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:



	June 30, 2014				December 31, 2013
(Dollars in thousands)	Outstanding Balance		Percent of Total Portfolio		Outstanding Balance		Percent of Total Portfolio
Real estate loans:
Construction	$	29,378	4.0	%	$	36,025	5.0	%
Secured by farmland	17,414		2.4		16,578		2.3
Secured by 1-4 family residential	271,735		37.4		273,384		37.5
Other real estate loans	264,933		36.4		260,333		35.7
Commercial loans	127,231		17.5		129,554		17.8
Consumer loans	16,415		2.3		12,606		1.7
Total Gross Loans ⁽¹⁾	$	727,106	100.00	%	$	728,480	100.00	%
Less allowance for loan losses	11,508				13,320
Net loans	$	715,598			$	715,160


⁽¹⁾	Gross loan balances at June 30, 2014 and December 31, 2013 are net of deferred loan costs of $2.2 million and $2.4 million, respectively.

Loans presented in the table above exclude loans held for sale. The Company had $13.5 million and $33.2 million in mortgages held for sale at June 30, 2014 and December 31, 2013, respectively.

The Company sold $6.6 million in loans during the six months ended June 30, 2014. Of this amount, $5.9 million were on nonaccrual status and $6.3 million were classified as TDRs. Specific reserves associated with these loans totaled $655,000.

The following tables present a contractual aging of the recorded investment in past due loans by class of loans:



	June 30, 2014
(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	$	—	$	—	$	1,889	$	1,889	$	27,489	$	29,378
Secured by farmland	—		—		—		—		17,414		17,414
Secured by 1-4 family residential	827		71		4,020		4,918		266,817		271,735
Other real estate loans	51		—		219		270		264,663		264,933
Commercial loans	—		259		1,527		1,786		125,445		127,231
Consumer loans	4		4		17		25		16,390		16,415
Total	$	882	$	334	$	7,672	$	8,888	$	718,218	$	727,106



	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

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing by class of loans:



	June 30, 2014				December 31, 2013
(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	$	1,783	$	344	$	2,368	$	268
Secured by 1-4 family residential	5,135		—		9,458		539
Other real estate loans	1,568		—		6,045		—
Commercial loans	1,911		5		1,844		—
Consumer loans	11		6		37		1
Total	$	10,408	$	355	$	19,752	$	808

If interest on nonaccrual loans had been accrued, such income would have approximated $298,000 and $1.1 million for the six months ended June 30, 2014 and the year ended December 31, 2013, respectively. The Company sold $6.6 million in loans during the six months ended June 30, 2014. Of this amount, $5.9 million were on nonaccrual status.

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:



June 30, 2014
(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	$	20,305	$	8,904	$	261,694	$	241,372	$	121,602	$	16,357	$	670,234
Special Mention	6,946		7,903		2,718		16,039		3,109		31		36,746
Substandard	2,127		607		6,936		7,522		2,270		16		19,478
Doubtful	—		—		387		—		250		11		648
Loss	—		—		—		—		—		—		—
Ending Balance	$	29,378	$	17,414	$	271,735	$	264,933	$	127,231	$	16,415	$	727,106



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

The following tables present loans individually evaluated for impairment by class of loan:



	June 30, 2014
(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	$	1,622	$	2,174	$	—	$	1,864	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	2,028		2,445		—		2,390		28
Other real estate loans	3,385		3,385		—		3,470		104
Commercial loans	2,067		2,067		—		2,090		—
Consumer loans	—		—		—		15		—
Total with no related allowance	$	9,102	$	10,071	$	—	$	9,829	$	132
With an allowance recorded:
Real estate loans:
Construction	$	504	$	504	$	111	$	3,175	$	150
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	3,871		3,923		1,993		3,879		12
Other real estate loans	1,260		1,260		312		1,269		69
Commercial loans	436		436		217		802		8
Consumer loans	11		11		11		9		—
Total with a related allowance	$	6,082	$	6,134	$	2,644	$	9,134	$	239
Total	$	15,184	$	16,205	$	2,644	$	18,963	$	371



	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

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 and nonaccrual payments applied to principal.

Included in certain loan categories of impaired loans are troubled debt restructurings (“TDRs”). The total balance of TDRs at June 30, 2014 was $7.6 million of which $3.0 million were included in the Company’s nonaccrual loan totals at that date and $4.6 million represented loans performing as agreed according to the restructured terms. This compares with $15.6 million in total restructured loans at December 31, 2013. The amount of the valuation allowance related to TDRs was $760,000 and $2.8 million as of June 30, 2014 and December 31, 2013, respectively.

Loan modifications that were classified as TDRs during the three and six months ended June 30, 2014 and 2013 were as follows:



	Loans Modified as TDRs
	For the Three Months Ended June 30,
(Dollars in thousands)	2014					2013
Class of Loan	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans:
Construction	—	$	—	$	—	1	$	512	$	473
Secured by farmland	—	—		—		—	—		—
Secured by 1-4 family residential	1	409		409		5	1,394		1,387
Other real estate loans	—	—		—		—	—		—
Total real estate loans	1	$	409	$	409	6	$	1,906	$	1,860
Commercial loans	—	—		—		1	466		466
Consumer loans	—	—		—		—	—		—
Total	1	$	409	$	409	7	$	2,372	$	2,326



	Loans Modified as TDRs
	For the Six Months Ended June 30,
(Dollars in thousands)	2014					2013
Class of Loan	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans:
Construction	—	$	—	$	—	1	$	512	$	473
Secured by farmland	—	—		—		—	—		—
Secured by 1-4 family residential	4	1,190		1,142		6	1,445		1,433
Other real estate loans	1	200		173		2	168		143
Total real estate loans	5	$	1,390	$	1,315	9	$	2,125	$	2,049
Commercial loans	—	—		—		1	466		466
Consumer loans	—	—		—		—	—		—
Total	5	$	1,390	$	1,315	10	$	2,591	$	2,515

Of the five TDRs identified as of June 30, 2014, two loans had previously been measured under the general allowance methodology of the allowance for loan losses. 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 June 30, 2014, the recorded investment in the loans restructured during the period for which the allowance was previously measured under the general allowance methodology was $916,000. There was no allowance for loan losses associated with those loans on the basis of a current evaluation of loss.

Of the five TDRs identified above as of June 30, 2014, one paid off and two were sold totaling $707,000 during the quarter ended June 30, 2014.

TDR payment defaults during three and six months ended June 30, 2014 and 2013 were as follows:



	For the Three Months Ended June 30,
(Dollars in thousands)	2014			2013
Class of Loan	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Real estate loans:
Construction	—	$	—	—	$	—
Secured by farmland	—	—		—	—
Secured by 1-4 family residential	2	200		2	852
Other real estate loans	1	94		—	—
Total real estate loans	3	$	294	2	$	852
Commercial loans	1	49		1	34
Consumer loans	—	—		—	—
Total	4	$	343	3	$	886



	For the Six Months Ended June 30,
(Dollars in thousands)	2014			2013
Class of Loan	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Real estate loans:
Construction	—	$	—	1	$	102
Secured by farmland	—	—		—	—
Secured by 1-4 family residential	4	376		2	852
Other real estate loans	1	94		—	—
Total real estate loans	5	$	470	3	$	954
Commercial loans	1	49		1	34
Consumer loans	—	—		—	—
Total	6	$	519	4	$	988

For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due.