Loans and Allowance for Loan Losses

Loans are stated at the principal amount outstanding net of unearned discounts, unearned income and allowance for loan losses. Unearned income includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximated the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding. A summary of loans at June 30, 2016 and December 31, 2015 follows (in thousands):



	June 30, 2016		December 31, 2015
Construction and land development	$	33,820	$	39,232
Agricultural real estate	122,384		122,579
1-4 Family residential properties	219,817		231,383
Multifamily residential properties	47,243		45,765
Commercial real estate	446,356		409,487
Loans secured by real estate	869,620		848,446
Agricultural loans	72,855		75,998
Commercial and industrial loans	301,873		305,851
Consumer loans	38,448		42,097
All other loans	33,719		11,317
Gross loans	1,316,515		1,283,709
Less:
Net deferred loan fees, premiums and discounts	2,674		2,788
Allowance for loan losses	15,164		14,576
Net loans	$	1,298,677	$	1,266,345

Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or market value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties. The balance of loans held for sale, excluded from the balances above, were $1,346,000 and $968,000 at June 30, 2016 and December 31, 2015, respectively.

Most of the Company’s business activities are with customers located within central Illinois. At June 30, 2016, the Company’s loan portfolio included $195.2 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $162.7 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased $3.4 million from $198.6 million at December 31, 2015 due to seasonal paydowns based upon timing of cash flow requirements. Loans concentrated in other grain farming increased $1.2 million from $161.5 million at December 31, 2015. While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio.

In addition, the Company has $65.0 million of loans to motels and hotels. The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region. While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses. The Company also has $116.4 million of loans to lessors of non-residential buildings and $64.4 million of loans to lessors of residential buildings and dwellings.

The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the board of directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed. The vast majority of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

The Company’s lending can be summarized into the following primary areas:

Commercial Real Estate Loans. Commercial real estate loans are generally comprised of loans to small business entities to purchase or expand structures in which the business operations are housed, loans to owners of real estate who lease space to non-related commercial entities, loans for construction and land development, loans to hotel operators, and loans to owners of multi-family residential structures, such as apartment buildings. Commercial real estate loans are underwritten based on historical and projected cash flows of the borrower and secondarily on the underlying real estate pledged as collateral on the debt. For the various types of commercial real estate loans, minimum criteria have been established within the Company’s loan policy regarding debt service coverage while maximum limits on loan-to-value and amortization periods have been defined. Maximum loan-to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while the desired minimum debt coverage ratio is 1.20x. Amortization periods for commercial real estate loans are generally limited to twenty years. The Company’s commercial real estate portfolio is well below the thresholds that would designate a concentration in commercial real estate lending, as established by the federal banking regulators.

Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund accounts receivable that are secured by business assets other than real estate. These loans are generally written for one year or less. Also, equipment financing is provided to businesses with these loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years. Commercial loans are often accompanied by a personal guaranty of the principal owners of a business. Like commercial real estate loans, the underlying cash flow of the business is the primary consideration in the underwriting process. The financial condition of commercial borrowers is monitored at least annually with the type of financial information required determined by the size of the relationship. Measures employed by the Company for businesses with higher risk profiles include the use of government-assisted lending programs through the Small Business Administration and U.S. Department of Agriculture.

Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop. Loan-to-value ratios on loans secured by farmland generally do not exceed 65% and have amortization periods limited to twenty five years. Federal government-assistance lending programs through the Farm Service Agency are used to mitigate the level of credit risk when deemed appropriate.

Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties consisting of one-to-four units and home equity loans and lines of credit. The Company sells the vast majority of its long-term fixed rate residential real estate loans to secondary market investors. The Company also releases the servicing of these loans upon sale. The Company retains all residential real estate loans with balloon payment features. Balloon periods are limited to five years. Residential real estate loans are typically underwritten to conform to industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit scores. Loans secured by first liens on residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have amortization periods of twenty five years or less. The Company does not originate subprime mortgage loans.

Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an automobile or other living expenses. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio, employment history, and collateral coverage. Typically, consumer loans are set up on monthly payments with amortization periods based on the type and age of the collateral.

Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or equipment purchases. Underwriting guidelines for these loans are consistent with those established for commercial loans with the additional repayment source of the taxing authority of the municipality.

Allowance for Loan Losses

The allowance for loan losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses existing in the current portfolio. The provision for loan losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, the Company relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and troubled debt restructurings, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates. The Company estimates the appropriate level of allowance for loan losses by separately evaluating large impaired loans and nonimpaired loans.

Impaired loans

The Company individually evaluates certain loans for impairment. In general, these loans have been internally identified via the Company’s loan grading system as credits requiring management’s attention due to underlying problems in the borrower’s business or collateral concerns. This evaluation considers expected future cash flows, the value of collateral and also other factors that may impact the borrower’s ability to make payments when due. For loans greater than $250,000, impairment is individually measured each quarter using one of three alternatives: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price, if available; or (3) the fair value of the collateral less costs to sell for collateral dependent loans and loans for which foreclosure is deemed to be probable. A specific allowance is assigned when expected cash flows or collateral do not justify the carrying amount of the loan. The carrying value of the loan reflects reductions from prior charge-offs.

Non-Impaired loans

Non-impaired loans comprise the vast majority of the Company’s total loan portfolio and include loans in accrual status and those credits not identified as troubled debt restructurings. A small portion of these loans are considered “criticized” due to the risk rating assigned reflecting elevated credit risk due to characteristics, such as a strained cash flow position, associated with the individual borrowers. Criticized loans are those assigned risk ratings of Watch, Substandard, or Doubtful. Determining the appropriate level of the allowance for loan losses for all non-impaired loans is based on a migration analysis of net losses over a rolling twelve quarter period by loan segment. A weighted average of the net losses is determined by assigning more weight to the most recent quarters in order to recognize current risk factors influencing the various segments of the loan portfolio more prominently than past periods. Environmental factors including changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets are evaluated each quarter to determine if adjustments to the weighted average historical net losses is appropriate given these current influences on the risk profile of each loan segment. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is periodically assessed and adjusted when appropriate. Consumer loans are evaluated for adverse classification based primarily on the Uniform Retail Credit Classification and Account Management Policy established by the federal banking regulators. Classification standards are generally based on delinquency status, collateral coverage, bankruptcy and the presence of fraud.

Due to weakened economic conditions during recent years, the Company established qualitative factor adjustments for each of the loan segments at levels above the historical net loss averages. Some of the economic factors included the potential for reduced cash flow for commercial operating loans from reduction in sales or increased operating costs, decreased occupancy rates for commercial buildings, reduced levels of home sales for commercial land developments, the uncertainty regarding grain prices and increased operating costs for farmers, and increased levels of unemployment and bankruptcy impacting consumer’s ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the allowance for loan losses.

The Company has not materially changed any aspect of its overall approach in the determination of the allowance for loan losses. However, on an on-going basis the Company continues to refine the methods used in determining management’s best estimate of the allowance for loan losses.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three and six-months ended June 30, 2016 and 2015 and for the year ended December 31, 2015 (in thousands):



	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate		Residential Real Estate			Consumer			Unallocated			Total
Three months ended June 30, 2016
Allowance for loan losses:
Balance, beginning of period	$	11,789		$	1,270	$	926		$	710		$	41		$	14,736
Provision charged to expense	388			179		56			88			22			733
Losses charged off	(572		)	—		(58		)	(109		)	—			(739		)
Recoveries	390			—		—			44			—			434
Balance, end of period	$	11,995		$	1,449	$	924		$	733		$	63		$	15,164
Ending balance:
Individually evaluated for impairment	$	297		$	—	$	—		$	—		$	—		$	297
Collectively evaluated for impairment	$	11,698		$	1,449	$	924		$	733		$	63		$	14,867
Three months ended June 30, 2015
Allowance for loan losses:
Balance, beginning of period	$	11,459		$	1,291	$	753		$	386		$	217		$	14,106
Provision charged to expense	(123		)	20		(7		)	258			(5		)	143
Losses charged off	(62		)	—		(15		)	(304		)	—			(381		)
Recoveries	20			1		—			42			—			63
Balance, end of period	$	11,294		$	1,312	$	731		$	382		$	212		$	13,931
Ending balance:
Individually evaluated for impairment	$	537		$	—	$	—		$	—		$	—		$	537
Collectively evaluated for impairment	$	10,757		$	1,312	$	731		$	382		$	212		$	13,394
Six months ended June 30, 2016
Allowance for loan losses:
Balance, beginning of year	$	11,379		$	1,337	$	994		$	642		$	224		$	14,576
Provision charged to expense	613			111		72			211			(161		)	846
Losses charged off	(612		)	—		(142		)	(222		)	—			(976		)
Recoveries	615			1		—			102			—			718
Balance, end of period	$	11,995		$	1,449	$	924		$	733		$	63		$	15,164
Ending balance:
Individually evaluated for impairment	$	297		$	—	$	—		$	—		$	—		$	297
Collectively evaluated for impairment	$	11,698		$	1,449	$	924		$	733		$	63		$	14,867
Loans:
Ending balance	$	857,150		$	194,814	$	221,546		$	41,677		$	—		$	1,315,187
Ending balance:
Individually evaluated for impairment	$	1,555		$	430	$	—		$	21		$	—		$	2,006
Collectively evaluated for impairment	$	855,595		$	194,384	$	221,546		$	41,656		$	—		$	1,313,181



	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated			Total
Six months ended June 30, 2015
Allowance for loan losses:
Balance, beginning of year	$	10,914		$	1,360		$	790		$	386		$	232		$	13,682
Provision charged to expense	235			(49		)	(20		)	262			(20		)	408
Losses charged off	(71		)	—			(40		)	(360		)	—			(471		)
Recoveries	216			1			1			94			—			312
Balance, end of period	$	11,294		$	1,312		$	731		$	382		$	212		$	13,931
Ending balance:
Individually evaluated for impairment	$	537		$	—		$	—		$	—		$	—		$	537
Collectively evaluated for impairment	$	10,757		$	1,312		$	731		$	382		$	212		$	13,394
Loans:
Ending balance	$	696,596		$	171,376		$	175,680		$	15,451		$	—		$	1,059,103
Ending balance:
Individually evaluated for impairment	$	1,766		$	—		$	—		$	—		$	—		$	1,766
Collectively evaluated for impairment	$	694,830		$	171,376		$	175,680		$	15,451		$	—		$	1,057,337
Year ended December 31, 2015
Allowance for loan losses:
Balance, beginning of year	10,914			1,360			790			386			232			13,682
Provision charged to expense	451			(25		)	267			633			(8		)	1,318
Losses charged off	(289		)	—			(64		)	(553		)	—			(906		)
Recoveries	303			2			1			176			—			482
Balance, end of year	11,379			1,337			994			642			224			14,576
Ending balance:
Individually evaluated for impairment	$	134		$	—		$	—		$	—		$	—		$	134
Collectively evaluated for impairment	$	11,245		$	1,337		$	994		$	642		$	224		$	14,442
Loans:
Ending balance	$	807,736		$	198,066		$	232,348		$	43,739		$	—		$	1,281,889
Ending balance:
Individually evaluated for impairment	$	744		$	430		$	—		$	—		$	—		$	1,174
Collectively evaluated for impairment	$	806,992		$	197,636		$	232,348		$	43,739		$	—		$	1,280,715

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

Credit Quality

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, collateral support, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Company uses the following definitions for risk ratings which are commensurate with a loan considered “criticized”:

Watch. Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current sound-worthiness and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered pass rated loans.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2016 and December 31, 2015 (in thousands):



	Construction & Land Development				Agricultural Real Estate				1-4 Family Residential Properties				Multifamily Residential Properties
	2016		2015		2016		2015		2016		2015		2016		2015
Pass	$	33,578	$	39,067	$	114,113	$	118,103	$	213,926	$	224,552	$	46,671	$	45,180
Watch	—		—		6,017		2,282		1,059		1,454		240		243
Substandard	234		142		2,181		2,089		5,502		5,565		304		317
Doubtful	—		—		—		—		—		—		—		—
Total	$	33,812	$	39,209	$	122,311	$	122,474	$	220,487	$	231,571	$	47,215	$	45,740



	Commercial Real Estate (Nonfarm/Nonresidential)				Agricultural Loans				Commercial & Industrial Loans				Consumer Loans
	2016		2015		2016		2015		2016		2015		2016		2015
Pass	$	424,934	$	386,769	$	70,878	$	75,437	$	295,484	$	298,633	$	37,696	$	41,278
Watch	9,565		10,498		1,849		210		3,695		4,686		19		—
Substandard	11,333		11,905		49		239		1,908		1,741		334		301
Doubtful	—		—		—		—		—		—		—		—
Total	$	445,832	$	409,172	$	72,776	$	75,886	$	301,087	$	305,060	$	38,049	$	41,579



	All Other Loans				Total Loans
	2016		2015		2016		2015
Pass	$	33,618	$	11,198	$	1,270,898	$	1,240,217
Watch	—		—		22,444		19,373
Substandard	—		—		21,845		22,299
Doubtful	—		—		—		—
Total	$	33,618	$	11,198	$	1,315,187	$	1,281,889

The following table presents the Company’s loan portfolio aging analysis at June 30, 2016 and December 31, 2015 (in thousands):



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
June 30, 2016
Construction and land development	$	—	$	189	$	—	$	189	$	33,623	$	33,812	$	—
Agricultural real estate	131		430		—		561		121,750		122,311		—
1-4 Family residential properties	371		554		225		1,150		219,337		220,487		—
Multifamily residential properties	240		—		—		240		46,975		47,215		—
Commercial real estate	52		—		469		521		445,311		445,832		—
Loans secured by real estate	794		1,173		694		2,661		866,996		869,657		—
Agricultural loans	20		—		—		20		72,756		72,776		—
Commercial and industrial loans	108		114		282		504		300,583		301,087		—
Consumer loans	52		7		1		60		37,989		38,049		—
All other loans	437		—		10		447		33,171		33,618		—
Total loans	$	1,411	$	1,294	$	987	$	3,692	$	1,311,495	$	1,315,187	$	—
December 31, 2015
Construction and land development	$	—	$	—	$	—	$	—	$	39,209	$	39,209	$	—
Agricultural real estate	106		—		—		106		122,368		122,474		—
1-4 Family residential properties	1,059		742		154		1,955		229,616		231,571		—
Multifamily residential properties	—		—		—		—		45,740		45,740		—
Commercial real estate	251		67		31		349		408,823		409,172		—
Loans secured by real estate	1,416		809		185		2,410		845,756		848,166		—
Agricultural loans	65		74		—		139		75,747		75,886		—
Commercial and industrial loans	65		476		196		737		304,323		305,060		—
Consumer loans	137		42		13		192		41,387		41,579		—
All other loans	—		—		—		—		11,198		11,198		—
Total loans	$	1,683	$	1,401	$	394	$	3,478	$	1,278,411	$	1,281,889	$	—

Impaired Loans

Within all loan portfolio segments, loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Impaired loans, excluding certain troubled debt restructured loans, are placed on nonaccrual status. Impaired loans include nonaccrual loans and loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being modified remain on nonaccrual status until, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. If the restructured loan is on accrual status prior to being modified, the loan is reviewed to determine if the modified loan should remain on accrual status

The Company’s policy is to discontinue the accrual of interest income on all loans for which principal or interest is ninety days past due. The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Interest on loans determined to be troubled debt restructurings is recognized on an accrual basis in accordance with the restructured terms if the loan is in compliance with the modified terms. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

The following tables present impaired loans as of June 30, 2016 and December 31, 2015 (in thousands):



	June 30, 2016						December 31, 2015
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans with a specific allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural real estate	430		430		—		430		430		—
1-4 Family residential properties	—		—		—		—		—		—
Multifamily residential properties	304		304		—		316		316		—
Commercial real estate	848		848		208		—		—		—
Loans secured by real estate	1,582		1,582		208		746		746		—
Agricultural loans	—		—		—		—		—		—
Commercial and industrial loans	403		818		89		405		405		134
Consumer loans	21		21		—		23		23		—
All other loans	—		—		—		—		—		—
Total loans	$	2,006	$	2,421	$	297	$	1,174	$	1,174	$	134
Loans without a specific allowance:
Construction and land development	$	234	$	485	$	—	$	142	$	707	$	—
Agricultural real estate	20		23		—		24		28		—
1-4 Family residential properties	1,198		1,372		—		1,373		1,688		—
Multifamily residential properties	—		—		—		1		1		—
Commercial real estate	283		304		—		304		325		—
Loans secured by real estate	1,735		2,184		—		1,844		2,749		—
Agricultural loans	15		15		—		79		79		—
Commercial and industrial loans	633		831		—		670		932		—
Consumer loans	231		235		—		242		256		—
All other loans	10		10		—		—		—		—
Total loans	$	2,624	$	3,275	$	—	$	2,835	$	4,016	$	—
Total loans:
Construction and land development	$	234	$	485	$	—	$	142	$	707	$	—
Agricultural real estate	450		453		—		454		458		—
1-4 Family residential properties	1,198		1,372		—		1,373		1,688		—
Multifamily residential properties	304		304		—		317		317		—
Commercial real estate	1,131		1,152		208		304		325		—
Loans secured by real estate	3,317		3,766		208		2,590		3,495		—
Agricultural loans	15		15		—		79		79		—
Commercial and industrial loans	1,036		1,649		89		1,075		1,337		134
Consumer loans	252		256		—		265		279		—
All other loans	10		10		—		—		—		—
Total loans	$	4,630	$	5,696	$	297	$	4,009	$	5,190	$	134

The following tables present average recorded investment and interest income recognized on impaired loans for the three and six-month periods ended June 30, 2016 and 2015 (in thousands):




	For the three months ended
	June 30, 2016				June 30, 2015
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Construction and land development	$	580	$	—	$	154	$	—
Agricultural real estate	450		—		93		1
1-4 Family residential properties	1,244		4		1,163		2
Multifamily residential properties	305		—		—		—
Commercial real estate	1,132		1		655		1
Loans secured by real estate	3,711		5		2,065		4
Agricultural loans	15		—		—		—
Commercial and industrial loans	1,100		—		584		1
Consumer loans	260		—		448		1
All other loans	10		—		—		—
Total loans	$	5,096	$	5	$	3,097	$	6



	For the six months ended
	June 30, 2016				June 30, 2015
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Construction and land development	$	632	$	—	$	154	$	—
Agricultural real estate	450		—		94		2
1-4 Family residential properties	1,264		8		1,188		3
Multifamily residential properties	307		—		—		—
Commercial real estate	1,133		1		659		1
Loans secured by real estate	3,786		9		2,095		6
Commercial and industrial loans	1,143		—		594		3
Consumer loans	264		—		448		1
Total loans	$	5,219	$	9	$	3,137	$	10

The amount of interest income recognized by the Company within the periods stated above was due to loans modified in a troubled debt restructuring that remained on accrual status. The balance of loans modified in a troubled debt restructuring included in the impaired loans at June 30, 2016 stated above that were still accruing was $253,000 of 1-4 Family residential properties, $34,000 of commercial real estate, $22,000 of commercial & industrial loans and $10,000 of consumer loans. The balance of loans modified into a troubled debt restructuring at June 30, 2015 included in the impaired loans stated above that were still accruing was $67,000 of Agricultural real estate loans, $342,000 of 1-4 family residential properties, $36,000 commercial real estate and $39,000 of consumer loans. For the six months ended June 30, 2016 and 2015, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

Non Accrual Loans

The following table presents the Company’s recorded balance of nonaccrual loans as June 30, 2016 and December 31, 2015 (in thousands). This table excludes purchased impaired loans and performing troubled debt restructurings.



	June 30, 2016		December 31, 2015
Construction and land development	$	234	$	142
Agricultural real estate	450		454
1-4 Family residential properties	945		975
Multifamily residential properties	304		317
Commercial real estate	1,097		269
Loans secured by real estate	3,030		2,157
Agricultural loans	15		79
Commercial and industrial loans	1,014		928
Consumer loans	242		248
All other loans	10		—
Total loans	$	4,311	$	3,412

Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $80,000 and $39,000 for the six months ended June 30, 2016 and 2015, respectively.

Troubled Debt Restructuring

The balance of troubled debt restructurings ("TDRs") at June 30, 2016 and December 31, 2015 was $1.63 million and $1.74 million, respectively. There were no specific reserves established with respect to these loans as of June 30, 2016 and December 31, 2015. As troubled debt restructurings, these loans are included in nonperforming loans and are classified as impaired which requires that they be individually measured for impairment. The modification of the terms of these loans included one or a combination of the following: a reduction of stated interest rate of the loan; an extension of the maturity date and change in payment terms; or a permanent reduction of the recorded investment in the loan. The following table presents the Company’s recorded balance of troubled debt restructurings at June 30, 2016 and December 31, 2015 (in thousands).



Troubled debt restructurings:	June 30, 2016		December 31, 2015
Construction and land development	$	234	$	142
Agricultural real estate	232		232
1-4 Family residential properties	413		515
Commercial real estate	118		124
Loans secured by real estate	997		1,013
Commercial and industrial loans	415		491
Consumer loans	214		239
Total	$	1,626	$	1,743
Performing troubled debt restructurings:
1-4 Family residential properties	253		$	397
Commercial real estate	34		36
Loans secured by real estate	287		433
Commercial and industrial loans	22		147
Consumer loans	10		21
Total	$	319	$	601

The decrease in TDRs during the period was due to loans that paid off. The following table presents loans modified as TDRs during the six months ended June 30, 2016 and 2015, as a result of various modified loan factors (in thousands):



	June 30, 2016				June 30, 2015
	Number of Modifications	Recorded Investment		Type of Modifications	Number of Modifications	Recorded Investment		Type of Modifications
Construction and land development	1	$	234	(b)(c)	—	$	—
Farm Loans	—	—			1	23		(b)
1-4 Family residential properties	1	48		(c)	4	79		(b)(c)
Loans secured by real estate	2	282			5	102
Commercial and industrial loans	3	75		(b)(c)	2	227		(b)(c)
Consumer Loans	—	—			3	439		(b)(c)
Total	5	$	357		10	$	768

Type of modifications:

(a) Reduction of stated interest rate of loan

(b) Change in payment terms

A loan is considered to be in payment default once it is 90 days past due under the modified terms. There was one loan modified as troubled debt restructuring during the prior twelve months that experienced defaults during the six months ended June 30, 2016. There were no loans in payment default as of December 31, 2015.

The balance of real estate owned includes $436,000 and $477,000 of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property at June 30, 2016 and December 31, 2015, respectively. the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process was $157,000 and $55,000 at June 30, 2016 and December 31, 2015, respectively.