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3. Loans | 9 Months Ended
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Sep. 30, 2016
Receivables [Abstract] |
3. Loans | Major classifications of loans at September 30, 2016 and December 31, 2015 are summarized as follows:
(Dollars in thousands) |  |  |  |  |
|  | September 30, 2016 |  |  | December 31, 2015
Real estate loans: |  |  |  |  |
Construction and land development |  | $ | 59,456 |  |  |  | 65,791
Single-family residential |  |  | 231,958 |  |  |  | 220,690
Single-family residential - |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 40,934 |  |  |  | 43,733
Commercial |  |  | 240,150 |  |  |  | 228,526
Multifamily and farmland |  |  | 18,727 |  |  |  | 18,080
Total real estate loans |  |  | 591,225 |  |  |  | 576,820
Loans not secured by real estate: |  |  |  |  |  |  |
Commercial loans |  |  | 94,790 |  |  |  | 91,010
Farm loans |  |  | - |  |  |  | 3
Consumer loans |  |  | 10,036 |  |  |  | 10,027
All other loans |  |  | 16,968 |  |  |  | 11,231
Total loans |  |  | 713,019 |  |  |  | 689,091
Less allowance for loan losses |  |  | 8,045 |  |  |  | 9,589
Total net loans |  | $ | 704,974 |  |  |  | 679,502
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, Durham and Forsyth 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 September 30, 2016, construction and land development loans comprised approximately 8% 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 September 30, 2016, single-family residential loans comprised approximately 38% of the Bank's total loan portfolio, and include Banco's single-family residential stated income loans, which were approximately 6% 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 September 30, 2016, commercial real estate loans comprised approximately 34% 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 September 30, 2016, 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 September 30, 2016 and December 31, 2015:
September 30, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(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 |  | $ | 18 |  |  |  | 13 |  |  |  | 31 |  |  |  | 59,425 |  |  |  | 59,456 |  |  |  | -
Single-family residential |  |  | 1,344 |  |  |  | 310 |  |  |  | 1,654 |  |  |  | 230,304 |  |  |  | 231,958 |  |  |  | -
Single-family residential - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 1,588 |  |  |  | 257 |  |  |  | 1,845 |  |  |  | 39,089 |  |  |  | 40,934 |  |  |  | -
Commercial |  |  | 58 |  |  |  | - |  |  |  | 58 |  |  |  | 240,092 |  |  |  | 240,150 |  |  |  | -
Multifamily and farmland |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 18,727 |  |  |  | 18,727 |  |  |  | -
Total real estate loans |  |  | 3,008 |  |  |  | 580 |  |  |  | 3,588 |  |  |  | 587,637 |  |  |  | 591,225 |  |  |  | -
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  |  | 85 |  |  |  | - |  |  |  | 85 |  |  |  | 94,705 |  |  |  | 94,790 |  |  |  | -
Farm loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | -
Consumer loans |  |  | 95 |  |  |  | 7 |  |  |  | 102 |  |  |  | 9,934 |  |  |  | 10,036 |  |  |  | -
All other loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 16,968 |  |  |  | 16,968 |  |  |  | -
Total loans |  | $ | 3,188 |  |  |  | 587 |  |  |  | 3,775 |  |  |  | 709,244 |  |  |  | 713,019 |  |  |  | -
December 31, 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 |  | $ | 330 |  |  |  | 17 |  |  |  | 347 |  |  |  | 65,444 |  |  |  | 65,791 |  |  |  | -
Single-family residential |  |  | 2,822 |  |  |  | 1,385 |  |  |  | 4,207 |  |  |  | 216,483 |  |  |  | 220,690 |  |  |  | -
Single-family residential - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 7,021 |  |  |  | 114 |  |  |  | 7,135 |  |  |  | 36,598 |  |  |  | 43,733 |  |  |  | -
Commercial |  |  | 2,619 |  |  |  | 157 |  |  |  | 2,776 |  |  |  | 225,750 |  |  |  | 228,526 |  |  |  | -
Multifamily and farmland |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 18,080 |  |  |  | 18,080 |  |  |  | -
Total real estate loans |  |  | 12,792 |  |  |  | 1,673 |  |  |  | 14,465 |  |  |  | 562,355 |  |  |  | 576,820 |  |  |  | -
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  |  | 185 |  |  |  | 40 |  |  |  | 225 |  |  |  | 90,785 |  |  |  | 91,010 |  |  |  | 17
Farm loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | 3 |  |  |  | -
Consumer loans |  |  | 136 |  |  |  | 8 |  |  |  | 144 |  |  |  | 9,883 |  |  |  | 10,027 |  |  |  | -
All other loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 11,231 |  |  |  | 11,231 |  |  |  | -
Total loans |  | $ | 13,113 |  |  |  | 1,721 |  |  |  | 14,834 |  |  |  | 674,257 |  |  |  | 689,091 |  |  |  | 17
The following table presents non-accrual loans as of September 30, 2016 and December 31, 2015:
(Dollars in thousands) |  |  |  |  |
|  | September 30, 2016 |  |  | December 31, 2015
Real estate loans: |  |  |  |  |
Construction and land development |  | $ | 31 |  |  |  | 146
Single-family residential |  |  | 1,797 |  |  |  | 4,023
Single-family residential - |  |  |  |  |  |  |
Banco de la Gente stated income |  |  | 1,251 |  |  |  | 1,106
Commercial |  |  | 1,571 |  |  |  | 2,992
Multifamily and farmland |  |  | - |  |  |  | -
Total real estate loans |  |  | 4,650 |  |  |  | 8,267
Loans not secured by real estate: |  |  |  |  |  |  |
Commercial loans |  |  | 66 |  |  |  | 113
Consumer loans |  |  | 41 |  |  |  | 52
Total |  | $ | 4,757 |  |  |  | 8,432
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 $22.9 million, $25.0 million and $25.5 million at September 30, 2016, December 31, 2015 and September 30, 2015, respectively. Interest income recognized on accruing impaired loans was $871,000, $968,000 and $1.3 million for the nine months ended September 30, 2016, the nine months ended September 30, 2015 and the year ended December 31, 2015, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual. The following tables present impaired loans as of September 30, 2016 and December 31, 2015:
September 30, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  | Nine months ended |  | Three months ended
| Unpaid Contractual Principal Balance |  | Recorded Investment With No Allowance |  | Recorded Investment With Allowance |  | Recorded Investment in Impaired Loans |  | Related Allowance |  | Average Outstanding Impaired Loans |  | Interest Income Recognized |  | Average Outstanding Impaired Loans |  | Interest Income Recognized
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development | $ | 292 |  | - |  | 288 |  | 288 |  | 13 |  | 375 |  | 10 |  | 369 |  | 3
Single-family residential |  | 5,731 |  | 878 |  | 4,473 |  | 5,351 |  | 46 |  | 8,921 |  | 122 |  | 6,556 |  | 40
Single-family residential - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Banco de la Gente stated income |  | 18,603 |  | - |  | 18,094 |  | 18,094 |  | 1,188 |  | 17,673 |  | 657 |  | 17,395 |  | 207
Commercial |  | 3,775 |  | 1,221 |  | 2,222 |  | 3,443 |  | 174 |  | 5,376 |  | 73 |  | 4,013 |  | 24
Multifamily and farmland |  | 78 |  | - |  | 78 |  | 78 |  | - |  | 79 |  | 3 |  | 78 |  | -
Total impaired real estate loans |  | 28,479 |  | 2,099 |  | 25,155 |  | 27,254 |  | 1,421 |  | 32,424 |  | 865 |  | 28,411 |  | 274
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  | 74 |  | - |  | 73 |  | 73 |  | 1 |  | 123 |  | - |  | 116 |  | -
Consumer loans |  | 226 |  | - |  | 219 |  | 219 |  | 4 |  | 235 |  | 6 |  | 225 |  | 2
Total impaired loans | $ | 28,779 |  | 2,099 |  | 25,447 |  | 27,546 |  | 1,426 |  | 32,782 |  | 871 |  | 28,752 |  | 276
December 31, 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 |  | YTD Interest Income Recognized
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development | $ | 643 |  | 216 |  | 226 |  | 442 |  | 12 |  | 705 |  | 18
Single-family residential |  | 8,828 |  | 1,489 |  | 6,805 |  | 8,294 |  | 189 |  | 10,852 |  | 224
Single-family residential - |  |  |  |  |  |  |  |  |  |  |  |  |  |
Banco de la Gente stated income |  | 20,375 |  | - |  | 19,215 |  | 19,215 |  | 1,143 |  | 18,414 |  | 921
Commercial |  | 4,556 |  | - |  | 4,893 |  | 4,893 |  | 179 |  | 5,497 |  | 89
Multifamily and farmland |  | 96 |  | - |  | 83 |  | 83 |  | - |  | 93 |  | 6
Total impaired real estate loans |  | 34,498 |  | 1,705 |  | 31,222 |  | 32,927 |  | 1,523 |  | 35,561 |  | 1,258
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  | 180 |  | - |  | 161 |  | 161 |  | 3 |  | 132 |  | 5
Consumer loans |  | 286 |  | - |  | 260 |  | 260 |  | 4 |  | 283 |  | 11
Total impaired loans | $ | 34,964 |  | 1,705 |  | 31,643 |  | 33,348 |  | 1,530 |  | 35,976 |  | 1,274
Changes in the allowance for loan losses for the three and nine months ended September 30, 2016 and 2015 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 |
Nine months ended September 30, 2016: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 2,185 |  | 2,534 |  | 1,460 |  | 1,917 |  | - |  | 842 |  | - |  | 172 |  | 479 |  | 9,589 |
Charge-offs |  | - |  | (158 | ) | - |  | (106 | ) | - |  | (129 | ) | - |  | (361 | ) | - |  | (754 | )
Recoveries |  | 8 |  | 18 |  | - |  | 15 |  | - |  | 165 |  | - |  | 112 |  | - |  | 318 |
Provision |  | (808 | ) | (388 | ) | (60 | ) | (250 | ) | 47 |  | (118 | ) | - |  | 291 |  | 178 |  | (1,108 | )
Ending balance | $ | 1,385 |  | 2,006 |  | 1,400 |  | 1,576 |  | 47 |  | 760 |  | - |  | 214 |  | 657 |  | 8,045 |
Three months ended September 30, 2016: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 1,582 |  | 2,233 |  | 1,354 |  | 1,650 |  | 46 |  | 803 |  | - |  | 234 |  | 638 |  | 8,540 |
Charge-offs |  | - |  | (35 | ) | - |  | - |  | - |  | (89 | ) | - |  | (122 | ) | - |  | (246 | )
Recoveries |  | 2 |  | 6 |  | - |  | 5 |  | - |  | 60 |  | - |  | 38 |  | - |  | 111 |
Provision |  | (199 | ) | (198 | ) | 46 |  | (79 | ) | 1 |  | (14 | ) | - |  | 64 |  | 19 |  | (360 | )
Ending balance | $ | 1,385 |  | 2,006 |  | 1,400 |  | 1,576 |  | 47 |  | 760 |  | - |  | 214 |  | 657 |  | 8,045 |
Allowance for loan losses at September 30, 2016: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance: individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $ | - |  | - |  | 1,164 |  | 167 |  | - |  | - |  | - |  | - |  | - |  | 1,331 |
Ending balance: collectively |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  | 1,385 |  | 2,006 |  | 236 |  | 1,409 |  | 47 |  | 760 |  | - |  | 214 |  | 657 |  | 6,714 |
Ending balance | $ | 1,385 |  | 2,006 |  | 1,400 |  | 1,576 |  | 47 |  | 760 |  | - |  | 214 |  | 657 |  | 8,045 |
Loans at September 30, 2016: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance | $ | 59,456 |  | 231,958 |  | 40,934 |  | 240,150 |  | 18,727 |  | 94,790 |  | - |  | 27,004 |  | - |  | 713,019 |
Ending balance: individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $ | - |  | 1,019 |  | 16,890 |  | 3,586 |  | - |  | - |  | - |  | - |  | - |  | 21,495 |
Ending balance: collectively |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $ | 59,456 |  | 230,939 |  | 24,044 |  | 236,564 |  | 18,727 |  | 94,790 |  | - |  | 27,004 |  | - |  | 691,524 |
(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 |
Nine months ended September 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 |  | (198 | ) | (447 | ) | (59 | ) | (62 | ) | - |  | (16 | ) | - |  | (394 | ) | - |  | (1,176 | )
Recoveries |  | 43 |  | 30 |  | 22 |  | 15 |  | - |  | 96 |  | - |  | 115 |  | - |  | 321 |
Provision |  | 119 |  | 676 |  | (113 | ) | 75 |  | (2 | ) | (297 | ) | - |  | 258 |  | (523 | ) | 193 |
Ending balance | $ | 2,749 |  | 2,825 |  | 1,460 |  | 1,930 |  | 5 |  | 881 |  | - |  | 212 |  | 358 |  | 10,420 |
Three months ended September 30, 2015: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 2,924 |  | 2,456 |  | 1,528 |  | 1,749 |  | 2 |  | 902 |  | - |  | 231 |  | 586 |  | 10,378 |
Charge-offs |  | (110 | ) | (48 | ) | - |  | - |  | - |  | (1 | ) | - |  | (156 | ) | - |  | (315 | )
Recoveries |  | 20 |  | 21 |  | - |  | 5 |  | - |  | 43 |  | - |  | 33 |  | - |  | 122 |
Provision |  | (85 | ) | 396 |  | (68 | ) | 176 |  | 3 |  | (63 | ) | - |  | 104 |  | (228 | ) | 235 |
Ending balance | $ | 2,749 |  | 2,825 |  | 1,460 |  | 1,930 |  | 5 |  | 881 |  | - |  | 212 |  | 358 |  | 10,420 |
Allowance for loan losses September 30, 2015: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance: individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $ | - |  | 96 |  | 1,128 |  | 227 |  | - |  | - |  | - |  | - |  | - |  | 1,451 |
Ending balance: collectively |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment |  | 2,749 |  | 2,729 |  | 332 |  | 1,703 |  | 5 |  | 881 |  | - |  | 212 |  | 358 |  | 8,969 |
Ending balance | $ | 2,749 |  | 2,825 |  | 1,460 |  | 1,930 |  | 5 |  | 881 |  | - |  | 212 |  | 358 |  | 10,420 |
Loans September 30, 2015: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance | $ | 61,748 |  | 218,365 |  | 44,433 |  | 234,003 |  | 14,003 |  | 88,931 |  | 3 |  | 23,314 |  | - |  | 684,800 |
Ending balance: individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $ | 241 |  | 2,944 |  | 18,193 |  | 3,525 |  | - |  | - |  | - |  | - |  | - |  | 24,903 |
Ending balance: collectively |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $ | 61,507 |  | 215,421 |  | 26,240 |  | 230,478 |  | 14,003 |  | 88,931 |  | 3 |  | 23,314 |  | - |  | 659,897 |
The provision for loan losses for the three months ended September 30, 2016 was a credit of $360,000, as compared to an expense of $235,000 for the three months ended September 30, 2015. The decrease in the provision for loan losses is primarily attributable to a reduction in the required level of the allowance for loan losses resulting from lower historical loss rates used to calculate the ASC 450-20 reserve as the elevated level of loan losses incurred in 2010 and 2011 are no longer included in the historical loss calculations. The provision for loan losses for the nine months ended September 30, 2016 was a credit of $1.1 million, as compared to an expense of $193,000 for the nine months ended September 30, 2015. The decrease in the provision for loan losses is primarily attributable to a reduction in the required level of the allowance for loan losses resulting from lower historical loss rates used to calculate the ASC 450-20 reserve as the elevated level of loan losses incurred in 2010 and 2011 are no longer included in the historical loss calculations. 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 September 30, 2016 and December 31, 2015:
September 30, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(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 | $ | - |  | 12,340 |  | - |  | - |  | - |  | 546 |  | - |  | 1,069 |  | 50 |  | 14,005
2- High Quality |  | 8,012 |  | 103,847 |  | - |  | 39,701 |  | 2,915 |  | 28,510 |  | - |  | 3,399 |  | 2,580 |  | 188,964
3- Good Quality |  | 32,958 |  | 81,307 |  | 17,136 |  | 166,724 |  | 12,150 |  | 59,125 |  | - |  | 4,838 |  | 12,565 |  | 386,803
4- Management Attention |  | 11,406 |  | 25,846 |  | 15,811 |  | 27,507 |  | 1,187 |  | 6,248 |  | - |  | 632 |  | 1,773 |  | 90,410
5- Watch |  | 6,858 |  | 3,854 |  | 2,807 |  | 3,321 |  | 2,475 |  | 250 |  | - |  | 43 |  | - |  | 19,608
6- Substandard |  | 222 |  | 4,764 |  | 5,180 |  | 2,897 |  | - |  | 111 |  | - |  | 54 |  | - |  | 13,228
7- Doubtful |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | -
8- Loss |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | 1 |  | - |  | 1
Total | $ | 59,456 |  | 231,958 |  | 40,934 |  | 240,150 |  | 18,727 |  | 94,790 |  | - |  | 10,036 |  | 16,968 |  | 713,019
December 31, 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 | $ | - |  | 15,189 |  | - |  | - |  | - |  | 700 |  | - |  | 1,091 |  | - |  | 16,980
2- High Quality |  | 10,144 |  | 86,061 |  | - |  | 38,647 |  | 2,998 |  | 24,955 |  | - |  | 3,647 |  | 1,665 |  | 168,117
3- Good Quality |  | 35,535 |  | 78,843 |  | 19,223 |  | 148,805 |  | 12,058 |  | 58,936 |  | 3 |  | 4,571 |  | 7,828 |  | 365,802
4- Management Attention |  | 12,544 |  | 30,259 |  | 15,029 |  | 31,824 |  | 335 |  | 5,905 |  | - |  | 620 |  | 1,738 |  | 98,254
5- Watch |  | 7,265 |  | 4,322 |  | 3,308 |  | 4,561 |  | 2,689 |  | 332 |  | - |  | 43 |  | - |  | 22,520
6- Substandard |  | 303 |  | 6,016 |  | 6,173 |  | 4,689 |  | - |  | 182 |  | - |  | 55 |  | - |  | 17,418
7- Doubtful |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | -
8- Loss |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | -
Total | $ | 65,791 |  | 220,690 |  | 43,733 |  | 228,526 |  | 18,080 |  | 91,010 |  | 3 |  | 10,027 |  | 11,231 |  | 689,091
Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $4.3 million and $8.8 million at September 30, 2016 and December 31, 2015, 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 $41,000 and $354,000 in performing loans classified as TDR loans at September 30, 2016 and December 31, 2015, respectively. The following table presents an analysis of TDR loan modifications during the three and nine months ended September 30, 2016.
Three and nine months ended September 30, 2016 |  |  |  |  |
(Dollars in thousands) |  |  |  |  |
| Number of Contracts |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
Real estate loans |  |  |  |  |
Single-family residential | 1 |  | $ | 41 |  | 41
Total real estate TDR loans | 1 |  |  | 41 |  | 41
Total TDR loans | 1 |  | $ | 41 |  | 41
During the three and nine months ended September 30, 2016, one loan was modified that was considered to be a new TDR loan. The interest rate was modified on this TDR loan. There were no TDR modifications during the three months ended September 30, 2015. The following table presents an analysis of TDR loan modifications during the nine months ended September 30, 2015.
Nine months ended September 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 |  | 142
Total real estate TDR loans | 1 |  |  | 146 |  | 142
Total TDR loans | 1 |  | $ | 146 |  | 142
During the nine months ended September 30, 2015, one loan was modified that was considered to be a new TDR loan. The interest rate was modified on this TDR loan. There were no loans modified as TDR that defaulted during the three and nine months ended September 30, 2016 and 2015, which were within 12 months of their modification date. Generally, a TDR loan is considered to be in default once it becomes 90 days or more past due following a modification.

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