans $ 2,874 $ 10,090 $ 12,964 $ 951,347 $ 964,311 December 31, 2017 30-89 Days Past Due Nonaccrual Total Past Due Current Total Loans Receivable Mortgage loans on real estate: Residential 1-4 family $ 1,056 $ 1,962 $ 3,018 $ 224,524 $ 227,542 Commercial 104 1,498 1,602 364,729 366,331 Construction and land development — 4,277 4,277 103,537 107,814 Second mortgages — — — 8,410 8,410 Multifamily — — — 59,024 59,024 Agriculture 19 68 87 7,396 7,483 Total real estate loans 1,179 7,805 8,984 767,620 776,604 Commercial loans 48 1,214 1,262 157,762 159,024 Consumer installment loans 12 7 19 5,150 5,169 All other loans — — — 1,221 1,221 Total loans $ 1,239 $ 9,026 $ 10,265 $ 931,753 $ 942,018 Activity in the allowance for loan losses on loans by segment for the thre e months ended March 3 1 , 201 8 and 201 7 is presented in the following tables (dollars in thousands): December 31, 2017 Provision Allocation Charge-offs Recoveries March 31, 2018 Mortgage loans on real estate: Residential 1-4 family $ 3,466 $ (366) $ — $ 15 $ 3,115 Commercial 2,423 184 — 13 2,620 Construction and land development 1,247 364 — 1 1,612 Second mortgages 24 9 — 1 34 Multifamily 496 (298) — — 198 Agriculture 14 19 — — 33 Total real estate loans 7,670 (88) — 30 7,612 Commercial loans 1,139 (152) (39) 14 962 Consumer installment loans 110 8 (45) 39 112 All other loans 3 7 — — 10 Unallocated 47 225 — — 272 Total loans $ 8,969 $ — $ (84) $ 83 $ 8,968 December 31, 2016 Provision Allocation Charge-offs Recoveries March 31, 2017 Mortgage loans on real estate: Residential 1-4 family $ 2,769 $ 62 $ (26) $ 18 $ 2,823 Commercial 1,952 (183) — 7 1,776 Construction and land development 2,195 (635) (14) 1 1,547 Second mortgages 72 (69) — 47 50 Multifamily 260 (67) — — 193 Agriculture 15 17 — — 32 Total real estate loans 7,263 (875) (40) 73 6,421 Commercial loans 602 712 — 2 1,316 Consumer installment loans 135 13 (45) 30 133 All other loans 7 8 — — 15 Unallocated 1,486 142 — — 1,628 Total loans $ 9,493 $ — $ (85) $ 105 $ 9,513 The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of March 3 1 , 201 8 and December 31, 201 7 (dollars in thousands): March 31, 2018 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 $ 296 $ 2,819 $ 3,115 $ 4,126 $ 218,591 $ 222,717 Commercial 64 2,556 2,620 4,343 367,151 371,494 Construction and land development 694 918 1,612 5,554 103,980 109,534 Second mortgages — 34 34 — 7,689 7,689 Multifamily — 198 198 — 59,920 59,920 Agriculture 8 25 33 67 7,357 7,424 Total real estate loans 1,062 6,550 7,612 14,090 764,688 778,778 Commercial loans 31 931 962 1,228 169,217 170,445 Consumer installment loans — 112 112 4 13,874 13,878 All other loans — 10 10 — 1,210 1,210 Unallocated — 272 272 — — — Total loans $ 1,093 $ 7,875 $ 8,968 $ 15,322 $ 948,989 $ 964,311 December 31, 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 $ 290 $ 3,176 $ 3,466 $ 4,117 $ 223,425 $ 227,542 Commercial 65 2,358 2,423 4,396 361,935 366,331 Construction and land development 556 691 1,247 4,276 103,538 107,814 Second mortgages — 24 24 — 8,410 8,410 Multifamily — 496 496 — 59,024 59,024 Agriculture 8 6 14 68 7,415 7,483 Total real estate loans 919 6,751 7,670 12,857 763,747 776,604 Commercial loans 39 1,100 1,139 1,433 157,591 159,024 Consumer installment loans 1 109 110 7 5,162 5,169 All other loans — 3 3 — 1,221 1,221 Unallocated — 47 47 — — — Total loans $ 959 $ 8,010 $ 8,969 $ 14,297 $ 927,721 $ 942,018 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 $17.7 million and $18.0 million at March 3 1 , 201 8 and December 31, 201 7 , 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 3 1 , 201 8 and December 31, 201 7 (dollars in thousands): March 31, 2018 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 217,935 $ 2,753 $ 2,029 $ — $ 222,717 Commercial 354,462 14,073 2,959 — 371,494 Construction and land development 103,810 170 5,554 — 109,534 Second mortgages 7,474 215 — — 7,689 Multifamily 57,357 — 2,563 — 59,920 Agriculture 6,952 386 86 — 7,424 Total real estate loans 747,990 17,597 13,191 — 778,778 Commercial loans 167,659 1,738 1,048 — 170,445 Consumer installment loans 13,683 191 4 — 13,878 All other loans 1,210 — — — 1,210 Total loans $ 930,542 $ 19,526 $ 14,243 $ — $ 964,311 December 31, 2017 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 222,026 $ 3,442 $ 2,074 $ — $ 227,542 Commercial 355,188 8,145 2,998 — 366,331 Construction and land development 103,356 182 4,276 — 107,814 Second mortgages 8,187 223 — — 8,410 Multifamily 56,452 — 2,572 — 59,024 Agriculture 7,010 385 88 — 7,483 Total real estate loans 752,219 12,377 12,008 — 776,604 Commercial loans 156,604 1,171 1,249 — 159,024 Consumer installment loans 5,137 25 7 — 5,169 All other loans 1,221 — — — 1,221 Total loans $ 915,181 $ 13,573 $ 13,264 $ — $ 942,018 In accordance with FASB Accounting Standards Update ( 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 17 loans that met the definition of a TDR at March 3 1 , 201 8 and 201 7 , respectively. The Company had no loan modifications considered to be TDRs during the three months ended March 3 1 , 201 8 and 2017 . 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 3 1 , 201 8 and 201 7 . 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 3 1 , 201 8 , the Company had 1-4 family mortgages in the amount of $137.1 million pledged to the Federal Home Loan Bank with a lendable collateral value of $110.3 million. |