Loans and Allowance for Loan Losses

Loans are stated at the principal amount outstanding net of unearned discounts, unearned income and allowance for loan losses. Unearned income includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximated the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding. A summary of loans at September 30, 2014 and December 31, 2013 follows (in thousands):



	September 30, 2014		December 31, 2013
Construction and land development	$	23,113	$	25,321
Agricultural real estate	109,695		109,376
1-4 Family residential properties	183,612		184,158
Multifamily residential properties	53,186		50,174
Commercial real estate	375,256		357,726
Loans secured by real estate	744,862		726,755
Agricultural loans	60,145		64,055
Commercial and industrial loans	211,220		168,227
Consumer loans	15,054		14,579
All other loans	8,276		9,094
Gross loans	1,039,557		982,710
Less:
Net deferred loan fees, premiums and discounts	229		420
Allowance for loan losses	13,705		13,249
Net loans	$	1,025,623	$	969,041

Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or market value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties. The balance of loans held for sale, excluded from the balances above, were $1,680,000 and $514,000 at September 30, 2014 and December 31, 2013, respectively.

Most of the Company’s business activities are with customers located within central Illinois. At September 30, 2014, the Company’s loan portfolio included $169.8 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $143.5 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased $3.6 million from $173.4 million at December 31, 2013 while loans concentrated in other grain farming decreased $3.6 million from $147.1 million at December 31, 2013 due to seasonal paydowns based upon timing of cash flow requirements. While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio.

In addition, the Company has $56.1 million of loans to motels and hotels. The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region. While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses. The Company also has $98.6 million of loans to lessors of non-residential buildings and $64.2 million of loans to lessors of residential buildings and dwellings.

The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the Board of Directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed. The vast majority of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

The Company’s lending can be summarized into the following primary areas:

Commercial Real Estate Loans. Commercial real estate loans are generally comprised of loans to small business entities to purchase or expand structures in which the business operations are housed, loans to owners of real estate who lease space to non-related commercial entities, loans for construction and land development, loans to hotel operators, and loans to owners of multi-family residential structures, such as apartment buildings. Commercial real estate loans are underwritten based on historical and projected cash flows of the borrower and secondarily on the underlying real estate pledged as collateral on the debt. For the various types of commercial real estate loans, minimum criteria have been established within the Company’s loan policy regarding debt service coverage while maximum limits on loan-to-value and amortization periods have been defined. Maximum loan-to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while the desired minimum debt coverage ratio is 1.20x. Amortization periods for commercial real estate loans are generally limited to twenty years. The Company’s commercial real estate portfolio is well below the thresholds that would designate a concentration in commercial real estate lending, as established by the federal banking regulators.

Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund accounts receivable that are secured by business assets other than real estate. These loans are generally written for one year or less. Also, equipment financing is provided to businesses with these loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years. Commercial loans are often accompanied by a personal guaranty of the principal owners of a business. Like commercial real estate loans, the underlying cash flow of the business is the primary consideration in the underwriting process. The financial condition of commercial borrowers is monitored at least annually with the type of financial information required determined by the size of the relationship. Measures employed by the Company for businesses with higher risk profiles include the use of government-assisted lending programs through the Small Business Administration and U.S. Department of Agriculture.

Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop. Loan-to-value ratios on loans secured by farmland generally do not exceed 65% and have amortization periods limited to twenty five years. Federal government-assistance lending programs through the Farm Service Agency are used to mitigate the level of credit risk when deemed appropriate.

Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties consisting of one-to-four units and home equity loans and lines of credit. The Company sells the vast majority of its long-term fixed rate residential real estate loans to secondary market investors. The Company also releases the servicing of these loans upon sale. The Company retains all residential real estate loans with balloon payment features. Balloon periods are limited to five years. Residential real estate loans are typically underwritten to conform to industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit scores. Loans secured by first liens on residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have amortization periods of twenty five years or less. The Company does not originate subprime mortgage loans.

Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an automobile or other living expenses. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio, employment history, and collateral coverage. Typically, consumer loans are set up on monthly payments with amortization periods based on the type and age of the collateral.

Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or equipment purchases. Underwriting guidelines for these loans are consistent with those established for commercial loans with the additional repayment source of the taxing authority of the municipality.

Allowance for Loan Losses

The allowance for loan losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses existing in the current portfolio. The provision for loan losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an adequate allowance for loan losses.

In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, the Company relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. The Company considers collateral values and guarantees in the determination of such specific allocations. Additional factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and troubled debt restructurings, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates.

The Company estimates the appropriate level of allowance for loan losses by separately evaluating large impaired loans, large adversely classified loans and nonimpaired loans.

Impaired loans

The Company individually evaluates certain loans for impairment. In general, these loans have been internally identified via the Company’s loan grading system as credits requiring management’s attention due to underlying problems in the borrower’s business or collateral concerns. This evaluation considers expected future cash flows, the value of collateral and also other factors that may impact the borrower’s ability to make payments when due. For loans greater than $100,000 in the commercial, commercial real estate, agricultural, agricultural real estate segments, impairment is individually measured each quarter using one of three alternatives: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price, if available; or (3) the fair value of the collateral less costs to sell for collateral dependent loans and loans for which foreclosure is deemed to be probable. A specific allowance is assigned when expected cash flows or collateral do not justify the carrying amount of the loan. The carrying value of the loan reflects reductions from prior charge-offs.

Adversely classified loans

A detailed analysis is also performed on each adversely classified (substandard or doubtful rated) borrower with an aggregate, outstanding balance of $100,000 or more. This analysis includes commercial, commercial real estate, agricultural, and agricultural real estate borrowers who are not currently identified as impaired but pose sufficient risk to warrant in-depth review. Estimated collateral shortfalls are then calculated with allocations for each loan segment based on the five-year historical average of collateral shortfalls adjusted for environmental factors including changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is periodically assessed and adjusted when appropriate. Consumer loans are evaluated for adverse classification based primarily on the Uniform Retail Credit Classification and Account Management Policy established by the federal banking regulators. Classification standards are generally based on delinquency status, collateral coverage, bankruptcy and the presence of fraud.

Non-classified and Watch loans

For loans, in all segments of the portfolio, that are considered to possess levels of risk commensurate with a pass rating, management establishes base loss estimations which are derived from historical loss experience. Use of a five-year historical loss period eliminates the effect of any significant losses that can be attributed to a single event or borrower during a given reporting period. The base loss estimations for each loan segment are adjusted after consideration of several environmental factors influencing the level of credit risk in the portfolio. In addition, loans rated as watch are further segregated in the commercial / commercial real estate and agricultural / agricultural real estate segments. These loans possess potential weaknesses that, if unchecked, may result in deterioration to the point of becoming a problem asset. Due to the elevated risk inherent in these loans, an allocation of twice the adjusted base loss estimation of the applicable loan segment is determined appropriate.

Due to weakened economic conditions during recent years, the Company established allocations for each of the loan segments at levels above the base loss estimations. Some of the economic factors included the potential for reduced cash flow for commercial operating loans from reduction in sales or increased operating costs, decreased occupancy rates for commercial buildings, reduced levels of home sales for commercial land developments, the uncertainty regarding grain prices and increased operating costs for farmers, and increased levels of unemployment and bankruptcy impacting consumer’s ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. The Company has not materially changed any aspect of its overall approach in the determination of the allowance for loan losses. However, on an on-going basis the Company continues to refine the methods used in determining management’s best estimate of the allowance for loan losses.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three and nine-months ended September 30, 2014 and 2013 and for the year ended December 31, 2013 (in thousands):



	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate		Residential Real Estate			Consumer			Unallocated			Total
Three months ended September 30, 2014
Allowance for loan losses:
Balance, beginning of period	$	10,771		$	524	$	757		$	368		$	1,261		$	13,681
Provision charged to expense	(267		)	775		87			58			(609		)	44
Losses charged off	(22		)	—		(30		)	(81		)	—			(133		)
Recoveries	66			1		4			42			—			113
Balance, end of period	$	10,548		$	1,300	$	818		$	387		$	652		$	13,705
Ending balance:
Individually evaluated for impairment	$	293		$	—	$	14		$	—		$	—		$	307
Collectively evaluated for impairment	$	10,255		$	1,300	$	804		$	387		$	652		$	13,398
Three months ended September 30, 2013
Allowance for loan losses:
Balance, beginning of period	$	9,304		$	414	$	793		$	397		$	1,223		$	12,131
Provision charged to expense	1,475			43		17			50			(610		)	975
Losses charged off	(184		)	—		(18		)	(72		)	—			(274		)
Recoveries	108			3		2			32			—			145
Balance, end of period	$	10,703		$	460	$	794		$	407		$	613		$	12,977
Ending balance:
Individually evaluated for impairment	$	540		$	—	$	—		$	—		$	—		$	540
Collectively evaluated for impairment	$	10,163		$	460	$	794		$	407		$	613		$	12,437
Nine months ended September 30, 2014
Allowance for loan losses:
Balance, beginning of year	$	10,646		$	533	$	771		$	377		$	922		$	13,249
Provision charged to expense	(192		)	765		98			94			(270		)	495
Losses charged off	(54		)	—		(75		)	(186		)	—			(315		)
Recoveries	148			2		24			102			—			276
Balance, end of period	$	10,548		$	1,300	$	818		$	387		$	652		$	13,705
Ending balance:
Individually evaluated for impairment	$	293		$	—	$	14		$	—		$	—		$	307
Collectively evaluated for impairment	$	10,255		$	1,300	$	804		$	387		$	652		$	13,398
Loans:
Ending balance	$	667,656		$	169,309	$	188,521		$	15,522		$	—		$	1,041,008
Ending balance:
Individually evaluated for impairment	$	3,473		$	—	$	225		$	—		$	—		$	3,698
Collectively evaluated for impairment	$	664,183		$	169,309	$	188,296		$	15,522		$	—		$	1,037,310



	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated			Total
Nine months ended September 30, 2013
Allowance for loan losses:
Balance, beginning of year	$	9,301		$	558		$	726		$	403		$	788		$	11,776
Provision charged to expense	1,759			(102		)	161			64			(175		)	1,707
Losses charged off	(551		)	—			(104		)	(169		)	—			(824		)
Recoveries	194			4			11			109			—			318
Balance, end of period	$	10,703		$	460		$	794		$	407		$	613		$	12,977
Ending balance:
Individually evaluated for impairment	$	540		$	—		$	—		$	—		$	—		$	540
Collectively evaluated for impairment	$	10,163		$	460		$	794		$	407		$	613		$	12,437
Loans:
Ending balance	$	575,912		$	162,443		$	189,440		$	15,296		$	—		$	943,091
Ending balance:
Individually evaluated for impairment	$	4,540		$	337		$	—		$	—		$	—		$	4,877
Collectively evaluated for impairment	$	571,372		$	162,106		$	189,440		$	15,296		$	—		$	938,214
Year ended December 31, 2013
Allowance for loan losses:
Balance, beginning of year	$	9,301		$	558		$	726		$	403		$	788		$	11,776
Provision charged to expense	1,861			(30		)	171			57			134			2,193
Losses charged off	(764		)	—			(141		)	(223		)	—			(1,128		)
Recoveries	248			5			15			140			—			408
Balance, end of year	$	10,646		$	533		$	771		$	377		$	922		$	13,249
Ending balance:
Individually evaluated for impairment	$	604		$	—		$	—		$	—		$	—		$	604
Collectively evaluated for impairment	$	10,042		$	533		$	771		$	377		$	922		$	12,645
Loans:
Ending balance	$	607,062		$	172,979		$	187,796		$	14,967		$	—		$	982,804
Ending balance:
Individually evaluated for impairment	$	5,145		$	—		$	—		$	—		$	—		$	5,145
Collectively evaluated for impairment	$	601,917		$	172,979		$	187,796		$	14,967		$	—		$	977,659

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

Credit Quality

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, collateral support, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a continuous basis. The Company uses the following definitions for risk ratings:

Watch. Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current sound-worthiness and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered pass rated loans.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2014 and December 31, 2013 (in thousands):



	Construction & Land Development				Agricultural Real Estate				1-4 Family Residential Properties				Multifamily Residential Properties
	2014		2013		2014		2013		2014		2013		2014		2013
Pass	$	22,296	$	23,839	$	108,111	$	108,262	$	181,577	$	182,593	$	53,186	$	50,174
Watch	—		—		431		231		818		637		—		—
Substandard	817		1,482		1,186		912		2,979		1,531		—		—
Doubtful	—		—		—		—		—		—		—		—
Total	$	23,113	$	25,321	$	109,728	$	109,405	$	185,374	$	184,761	$	53,186	$	50,174



	Commercial Real Estate (Nonfarm/Nonresidential)				Agricultural Loans				Commercial & Industrial Loans				Consumer Loans
	2014		2013		2014		2013		2014		2013		2014		2013
Pass	$	355,902	$	335,284	$	58,601	$	62,439	$	206,074	$	158,107	$	15,039	$	14,558
Watch	15,877		17,998		734		193		4,599		3,515		10		—
Substandard	2,913		3,717		886		1,496		691		6,731		5		21
Doubtful	—		—		—		—		—		—		—		—
Total	$	374,692	$	356,999	$	60,221	$	64,128	$	211,364	$	168,353	$	15,054	$	14,579



	All Other Loans				Total Loans
	2014		2013		2014		2013
Pass	$	8,276	$	9,084	$	1,009,062	$	944,340
Watch	—		—		22,469		22,574
Substandard	—		—		9,477		15,890
Doubtful	—		—		—		—
Total	$	8,276	$	9,084	$	1,041,008	$	982,804

The following table presents the Company’s loan portfolio aging analysis at September 30, 2014 and December 31, 2013 (in thousands):



	30-59 days Past Due		60-89 days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 days & Accruing
September 30, 2014
Construction and land development	$	26	$	—	$	—	$	26	$	23,087	$	23,113	$	—
Agricultural real estate	81		—		—		81		109,647		109,728		—
1-4 Family residential properties	564		160		212		936		184,438		185,374		—
Multifamily residential properties	—		—		—		—		53,186		53,186		—
Commercial real estate	—		1,285		49		1,334		373,358		374,692		—
Loans secured by real estate	671		1,445		261		2,377		743,716		746,093		—
Agricultural loans	328		184		—		512		59,709		60,221		—
Commercial and industrial loans	88		69		72		229		211,135		211,364		—
Consumer loans	51		—		17		68		14,986		15,054		—
All other loans	—		—		—		—		8,276		8,276		—
Total loans	$	1,138	$	1,698	$	350	$	3,186	$	1,037,822	$	1,041,008	$	—
December 31, 2013
Construction and land development	$	—	$	—	$	—	$	—	$	25,321	$	25,321	$	—
Agricultural real estate	299		—		—		299		109,106		109,405		—
1-4 Family residential properties	326		146		371		843		183,918		184,761		—
Multifamily residential properties	—		—		—		—		50,174		50,174		—
Commercial real estate	568		1,030		145		1,743		355,256		356,999		—
Loans secured by real estate	1,193		1,176		516		2,885		723,775		726,660		—
Agricultural loans	122		49		—		171		63,957		64,128		—
Commercial and industrial loans	113		88		62		263		168,090		168,353		—
Consumer loans	83		25		4		112		14,467		14,579		—
All other loans	—		—		—		—		9,084		9,084		—
Total loans	$	1,511	$	1,338	$	582	$	3,431	$	979,373	$	982,804	$	—

Impaired Loans

Within all loan portfolio segments, loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Impaired loans, excluding certain troubled debt restructured loans, are placed on nonaccrual status. Impaired loans include nonaccrual loans and loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being modified remain on nonaccrual status until, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. If the restructured loan is on accrual status prior to being modified, the loan is reviewed to determine if the modified loan should remain on accrual status.

The Company’s policy is to discontinue the accrual of interest income on all loans for which principal or interest is ninety days past due. The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Interest on loans determined to be troubled debt restructurings is recognized on an accrual basis in accordance with the restructured terms if the loan is in compliance with the modified terms. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

The following tables present impaired loans as of September 30, 2014 and December 31, 2013 (in thousands):



	September 30, 2014						December 31, 2013
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans with a specific allowance:
Construction and land development	$	817	$	1,668	$	52	$	614	$	614	$	76
Agricultural real estate	—		—		—		—		—		—
1-4 Family residential properties	171		171		14		—		—		—
Multifamily residential properties	—		—		—		—		—		—
Commercial real estate	518		518		141		1,096		1,096		301
Loans secured by real estate	1,506		2,357		207		1,710		1,710		377
Agricultural loans	—		—		—		—		—		—
Commercial and industrial loans	100		100		100		275		275		227
Consumer loans	—		—		—		—		—		—
All other loans	—		—		—		—		—		—
Total loans	$	1,606	$	2,457	$	307	$	1,985	$	1,985	$	604
Loans without a specific allowance:
Construction and land development	$	—	$	—	$	—	$	869	$	1,727	$	—
Agricultural real estate	34		41		—		105		113		—
1-4 Family residential properties	867		1,240		—		1,110		1,558		—
Multifamily residential properties	—		—		—		—		—		—
Commercial real estate	1,770		1,794		—		1,750		1,778		—
Loans secured by real estate	2,671		3,075		—		3,834		5,176		—
Agricultural loans	—		—		—		—		—		—
Commercial and industrial loans	510		830		—		613		946		—
Consumer loans	33		42		—		37		51		—
All other loans	—		—		—		—		—		—
Total loans	$	3,214	$	3,947	$	—	$	4,484	$	6,173	$	—
Total loans:
Construction and land development	$	817	$	1,668	$	52	$	1,483	$	2,341	$	76
Agricultural real estate	34		41		—		105		113		—
1-4 Family residential properties	1,038		1,411		14		1,110		1,558		—
Multifamily residential properties	—		—		—		—		—		—
Commercial real estate	2,288		2,312		141		2,846		2,874		301
Loans secured by real estate	4,177		5,432		207		5,544		6,886		377
Agricultural loans	—		—		—		—		—		—
Commercial and industrial loans	610		930		100		888		1,221		227
Consumer loans	33		42		—		37		51		—
All other loans	—		—		—		—		—		—
Total loans	$	4,820	$	6,404	$	307	$	6,469	$	8,158	$	604

The following tables present average recorded investment and interest income recognized on impaired loans for the three and nine-month periods ended September 30, 2014 and 2013 (in thousands):



	For the three months ended
	September 30, 2014				September 30, 2013
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Construction and land development	$	817	$	—	$	1,753	$	—
Agricultural real estate	34		—		238		—
1-4 Family residential properties	1,129		5		1,007		2
Commercial real estate	2,349		1		2,939		—
Loans secured by real estate	4,329		6		5,937		2
Agricultural loans	—		—		209		—
Commercial and industrial loans	653		—		905		—
Consumer loans	35		—		78		1
Total loans	$	5,017	$	6	$	7,129	$	3




	For the nine months ended
	September 30, 2014				September 30, 2013
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Construction and land development	$	1,004	$	—	$	1,775	$	—
Agricultural real estate	35		—		238		—
1-4 Family residential properties	1,156		12		1,172		4
Commercial real estate	2,379		2		2,985		—
Loans secured by real estate	4,574		14		6,170		4
Agricultural loans	—		—		238		—
Commercial and industrial loans	696		—		1,169		—
Consumer loans	39		1		82		2
Total loans	$	5,309	$	15	$	7,659	$	6

The amount of interest income recognized by the Company within the periods stated above was due to loans modified in a troubled debt restructuring that remained on accrual status. The balance of loans modified in a troubled debt restructuring included in the impaired loans stated above that were still accruing was $345,000 of 1-4 Family residential properties, $38,000 of commercial real estate, and $12,000 of consumer loans at September 30, 2014 and $102,000 of 1-4 family residential properties, and $29,000 of consumer loans at September 30, 2013. For the nine months ended September 30, 2014 and 2013, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

Non Accrual Loans

The following table presents the Company’s recorded balance of nonaccrual loans as September 30, 2014 and December 31, 2013 (in thousands). This table excludes purchased impaired loans and performing troubled debt restructurings.



	September 30, 2014		December 31, 2013
Construction and land development	$	817	$	1,483
Agricultural real estate	34		105
1-4 Family residential properties	693		1,009
Commercial real estate	2,250		2,807
Loans secured by real estate	3,794		5,404
Agricultural loans	—		—
Commercial and industrial loans	610		706
Consumer loans	20		11
Total loans	$	4,424	$	6,121

Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $44,000 and $109,000 for the nine months ended September 30, 2014 and 2013, respectively.

Troubled Debt Restructuring

The balance of troubled debt restructurings ("TDRs") at September 30, 2014 and December 31, 2013 was $3.0 million and $3.2 million, respectively. Approximately $260,000 and $431,000 in specific reserves have been established with respect to these loans as of September 30, 2014 and December 31, 2013, respectively. As troubled debt restructurings, these loans are included in nonperforming loans and are classified as impaired which requires that they be individually measured for impairment. The modification of the terms of these loans included one or a combination of the following: a reduction of stated interest rate of the loan; an extension of the maturity date and change in payment terms; or a permanent reduction of the recorded investment in the loan.

The following table presents the Company’s recorded balance of troubled debt restructurings at September 30, 2014 and December 31, 2013 (in thousands).



Troubled debt restructurings:	September 30, 2014		December 31, 2013
Construction and land development	$	817	$	1,482
1-4 Family residential properties	511		306
Commercial real estate	1,345		899
Loans secured by real estate	2,673		2,687
Commercial and industrial loans	286		487
Consumer loans	18		26
Total	$	2,977	$	3,200
Performing troubled debt restructurings:
1-4 Family residential properties	$	345	$	101
Commercial real estate	38		39
Loans secured by real estate	383		140
Commercial and industrial loans	—		182
Consumer loans	12		26
Total	$	395	$	348

The following table presents loans modified as TDRs during the nine months ended September 30, 2014 and 2013, as a result of various modified loan factors (in thousands):



	September 30, 2014				September 30, 2013
	Number of Modifications	Recorded Investment		Type of Modifications	Number of Modifications	Recorded Investment		Type of Modifications
1-4 Family residential properties	3	248		(c)	1	$	357	(a)
Commercial real estate	1	501		(b)(c)	4	176		(a)(b)(c)
Loans secured by real estate	4	749			5	533
Commercial and industrial loans	—	—			1	54		(a)(b)
Consumer Loans	—	—			3	16		(b)(c)
Total	4	$	749		9	$	603

Type of modifications:

(a) Reduction of stated interest rate of loan

(b) Change in payment terms

A loan is considered to be in payment default once it is 90 days past due under the modified terms. There were no loans modified as troubled debt restructurings during the prior twelve months that experienced defaults during the nine months ended September 30, 2014 or the year ended December 31, 2013.