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 June 30, 2015 and December 31, 2014:


	(In Thousands)
	June 30, 2015			December 31, 2014
Mortgage loans on real estate
Residential 1-4 family	$	355,924		$	350,758
Multifamily		50,559			31,242
Commercial		585,217			564,965
Construction and land development		277,518			245,830
Farmland		31,479			30,236
Second mortgages		8,681			9,026
Equity lines of credit		45,818			41,496

Total mortgage loans on real estate		1,355,196			1,273,553

Commercial loans		29,532			30,000

Agricultural loans		1,451			1,670

Consumer installment loans
Personal		39,279			37,745
Credit cards		3,169			3,280

Total consumer installment loans		42,448			41,025

Other loans		9,592			10,530

		1,438,219			1,356,778

Net deferred loan fees		(4,758	)		(4,341	)

Total loans		1,433,461			1,352,437

Less: Allowance for loan losses		(22,412	)		(22,572	)

Net Loans	$	1,411,049		$	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 six months ended June 30, 2015 and year ended December 31, 2014 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
June 30, 2015
Allowance for loan losses:
Beginning balance	$	5,582			172		9,578			5,578			795			61			304			176		2			324			22,572
Provision		99			61		(1,122	)		1,027			(250	)		50			45			50		2			194			156
Charge-offs		(135	)		—		(43	)		(1	)		—			(20	)		(6	)		—		(2	)		(302	)		(509	)
Recoveries		27			—		3			22			—			—			1			5		3			132			193

Ending balance	$	5,573			233		8,416			6,626			545			91			344			231		5			348			22,412

Ending balance individually evaluated for impairment	$	208			—		711			—			—			—			—			—		—			—			919

Ending balance collectively evaluated for impairment	$	5,365			233		7,705			6,626			545			91			344			231		5			348			21,493

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

Loans:
Ending balance	$	355,924			50,559		585,217			277,518			31,479			8,681			45,818			29,532		1,451			52,040			1,438,219

Ending balance individually evaluated for impairment	$	1,386			—		10,559			—			575			—			—			—		—			—			12,520

Ending balance collectively evaluated for impairment	$	354,538			50,559		574,658			277,518			30,904			8,681			45,818			29,532		1,451			52,040			1,425,699

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			7			321			22,935
Provision		1,059			95		(378	)		102			176		(164	)		3		(641	)		(10	)		256			498
Charge-offs		(468	)		—		(968	)		(7	)		—		—			—		(37	)		—			(387	)		(1,867	)
Recoveries		56			—		6			324			1		20			1		459			5			134			1,006

Ending balance	$	5,582			172		9,578			5,578			795		61			304		176			2			324			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			2			324			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			1,670			51,555			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			1,670			51,555			1,346,281

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

Impaired Loans

At June 30, 2015, the Company had certain impaired loans of $6.7 million which were on non-accruing interest status. At December 31, 2014, the Company had certain impaired loans of $616,000 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 June 30, 2015 and December 31, 2014.


	In Thousands
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
June 30, 2015
With no related allowance recorded:
Residential 1-4 family	$	631		626		—		817		19
Multifamily		—		—		—		—		—
Commercial real estate		6,120		6,120		—		5,628		(9	)
Construction		—		—		—		—		—
Farmland		575		575		—		288		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—

	$	7,326		7,321		—		6,733		10

With allowance recorded:
Residential 1-4 family	$	769		760		208		771		22
Multifamily		—		—		—		—		—
Commercial real estate		4,449		6,143		711		4,628		98
Construction		—		—		—		—		—
Farmland		—		—		—		287		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—

	$	5,218		6,903		919		5,686		120

Total
Residential 1-4 family	$	1,400		1,386		208		1,588		41
Multifamily		—		—		—		—		—
Commercial real estate		10,569		12,263		711		10,256		89
Construction		—		—		—		—		—
Farmland		575		575		—		575		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—

	$	12,544		14,224		919		12,419		130


	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. 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 June 30, 2015 and December 31, 2014.


	June 30, 2015		December 31, 2014
	(In thousands)
Performing TDRs	$	4,226	$	4,443
Nonperforming TDRs		3,035		3,597

Total TDRS	$	7,261	$	8,040

The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the six months ended June 30, 2015 and the year ended December 31, 2014 (in thousands, except for number of contracts):


	June 30, 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		1	$	56	$	56		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		2	$	58	$	58		10	$	2,370	$	2,242

As of June 30, 2015, the Company had one loan relationship in the amount of $1.0 million that had been previously classified as a troubled debt restructuring that subsequently defaulted within twelve months of restructuring. As of 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 June 30, 2015, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $601,000.

Potential problem loans, which include nonperforming loans, amounted to approximately $34.1 million at June 30, 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:


	(In Thousands)
	Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction		Farmland		Second Mortgages		Equity Lines of Credit		Commercial		Agricultural		Installment and Other		Total
June 30, 2015
Credit Risk Profile by Internally Assigned Rating
Pass	$	346,779		50,559		562,510		277,150		30,451		8,089		45,637		29,516		1,451		51,947		1,404,089
Special Mention		5,538		—		11,603		320		33		296		181		13		—		8		17,992
Substandard		3,607		—		11,104		48		995		296		—		3		—		85		16,138
Doubtful		—		—		—		—		—		—		—		—		—		—		—

Total	$	355,924		50,559		585,217		277,518		31,479		8,681		45,818		29,532		1,451		52,040		1,438,219

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		1,661		51,387		1,320,970
Special Mention		7,681		—		13,313		2,362		57		347		176		18		2		14		23,970
Substandard		3,548		—		6,351		52		919		672		46		89		7		154		11,838
Doubtful		—		—		—		—		—		—		—		—		—		—		—

Total	$	350,758		31,242		564,965		245,830		30,236		9,026		41,496		30,000		1,670		51,555		1,356,778