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:



	September 30, 2014				December 31, 2013
(Dollars in thousands)	Outstanding Balance		Percent of Total Portfolio		Outstanding Balance		Percent of Total Portfolio
Real estate loans:
Construction	$	32,057	4.4	%	$	36,025	5.0	%
Secured by farmland	17,332		2.4		16,578		2.3
Secured by 1-4 family residential	267,216		36.7		273,384		37.5
Other real estate loans	254,686		34.9		260,333		35.7
Commercial loans	140,555		19.3		129,554		17.8
Consumer loans	16,906		2.3		12,606		1.7
Total Gross Loans ⁽¹⁾	$	728,752	100.0	%	$	728,480	100.0	%
Less allowance for loan losses	11,423				13,320
Net loans	$	717,329			$	715,160


⁽¹⁾	Gross loan balances at September 30, 2014 and December 31, 2013 are net of deferred loan costs of $2.7 million and $2.4 million, respectively.

Loans presented in the table above exclude loans held for sale. The Company had no mortgages held for sale at September 30, 2014 and $33.2 million in mortgages held for sale at December 31, 2013.

The Company sold, on a non-recourse basis, $6.6 million in portfolio loans during the nine months ended September 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:



	September 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	$	—	$	—	$	76	$	76	$	31,981	$	32,057
Secured by farmland	—		—		—		—		17,332		17,332
Secured by 1-4 family residential	629		—		748		1,377		265,839		267,216
Other real estate loans	—		—		—		—		254,686		254,686
Commercial loans	650		—		328		978		139,577		140,555
Consumer loans	1		1		3		5		16,901		16,906
Total	$	1,280	$	1	$	1,155	$	2,436	$	726,316	$	728,752



	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:



	September 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	$	258	$	—	$	2,368	$	268
Secured by 1-4 family residential	5,265		—		9,458		539
Other real estate loans	1,507		—		6,045		—
Commercial loans	299		30		1,844		—
Consumer loans	3		—		37		1
Total	$	7,332	$	30	$	19,752	$	808

If interest on nonaccrual loans had been accrued, such income would have approximated $325,600 and $1.1 million for the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively. The Company sold $6.6 million in loans during the nine months ended September 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:



September 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	$	24,637	$	8,824	$	256,919	$	230,626	$	136,787	$	13,853	$	671,646
Special Mention	6,818		7,903		2,012		16,618		3,129		24		36,504
Substandard	602		605		7,740		7,442		389		3,026		19,804
Doubtful	—		—		545		—		250		3		798
Loss	—		—		—		—		—		—		—
Ending Balance	$	32,057	$	17,332	$	267,216	$	254,686	$	140,555	$	16,906	$	728,752



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:



	September 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	$	140	$	140	$	—	$	172	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	2,061		2,190		—		2,169		26
Other real estate loans	3,325		3,325		—		3,373		104
Commercial loans	451		451		—		456		18
Consumer loans	—		—		—		—		—
Total with no related allowance	$	5,977	$	6,106	$	—	$	6,170	$	148
With an allowance recorded:
Real estate loans:
Construction	$	119	$	119	$	69	$	125	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	3,965		4,017		1,141		3,978		12
Other real estate loans	1,253		1,253		305		1,266		69
Commercial loans	421		421		309		794		8
Consumer loans	3,003		3,003		630		3,002		128
Total with a related allowance	$	8,761	$	8,813	$	2,454	$	9,165	$	217
Total	$	14,738	$	14,919	$	2,454	$	15,335	$	365



	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 net of charge-offs and nonaccrual payments to interest 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 September 30, 2014 was $7.4 million of which $2.9 million were included in the Company’s nonaccrual loan totals at that date and $4.5 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 $730,200 and $2.8 million as of September 30, 2014 and December 31, 2013, respectively.

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



	Loans Modified as TDRs
	For the Three Months Ended September 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	$	45	$	41
Secured by farmland	—	—		—		—	—		—
Secured by 1-4 family residential	—	—		—		6	2,300		1,986
Other real estate loans	—	—		—		3	701		676
Total real estate loans	—	$	—	$	—	10	$	3,046	$	2,703
Commercial loans	—	—		—		1	50		49
Consumer loans	—	—		—		—	—		—
Total	—	$	—	$	—	11	$	3,096	$	2,752



	Loans Modified as TDRs
	For the Nine Months Ended September 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	—	$	—	$	—	2	$	557	$	514
Secured by farmland	—	—		—		—	—		—
Secured by 1-4 family residential	4	1,190		1,142		11	3,549		3,227
Other real estate loans	1	200		173		5	869		824
Total real estate loans	5	$	1,390	$	1,315	18	$	4,975	$	4,565
Commercial loans	—	—		—		2	517		515
Consumer loans	—	—		—		—	—		—
Total	5	$	1,390	$	1,315	20	$	5,492	$	5,080

Of the five TDRs identified during the nine months ended September 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. Accounting guidance requires prospective application of the impairment measurement for those loans newly identified as impaired. As of September 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, one paid off and two were sold totaling $707,000 during the nine months ended September 30, 2014. There were no outstanding commitments to lend additional amounts to troubled debt restructured borrowers at September 30, 2014.

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



	For the Three Months Ended September 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	—	—		—	—
Other real estate loans	1	91		—	—
Total real estate loans	1	$	91	—	$	—
Commercial loans	1	49		—	—
Consumer loans	—	—		—	—
Total	2	$	140	—	$	—



	For the Nine Months Ended September 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	—	—		1	712
Other real estate loans	1	91		—	—
Total real estate loans	1	$	91	1	$	712
Commercial loans	1	49		—	—
Consumer loans	—	—		—	—
Total	2	$	140	1	$	712

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.