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3. Loans | 6 Months Ended
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Jun. 30, 2015
Receivables [Abstract] |
3. Loans | Major classifications of loans at June 30, 2015 and December 31, 2014 are summarized as follows:
(Dollars in thousands) |  |  |  |  |  |
|  | June 30, 2015 |  |  | December 31, 2014 |
Real estate loans: |  |  |  |  |  |
Construction and land development |  | $ | 60,066 |  |  |  | 57,617 |
Single-family residential |  |  | 208,653 |  |  |  | 206,417 |
Single-family residential - |  |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 45,252 |  |  |  | 47,015 |
Commercial |  |  | 231,684 |  |  |  | 228,558 |
Multifamily and farmland |  |  | 12,402 |  |  |  | 12,400 |
Total real estate loans |  |  | 558,057 |  |  |  | 552,007 |
Loans not secured by real estate: |  |  |  |  |  |  |  |
Commercial loans |  |  | 85,124 |  |  |  | 76,262 |
Farm loans |  |  | 4 |  |  |  | 7 |
Consumer loans |  |  | 10,069 |  |  |  | 10,060 |
All other loans |  |  | 13,513 |  |  |  | 13,555 |
Total loans |  |  | 666,767 |  |  |  | 651,891 |
Less allowance for loan losses |  |  | 10,378 |  |  |  | 11,082 |
Total net loans |  | $ | 656,389 |  |  |  | 640,809 |
The Bank grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties, and also in Mecklenburg, Union, Wake and Durham counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below:
• | Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of June 30, 2015, construction and land development loans comprised approximately 9% of the Bank’s total loan portfolio.
• | Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of June 30, 2015, single-family residential loans comprised approximately 38% of the Bank’s total loan portfolio, and include Banco de la Gente single-family residential stated income loans, which were approximately 7% of the Bank’s total loan portfolio.
• | Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of June 30, 2015, commercial real estate loans comprised approximately 35% of the Bank’s total loan portfolio.
• | Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business. As of June 30, 2015, commercial loans comprised approximately 13% of the Bank’s total loan portfolio.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The following tables present an age analysis of past due loans, by loan type, as of June 30, 2015 and December 31, 2014:
June 30, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Loans 30-89 Days Past Due |  |  | Loans 90 or More Days Past Due |  |  | Total Past Due Loans |  |  | Total Current Loans |  |  | Total Loans |  |  | Accruing Loans 90 or More Days Past Due |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 313 |  |  |  | 227 |  |  |  | 540 |  |  |  | 59,526 |  |  |  | 60,066 |  |  |  | - |
Single-family residential |  |  | 1,869 |  |  |  | 641 |  |  |  | 2,510 |  |  |  | 206,143 |  |  |  | 208,653 |  |  |  | 100 |
Single-family residential - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 999 |  |  |  | 205 |  |  |  | 1,204 |  |  |  | 44,048 |  |  |  | 45,252 |  |  |  | - |
Commercial |  |  | 36 |  |  |  | 326 |  |  |  | 362 |  |  |  | 231,322 |  |  |  | 231,684 |  |  |  | - |
Multifamily and farmland |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12,402 |  |  |  | 12,402 |  |  |  | - |
Total real estate loans |  |  | 3,217 |  |  |  | 1,399 |  |  |  | 4,616 |  |  |  | 553,441 |  |  |  | 558,057 |  |  |  | 100 |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  |  | 69 |  |  |  | 5 |  |  |  | 74 |  |  |  | 85,050 |  |  |  | 85,124 |  |  |  | - |
Farm loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4 |  |  |  | 4 |  |  |  | - |
Consumer loans |  |  | 150 |  |  |  | 9 |  |  |  | 159 |  |  |  | 9,910 |  |  |  | 10,069 |  |  |  | - |
All other loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 13,513 |  |  |  | 13,513 |  |  |  | - |
Total loans |  | $ | 3,436 |  |  |  | 1,413 |  |  |  | 4,849 |  |  |  | 661,918 |  |  |  | 666,767 |  |  |  | 100 |
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Loans 30-89 Days Past Due |  |  | Loans 90 or More Days Past Due |  |  | Total Past Due Loans |  |  | Total Current Loans |  |  | Total Loans |  |  | Accruing Loans 90 or More Days Past Due |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 294 |  |  |  | 3,540 |  |  |  | 3,834 |  |  |  | 53,783 |  |  |  | 57,617 |  |  |  | - |
Single-family residential |  |  | 5,988 |  |  |  | 268 |  |  |  | 6,256 |  |  |  | 200,161 |  |  |  | 206,417 |  |  |  | - |
Single-family residential - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 8,998 |  |  |  | 610 |  |  |  | 9,608 |  |  |  | 37,407 |  |  |  | 47,015 |  |  |  | - |
Commercial |  |  | 3,205 |  |  |  | 366 |  |  |  | 3,571 |  |  |  | 224,987 |  |  |  | 228,558 |  |  |  | - |
Multifamily and farmland |  |  | 85 |  |  |  | - |  |  |  | 85 |  |  |  | 12,315 |  |  |  | 12,400 |  |  |  | - |
Total real estate loans |  |  | 18,570 |  |  |  | 4,784 |  |  |  | 23,354 |  |  |  | 528,653 |  |  |  | 552,007 |  |  |  | - |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  |  | 241 |  |  |  | 49 |  |  |  | 290 |  |  |  | 75,972 |  |  |  | 76,262 |  |  |  | - |
Farm loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 7 |  |  |  | 7 |  |  |  | - |
Consumer loans |  |  | 184 |  |  |  | - |  |  |  | 184 |  |  |  | 9,876 |  |  |  | 10,060 |  |  |  | - |
All other loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 13,555 |  |  |  | 13,555 |  |  |  | - |
Total loans |  | $ | 18,995 |  |  |  | 4,833 |  |  |  | 23,828 |  |  |  | 628,063 |  |  |  | 651,891 |  |  |  | - |
The following table presents the Company’s non-accrual loans as of June 30, 2015 and December 31, 2014:
(Dollars in thousands) |  |  |  |  |  |
|  | June 30, 2015 |  |  | December 31, 2014 |
Real estate loans: |  |  |  |  |  |
Construction and land development |  | $ | 546 |  |  |  | 3,854 |
Single-family residential |  |  | 3,171 |  |  |  | 2,370 |
Single-family residential - |  |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 1,062 |  |  |  | 1,545 |
Commercial |  |  | 2,641 |  |  |  | 2,598 |
Multifamily and farmland |  |  | - |  |  |  | 110 |
Total real estate loans |  |  | 7,420 |  |  |  | 10,477 |
Loans not secured by real estate: |  |  |  |  |  |  |  |
Commercial loans |  |  | 109 |  |  |  | 176 |
Consumer loans |  |  | 67 |  |  |  | 75 |
Total |  | $ | 7,596 |  |  |  | 10,728 |
At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $26.2 million, $25.6 million and $27.7 million at June 30, 2015, December 31, 2014 and June 30, 2014, respectively. Interest income recognized on accruing impaired loans was $662,000, $681,000 and $1.3 million for the six months ended June 30, 2015, the six months ended June 30, 2014 and the year ended December 31, 2014, respectively. Interest income recognized on accruing impaired loans was $327,000 and $325,000 for the three months ended June 30, 2015 and 2014, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual. The following tables present the Company’s impaired loans as of June 30, 2015 and December 31, 2014:
June 30, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |
| Unpaid Contractual Principal Balance |  |  | Recorded Investment With No Allowance |  |  | Recorded Investment With Allowance |  |  | Recorded Investment in Impaired Loans |  |  | Related Allowance |  |  | Average Outstanding Impaired Loans |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 1,083 |  |  |  | 241 |  |  |  | 627 |  |  |  | 868 |  |  |  | 44 |  |  |  | 1,992 |
Single-family residential |  |  | 8,396 |  |  |  | 1,606 |  |  |  | 6,442 |  |  |  | 8,048 |  |  |  | 176 |  |  |  | 8,535 |
Single-family residential - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 20,375 |  |  |  | - |  |  |  | 19,798 |  |  |  | 19,798 |  |  |  | 1,167 |  |  |  | 19,421 |
Commercial |  |  | 4,797 |  |  |  | 1,753 |  |  |  | 2,626 |  |  |  | 4,379 |  |  |  | 243 |  |  |  | 4,404 |
Multifamily and farmland |  |  | 101 |  |  |  | - |  |  |  | 98 |  |  |  | 98 |  |  |  | - |  |  |  | 103 |
Total impaired real estate loans |  |  | 34,752 |  |  |  | 3,600 |  |  |  | 29,591 |  |  |  | 33,191 |  |  |  | 1,630 |  |  |  | 34,455 |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  |  | 159 |  |  |  | - |  |  |  | 133 |  |  |  | 133 |  |  |  | 2 |  |  |  | 156 |
Consumer loans |  |  | 296 |  |  |  | - |  |  |  | 288 |  |  |  | 288 |  |  |  | 5 |  |  |  | 304 |
Total impaired loans |  | $ | 35,207 |  |  |  | 3,600 |  |  |  | 30,012 |  |  |  | 33,612 |  |  |  | 1,637 |  |  |  | 34,915 |
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Unpaid Contractual Principal Balance |  |  | Recorded Investment With No Allowance |  |  | Recorded Investment With Allowance |  |  | Recorded Investment in Impaired Loans |  |  | Related Allowance |  |  | Average Outstanding Impaired Loans |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 5,481 |  |  |  | 3,639 |  |  |  | 555 |  |  |  | 4,194 |  |  |  | 31 |  |  |  | 5,248 |
Single-family residential |  |  | 6,717 |  |  |  | 933 |  |  |  | 5,540 |  |  |  | 6,473 |  |  |  | 154 |  |  |  | 7,430 |
Single-family residential - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 21,243 |  |  |  | - |  |  |  | 20,649 |  |  |  | 20,649 |  |  |  | 1,191 |  |  |  | 19,964 |
Commercial |  |  | 4,752 |  |  |  | 1,485 |  |  |  | 2,866 |  |  |  | 4,351 |  |  |  | 272 |  |  |  | 4,399 |
Multifamily and farmland |  |  | 111 |  |  |  | - |  |  |  | 110 |  |  |  | 110 |  |  |  | 1 |  |  |  | 154 |
Total impaired real estate loans |  |  | 38,304 |  |  |  | 6,057 |  |  |  | 29,720 |  |  |  | 35,777 |  |  |  | 1,649 |  |  |  | 37,195 |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  |  | 218 |  |  |  | - |  |  |  | 201 |  |  |  | 201 |  |  |  | 4 |  |  |  | 641 |
Farm loans (non RE) |  |  |  |  |  |  |  |  |  |  | - |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer loans |  |  | 318 |  |  |  | - |  |  |  | 313 |  |  |  | 313 |  |  |  | 5 |  |  |  | 309 |
All other loans (not secured by real estate) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total impaired loans |  | $ | 38,840 |  |  |  | 6,057 |  |  |  | 30,234 |  |  |  | 36,291 |  |  |  | 1,658 |  |  |  | 38,145 |
Changes in the allowance for loan losses for the three and six months ended June 30, 2015 and 2014 were as follows:
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Construction and Land Development |  |  | Single- Family Residential |  |  | Single- Family Residential- Banco de la Gente Stated Income |  |  | Commercial |  |  | Multifamily and Farmland |  |  | Commercial |  |  | Farm |  |  | Consumer and All Other |  |  | Unallocated |  |  | Total |
Six months ended June 30, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 2,785 |  |  |  | 2,566 |  |  |  | 1,610 |  |  |  | 1,902 |  |  |  | 7 |  |  |  | 1,098 |  |  |  | - |  |  |  | 233 |  |  |  | 881 |  |  |  | 11,082 |
Charge-offs |  |  | (73 | ) |  |  | (400 | ) |  |  | (59 | ) |  |  | (62 | ) |  |  | - |  |  |  | (15 | ) |  |  | - |  |  |  | (253 | ) |  |  | - |  |  |  | (862 | )
Recoveries |  |  | 23 |  |  |  | 10 |  |  |  | 22 |  |  |  | 10 |  |  |  | - |  |  |  | 53 |  |  |  | - |  |  |  | 81 |  |  |  | - |  |  |  | 199 |
Provision |  |  | 189 |  |  |  | 280 |  |  |  | (45 | ) |  |  | (101 | ) |  |  | (5 | ) |  |  | (234 | ) |  |  | - |  |  |  | 170 |  |  |  | (295 | ) |  |  | (41 | )
Ending balance |  | $ | 2,924 |  |  |  | 2,456 |  |  |  | 1,528 |  |  |  | 1,749 |  |  |  | 2 |  |  |  | 902 |  |  |  | - |  |  |  | 231 |  |  |  | 586 |  |  |  | 10,378 |
Three months ended June 30, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 2,758 |  |  |  | 2,599 |  |  |  | 1,586 |  |  |  | 1,786 |  |  |  | 6 |  |  |  | 1,181 |  |  |  | - |  |  |  | 208 |  |  |  | 719 |  |  |  | 10,843 |
Charge-offs |  |  | - |  |  |  | (109 | ) |  |  | (17 | ) |  |  | (59 | ) |  |  | - |  |  |  | (15 | ) |  |  | - |  |  |  | (132 | ) |  |  | - |  |  |  | (332 | )
Recoveries |  |  | 18 |  |  |  | 4 |  |  |  | - |  |  |  | 5 |  |  |  | - |  |  |  | 17 |  |  |  | - |  |  |  | 37 |  |  |  | - |  |  |  | 81 |
Provision |  |  | 148 |  |  |  | (38 | ) |  |  | (41 | ) |  |  | 17 |  |  |  | (4 | ) |  |  | (281 | ) |  |  | - |  |  |  | 118 |  |  |  | (133 | ) |  |  | (214 | )
Ending balance |  | $ | 2,924 |  |  |  | 2,456 |  |  |  | 1,528 |  |  |  | 1,749 |  |  |  | 2 |  |  |  | 902 |  |  |  | - |  |  |  | 231 |  |  |  | 586 |  |  |  | 10,378 |
Allowance for loan losses June 30, 2015: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance: individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  | $ | - |  |  |  | 92 |  |  |  | 1,135 |  |  |  | 235 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,462 |
Ending balance: collectively |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  |  | 2,924 |  |  |  | 2,364 |  |  |  | 393 |  |  |  | 1,514 |  |  |  | 2 |  |  |  | 902 |  |  |  | - |  |  |  | 231 |  |  |  | 586 |  |  |  | 8,916 |
Ending balance |  | $ | 2,924 |  |  |  | 2,456 |  |  |  | 1,528 |  |  |  | 1,749 |  |  |  | 2 |  |  |  | 902 |  |  |  | - |  |  |  | 231 |  |  |  | 586 |  |  |  | 10,378 |
Loans June 30, 2015: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance |  | $ | 60,066 |  |  |  | 208,653 |  |  |  | 45,252 |  |  |  | 231,684 |  |  |  | 12,402 |  |  |  | 85,124 |  |  |  | 4 |  |  |  | 23,582 |  |  |  | - |  |  |  | 666,767 |
Ending balance: individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  | $ | 241 |  |  |  | 2,998 |  |  |  | 18,346 |  |  |  | 3,575 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 25,160 |
Ending balance: collectively |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  | $ | 59,825 |  |  |  | 205,655 |  |  |  | 26,906 |  |  |  | 228,109 |  |  |  | 12,402 |  |  |  | 85,124 |  |  |  | 4 |  |  |  | 23,582 |  |  |  | - |  |  |  | 641,607 |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Construction and Land Development |  |  | Single- Family Residential |  |  | Single- Family Residential- Banco de la Gente Stated Income |  |  | Commercial |  |  | Multifamily and Farmland |  |  | Commercial |  |  | Farm |  |  | Consumer and All Other |  |  | Unallocated |  |  | Total |
Six months ended June 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 3,218 |  |  |  | 3,123 |  |  |  | 1,863 |  |  |  | 2,219 |  |  |  | 37 |  |  |  | 1,069 |  |  |  | - |  |  |  | 245 |  |  |  | 1,727 |  |  |  | 13,501 |
Charge-offs |  |  | (260 | ) |  |  | (194 | ) |  |  | (140 | ) |  |  | (131 | ) |  |  | - |  |  |  | (193 | ) |  |  | - |  |  |  | (254 | ) |  |  | - |  |  |  | (1,172 | )
Recoveries |  |  | 282 |  |  |  | 60 |  |  |  | 17 |  |  |  | 161 |  |  |  | - |  |  |  | 26 |  |  |  | - |  |  |  | 82 |  |  |  | - |  |  |  | 628 |
Provision |  |  | 147 |  |  |  | (141 | ) |  |  | (32 | ) |  |  | (410 | ) |  |  | (30 | ) |  |  | 179 |  |  |  | - |  |  |  | 180 |  |  |  | (175 | ) |  |  | (282 | )
Ending balance |  | $ | 3,387 |  |  |  | 2,848 |  |  |  | 1,708 |  |  |  | 1,839 |  |  |  | 7 |  |  |  | 1,081 |  |  |  | - |  |  |  | 253 |  |  |  | 1,552 |  |  |  | 12,675 |
Three months ended June 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 3,133 |  |  |  | 3,132 |  |  |  | 1,767 |  |  |  | 2,196 |  |  |  | 36 |  |  |  | 945 |  |  |  | - |  |  |  | 230 |  |  |  | 1,539 |  |  |  | 12,978 |
Charge-offs |  |  | - |  |  |  | (171 | ) |  |  | (108 | ) |  |  | (20 | ) |  |  | - |  |  |  | (181 | ) |  |  | - |  |  |  | (117 | ) |  |  | - |  |  |  | (597 | )
Recoveries |  |  | 3 |  |  |  | 52 |  |  |  | 5 |  |  |  | 101 |  |  |  | - |  |  |  | 21 |  |  |  | - |  |  |  | 45 |  |  |  | - |  |  |  | 227 |
Provision |  |  | 251 |  |  |  | (165 | ) |  |  | 44 |  |  |  | (438 | ) |  |  | (29 | ) |  |  | 296 |  |  |  | - |  |  |  | 95 |  |  |  | 13 |  |  |  | 67 |
Ending balance |  | $ | 3,387 |  |  |  | 2,848 |  |  |  | 1,708 |  |  |  | 1,839 |  |  |  | 7 |  |  |  | 1,081 |  |  |  | - |  |  |  | 253 |  |  |  | 1,552 |  |  |  | 12,675 |
Allowance for loan losses June 30, 2014: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance: individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  | $ | - |  |  |  | 67 |  |  |  | 1,175 |  |  |  | - |  |  |  | - |  |  |  | 242 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,484 |
Ending balance: collectively |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  |  | 3,387 |  |  |  | 2,781 |  |  |  | 533 |  |  |  | 1,839 |  |  |  | 7 |  |  |  | 839 |  |  |  | - |  |  |  | 253 |  |  |  | 1,552 |  |  |  | 11,191 |
Ending balance |  | $ | 3,387 |  |  |  | 2,848 |  |  |  | 1,708 |  |  |  | 1,839 |  |  |  | 7 |  |  |  | 1,081 |  |  |  | - |  |  |  | 253 |  |  |  | 1,552 |  |  |  | 12,675 |
Loans June 30, 2014: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance |  | $ | 59,843 |  |  |  | 196,192 |  |  |  | 48,165 |  |  |  | 214,378 |  |  |  | 11,821 |  |  |  | 78,056 |  |  |  | 93 |  |  |  | 24,788 |  |  |  | - |  |  |  | 633,336 |
Ending balance: individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  | $ | 5,297 |  |  |  | 2,325 |  |  |  | 19,287 |  |  |  | - |  |  |  | - |  |  |  | 3,307 |  |  |  | - |  |  |  | 250 |  |  |  | - |  |  |  | 30,466 |
Ending balance: collectively |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  | $ | 54,546 |  |  |  | 193,867 |  |  |  | 28,878 |  |  |  | 214,378 |  |  |  | 11,821 |  |  |  | 74,749 |  |  |  | 93 |  |  |  | 24,538 |  |  |  | - |  |  |  | 602,870 |
The provision for loan losses for the three months ended June 30, 2015 was a credit of $214,000, as compared to an expense of $67,000 for the three months ended June 30, 2014. The decrease in the provision for loan losses is primarily attributable to a $3.3 million reduction in non-accrual loans from June 30, 2014 to June 30, 2015 and a $119,000 reduction in net charge-offs during the three months ended June 30, 2015, as compared to the same period one year ago. The provision for loan losses for the six months ended June 30, 2015 was a credit of $41,000, as compared to a credit of $282,000 for the six months ended June 30, 2014. The credit to the provision for loan losses for the six months ended June 30, 2015 was less than the credit to the provision for loan losses for the six months ended June 30, 2014 primarily due to a $33.5 million increase in loans from June 30, 2014 to June 30, 2015 and a $119,000 increase in net charge-offs during the six months ended June 30, 2015, as compared to the same period one year ago. The credit to provision for loan losses in the three and six months ended June 30, 2015 resulted from, and was considered appropriate as part of, management’s assessment and estimate of the risks in the total loan portfolio and determination of the total allowance for loan losses. The primary factors contributing to the decrease in the allowance for loan losses at June 30, 2015 to $10.4 million from $11.1 million at December 31, 2014 were the continuing positive trends in indicators of potential losses on loans, primarily non-accrual loans and the declining trend in net charge-offs. The Company utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows:
• | Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.
• | Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.
• | Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).
• | Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.
• | Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date.
• | Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
• | Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified as Substandard, plus 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. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
• | Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.
The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of June 30, 2015 and December 31, 2014:
June 30, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Construction and Land Development |  |  | Single- Family Residential |  |  | Single- Family Residential- Banco de la Gente Stated Income |  |  | Commercial |  |  | Multifamily and Farmland |  |  | Commercial |  |  | Farm |  |  | Consumer |  |  | All Other |  |  | Total |
1- Excellent Quality |  | $ | - |  |  |  | 14,306 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 984 |  |  |  | - |  |  |  | 1,222 |  |  |  | - |  |  |  | 16,512 |
2- High Quality |  |  | 9,578 |  |  |  | 80,824 |  |  |  | - |  |  |  | 41,564 |  |  |  | 218 |  |  |  | 26,392 |  |  |  | - |  |  |  | 3,698 |  |  |  | 1,741 |  |  |  | 164,015 |
3- Good Quality |  |  | 28,682 |  |  |  | 71,510 |  |  |  | 20,081 |  |  |  | 142,618 |  |  |  | 9,096 |  |  |  | 44,283 |  |  |  | 4 |  |  |  | 4,499 |  |  |  | 9,997 |  |  |  | 330,770 |
4- Management Attention |  |  | 12,361 |  |  |  | 30,906 |  |  |  | 12,510 |  |  |  | 37,876 |  |  |  | 358 |  |  |  | 12,839 |  |  |  | - |  |  |  | 540 |  |  |  | 1,775 |  |  |  | 109,165 |
5- Watch |  |  | 8,817 |  |  |  | 4,674 |  |  |  | 5,746 |  |  |  | 5,604 |  |  |  | 2,730 |  |  |  | 473 |  |  |  | - |  |  |  | 42 |  |  |  | - |  |  |  | 28,086 |
6- Substandard |  |  | 628 |  |  |  | 6,433 |  |  |  | 6,915 |  |  |  | 4,022 |  |  |  | - |  |  |  | 153 |  |  |  | - |  |  |  | 68 |  |  |  | - |  |  |  | 18,219 |
7- Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
8- Loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total |  | $ | 60,066 |  |  |  | 208,653 |  |  |  | 45,252 |  |  |  | 231,684 |  |  |  | 12,402 |  |  |  | 85,124 |  |  |  | 4 |  |  |  | 10,069 |  |  |  | 13,513 |  |  |  | 666,767 |
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Construction and Land Development |  |  | Single- Family Residential |  |  | Single- Family Residential- Banco de la Gente Stated Income |  |  | Commercial |  |  | Multifamily and Farmland |  |  | Commercial |  |  | Farm |  |  | Consumer |  |  | All Other |  |  | Total |
1- Excellent Quality |  | $ | - |  |  |  | 15,099 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 924 |  |  |  | - |  |  |  | 1,232 |  |  |  | - |  |  |  | 17,255 |
2- High Quality |  |  | 6,741 |  |  |  | 74,367 |  |  |  | - |  |  |  | 39,888 |  |  |  | 241 |  |  |  | 18,730 |  |  |  | - |  |  |  | 3,576 |  |  |  | 1,860 |  |  |  | 145,403 |
3- Good Quality |  |  | 24,641 |  |  |  | 74,453 |  |  |  | 21,022 |  |  |  | 142,141 |  |  |  | 8,376 |  |  |  | 44,649 |  |  |  | 7 |  |  |  | 4,549 |  |  |  | 8,055 |  |  |  | 327,893 |
4- Management Attention |  |  | 13,013 |  |  |  | 30,954 |  |  |  | 12,721 |  |  |  | 36,433 |  |  |  | 1,001 |  |  |  | 11,312 |  |  |  | - |  |  |  | 566 |  |  |  | 3,640 |  |  |  | 109,640 |
5- Watch |  |  | 9,294 |  |  |  | 5,749 |  |  |  | 5,799 |  |  |  | 6,153 |  |  |  | 2,672 |  |  |  | 383 |  |  |  | - |  |  |  | 46 |  |  |  | - |  |  |  | 30,096 |
6- Substandard |  |  | 3,928 |  |  |  | 5,795 |  |  |  | 7,473 |  |  |  | 3,943 |  |  |  | 110 |  |  |  | 264 |  |  |  | - |  |  |  | 87 |  |  |  | - |  |  |  | 21,600 |
7- Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
8- Loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | 4 |
Total |  | $ | 57,617 |  |  |  | 206,417 |  |  |  | 47,015 |  |  |  | 228,558 |  |  |  | 12,400 |  |  |  | 76,262 |  |  |  | 7 |  |  |  | 10,060 |  |  |  | 13,555 |  |  |  | 651,891 |
TDR loans modified in 2015, past due TDR loans and non-accrual TDR loans totaled $5.6 million and $15.0 million at June 30, 2015 and December 31, 2014, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were $144,000 and $1.4 million in performing loans classified as TDR loans at June 30, 2015 and December 31, 2014, respectively. The following tables present an analysis of loan modifications during the six months ended June 30, 2015 and 2014:
Six months ended June 30, 2015 |  |  |  |  |
(Dollars in thousands) |  |  |  |  |
| Number of Contracts |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
Real estate loans |  |  |  |  |
Single-family residential | 1 |  | $ | 146 |  | 144
Total real estate TDR loans | 1 |  |  | 146 |  | 144
Total TDR loans | 1 |  | $ | 146 |  | 144
During the six months ended June 30, 2015, one loan was modified that was considered to be a troubled debt restructuring. The interest rate was modified on this loan.
Six months ended June 30, 2014 |  |  |  |  |
(Dollars in thousands) |  |  |  |  |
| Number of Contracts |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
Real estate loans |  |  |  |  |
Construction and land development | 1 |  | $ | 316 |  | 316
Single-family residential | 1 |  |  | 734 |  | 734
Single-family residential - |  |  |  |  |  |
Banco de la Gente stated income | 6 |  |  | 494 |  | 494
Commercial | - |  |  | - |  | -
Multifamily and farmland | - |  |  | - |  | -
Total real estate TDR loans | 8 |  |  | 1,544 |  | 1,544
Total TDR loans | 8 |  | $ | 1,544 |  | 1,544
During the six months ended June 30, 2015, eight loans were modified that were considered to be troubled debt restructurings. The interest rate was modified on these loans.

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- Definition The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=49124121&loc=d3e5066-111524 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02.3,4) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 50 -Paragraph 11 -URI http://asc.fasb.org/extlink&oid=49124121&loc=d3e5162-111524 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(k)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=49124121&loc=d3e5074-111524 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 03 -Paragraph 7 -Article 9 + Details
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