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, 2018 and December 31, 2017 were comprised of the following (dollars in thousands): June 30, 2018 December 31, 2017 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1-4 family $ 217,610 22.50 % $ 227,542 24.16 % Commercial 376,134 38.88 366,331 38.89 Construction and land development 119,110 12.31 107,814 11.44 Second mortgages 7,387 0.76 8,410 0.89 Multifamily 54,329 5.62 59,024 6.27 Agriculture 7,467 0.77 7,483 0.79 Total real estate loans 782,037 80.84 776,604 82.44 Commercial loans 170,065 17.58 159,024 16.88 Consumer installment loans 13,717 1.42 5,169 0.55 All other loans 1,542 0.16 1,221 0.13 Total loans $ 967,361 100.00 % $ 942,018 100.00 % The Company held $17.0 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 June 30, 2018 and December 31, 2017, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $ 990,000 and $ 824,000 at June 30, 2018 and December 31, 2017, 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 30, 2018 and December 31, 2017, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with 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 June 30, 2018 (dollars in thousands): Three months ended Six months ended June 30, 2018 June 30, 2018 June 30, 2018 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 $ 1,853 $ 2,227 $ — $ 1,863 $ 10 $ 1,876 $ 20 Commercial 3,578 4,225 — 3,702 38 3,755 75 Construction and land development 388 388 — 403 — 268 — Multifamily 2,559 2,559 — 1,279 31 853 61 Total real estate loans 8,378 9,399 — 7,247 79 6,752 156 Commercial loans 272 278 — 625 — 786 — Subtotal impaired loans with no valuation allowance 8,650 9,677 — 7,872 79 7,538 156 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 2,193 2,605 291 2,223 19 2,221 39 Commercial 1,546 1,998 458 1,032 2 866 4 Construction and land development 4,796 6,061 610 4,966 — 4,737 — Agriculture — — — 34 — 45 — Total real estate loans 8,535 10,664 1,359 8,255 21 7,869 43 Commercial loans 245 246 31 247 1 273 2 Consumer installment loans — — — 2 — 3 — Subtotal impaired loans with a valuation allowance 8,780 10,910 1,390 8,504 22 8,145 45 Total: Mortgage loans on real estate: Residential 1-4 family 4,046 4,832 291 4,086 29 4,097 59 Commercial 5,124 6,223 458 4,734 40 4,621 79 Construction and land development 5,184 6,449 610 5,369 — 5,005 — Multifamily 2,559 2,559 — 1,279 31 853 61 Agriculture — — — 34 — 45 — Total real estate loans 16,913 20,063 1,359 15,502 100 14,621 199 Commercial loans 517 524 31 872 1 1,059 2 Consumer installment loans — — — 2 — 3 — Total impaired loans $ 17,430 $ 20,587 $ 1,390 $ 16,376 $ 101 $ 15,683 $ 201 (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, 2017 and the three and six months ended June 30, 2017 (dollars in thousands): Three months ended Six months ended December 31, 2017 June 30, 2017 June 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 $ 1,901 $ 2,246 $ — $ 2,065 $ 7 $ 1,945 $ 15 Commercial 3,862 4,477 — 3,927 38 4,808 76 Construction and land development — — — — — — — Agriculture — — — 129 — 86 — Total real estate loans 5,763 6,723 — 6,121 45 6,839 91 Commercial loans 1,108 1,108 — — — 400 — Consumer installment loans — — — — — — — Subtotal impaired loans with no valuation allowance 6,871 7,831 — 6,121 45 7,239 91 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 2,216 2,640 290 2,352 20 2,441 39 Commercial 533 958 65 1,596 2 1,270 4 Construction and land development 4,277 5,537 556 4,300 — 4,699 — Agriculture 68 71 8 — — — — Total real estate loans 7,094 9,206 919 8,248 22 8,410 43 Commercial loans 325 446 39 892 1 612 2 Consumer installment loans 7 7 1 26 — 111 — Subtotal impaired loans with a valuation allowance 7,426 9,659 959 9,166 23 9,133 45 Total: Mortgage loans on real estate: Residential 1-4 family 4,117 4,886 290 4,417 27 4,386 54 Commercial 4,395 5,435 65 5,523 40 6,078 80 Construction and land development 4,277 5,537 556 4,300 — 4,699 — Agriculture 68 71 8 129 — 86 — Total real estate loans 12,857 15,929 919 14,369 67 15,249 134 Commercial loans 1,433 1,554 39 892 1 1,012 2 Consumer installment loans 7 7 1 26 — 111 — Total impaired loans $ 14,297 $ 17,490 $ 959 $ 15,287 $ 68 $ 16,372 $ 136 (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 June 30, 2018 and December 31, 2017, is set forth in the table below (dollars in thousands): June 30, 2018 December 31, 2017 Nonaccruals $ 9,343 $ 9,026 Trouble debt restructure and still accruing 8,087 5,271 Total impaired $ 17,430 $ 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 and six months ended June 30, 2018 and 2017. For the three months ended June 30, 2018 and 2017, estimated interest income of $183,000 and $201,000 , 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 30, 2018 and 2017, estimated interest income of $322,000 and $345,000 , 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 June 30, 2018 and December 31, 2017. The following tables present an age analysis of past due status of loans by category as of June 30, 2018 and December 31, 2017 (dollars in thousands): June 30, 2018 30-89 Days Past Due Nonaccrual Total Past Due Current Total Loans Receivable Mortgage loans on real estate: Residential 1-4 family $ 1,104 $ 1,578 $ 2,682 $ 214,928 $ 217,610 Commercial 87 2,274 2,361 373,773 376,134 Construction and land development 65 5,184 5,249 113,861 119,110 Second mortgages — — — 7,387 7,387 Multifamily 2,559 — 2,559 51,770 54,329 Agriculture — — — 7,467 7,467 Total real estate loans 3,815 9,036 12,851 769,186 782,037 Commercial loans — 307 307 169,758 170,065 Consumer installment loans 21 — 21 13,696 13,717 All other loans — — — 1,542 1,542 Total loans $ 3,836 $ 9,343 $ 13,179 $ 954,182 $ 967,361 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 three and six months ended June 30, 2018 and 2017 is presented in the following tables (dollars in thousands): Three Months Ended June 30, 2018 March 31, 2018 Provision Allocation Charge-offs Recoveries June 30, 2018 Mortgage loans on real estate: Residential 1-4 family $ 3,115 $ 431 $ (53) $ 58 $ 3,551 Commercial 2,620 (438) — 7 2,189 Construction and land development 1,612 (218) — 35 1,429 Second mortgages 34 (3) — 1 32 Multifamily 198 128 — — 326 Agriculture 33 (27) — — 6 Total real estate loans 7,612 (127) (53) 101 7,533 Commercial loans 962 199 — 1 1,162 Consumer installment loans 112 (12) (67) 136 169 All other loans 10 (10) — 3 3 Unallocated 272 (50) — — 222 Total loans $ 8,968 $ — $ (120) $ 241 $ 9,089 Three Months Ended June 30, 2017 March 31, 2017 Provision Allocation Charge-offs Recoveries June 30, 2017 Mortgage loans on real estate: Residential 1-4 family $ 2,823 $ 927 $ (12) $ 59 $ 3,797 Commercial 1,776 (11) — 18 1,783 Construction and land development 1,547 (226) — 62 1,383 Second mortgages 50 (19) — 2 33 Multifamily 193 (26) — — 167 Agriculture 32 (11) — — 21 Total real estate loans 6,421 634 (12) 141 7,184 Commercial loans 1,316 260 (120) 1 1,457 Consumer installment loans 133 12 (78) 44 111 All other loans 15 (6) — — 9 Unallocated 1,628 (900) — — 728 Total loans $ 9,513 $ — $ (210) $ 186 $ 9,489 Six Months Ended June 30, 2018 December 31, 2017 Provision Allocation Charge-offs Recoveries June 30, 2018 Mortgage loans on real estate: Residential 1-4 family $ 3,466 $ 65 $ (53) $ 73 $ 3,551 Commercial 2,423 (254) — 20 2,189 Construction and land development 1,247 146 — 36 1,429 Second mortgages 24 6 — 2 32 Multifamily 496 (170) — — 326 Agriculture 14 (8) — — 6 Total real estate loans 7,670 (215) (53) 131 7,533 Commercial loans 1,139 47 (39) 15 1,162 Consumer installment loans 110 (4) (112) 175 169 All other loans 3 (3) — 3 3 Unallocated 47 175 — — 222 Total loans $ 8,969 $ — $ (204) $ 324 $ 9,089 Six Months Ended June 30, 2017 December 31, 2016 Provision Allocation Charge-offs Recoveries June 30, 2017 Mortgage loans on real estate: Residential 1-4 family $ 2,769 $ 989 $ (38) $ 77 $ 3,797 Commercial 1,952 (194) — 25 1,783 Construction and land development 2,195 (861) (14) 63 1,383 Second mortgages 72 (88) — 49 33 Multifamily 260 (93) — — 167 Agriculture 15 6 — — 21 Total real estate loans 7,263 (241) (52) 214 7,184 Commercial loans 602 972 (120) 3 1,457 Consumer installment loans 135 25 (123) 74 111 All other loans 7 2 — — 9 Unallocated 1,486 (758) — — 728 Total loans $ 9,493 $ — $ (295) $ 291 $ 9,489 The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of June 30, 2018 and December 31, 2017 (dollars in thousands): June 30, 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 $ 291 $ 3,260 $ 3,551 $ 4,046 $ 213,564 $ 217,610 Commercial 458 1,731 2,189 5,124 371,010 376,134 Construction and land development 610 819 1,429 5,184 113,926 119,110 Second mortgages — 32 32 — 7,387 7,387 Multifamily — 326 326 2,559 51,770 54,329 Agriculture — 6 6 — 7,467 7,467 Total real estate loans 1,359 6,174 7,533 16,913 765,124 782,037 Commercial loans 31 1,131 1,162 517 169,548 170,065 Consumer installment loans — 169 169 — 13,717 13,717 All other loans — 3 3 — 1,542 1,542 Unallocated — 222 222 — — — Total loans $ 1,390 $ 7,699 $ 9,089 $ 17,430 $ 949,931 $ 967,361 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 $17.0 million and $18.0 million at June 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017 (dollars in thousands): June 30, 2018 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 212,594 $ 3,349 $ 1,667 $ — $ 217,610 Commercial 361,232 9,471 5,431 — 376,134 Construction and land development 113,722 204 5,184 — 119,110 Second mortgages 7,181 206 — — 7,387 Multifamily 51,160 610 2,559 — 54,329 Agriculture 7,081 386 — — 7,467 Total real estate loans 752,970 14,226 14,841 — 782,037 Commercial loans 166,560 3,165 340 — 170,065 Consumer installment loans 13,708 9 — — 13,717 All other loans 1,542 — — — 1,542 Total loans $ 934,780 $ 17,400 $ 15,181 $ — $ 967,361 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 21 loans that met the definition of a TDR at June 30, 2018 and 2017, respectively. During the three and six months ended June 30, 2018, the Company modified one multifamily loan that was considered to be a TDR. The Company restructured the terms for this loan, which had a pre- and post -modification balance of $2.6 million. During the three and six months ended June 30, 2017, the Company modified one residential 1-4 family loan and one agriculture loan that w ere considered to be TDR s . The Company lowered the interest rate for the residential 1-4 family loan, which had a pre- and post -modification balance of $894,000 . The Company extended the terms for the agriculture loan, which had a pre- and post -modification balance of $258,000 . 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 30, 2018 and 2017. 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 30, 2018, the Company had 1-4 family mortgages in the amount of $129.7 million pledged to the Federal Home Loan Bank with a lendable collateral value of $103.6 million. |