Loans and Allowance for Loan Losses | Loans and Allowance for Loan Losses For financial reporting purposes, the Company classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”). The following schedule details the loans of the Company at September 30, 2016 and December 31, 2015 : (In Thousands) September 30, December 31, Mortgage loans on real estate Residential 1-4 family $ 371,141 $ 349,631 Multifamily 82,085 49,564 Commercial 688,427 625,623 Construction and land development 302,918 275,319 Farmland 37,746 32,114 Second mortgages 7,976 7,551 Equity lines of credit 53,300 46,506 Total mortgage loans on real estate 1,543,593 1,386,308 Commercial loans 34,527 30,537 Agricultural loans 1,565 1,552 Consumer installment loans Personal 39,217 40,196 Credit cards 3,029 3,271 Total consumer installment loans 42,246 43,467 Other loans 9,297 9,250 Total loans before net deferred loan fees 1,631,228 1,471,114 Net deferred loan fees (5,955 ) (5,035 ) Total loans 1,625,273 1,466,079 Less: Allowance for loan losses (23,320 ) (22,900 ) Net loans $ 1,601,953 $ 1,443,179 Risk characteristics relevant to each portfolio segment are as follows: Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayments substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. 1-4 family residential real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value ("LTV"), minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. 1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans, as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans. Multi-family and commercial real estate: Multi-family and commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property. Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV on secured consumer loans, minimum credit scores, and maximum debt to income. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle or other large personal items, or for consolidating debt. These loan may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures. The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. Transactions in the allowance for loan losses for the nine months ended September 30, 2016 and year ended December 31, 2015 are summarized as follows: (In Thousands) Residential 1-4 Family Multifamily Commercial Real Estate Construction Farmland Second Mortgages Equity Lines of Credit Commercial Agricultural, Installment and Other Total September 30, 2016 Allowance for loan losses: Beginning balance $ 5,024 619 9,986 5,136 654 106 594 301 480 22,900 Provision (226 ) 391 185 (659 ) 106 (28 ) 18 23 480 290 Charge-offs (97 ) — — (66 ) — — — (11 ) (527 ) (701 ) Recoveries 49 — 53 523 1 4 15 6 180 831 Ending balance $ 4,750 1,010 10,224 4,934 761 82 627 319 613 23,320 Ending balance individually evaluated for impairment $ 179 — — — — — — — — 179 Ending balance collectively evaluated for impairment $ 4,571 1,010 10,224 4,934 761 82 627 319 613 23,141 Ending balance loans acquired with deteriorated credit quality $ — — — — — — — — — — Loans: Ending balance $ 371,141 82,085 688,427 302,918 37,746 7,976 53,300 34,527 53,108 1,631,228 Ending balance individually evaluated for impairment $ 681 — 4,253 1,698 104 — — — — 6,736 Ending balance collectively evaluated for impairment $ 370,460 82,085 684,174 301,220 37,642 7,976 53,300 34,527 53,108 1,624,492 Ending balance loans acquired with deteriorated credit quality $ — — — — — — — — — — Residential 1-4 Family Multifamily Commercial Real Estate Construction Farmland Second Mortgages Equity Lines of Credit Commercial Agricultural, Installment and Other Total December 31, 2015 Allowance for loan losses: Beginning balance $ 5,582 172 9,578 5,578 795 61 304 176 326 22,572 Provision (290 ) 447 (267 ) (455 ) (142 ) 87 303 118 587 388 Charge-offs (311 ) — (44 ) (26 ) — (45 ) (14 ) — (664 ) (1,104 ) Recoveries 43 — 719 39 1 3 1 7 231 1,044 Ending balance $ 5,024 619 9,986 5,136 654 106 594 301 480 22,900 Ending balance individually evaluated for impairment $ 194 — — — — — — — — 194 Ending balance collectively evaluated for impairment $ 4,830 619 9,986 5,136 654 106 594 301 480 22,706 Ending balance loans acquired with deteriorated credit quality $ — — — — — — — — — — Loans: Ending balance $ 349,631 49,564 625,623 275,319 32,114 7,551 46,506 30,537 54,269 1,471,114 Ending balance individually evaluated for impairment $ 1,449 — 4,643 1,938 575 — — — — 8,605 Ending balance collectively evaluated for impairment $ 348,182 49,564 620,980 273,381 31,539 7,551 46,506 30,537 54,269 1,462,509 Ending balance loans acquired with deteriorated credit quality $ — — — — — — — — — — Impaired Loans At September 30, 2016 , the Company had certain impaired loans of $ 3.0 million which were on non-accruing interest status. At December 31, 2015 , the Company had certain impaired loans of $4.9 million which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The following table presents the Company’s impaired loans at September 30, 2016 and December 31, 2015 . In Thousands Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized September 30, 2016 With no related allowance recorded: Residential 1-4 family $ 149 148 — 149 5 Multifamily — — — — — Commercial real estate 4,256 4,253 — 4,386 24 Construction 1,703 1,698 — 1,830 64 Farmland 105 104 — 70 3 Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — — $ 6,213 6,203 — 6,435 96 With allowance recorded: Residential 1-4 family $ 541 533 179 539 24 Multifamily — — — — — Commercial real estate — — — — — Construction — — — — — Farmland — — — — — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — — $ 541 533 179 539 24 Total Residential 1-4 family $ 690 681 179 688 29 Multifamily — — — — — Commercial real estate 4,256 4,253 — 4,386 24 Construction 1,703 1,698 — 1,830 64 Farmland 105 104 — 70 3 Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — — $ 6,754 6,736 179 6,974 120 In Thousands Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2015 With no related allowance recorded: Residential 1-4 family $ 633 622 — 724 39 Multifamily — — — — — Commercial real estate 4,645 4,643 — 5,048 24 Construction 1,943 1,938 — 486 97 Farmland 575 575 — 431 — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — — $ 7,796 7,778 — 6,689 160 With allowance recorded: Residential 1-4 family $ 834 827 194 785 47 Multifamily — — — — — Commercial real estate — — — 3,419 — Construction — — — — — Farmland — — — 144 — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — — $ 834 827 194 4,348 47 Total: Residential 1-4 family $ 1,467 1,449 194 1,509 86 Multifamily — — — — — Commercial real estate 4,645 4,643 — 8,467 24 Construction 1,943 1,938 — 486 97 Farmland 575 575 — 575 — Second mortgages — — — — — Equity lines of credit — — — — — Commercial — — — — — Agricultural, installment and other — — — — — $ 8,630 8,605 194 11,037 207 Impaired loans also include loans that the Company may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Company may otherwise incur. These loans are classified as impaired loans and, if on non-accruing status as of the date of restructuring, the loans are included in the nonperforming loan balances. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date. Troubled Debt Restructuring The Bank’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. The following table summarizes the carrying balances of TDR’s at September 30, 2016 and December 31, 2015 . September 30, 2016 December 31, 2015 (In thousands) Performing TDRs $ 2,411 $ 983 Nonperforming TDRs 1,896 3,121 Total TDRS $ 4,307 $ 4,104 The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the nine months ended September 30, 2016 and the year ended December 31, 2015 (in thousands, except for number of contracts): September 30, 2016 December 31, 2015 Number of Contracts Pre Modification Outstanding Recorded Investment Post Modification Outstanding Recorded Investment, Net of Related Allowance Number of Contracts Pre Modification Outstanding Recorded Investment Post Modification Outstanding Recorded Investment, Net of Related Allowance Residential 1-4 family 3 $ 124 $ 124 2 $ 77 $ 77 Multifamily — — — — — — Commercial real estate 1 927 927 — — — Construction — — — 1 1,938 1,938 Farmland 1 105 105 — — — Second mortgages — — — — — — Equity lines of credit — — — — — — Commercial — — — — — — Agricultural, installment and other 2 18 18 1 2 1 Total 7 $ 1,174 $ 1,174 4 $ 2,017 $ 2,016 As of September 30, 2016 , the Company had no loan relationships that had been previously classified as troubled debt restructuring subsequently default within twelve months of restructuring. As of December 31, 2015 , the Company had two loans totaling $1,060,000 that had been previously classified as troubled debt restructuring subsequently default within twelve months of restructuring. A default is defined as an occurrence which violates the terms of the receivable’s contract. As of September 30, 2016 and December 31, 2015 , the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $478,000 and $639,000 , respectively. Potential problem loans, which include nonperforming loans, amounted to approximately $16.0 million at September 30, 2016 compared to $25.2 million at December 31, 2015 . Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful. The following summary presents our loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows: • Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. • Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. • Doubtful loans have all the characteristics of substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Bank considers all doubtful loans to be impaired and places the loan on nonaccrual status. The following table is a summary of the Bank’s loan portfolio by risk rating at September 30, 2016 and December 31, 2015: (In Thousands) Residential 1-4 Family Multifamily Commercial Real Estate Construction Farmland Second Mortgages Equity Lines of Credit Commercial Agricultural, installment and other Total September 30, 2016 Credit Risk Profile by Internally Assigned Rating Pass $ 362,187 82,085 683,359 302,611 36,893 7,552 53,045 34,527 52,991 1,615,250 Special Mention 5,609 — 353 200 151 306 116 — 28 6,763 Substandard 3,345 — 4,715 107 702 118 139 — 89 9,215 Doubtful — — — — — — — — — — Total $ 371,141 82,085 688,427 302,918 37,746 7,976 53,300 34,527 53,108 1,631,228 December 31, 2015 Credit Risk Profile by Internally Assigned Rating Pass $ 340,019 49,564 612,318 274,926 30,933 7,097 46,361 30,525 54,154 1,445,897 Special Mention 6,957 — 8,227 277 200 353 — 10 38 16,062 Substandard 2,655 — 5,078 116 981 101 145 2 77 9,155 Doubtful — — — — — — — — — — Total $ 349,631 49,564 625,623 275,319 32,114 7,551 46,506 30,537 54,269 1,471,114 |