Loans, Net

The Company segregates its loan portfolio into three primary loan segments: Real Estate Loans, Commercial Loans, and Consumer Loans. Real estate loans are further segregated into the following classes: construction loans, loans secured by farmland, loans secured by 1-4 family residential real estate, and other real estate loans. Other real estate loans include commercial real estate loans. The consolidated loan portfolio was composed of the following:



	2013				2012
(Dollars in thousands)	Outstanding Balance		Percent of Total Portfolio		Outstanding Balance		Percent of Total Portfolio
Real estate loans:
Construction	$	36,025	5.0	%	$	50,218	7.1	%
Secured by farmland	16,578		2.3		11,876		1.7
Secured by 1-4 family residential	273,384		37.5		260,620		36.7
Other real estate loans	260,333		35.7		254,930		35.9
Commercial loans	129,554		17.8		118,573		16.8
Consumer loans	12,606		1.7		13,260		1.8
Total Gross Loans ⁽¹⁾	728,480		100.0	%	709,477		100.0	%
Less allowance for loan losses	13,320				14,311
Net loans	$	715,160			$	695,166


⁽¹⁾	Gross loan balances at December 31, 2013 and 2012 are net of deferred loan costs of $2.4 million and $2.1 million, respectively.

Loans presented in the table above exclude loans held for sale. The Company had $33.2 million and $82.1 million in mortgages held for sale at December 31, 2013 and 2012, respectively.

The following tables present a contractual aging of the recorded investment in past due loans by class of loans as of December 31, 2013 and December 31, 2012.



	December 31, 2013
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans
Real estate loans:
Construction	$	76	$	1,649	$	554	$	2,279	$	33,746	$	36,025
Secured by farmland	—		—		—		—		16,578		16,578
Secured by 1-4 family residential	590		3,751		1,022		5,363		268,021		273,384
Other real estate loans	116		—		4,197		4,313		256,020		260,333
Commercial loans	162		1,513		27		1,702		127,852		129,554
Consumer loans	31		9		38		78		12,528		12,606
Total	$	975	$	6,922	$	5,838	$	13,735	$	714,745	$	728,480



	December 31, 2012
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans
Real estate loans:
Construction	$	—	$	108	$	2,043	$	2,151	$	48,067	$	50,218
Secured by farmland	415		—		—		415		11,461		11,876
Secured by 1-4 family residential	1,625		568		1,910		4,103		256,517		260,620
Other real estate loans	197		361		6,112		6,670		248,260		254,930
Commercial loans	—		44		144		188		118,385		118,573
Consumer loans	27		10		32		69		13,191		13,260
Total	$	2,264	$	1,091	$	10,241	$	13,596	$	695,881	$	709,477

The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of December 31 of the indicated year:



	2013				2012
(Dollars in thousands)	Nonaccrual		Past due 90 days or more and still accruing		Nonaccrual		Past due 90 days or more and still accruing
Real estate loans:
Construction	$	2,368	$	268	$	2,861	$	780
Secured by 1-4 family residential	9,458		539		8,761		228
Other real estate loans	6,045		—		7,866		—
Commercial loans	1,844		—		2,146		34
Consumer loans	37		1		30		2
Total	$	19,752	$	808	$	21,664	$	1,044

If interest on nonaccrual loans had been accrued, such income would have approximated $1.8 million, $1.4 million, and $1.5 million for the years ended December 31, 2013, 2012, and 2011, respectively.

The Company utilizes an internal asset classification system as a means of measuring and monitoring credit risk in the loan portfolio. Under the Company’s classification system, problem and potential problem loans are classified as “Special Mention”, “Substandard”, and “Doubtful”.

Special Mention: Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, the potential weaknesses may result in the deterioration of the repayment prospects for the credit.

Substandard: Loans with well-defined weakness that jeopardize the liquidation of the debt. Either the paying capacity of the borrower or the value of the collateral may be inadequate to protect the Company from potential losses.

Doubtful: Loans with a very high possibility of loss. However, because of important and reasonably specific pending factors, classification as a loss is deferred until a more exact status may be determined.

Loss: Loans are deemed uncollectible and are charged off immediately.

The following tables present the recorded investment in loans by class of loan that have been classified according to the internal classification system as of December 31 of the indicated year:



December 31, 2013
(Dollars in thousands)	Real Estate Construction		Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential		Other Real Estate Loans		Commercial		Consumer		Total
Pass	$	31,143	$	8,067	$	253,654	$	238,811	$	126,246	$	12,510	$	670,431
Special Mention	2,245		7,903		1,732		9,475		775		15		22,145
Substandard	2,090		608		16,158		12,047		2,419		44		33,366
Doubtful	547		—		1,840		—		114		37		2,538
Loss	—		—		—		—		—		—		—
Ending Balance	$	36,025	$	16,578	$	273,384	$	260,333	$	129,554	$	12,606	$	728,480



December 31, 2012
(Dollars in thousands)	Real Estate Construction		Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential		Other Real Estate Loans		Commercial		Consumer		Total
Pass	$	29,741	$	11,068	$	237,121	$	228,052	$	112,298	$	13,134	$	631,414
Special Mention	15,540		199		3,767		12,949		3,332		47		35,834
Substandard	3,902		609		18,333		12,887		2,831		49		38,611
Doubtful	1,035		—		1,399		1,042		112		30		3,618
Loss	—		—		—		—		—		—		—
Ending Balance	$	50,218	$	11,876	$	260,620	$	254,930	$	118,573	$	13,260	$	709,477

The following tables present loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2013 and 2012:



	December 31, 2013
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	1,924	$	2,475	$	—	$	1,975	$	13
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	3,930		4,452		—		4,415		6
Other real estate loans	4,458		4,458		—		4,552		104
Commercial loans	2,115		2,115		—		2,267		—
Consumer loans	—		—		—		—		—
Total with no related allowance	$	12,427	$	13,500	$	—	$	13,209	$	123
With an allowance recorded:
Real estate loans:
Construction	$	712	$	712	$	486	$	878	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	6,481		6,428		3,045		6,632		47
Other real estate loans	4,684		4,684		812		4,840		71
Commercial loans	355		377		275		399		10
Consumer loans	37		37		37		39		—
Total with a related allowance	$	12,269	$	12,238	$	4,655	$	12,788	$	128
Total	$	24,696	$	25,738	$	4,655	$	25,997	$	251



	December 31, 2012
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	1,819	$	2,370	$	—	$	2,543	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	3,248		3,667		—		3,712		50
Other real estate loans	3,135		3,178		—		3,141		91
Commercial loans	1,947		1,947		—		1,924		—
Consumer loans	—		—		—		—		—
Total with no related allowance	$	10,149	$	11,162	$	—	$	11,320	$	141
With an allowance recorded:
Real estate loans:
Construction	$	1,150	$	2,250	$	166	$	1,685	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	7,544		8,203		2,724		7,842		65
Other real estate loans	7,505		7,605		1,045		7,691		73
Commercial loans	417		464		338		446		14
Consumer loans	30		30		30		30		—
Total with a related allowance	$	16,646	$	18,552	$	4,303	$	17,694	$	152
Total	$	26,795	$	29,714	$	4,303	$	29,014	$	293

The “Recorded Investment” amounts in the table above represent the outstanding principal balance on each loan represented in the table. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the table plus any amounts that have been charged-off on each loan.

Included in certain loan categories of impaired loans are troubled debt restructurings (“TDRs”). The total balance of TDRs at December 31, 2013 was $15.6 million of which $10.9 million were included in the Company’s nonaccrual loan totals at that date and $4.7 million represented loans performing as agreed according to the restructured terms. This compares with $12.0 million in total restructured loans at December 31, 2012. The amount of the valuation allowance related to TDRs was $2.8 million and $2.0 million as of December 31, 2013 and 2012 respectively.

Loan modifications that were classified as TDRs during the years ended December 31, 2013 and 2012 were as follows:



	Year Ended December 31,
(Dollars in thousands)	2013			2012
Class of Loan	Number of Contracts	Post-Modification Outstanding Recorded Investment		Number of Contracts	Post-Modification Outstanding Recorded Investment
Real estate loans:
Construction	4	$	698	1	$	108
Secured by farmland	—	—		—	—
Secured by 1-4 family residential	12	3,207		11	3,665
Other real estate loans	5	805		2	1,418
Total real estate loans	21	4,710		14	5,191
Commercial loans	2	509		1	61
Consumer loans	—	—		—	—
Total	23	$	5,219	15	$	5,252

Of the 23 contracts classified as TDRs during 2013, the terms were extended for 18 loans, the interest rates were lowered for 18 loans and 12 loans were placed on interest only payment methods. During 2012, of the 15 loans that were considered to be TDRs, the terms were extended for 3 loans, the interest rates were lowered for 9 loans and 3 loans were placed on interest only payment methods.

During the year ended December 31, 2013, the Company identified as TDRs 13 loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying these loans as TDRs, the Company evaluated them for impairment. The accounting amendments require prospective application of the impairment measurement guidance for those loans newly identified as impaired. As of December 31, 2013, the recorded investment in the loans restructured during 2013 for which the allowance was previously measured under a general allowance methodology was $3.5 million, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $1.3 million.

During the year ended December 31, 2012, the Company identified as TDRs, five loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying these loans as TDRs, the Company evaluated them for impairment. As of December 31, 2012, the recorded investment in the loans restructured during 2012 for which the allowance was previously measured under a general allowance methodology was $1.7 million, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $341,000.

One loan modified as TDR during the year ended December 31, 2013 with a year end balance of $132,000 subsequently defaulted (i.e. 90 days or more past due following a restructuring) during the year. Three loans modified as TDRs during the year ended December 31, 2012 with a year end balance of $851,000 subsequently defaulted (i.e. 90 days or more past due following a restructuring) during 2013. One loan, secured by 1-4 family residential real estate, was modified as TDR prior to 2013 and charged-off during the year. The amount of the charge-off was $293,000.