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, 2015 and December 31, 2014:



	(In Thousands)
	September 30, 2015			December 31, 2014
Mortgage loans on real estate
Residential 1-4 family	$	357,360		$	350,758
Multifamily	53,956			31,242
Commercial	603,283			564,965
Construction and land development	286,381			245,830
Farmland	34,911			30,236
Second mortgages	8,053			9,026
Equity lines of credit	47,958			41,496
Total mortgage loans on real estate	1,391,902			1,273,553
Commercial loans	27,278			30,000
Agricultural loans	1,524			1,670
Consumer installment loans
Personal	38,768			37,745
Credit cards	3,002			3,280
Total consumer installment loans	41,770			41,025
Other loans	9,700			10,530
	1,472,174			1,356,778
Net deferred loan fees	(5,138		)	(4,341		)
Total loans	1,467,036			1,352,437
Less: Allowance for loan losses	(22,702		)	(22,572		)
Net Loans	$	1,444,334		$	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 nine months ended September 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
September 30, 2015
Allowance for loan losses:
Beginning balance	$	5,582		172	9,578		5,578		795		61		304		176	2		324		22,572
Provision	225			125	(1,259	)	900		(185	)	72		49		32	4		302		265
Charge-offs	(156		)	—	(43	)	(1	)	—		(45	)	(6	)	—	(2	)	(465	)	(718	)
Recoveries	37			—	315		32		1		—		1		6	2		189		583
Ending balance	$	5,688		297	8,591		6,509		611		88		348		214	6		350		22,702
Ending balance individually evaluated for impairment	$	208		—	711		—		—		—		—		—	—		—		919
Ending balance collectively evaluated for impairment	$	5,480		297	7,880		6,509		611		88		348		214	6		350		21,783
Ending balance loans acquired with deteriorated credit quality	$	—		—	—		—		—		—		—		—	—		—		—
Loans:
Ending balance	$	357,360		53,956	603,283		286,381		34,911		8,053		47,958		27,278	1,524		51,470		1,472,174
Ending balance individually evaluated for impairment	$	1,378		—	8,703		—		575		—		—		—	—		—		10,656
Ending balance collectively evaluated for impairment	$	355,982		53,956	594,580		286,381		34,336		8,053		47,958		27,278	1,524		51,470		1,461,518
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 September 30, 2015, the Company had certain impaired loans of $4,868,000 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 September 30, 2015 and December 31, 2014.



	In Thousands
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
September 30, 2015
With no related allowance recorded:
Residential 1-4 family	$	629	622	—	754	29
Multifamily	—		—	—	—	—
Commercial real estate	4,293		4,293	—	5,183	5
Construction	—		—	—	—	—
Farmland	575		575	—	383	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural	—		—	—	—	—
	$	5,497	5,490	—	6,320	34
With allowance recorded:
Residential 1-4 family	$	764	756	208	768	32
Multifamily	—		—	—	—	—
Commercial real estate	4,420		6,113	711	4,558	147
Construction	—		—	—	—	—
Farmland	—		—	—	191	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural	—		—	—	—	—
	$	5,184	6,869	919	5,517	179
Total
Residential 1-4 family	$	1,393	1,378	208	1,522	61
Multifamily	—		—	—	—	—
Commercial real estate	8,713		10,406	711	9,741	152
Construction	—		—	—	—	—
Farmland	575		575	—	574	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural	—		—	—	—	—
	$	10,681	12,359	919	11,837	213



	In Thousands
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income 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 September 30, 2015 and December 31, 2014.



	September 30, 2015		December 31, 2014
	(In thousands)
Performing TDRs	$	4,246	$	4,443
Nonperforming TDRs	1,968		3,597
Total TDRS	$	6,214	$	8,040

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



	September 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 September 30, 2015, the Company had one large loan relationship in the amount of $1.0 million that had been previously classified as troubled debt restructuring subsequently default within twelve months of restructuring. As of December 31, 2014, the Company did not have any loans 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, 2015 and December 31, 2014, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $432,000 and $639,000, respectively.

Potential problem loans, which include nonperforming loans, amounted to approximately $28.6 million at September 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
September 30, 2015
Credit Risk Profile by Internally Assigned Rating
Pass	$	347,897	53,956	586,317	285,934	33,888	7,488	47,949	27,267	1,524	51,372	1,443,592
Special Mention	5,500		—	7,721	401	32	290	—	11	—	6	13,961
Substandard	3,963		—	9,245	46	991	275	9	—	—	92	14,621
Doubtful	—		—	—	—	—	—	—	—	—	—	—
Total	$	357,360	53,956	603,283	286,381	34,911	8,053	47,958	27,278	1,524	51,470	1,472,174
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