Note 2. 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 March 31, 2015 and December 31, 2014:


	(In Thousands)
	March 31, 2015			December 31, 2014
Mortgage Loans on real estate
Residential 1-4 family	$	352,539		$	350,758
Multifamily		40,546			31,242
Commercial		564,943			564,965
Construction		257,936			245,830
Farmland		30,879			30,236
Second mortgages		8,868			9,026
Equity lines of credit		43,728			41,496

Total mortgage loans on real estate		1,299,439			1,273,553

Commercial loans		30,357			30,000

Agricultural loans		1,559			1,670

Consumer installment loans
Personal		37,825			37,745
Credit cards		2,987			3,280

Total consumer installment loans		40,812			41,025

Other loans		10,615			10,530

		1,382,782			1,356,778

Net deferred loan fees		(4,503	)		(4,341	)

Total loans		1,378,279			1,352,437

Less: Allowance for loan losses		(22,498	)		(22,572	)

Net Loans	$	1,355,781		$	1,329,865

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 three months ended March 31, 2015 and year ended December 31, 2014 are summarized as follows:


	Residential 1-4 Family			Multifamily		Commercial Real Estate			Construction		Farmland			Second Mortgages			Equity Lines of Credit		Commercial		Agricultural, Installment and Other			Total
March 31, 2015
Allowance for loan losses:
Beginning balance	$	5,582			172		9,578			5,578		795			61			304		176		326			22,572
Provision		29			51		(935	)		730		(85	)		52			35		76		122			75
Charge-offs		(64	)		—		—			—		—			(20	)		—		—		(170	)		(254	)
Recoveries		14			—		1			7		—			—			—		4		79			105

Ending balance	$	5,561			223		8,644			6,315		710			93			339		256		357			22,498

Ending balance individually evaluated for impairment	$	243			—		1,110			—		52			—			—		—		—			1,405

Ending balance collectively evaluated for impairment	$	5,318			223		7,534			6,315		658			93			339		256		357			21,093

Ending balance loans acquired with deteriorated credit quality	$	—			—		—			—		—			—			—		—		—			—

Loans:
Ending balance	$	352,539			40,546		564,943			257,936		30,879			8,868			43,728		30,357		52,986			1,382,782

Ending balance individually evaluated for impairment	$	1,737			—		9,889			—		574			—			—		—		—			12,200

Ending balance collectively evaluated for impairment	$	350,802			40,546		555,054			257,936		30,305			8,868			43,728		30,357		52,986			1,370,582

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, 2014
Allowance for loan losses:
Beginning balance	$	4,935			77		10,918			5,159			618		205			300		395			328			22,935
Provision		1,059			95		(378	)		102			176		(164	)		3		(641	)		246			498
Charge-offs		(468	)		—		(968	)		(7	)		—		—			—		(37	)		(387	)		(1,867	)
Recoveries		56			—		6			324			1		20			1		459			139			1,006

Ending balance	$	5,582			172		9,578			5,578			795		61			304		176			326			22,572

Ending balance individually evaluated for impairment	$	376			—		1,135			—			120		—			—		—			—			1,631

Ending balance collectively evaluated for impairment	$	5,206			172		8,443			5,578			675		61			304		176			326			20,941

Ending balance loans acquired with deteriorated credit quality	$	—			—		—			—			—		—			—		—			—			—

Loans:
Ending balance	$	350,758			31,242		564,965			245,830			30,236		9,026			41,496		30,000			53,225			1,356,778

Ending balance individually evaluated for impairment	$	3,061			—		6,455			—			701		280			—		—			—			10,497

Ending balance collectively evaluated for impairment	$	347,697			31,242		558,510			245,830			29.535		8,746			41,496		30,000			53,225			1,346,281

Ending balance loans acquired with deteriorated credit quality	$	—			—		—			—			—		—			—		—			—			—

Impaired Loans

At March 31, 2015, the Company had certain impaired loans of $4,694,000 which were on non-accruing interest status. At December 31, 2014, the Company had certain impaired loans of $574,000 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 March 31, 2015 and December 31, 2014.


	In Thousands
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
March 31, 2015
With no related allowance recorded:
Residential 1-4 family	$	1,002		974		—		1,446		15
Multifamily		—		—		—		—		—
Commercial real estate		5,135		5,121		—		3,244		(1	)
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		141		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—

	$	6,137		6,095		—		4,831		14

With allowance recorded:
Residential 1-4 family	$	772		763		243		996		12
Multifamily		—		—		—		—		—
Commercial real estate		4,806		6,472		1,110		4,969		53
Construction		—		—		—		—		—
Farmland		574		574		52		638		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—

	$	6,152		7,809		1,405		6,603		65

Total
Residential 1-4 family	$	1,774		1,737		243		2,442		27
Multifamily		—		—		—		—		—
Commercial real estate		9,941		11,593		1,110		8,213		52
Construction		—		—		—		—		—
Farmland		574		574		52		638		—
Second mortgages		—		—		—		141		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—

	$	12,289		13,904		1,405		11,434		79


	In Thousands
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
December 31, 2014
With no related allowance recorded:
Residential 1-4 family	$	1,891		1,854		—		1,081		114
Multifamily		—		—		—		—		—
Commercial real estate		1,352		2,188		—		5,984		95
Construction		—		—		—		673		—
Farmland		—		—		—		—		—
Second mortgages		281		280		—		222		3
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—

	$	3,524		4,322		—		7,960		212

With allowance recorded:
Residential 1-4 family	$	1,219		1,207		376		1,363		61
Multifamily		—		—		—		—		—
Commercial real estate		5,131		6,811		1,135		5,755		202
Construction		—		—		—		1,815		—
Farmland		702		701		120		767		7
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—

	$	7,052		8,719		1,631		9,700		270

Total:
Residential 1-4 family	$	3,110		3,061		376		2,444		175
Multifamily		—		—		—		—		—
Commercial real estate		6,483		8,999		1,135		11,739		297
Construction		—		—		—		2,488		—
Farmland		702		701		120		767		7
Second mortgages		281		280		—		222		3
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—

	$	10,576		13,041		1,631		17,660		482

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 have to 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 noted above. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date.

Troubled Debt Restructuring

The Company’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. The concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDR’s are classified as nonperforming at the time of the 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 TDRs at March 31, 2015 and December 31, 2014 (dollars in thousands):


	March 31, 2015		December 31, 2014
Performing TDRs	$	4,387		4,443
Nonperforming TDRs		3,486		3,597

Total TDRs	$	7,873		8,040

The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the three months ended March 31, 2015 and the year ended December 31, 2014 (dollars in thousands):


	March 31, 2015						December 31, 2014
	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		—	$	—	$	—		6	$	1,346	$	1,218
Multifamily		—		—		—		—		—		—
Commercial real estate		—		—		—		2		1,020		1,020
Construction		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Second mortgages		—		—		—		—		—		—
Equity lines of credit		—		—		—		—		—		—
Commercial		—		—		—		1		3		3
Agricultural, installment and other		1		2		2		1		1		1

Total		1	$	2	$	2		10	$	2,370	$	2,242

As of March 31, 2015 and December 31, 2014, the Company did not have any loans previously classified as troubled debt restructurings 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 March 31, 2015, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $718,000.

Potential problem loans, which include nonperforming loans, amounted to approximately $35.6 million at March 31, 2015 compared to $35.8 million at December 31, 2014. 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:


	Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction		Farmland		Second Mortgages		Equity Lines of Credit		Commercial		Agricultural Installment and Other		Total
March 31, 2015
Credit Risk Profile by Internally Assigned Rating
Pass	$	342,965		40,546		541,373		257,547		29,935		8,023		43,535		30,337		52,874		1,347,135
Special Mention		5,941		—		13,160		338		34		274		187		17		8		19,959
Substandard		3,633		—		10,410		51		910		571		6		3		104		15,688
Doubtful		—		—		—		—		—		—		—		—		—		—

Total	$	352,539		40,546		564,943		257,936		30,879		8,868		43,728		30,357		52,986		1,382,782

December 31, 2014
Credit Risk Profile by Internally Assigned Rating
Pass	$	339,529		31,242		545,301		243,416		29,260		8,007		41,274		29,893		53,048		1,320,970
Special Mention		7,681		—		13,313		2,362		57		347		176		18		16		23,970
Substandard		3,548		—		6,351		52		919		672		46		89		161		11,838
Doubtful		—		—		—		—		—		—		—		—		—		—

Total	$	350,758		31,242		564,965		245,830		30,236		9,026		41,496		30,000		53,225		1,356,778