Note 4. Loans

The composition of loans, net at December 31, 2015 and 2014 is as follows:


	2015			2014
	(In Thousands)
Real Estate:
Land Development and Construction	$	33,133		$	43,233
Farmland		23,293			26,463
1-4 Family Mortgages		104,046			104,170
Commercial Real Estate		180,691			151,746

Total Real Estate Loans		341,163			325,612


Business Loans:
Commercial and Industrial Loans		61,425			38,333
Farm Production and other Farm Loans		1,055			1,035

Total Business Loans		62,480			39,368


Consumer Loans:
Credit Cards		1,061			1,075
Other Consumer Loans		25,564			25,440

Total Consumer Loans		26,625			26,515


Total Gross Loans		430,268			391,495


Unearned income		(686	)		(535	)
Allowance for loan losses		(6,474	)		(6,542	)


Loans, net	$	423,108		$	384,418

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews these policies and procedures and submits them to the Company’s Board of Directors for its approval when needed, but no less frequently than annually. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of this review are presented to management with quarterly reports made to the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by the lenders and credit personnel, as well as the Company’s policies and procedures.

Loans are made principally to customers in the Company’s market. The Company’s lending policy provides that loans collateralized by real estate are normally made with loan-to-value (“LTV”) ratios of 80 percent or less. Commercial loans are typically collateralized by property, equipment, inventories or receivables with LTV ratios from 50 percent to 80 percent. Real estate mortgage loans are collateralized by personal residences with LTV ratios of 80 percent or less. Consumer loans are typically collateralized by real estate, vehicles and other consumer durable goods. Approximately $37.3 million and $34.3 million of the loans outstanding at December 31, 2015 and December 31, 2014, respectively, were variable rate loans.

In the ordinary course of business, the Company has granted loans to certain directors and their affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Activity in related party loans during 2015 is presented in the following table.


Balance outstanding at December 31, 2014	$	4,139,357

Principal additions		2,648,168

Principal reductions		(1,166,551	)


Balance outstanding at December 31, 2015	$	5,620,974

Loans are considered to be 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 such loans are considered past due. When interest accruals are 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.

Year-end non-accrual loans, segregated by class of loans, were as follows:


	2015		2014
	(in thousands)
Real Estate:
Land Development and Construction	$	75	$	92
Farmland		158		222
1-4 Family Mortgages		2,464		1,905
Commercial Real Estate		11,662		9,444

Total Real Estate Loans		14,359		11,663


Business Loans:
Commercial and Industrial Loans		28		70

Total Business Loans		28		70


Consumer Loans:
Other Consumer Loans		36		133

Total Consumer Loans		36		133


Total Non-Accrual Loans	$	14,423	$	11,854

In the event that non-accrual loans had performed in accordance with their original terms, the Company would have recognized additional interest income of approximately $732,268, $819,524 and $813,710 in 2015, 2014 and 2013, respectively.

An age analysis of past due loans, segregated by class of loans, as of December 31, 2015 was as follows (in thousands):


											Accruing
			Loans								Loans
	Loans		90 or more								90 or more
	30-89 Days		Days Past		Total Past		Current		Total		Days
	Past Due		Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	1,126	$	21	$	1,147	$	31,986	$	33,133	$	21
Farmland		947		4		951		22,342		23,293		4
1-4 Family Mortgages		5,131		573		5,704		98,342		104,046		—
Commercial Real Estate		4,015		6,748		10,763		169,928		180,691		—

Total Real Estate Loans		11,219		7,346		18,565		322,598		341,163		25


Business Loans:
Commercial and Industrial Loans		245		12		257		61,168		61,425		12
Farm Production and other Farm Loans		12		—		12		1,043		1,055		—

Total Business Loans		257		12		269		62,211		62,480		12


Consumer Loans:
Credit Cards		12		9		21		1,040		1,061		9
Other Consumer Loans		1,017		30		1,047		24,517		25,564		30

Total Consumer Loans		1,029		39		1,068		25,557		26,625		39


Total Loans	$	12,505	$	7,397	$	19,902	$	410,366	$	430,268	$	76

An age analysis of past due loans, segregated by class of loans, as of December 31, 2014 was as follows (in thousands):


											Accruing
			Loans								Loans
	Loans		90 or more								90 or more
	30-89 Days Past Due		Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Days Past Due
Real Estate:
Land Development and Construction	$	578	$	—	$	578	$	42,655	$	43,233	$	—
Farmland		889		17		906		25,557		26,463		—
1-4 Family Mortgages		4,606		837		5,443		98,727		104,170		131
Commercial Real Estate		2,211		4,471		6,682		145,064		151,746		724

Total Real Estate Loans		8,284		5,325		13,609		312,003		325,612		855


Business Loans:
Commercial and Industrial Loans		115		3		118		38,215		38,333		3
Farm Production and other Farm Loans		22		—		22		1,013		1,035		—

Total Business Loans		137		3		140		39,228		39,368		3


Consumer Loans:
Credit Cards		27		6		33		1,042		1,075		6
Other Consumer Loans		1,179		53		1,232		24,208		25,440		16

Total Consumer Loans		1,206		59		1,265		25,250		26,515		22


Total Loans	$	9,627	$	5,387	$	15,014	$	376,481	$	391,495	$	880

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all the amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. In determining which loans to evaluate for impairment, management looks at past due loans, bankruptcy filings and any situation that might lend itself to cause a borrower to be unable to repay the loan according to the original contract terms. If a loan is determined to be impaired and the collateral is deemed to be insufficient to fully repay the loan, a specific reserve will be established. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

Impaired loans as of December 31, by class of loans, are as follows (in thousands):


2015	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	75	$	—	$	75	$	75	$	75	$	85
Farmland		679		69		610		679		54		739
1-4 Family Mortgages		3,103		1,754		1,349		3,103		183		2,829
Commercial Real Estate		11,662		1,409		10,253		11,662		2,685		10,552

Total Real Estate Loans		15,519		3,232		12,287		15,519		2,997		14,205


Business Loans:
Commercial and Industrial Loans		28		28		—		28		—		49
Farm Production and other Farm Loans		—		—		—		—		—		—

Total Business Loans		28		28		—		28		—		49


Consumer Loans:
Other Consumer Loans		36		36		—		36		—		78

Total Consumer Loans		36		36		—		36		—		78


Total Loans	$	15,583	$	3,296	$	12,287	$	15,583	$	2,997	$	14,332


2014	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	92	$	—	$	92	$	92	$	92	$	114
Farmland		798		104		694		798		108		575
1-4 Family Mortgages		2,554		1,685		869		2,554		143		2,210
Commercial Real Estate		9,444		895		8,549		9,444		1,642		9,169

Total Real Estate Loans		12,888		2,684		10,204		12,888		1,985		12,068


Business Loans:
Commercial and Industrial Loans		70		30		40		70		40		1,147

Total Business Loans		70		30		40		70		40		1,147


Consumer Loans:
Other Consumer Loans		121		121		—		121		—		120

Total Consumer Loans		121		121		—		121		—		120


Total Loans	$	13,079	$	2,835	$	10,244	$	13,079	$	2,025	$	13,335

The following table presents troubled debt restructurings segregated by class (in thousands, except number of loans):


December 31, 2015	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate		3	$	4,871	$	3,858


Total		3	$	4,871	$	3,858


December 31, 2014	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate		4	$	6,850	$	4,741


Total		4	$	6,850	$	4,741

Changes in the Company’s troubled debt restructurings are set forth in the table below:


	Number of Loans		Recorded Investment
Totals at January 1, 2015		4	$	4,741
Additional loans with concessions
Reductions due to:
Charge-off		1		(349	)
Principal paydowns				(534	)


Total at December 31, 2015		3	$	3,858

The allocated allowance for loan losses attributable to restructured loans was $174,274 at December 31, 2015 and 2014.

The Company had no remaining availability under commitments to lend additional funds on these troubled debt restructurings at December 31, 2015.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans when originated and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows.

Grade 1. MINIMAL RISK - These loans are without loss exposure to the Company. This classification is reserved for only the best, well secured loans to borrowers with significant capital strength, low leverage, stable earnings and growth and other readily available financing alternatives. This type of loan would also include loans secured by a program of the government.

Grade 2. MODEST RISK - These loans include borrowers with solid credit quality and moderate risk of loss. These loans may be fully secured by certificates of deposit with another reputable financial institution, or secured by readily marketable securities with acceptable margins.

Grade 3. AVERAGE RISK - This is the rating assigned to most of the loans held by the Company. This includes loans with average loss exposure and average overall quality. These loans should liquidate through possessing adequate collateral and adequate earnings of the borrower. In addition, these loans are properly documented and are in accordance with all aspects of the current loan policy.

Grade 4. ACCEPTABLE RISK - Borrower generates sufficient cash flow to fund debt service but most working asset and capital expansion needs are provided from external sources. Profitability and key balance sheet ratios are usually close to peers but one or more may be higher than peers.

Grade 5. MANAGEMENT ATTENTION - Borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the borrower has taken a negative turn and may be temporarily strained. Cash flow is weak but cash reserves remain adequate to meet debt service. Management weakness is evident.

Grade 6. OTHER LOANS ESPECIALLY MENTIONED (OLEM) - Loans in this category are fundamentally sound but possess some weaknesses. OLEM loans have potential weaknesses, which may, if not checked or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss.

Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss.

Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. A doubtful classification could reflect the fact that the primary source of repayment is gone and serious doubt exists as to the quality of a secondary source of repayment.

Grade 9. LOSS - Loans classified loss are considered uncollectible 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 it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Also included in this classification is the defined loss portion of loans rated substandard assets and doubtful assets.

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at December 31, 2015.

The following table details the amount of gross loans by loan grade and class for the year ended December 31, 2015 (in thousands):


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
Grades	1, 2, 3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	31,889	$	202	$	1,042	$	—	$	—	$	33,133
Farmland		21,084		989		1,220		—		—		23,293
1-4 Family Mortgages		88,425		4,874		10,747		—		—		104,046
Commercial Real Estate		155,898		12,286		12,507		—		—		180,691

Total Real Estate Loans		297,296		18,351		25,516		—		—		341,163


Business Loans:
Commercial and Industrial Loans		60,918		377		130		—		—		61,425
Farm Production and other Farm Loans		1,055		—		—		—		—		1,055

Total Business Loans		61,973		377		130		—		—		62,480


Consumer Loans:
Credit Cards		1,052		—		9		—		—		1,061
Other Consumer Loans		24,666		111		777		7		3		25,564

Total Consumer Loans		25,718		111		786		7		3		26,625


Total Loans	$	384,987	$	18,839	$	26,432	$	7	$	3	$	430,268

The following table details the amount of gross loans by loan grade and class for the year ended December 31, 2014:


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
Grades	1, 2, 3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	41,431	$	424	$	1,378	$	—	$	—	$	43,233
Farmland		23,993		708		1,762		—		—		26,463
1-4 Family Mortgages		86,969		5,351		11,850		—		—		104,170
Commercial Real Estate		126,881		13,558		11,307		—		—		151,746

Total Real Estate Loans		279,274		20,041		26,297		—		—		325,612


Business Loans:
Commercial and Industrial Loans		37,890		232		211		—		—		38,333
Farm Production and other Farm Loans		1,035		—		—		—		—		1,035

Total Business Loans		38,925		232		211		—		—		39,368


Consumer Loans:
Credit Cards		1,069		—		6		—		—		1,075
Other Consumer Loans		24,889		177		358		16		—		25,440

Total Consumer Loans		25,958		177		364		16		—		26,515


Total Loans	$	344,157	$	20,450	$	26,872	$	16	$	—	$	391,495

The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that will occur within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.

The allowance on the majority of the loan portfolio is calculated using a historical chargeoff percentage applied to the current loan balances by loan segment. This historical period is the average of the previous five years with the most current years weighted to show the effect of the most recent chargeoff activity. This percentage is also adjusted for economic factors such as unemployment and general business conditions, both local and nationwide.

The group of loans that are considered to be impaired are individually evaluated for possible loss and a specific reserve is established to cover any loss contingency. Loans that are determined to be a loss with no benefit of remaining in the portfolio are charged off to the allowance. These specific reserves are reviewed periodically for continued impairment and adequacy of the specific reserve and adjusted when necessary.

Net chargeoffs (recoveries), segregated by class of loans, were as follows:


	2015			2014		2013
Real Estate:
Land Development and Construction	$	(8,700	)	$	241,853	$	(15,787	)
Farmland		(5,156	)		52,731		14,915
1-4 Family Mortgages		149,014			22,205		152,756
Commercial Real Estate		415,413			42,582		513,841

Total Real Estate Loans		550,571			359,371		665,725


Business Loans:
Commercial and Industrial Loans		1,585			2,038,953		350,740
Farm Production and other Farm Loans		—			—		(1,700	)

Total Business Loans		1,585			2,038,953		349,040


Consumer Loans:
Credit Cards		15,493			11,482		17,726
Other Consumer Loans		57,661			49,022		48,387

Total Consumer Loans		73,154			60,504		66,113


Total Net Chargeoffs	$	625,310		$	2,458,828	$	1,080,878

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2015, 2014 and 2013:


	Real		Business
2015	Estate		Loans			Consumer		Total

Beginning Balance	$	5,202,151	$	873,815		$	466,360	$	6,542,326

Provision for loan losses		587,315		(228,982	)		198,354		556,687

Chargeoffs		625,556		32,258			164,091		821,905

Recoveries		74,985		30,673			90,937		196,595


Net Chargeoffs		550,571		1,585			73,154		625,310


Ending Balance	$	5,238,895	$	643,248		$	591,560	$	6,473,703


Period end allowance allocated to:
Loans individually evaluated for impairment	$	2,996,708	$	—		$	—	$	2,996,708

Loans collectively evaluated for impairment		2,242,187		643,248			591,560		3,476,995


Ending Balance	$	5,238,895	$	643,248		$	591,560	$	6,473,703


2014	Real Estate		Business Loans		Consumer			Total

Beginning Balance	$	4,706,011	$	2,767,409	$	604,337		$	8,077,757

Provision for loan losses		855,511		145,359		(77,473	)		923,397

Chargeoffs		560,298		2,050,939		121,093			2,732,330

Recoveries		200,927		11,986		60,589			273,502


Net Chargeoffs		359,371		2,038,953		60,504			2,458,828


Ending Balance	$	5,202,151	$	873,815	$	466,360		$	6,542,326


Period end allowance allocated to:
Loans individually evaluated for impairment	$	1,984,671	$	40,083	$	—		$	2,024,754

Loans collectively evaluated for impairment		3,217,480		833,732		466,360			4,517,572


Ending Balance	$	5,202,151	$	873,815	$	466,360		$	6,542,326


2013	Real Estate		Business Loans		Consumer			Total

Beginning Balance	$	4,629,559	$	1,554,698	$	770,012		$	6,954,269

Provision for loan losses		742,177		1 ,561,751		(99,562	)		2,204,366

Chargeoffs		763,914		375,498		135,302			1,274,714

Recoveries		98,189		26,458		69,189			193,836


Net Chargeoffs		665,725		349,040		66,113			1,080,878


Ending Balance	$	4,706,011	$	2,767,409	$	604,337		$	8,077,757


Period end allowance allocated to:
Loans individually evaluated for impairment	$	1,224,874	$	1,071,729	$	—		$	2,296,603

Loans collectively evaluated for impairment		3,481,137		1,695,680		604,337			5,781,154


Ending Balance	$	4,706,011	$	2,767,409	$	604,337		$	8,077,757

The Company’s recorded investment in loans as of December 31, 2015 and 2014 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows (in thousands):


2015	Real Estate		Business Loans		Consumer		Total

Loans individually evaluated for impairment	$	15,519	$	28	$	36	$	15,583

Loans collectively evaluated for impairment		325,644		62,452		26,589		414,685


	$	341,163	$	62,480	$	26,625	$	430,268


2014	Real Estate		Business Loans		Consumer		Total

Loans individually evaluated for impairment	$	12,888	$	70	$	121	$	13,079

Loans collectively evaluated for impairment		312,724		39,298		26,394		378,416


	$	325,612	$	39,368	$	26,515	$	391,495