Note 3. Loans

Loans at June 30, 2016 and December 31, 2015 are summarized as follows (in thousands):


	June 30, 2016			December 31, 2015
Real estate loans:
Construction and land development	$	33,232		$	33,135
Secured by 1-4 family residential		196,295			189,286
Other real estate loans		200,162			181,447
Commercial and industrial loans		24,721			24,048
Consumer and other loans		11,136			11,083

Total loans	$	465,546		$	438,999
Allowance for loan losses		(5,734	)		(5,524	)

Loans, net	$	459,812		$	433,475

Net deferred loan fees included in the above loan categories were $67 thousand at June 30, 2016 and net deferred loan costs included in the above loan categories were $54 thousand at December 31, 2015. Consumer and other loans included $334 thousand and $257 thousand of demand deposit overdrafts at June 30, 2016 and December 31, 2015, respectively.

Risk characteristics of each loan portfolio class that are considered by the Company include:

•

1-4 family residential mortgage loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

•

Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project.

•

Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project.

•

Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.

•

Consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, i.e. rapidly depreciating assets such as automobiles, or lack thereof. Consumer loans are likely to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy, or other changes in circumstances.

The following tables provide a summary of loan classes and an aging of past due loans as of June 30, 2016 and December 31, 2015 (in thousands):


	June 30, 2016
	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing
Real estate loans:
Construction and land development	$	111	$	126	$	—	$	237	$	32,995	$	33,232	$	1,539	$	—
Secured by 1-4 family residential		768		202		269		1,239		195,056		196,295		345		—
Other real estate loans		331		590		125		1,046		199,116		200,162		2,089		—
Commercial and industrial		9		34		8		51		24,670		24,721		84		8
Consumer and other loans		14		—		3		17		11,119		11,136		—		3

Total	$	1,233	$	952	$	405	$	2,590	$	462,956	$	465,546	$	4,057	$	11


	December 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing
Real estate loans:
Construction and land development	$	—	$	—	$	—	$	—	$	33,135	$	33,135	$	1,269	$	—
Secured by 1-4 family residential		635		18		264		917		188,369		189,286		346		—
Other real estate loans		387		358		790		1,535		179,912		181,447		2,145		—
Commercial and industrial		—		—		92		92		23,956		24,048		94		92
Consumer and other loans		20		—		—		20		11,063		11,083		—		—

Total	$	1,042	$	376	$	1,146	$	2,564	$	436,435	$	438,999	$	3,854	$	92

Credit Quality Indicators

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans. The Company utilizes a risk grading matrix to assign a rating to each of its loans. The loan ratings are summarized into the following categories: pass, special mention, substandard, doubtful and loss. Pass rated loans include all risk rated credits other than those included in special mention, substandard or doubtful. Loans classified as loss are charged-off. Loan officers assign risk grades to loans at origination and as renewals arise. The Bank’s Credit Administration department reviews risk grades for accuracy on a quarterly basis and as credit issues arise. In addition, a certain amount of loans are reviewed each year through the Company’s internal and external loan review process. A description of the general characteristics of the loan grading categories is as follows:

Pass – Loans classified as pass exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower as agreed.

Special Mention – Loans classified as special mention 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 the Bank’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment 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 Bank 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 facts, conditions and values, highly questionable and improbable. The Company considers all doubtful loans to be impaired and places the loan on non-accrual status.

Loss – Loans classified as loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

The following tables provide an analysis of the credit risk profile of each loan class as of June 30, 2016 and December 31, 2015 (in thousands):


	June 30, 2016
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	27,121	$	2,095	$	4,016	$	—	$	33,232
Secured by 1-4 family residential		190,518		2,566		3,211		—		196,295
Other real estate loans		185,740		8,330		6,092		—		200,162
Commercial and industrial		24,166		401		154		—		24,721
Consumer and other loans		11,136		—		—		—		11,136

Total	$	438,681	$	13,392	$	13,473	$	—	$	465,546


	December 31, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	26,371	$	2,587	$	4,177	$	—	$	33,135
Secured by 1-4 family residential		182,595		3,376		3,315		—		189,286
Other real estate loans		165,310		9,977		6,160		—		181,447
Commercial and industrial		23,351		432		265		—		24,048
Consumer and other loans		11,083		—		—		—		11,083

Total	$	408,710	$	16,372	$	13,917	$	—	$	438,999