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, 2016				December 31, 2015
(Dollars in thousands)	Outstanding Balance		Percent of Total Portfolio		Outstanding Balance		Percent of Total Portfolio
Real estate loans:
Construction	$	32,519	3.8	%	$	39,673	4.9	%
Secured by farmland	16,832		2.0		19,062		2.4
Secured by 1-4 family residential	332,408		39.3		280,096		34.8
Other real estate loans	250,778		29.7		258,035		32.0
Commercial loans	193,826		22.9		190,482		23.6
Consumer loans	19,527		2.3		18,333		2.3
Total gross loans ⁽¹⁾	$	845,890	100.0	%	$	805,681	100.0	%
Less allowance for loan losses	11,200				11,046
Net loans	$	834,690			$	794,635


⁽¹⁾	Includes net deferred loan costs and premiums of $3.7 million and $3.5 million, respectively.

During the nine months ended September 30, 2016, the Company received $4.4 million in proceeds from the sale of problem loans. Included in the sales were four loans with a recorded investment of $4.3 million, of which $1.2 million were on nonaccrual, as well as 28 loans with no outstanding recorded investment as they had been fully charged-off in prior periods. Gross charge-offs of $513,000 and gross recoveries of $640,000 were recorded through the allowance for loan losses during the nine months ended September 30, 2016, related to the sales of these loans.

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



	September 30, 2016
(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	$	—	$	—	$	—	$	—	$	32,519	$	32,519
Secured by farmland	—		—		—		—		16,832		16,832
Secured by 1-4 family residential	287		—		3,319		3,606		328,802		332,408
Other real estate loans	315		1,089		148		1,552		249,226		250,778
Commercial loans	568		350		495		1,413		192,413		193,826
Consumer loans	—		6		1,871		1,877		17,650		19,527
Total	$	1,170	$	1,445	$	5,833	$	8,448	$	837,442	$	845,890



	December 31, 2015
(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	$	69	$	—	$	—	$	69	$	39,604	$	39,673
Secured by farmland	—		—		—		—		19,062		19,062
Secured by 1-4 family residential	259		—		1,117		1,376		278,720		280,096
Other real estate loans	325		—		248		573		257,462		258,035
Commercial loans	1,242		15		31		1,288		189,194		190,482
Consumer loans	4		17		—		21		18,312		18,333
Total	$	1,899	$	32	$	1,396	$	3,327	$	802,354	$	805,681

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



	September 30, 2016				December 31, 2015
(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	$	29	$	11	$	204	$	—
Secured by 1-4 family residential	3,308		—		4,460		—
Other real estate loans	1,089		148		1,186		248
Commercial loans	406		89		1,036		30
Consumer loans	1,871		—		1,898		—
Total	$	6,703	$	248	$	8,784	$	278

If interest on nonaccrual loans had been accrued, such income would have approximated $370,000 and $342,000 for the nine months ended September 30, 2016 and the year ended December 31, 2015, 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:



September 30, 2016
(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	$	26,934	$	8,901	$	325,277	$	240,168	$	187,157	$	17,588	$	806,025
Special Mention	5,556		—		931		3,805		1,559		27		11,878
Substandard	29		7,931		5,976		5,716		4,704		1,911		26,267
Doubtful	—		—		126		1,089		406		—		1,621
Loss	—		—		98		—		—		1		99
Ending Balance	$	32,519	$	16,832	$	332,408	$	250,778	$	193,826	$	19,527	$	845,890



December 31, 2015
(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	$	30,114	$	10,566	$	271,721	$	243,768	$	183,532	$	16,347	$	756,048
Special Mention	9,024		—		896		7,254		3,638		42		20,854
Substandard	535		8,496		6,818		5,827		2,301		1,943		25,920
Doubtful	—		—		661		1,186		1,011		—		2,858
Loss	—		—		—		—		—		1		1
Ending Balance	$	39,673	$	19,062	$	280,096	$	258,035	$	190,482	$	18,333	$	805,681

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



	September 30, 2016
(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	$	30	$	30	$	—	$	31	$	—
Secured by farmland	7,931		7,931		—		7,917		217
Secured by 1-4 family residential	73		108		—		73		2
Other real estate loans	1,089		1,089		—		1,115		—
Commercial loans	879		879		—		885		15
Consumer loans	—		—		—		—		—
Total with no related allowance	$	10,002	$	10,037	$	—	$	10,021	$	234
With an allowance recorded:
Real estate loans:
Construction	$	—	$	—	$	—	$	—	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	4,289		4,341		1,214		4,323		46
Other real estate loans	3,865		3,865		406		3,890		139
Commercial loans	406		3,406		190		708		—
Consumer loans	1,871		1,871		802		1,885		—
Total with a related allowance	$	10,431	$	13,483	$	2,612	$	10,806	$	185
Total	$	20,433	$	23,520	$	2,612	$	20,827	$	419



	December 31, 2015
(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	$	100	$	100	$	—	$	106	$	—
Secured by farmland	7,903		7,903		—		7,903		237
Secured by 1-4 family residential	701		736		—		703		—
Other real estate loans	—		—		—		—		—
Commercial loans	458		493		—		490		17
Consumer loans	—		—		—		—		—
Total with no related allowance	$	9,162	$	9,232	$	—	$	9,202	$	254
With an allowance recorded:
Real estate loans:
Construction	$	103	$	103	$	53	$	109	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	4,426		4,478		1,120		4,547		27
Other real estate loans	4,196		4,196		464		4,224		157
Commercial loans	1,059		4,059		27		2,315		100
Consumer loans	1,898		1,898		1,000		2,449		—
Total with a related allowance	$	11,682	$	14,734	$	2,664	$	13,644	$	284
Total	$	20,844	$	23,966	$	2,664	$	22,846	$	538

The “Recorded Investment” amounts in the table above represent the outstanding principal balance net of charge-offs and nonaccrual payments to principal 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, 2016 was $14.4 million of which $2.0 million were included in the Company’s nonaccrual loan totals at that date and $12.4 million represented loans performing as agreed according to the restructured terms. This compares with $15.5 million in total restructured loans at December 31, 2015. The amount of the valuation allowance related to TDRs was $1.1 million and $1.6 million as of September 30, 2016 and December 31, 2015, respectively.

Loan modifications that were classified as TDRs during the three and nine months ended September 30, 2016 and 2015 were as follows:




	Loans Modified as TDRs
	For the Three Months Ended September 30,
(Dollars in thousands)	2016					2015
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	—	$	—	$	—	—	$	—	$	—
Secured by farmland	—	—		—		—	—		—
Secured by 1-4 family residential	1	409		406		—	—		—
Other real estate loans	—	—		—		—	—		—
Total real estate loans	1	$	409	$	406	—	$	—	$	—
Commercial loans	—	—		—		—	—		—
Consumer loans	—	—		—		—	—		—
Total	1	$	409	$	406	—	$	—	$	—




	Loans Modified as TDRs
	For the Nine Months Ended September 30,
(Dollars in thousands)	2016					2015
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	—	$	—	$	—	—	$	—	$	—
Secured by farmland	—	—		—		1	7,903		7,903
Secured by 1-4 family residential	2	809		806		—	—		—
Other real estate loans	1	368		367		—	—		—
Total real estate loans	3	$	1,177	$	1,173	1	$	7,903	$	7,903
Commercial loans	—	—		—		—	—		—
Consumer loans	—	—		—		1	3,000		2,282
Total	3	$	1,177	$	1,173	1	$	10,903	$	10,185

There were no outstanding commitments to lend additional amounts to troubled debt restructured borrowers at September 30, 2016 or December 31, 2015.

There were no TDR payment defaults during three and nine months ended September 30, 2016 and 2015. 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.