Loans and Related Allowance for Loan Losses | Note 3. Loans and Related Allowance for Loan Losses The Company’s loans, net o f deferred fees and costs, at September 30, 2018 and December 31, 2017 were comprised of the following (dollars in thousands): September 30, 2018 December 31, 2017 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1-4 family $ 216,203 22.46 % $ 227,542 24.16 % Commercial 358,490 37.25 366,331 38.89 Construction and land development 135,021 14.03 107,814 11.44 Second mortgages 7,179 0.75 8,410 0.89 Multifamily 52,255 5.43 59,024 6.27 Agriculture 8,066 0.84 7,483 0.79 Total real estate loans 777,214 80.76 776,604 82.44 Commercial loans 170,310 17.70 159,024 16.88 Consumer installment loans 13,135 1.36 5,169 0.55 All other loans 1,766 0.18 1,221 0.13 Total loans $ 962,425 100.00 % $ 942,018 100.00 % The Company held $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 September 30, 2018 and December 31, 2017 . As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $ 1.3 million and $ 824,000 at September 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 September 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 September 30, 2018 (dollars in thousands): Three months ended Nine months ended September 30, 2018 September 30, 2018 September 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 $ 1,579 $ 1,898 $ — $ 1,716 $ 11 $ 1,802 $ 33 Commercial 3,544 4,202 — 3,561 38 3,702 112 Construction and land development 464 464 — 426 — 318 — Multifamily 2,559 2,559 — 2,559 31 1,279 92 Total real estate loans 8,146 9,123 — 8,262 80 7,101 237 Commercial loans — — — 136 — 589 — Subtotal impaired loans with no valuation allowance 8,146 9,123 — 8,398 80 7,690 237 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 2,404 2,901 317 2,298 20 2,266 57 Commercial 1,653 2,127 472 1,600 4 1,063 13 Construction and land development 4,146 5,414 507 4,471 — 4,589 — Agriculture — — — — — 34 — Total real estate loans 8,203 10,442 1,296 8,369 24 7,952 70 Commercial loans 711 717 179 478 1 383 3 Consumer installment loans 5 5 1 3 — 4 — Subtotal impaired loans with a valuation allowance 8,919 11,164 1,476 8,850 25 8,339 73 Total: Mortgage loans on real estate: Residential 1-4 family 3,983 4,799 317 4,014 31 4,068 90 Commercial 5,197 6,329 472 5,161 42 4,765 125 Construction and land development 4,610 5,878 507 4,897 — 4,907 — Multifamily 2,559 2,559 — 2,559 31 1,279 92 Agriculture — — — — — 34 — Total real estate loans 16,349 19,565 1,296 16,631 104 15,053 307 Commercial loans 711 717 179 614 1 972 3 Consumer installment loans 5 5 1 3 — 4 — Total impaired loans $ 17,065 $ 20,287 $ 1,476 $ 17,248 $ 105 $ 16,029 $ 310 (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 nine months ended September 30, 2017 (dollars in thousands): Three months ended Nine months ended December 31, 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 $ 1,901 $ 2,246 $ — $ 1,935 $ 7 $ 1,941 $ 21 Commercial 3,862 4,477 — 3,802 39 4,582 114 Agriculture — — — 129 — 65 — Total real estate loans 5,763 6,723 — 5,866 46 6,588 135 Commercial loans 1,108 1,108 — 624 — 612 — Subtotal impaired loans with no valuation allowance 6,871 7,831 — 6,490 46 7,200 135 With an allowance recorded: Mortgage loans on real estate: Residential 1-4 family 2,216 2,640 290 2,373 20 2,426 59 Commercial 533 958 65 2,653 2 1,580 6 Construction and land development 4,277 5,537 556 4,290 — 4,595 — Agriculture 68 71 8 33 — 16 — Total real estate loans 7,094 9,206 919 9,349 22 8,617 65 Commercial loans 325 446 39 1,570 1 869 3 Consumer installment loans 7 7 1 20 — 91 — Subtotal impaired loans with a valuation allowance 7,426 9,659 959 10,939 23 9,577 68 Total: Mortgage loans on real estate: Residential 1-4 family 4,117 4,886 290 4,308 27 4,367 80 Commercial 4,395 5,435 65 6,455 41 6,162 120 Construction and land development 4,277 5,537 556 4,290 — 4,595 — Agriculture 68 71 8 162 — 81 — Total real estate loans 12,857 15,929 919 15,215 68 15,205 200 Commercial loans 1,433 1,554 39 2,194 1 1,481 3 Consumer installment loans 7 7 1 20 — 91 — Total impaired loans $ 14,297 $ 17,490 $ 959 $ 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 . 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, 2018 and December 31, 2017, is set forth in the table below (dollars in thousands): September 30, 2018 December 31, 2017 Nonaccruals $ 8,894 $ 9,026 Trouble debt restructure and still accruing 8,171 5,271 Total impaired $ 17,065 $ 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 nine months ended September 30, 2018 and 2017. For the three months ended September 30, 2018 and 2017, estimated interest income of $167,000 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 30, 2018 and 2017, estimated interest income of $471,000 and $550,000 , 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, 2018 and December 31, 2017. The following tables present an age analysis of past due status of loans by category as of September 30, 2018 and December 31, 2017 (dollars in thousands): September 30, 2018 30-89 Days Past Due Nonaccrual Total Past Due Current Total Loans Receivable Mortgage loans on real estate: Residential 1-4 family $ 635 $ 1,530 $ 2,165 $ 214,038 $ 216,203 Commercial 84 2,243 2,327 356,163 358,490 Construction and land development 3 4,610 4,613 130,408 135,021 Second mortgages — — — 7,179 7,179 Multifamily 2,559 — 2,559 49,696 52,255 Agriculture — — — 8,066 8,066 Total real estate loans 3,281 8,383 11,664 765,550 777,214 Commercial loans 512 506 1,018 169,292 170,310 Consumer installment loans 22 5 27 13,108 13,135 All other loans — — — 1,766 1,766 Total loans $ 3,815 $ 8,894 $ 12,709 $ 949,716 $ 962,425 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 nine months ended September 30, 2018 and 2017 is presented in the following tables (dollars in thousands): Three Months Ended September 30, 2018 June 30, 2018 Provision Allocation Charge-offs Recoveries September 30, 2018 Mortgage loans on real estate: Residential 1-4 family $ 3,551 $ (392) $ (35) $ 42 $ 3,166 Commercial 2,189 (477) — 7 1,719 Construction and land development 1,429 (270) (116) 1 1,044 Second mortgages 32 (2) — 2 32 Multifamily 326 (2) — — 324 Agriculture 6 — — — 6 Total real estate loans 7,533 (1,143) (151) 52 6,291 Commercial loans 1,162 380 (6) 31 1,567 Consumer installment loans 169 20 (33) 11 167 All other loans 3 2 — — 5 Unallocated 222 741 — — 963 Total loans $ 9,089 $ — $ (190) $ 94 $ 8,993 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 Nine Months Ended September 30, 2018 December 31, 2017 Provision Allocation Charge-offs Recoveries September 30, 2018 Mortgage loans on real estate: Residential 1-4 family $ 3,466 $ (327) $ (88) $ 115 $ 3,166 Commercial 2,423 (731) — 27 1,719 Construction and land development 1,247 (124) (116) 37 1,044 Second mortgages 24 4 — 4 32 Multifamily 496 (172) — — 324 Agriculture 14 (8) — — 6 Total real estate loans 7,670 (1,358) (204) 183 6,291 Commercial loans 1,139 427 (45) 46 1,567 Consumer installment loans 110 16 (145) 186 167 All other loans 3 (1) — 3 5 Unallocated 47 916 — — 963 Total loans $ 8,969 $ — $ (394) $ 418 $ 8,993 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 The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of September 30, 2018 and December 31, 2017 (dollars in thousands): September 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 $ 317 $ 2,849 $ 3,166 $ 3,983 $ 212,220 $ 216,203 Commercial 472 1,247 1,719 5,197 353,293 358,490 Construction and land development 507 537 1,044 4,610 130,411 135,021 Second mortgages — 32 32 — 7,179 7,179 Multifamily — 324 324 2,559 49,696 52,255 Agriculture — 6 6 — 8,066 8,066 Total real estate loans 1,296 4,995 6,291 16,349 760,865 777,214 Commercial loans 179 1,388 1,567 711 169,599 170,310 Consumer installment loans 1 166 167 5 13,130 13,135 All other loans — 5 5 — 1,766 1,766 Unallocated — 963 963 — — — Total loans $ 1,476 $ 7,517 $ 8,993 $ 17,065 $ 945,360 $ 962,425 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 $18.0 million and $18.0 million at September 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 September 30, 2018 and December 31, 2017 (dollars in thousands): September 30, 2018 Pass Special Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1-4 family $ 211,550 $ 3,016 $ 1,637 $ — $ 216,203 Commercial 350,683 4,072 3,735 — 358,490 Construction and land development 130,213 198 4,610 — 135,021 Second mortgages 7,084 95 — — 7,179 Multifamily 49,089 607 2,559 — 52,255 Agriculture 8,066 — — — 8,066 Total real estate loans 756,685 7,988 12,541 — 777,214 Commercial loans 167,431 2,342 537 — 170,310 Consumer installment loans 13,122 8 5 — 13,135 All other loans 1,766 — — — 1,766 Total loans $ 939,004 $ 10,338 $ 13,083 $ — $ 962,425 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 24 and 23 loans that met the definition of a TDR at September 30, 2018 and 2017, respectively. During the three months ended September 30, 2018, the Company modified one commercial real estate 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 $126,000 . During the nine months ended September 30, 2018, the Company modified one multifamily loan and one commercial real estate loan that w ere considered to be TDR s, which had a total pre- and post-modification balance of $2.6 million and $126,000 , respectively. The Company restructured the terms for both loans. 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 term 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 terms 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 . 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, 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 September 30, 2018, the Company had 1-4 family mortgages in the amount of $112.3 million pledged to the Federal Home Loan Bank with a lendable collateral value of $89.8 million . |