7. Loans and Allowance for Loan Losses

Major classifications of loans outstanding are summarized as follows:

(In thousands)	September 30, 2016		December 31, 2015

Real Estate
Real estate mortgage – construction and land development	$	114,454	$	115,516
Real estate mortgage – residential		341,160		355,134
Real estate mortgage – farmland and other commercial enterprises		393,973		386,386
Commercial
Commercial and industrial		47,706		48,379
States and political subdivisions		19,922		17,643
Other		23,666		23,798
Consumer
Secured		4,597		6,665
Unsecured		5,238		5,754
Total loans		950,716		959,275
Less unearned income		-		-
Total loans, net of unearned income	$	950,716	$	959,275

Activity in the allowance for loan losses by portfolio segment was as follows for the periods indicated:

(In thousands)	Real Estate			Commercial			Consumer			Total
Three months ended September 30, 201 6
Balance, beginning of period	$	8,404		$	806		$	275		$	9,485
Provision for loan losses		(425	)		203			32			(190	)
Recoveries		31			52			9			92
Loans charged off		(88	)		(134	)		(19	)		(241	)
Balance, end of period	$	7,922		$	927		$	297		$	9,146

Nine months ended September 30, 201 6
Balance, beginning of period	$	9,173		$	820		$	322		$	10,315
Provision for loan losses		(1,025	)		193			13			(819	)
Recoveries		133			107			52			292
Loans charged off		(359	)		(193	)		(90	)		(642	)
Balance, end of period	$	7,922		$	927		$	297		$	9,146

(In thousands)	Real Estate			Commercial			Consumer			Total
Three months ended September 30, 201 5
Balance, beginning of period	$	10,806		$	1,057		$	336		$	12,199
Provision for loan losses		(765	)		(136	)		3			(898	)
Recoveries		38			145			28			211
Loans charged off		(151	)		(42	)		(42	)		(235	)
Balance, end of period	$	9,928		$	1,024		$	325		$	11,277

Nine months ended September 30, 201 5
Balance, beginning of period	$	12,542		$	1,153		$	273		$	13,968
Provision for loan losses		(2,552	)		(237	)		82			(2,707	)
Recoveries		376			176			91			643
Loans charged off		(438	)		(68	)		(121	)		(627	)
Balance, end of period	$	9,928		$	1,024		$	325		$	11,277

The following tables present individually impaired loans by class of loans for the dates indicated.

September 30, 2016 (In thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Allowance for Loan Losses Allocated
Real Estate
Real estate mortgage – construction and land development	$	9,395	$	2,904	$	3,820	$	6,724	$	572
Real estate mortgage – residential		9,763		3,814		5,979		9,793		1,358
Real estate mortgage – farmland and other commercial enterprises		26,429		10,986		15,335		26,321		335
Commercial
Commercial and industrial		409		22		387		409		209
Consumer
Unsecured		147		-		148		148		147
Total	$	46,143	$	17,726	$	25,669	$	43,395	$	2,621

December 31, 2015 (In thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Allowance for Loan Losses Allocated
Real Estate
Real estate mortgage – construction and land development	$	9,932	$	3,875	$	3,372	$	7,247	$	556
Real estate mortgage – residential		8,655		2,502		6,024		8,526		1,278
Real estate mortgage – farmland and other commercial enterprises		20,980		4,149		16,703		20,852		681
Commercial
Commercial and industrial		399		-		400		400		223
Consumer
Unsecured		156		-		157		157		156
Total	$	40,122	$	10,526	$	26,656	$	37,182	$	2,894

Three Months Ended September 30,	2016						2015
(In thousands)	Average		Interest Income Recognized		Cash Basis Interest Recognized		Average		Interest Income Recognized		Cash Basis Interest Recognized
Real Estate
Real estate mortgage – construction and land development	$	7,838	$	88	$	88	$	9,650	$	49	$	47
Real estate mortgage – residential		9,214		136		136		9,416		109		109
Real estate mortgage – farmland and other commercial enterprises		26,401		292		292		20,999		255		252
Commercial
Commercial and industrial		409		4		2		449		5		5
Consumer
Unsecured		150		2		2		161		2		2
Total	$	44,012	$	522	$	520	$	40,675	$	420	$	415

Nine Months Ended September 30,	2016						2015
(In thousands)	Average		Interest Income Recognized		Cash Basis Interest Recognized		Average		Interest Income Recognized		Cash Basis Interest Recognized
Real Estate
Real estate mortgage – construction and land development	$	8,319	$	243	$	231	$	10,382	$	265	$	258
Real estate mortgage – residential		8,957		348		323		10,199		364		352
Real estate mortgage – farmland and other commercial enterprises		25,728		929		908		22,931		780		771
Commercial
Commercial and industrial		413		15		13		563		11		11
Consumer
Unsecured		152		5		4		118		4		4
Total	$	43,569	$	1,540	$	1,479	$	44,193	$	1,424	$	1,396

The following tables present the balance of the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2016 and December 31, 2015.

September 30, 2016 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,265	$	209	$	147	$	2,621
Collectively evaluated for impairment		5,657		718		150		6,525
Total ending allowance balance	$	7,922	$	927	$	297	$	9,146

Loans
Loans individually evaluated for impairment	$	42,838	$	409	$	148	$	43,395
Loans collectively evaluated for impairment		806,749		90,885		9,687		907,321
Total ending loan balance, net of unearned income	$	849,587	$	91,294	$	9,835	$	950,716

December 31, 2015 (In thousands)	Real Estate		Commercial		Consumer		Total
Allowance for Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,515	$	223	$	156	$	2,894
Collectively evaluated for impairment		6,658		597		166		7,421
Total ending allowance balance	$	9,173	$	820	$	322	$	10,315

Loans
Loans individually evaluated for impairment	$	36,625	$	400	$	157	$	37,182
Loans collectively evaluated for impairment		820,411		89,420		12,262		922,093
Total ending loan balance, net of unearned income	$	857,036	$	89,820	$	12,419	$	959,275

The following tables present the recorded investment in nonperforming loans by class of loans as of September 30, 2016 and December 31, 2015.

September 30, 2016 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate
Real estate mortgage – construction and land development	$	902	$	3,648	$	-
Real estate mortgage – residential		2,037		4,034		-
Real estate mortgage – farmland and other commercial enterprises		3,810		14,882		-
Commercial
Commercial and industrial		16		379		-
Other		6		-		-
Consumer
Secured		8		-		-
Unsecured		-		136		-
Total	$	6,779	$	23,079	$	-

December 31, 2015 (In thousands)	Nonaccrual		Restructured Loans		Loans Past Due 90 Days or More and Still Accruing
Real Estate
Real estate mortgage – construction and land development	$	1,567	$	3,674	$	-
Real estate mortgage – residential		2,485		4,127		-
Real estate mortgage – farmland and other commercial enterprises		4,266		15,503		-
Commercial
Commercial and industrial		44		384		-
Other		8		-		-
Consumer
Secured		10		-		-
Unsecured		-		143		-
Total	$	8,380	$	23,831	$	-

The Company has allocated $1.7 million and $1.9 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings and that are in compliance with those terms as of September 30, 2016 and December 31, 2015, respectively. The Company had no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at September 30, 2016 and December 31, 2015.

There were no loans modified as troubled debt restructurings during 2016. The Company had three credits modified as troubled debt restructurings during 2015. Additionally, troubled debt restructurings increased during the first quarter of 2015 as a result of the purchase of a previously

participated portion of a loan to a nonaffiliated bank. This loan was participated prior to it being restructured. The purchase price paid represented a discount of $482 thousand or 15% of the purchased principal amount. The loan is performing under the terms of the restructuring and the borrower’s financial position has steadily improved. Accretion of the discount was recognized over the contractual life of the loan, which ended in June 2015. There is no further accretion to be recognized. The total outstanding balance related to this credit, which was renewed during June 2015, was $11.0 million at September 30, 2016. This represents 47.8% of the Company’s total restructured loans and is the largest such individual credit. This credit was restructured in 2012 following an interest rate concession and extended amortization term.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2015

There were none during 2016 or during the three months ended September 30, 2015

(Dollars in thousands) Troubled Debt Restructurings:	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Nine Months Ended September 30, 201 5
Commercial:
Commercial and industrial		2	$	388	$	388
Consumer:
Secured		1		145		145
Total		3	$	533	$	533

The troubled debt restructurings identified above increased the allowance for loan losses by $356 thousand in the nine month period ended September 30, 2015. There were no charge-offs related to these loans. There were no payment defaults during the first nine months of 2016 or 2015 for credits that were restructured during the previous twelve months.

The tables below present an age analysis of past due loans 30 days or more by class of loans as of the dates indicated. Past due loans that are also classified as nonaccrual are included in their respective past due category

September 30, 2016 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate
Real estate mortgage – construction and land development	$	-	$	227	$	227	$	114,227	$	114,454
Real estate mortgage – residential		1,158		848		2,006		339,154		341,160
Real estate mortgage – farmland and other commercial enterprises		-		2,500		2,500		391,473		393,973
Commercial
Commercial and industrial		7		16		23		47,683		47,706
States and political subdivisions		-		-		-		19,922		19,922
Other		16		-		16		23,650		23,666
Consumer
Secured		6		2		8		4,589		4,597
Unsecured		19		-		19		5,219		5,238
Total	$	1,206	$	3,593	$	4,799	$	945,917	$	950,716

December 31, 2015 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total		Current		Total Loans
Real Estate
Real estate mortgage – construction and land development	$	-	$	227	$	227	$	115,289	$	115,516
Real estate mortgage – residential		421		1,448		1,869		353,265		355,134
Real estate mortgage – farmland and other commercial enterprises		42		2,376		2,418		383,968		386,386
Commercial
Commercial and industrial		42		43		85		48,294		48,379
States and political subdivisions		-		-		-		17,643		17,643
Other		62		-		62		23,736		23,798
Consumer
Secured		9		1		10		6,655		6,665
Unsecured		18		-		18		5,736		5,754
Total	$	594	$	4,095	$	4,689	$	954,586	$	959,275

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends and conditions. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes large-balance loans and non-homogeneous loans, such as commercial real estate and certain residential real estate loans. Loan rating grades, as described further below, are assigned based on a continuous process. The amount and adequacy of the allowance for loan loss is determined on a quarterly basis. The Company uses the following definitions for its risk ratings:

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 borrower’s repayment ability, weaken the collateral or inadequately protect the Company’s credit position at some future date. These credits pose elevated risk, but their weaknesses do not yet justify a substandard classification.

Substandard.

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

Doubtful.

Loans classified as doubtful have all the weaknesses inherent of 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.

Loans not meeting the criteria above which are analyzed individually as part of the above described process are considered to be pass rated loans, which are considered to have a low risk of loss. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows for the dates indicated. Each of the following tables excludes immaterial amounts attributed to accrued interest receivable.

	Real Estate						Commercial
September 30, 2016 (In thousands)	Real Estate Mortgage – Construction and Land Development		Real Estate Mortgage – Residential		Real Estate Mortgage – Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Other
Credit risk profile by internally assigned rating grades
Pass	$	106,172	$	314,282	$	356,497	$	46,298	$	19,922	$	23,660
Special Mention		1,349		12,985		19,634		816		-		-
Substandard		6,933		13,893		17,842		592		-		6
Doubtful		-		-		-		-		-		-
Total	$	114,454	$	341,160	$	393,973	$	47,706	$	19,922	$	23,666

	Real Estate						Commercial
December 31, 2015 (In thousands)	Real Estate Mortgage – Construction and Land Development		Real Estate Mortgage – Residential		Real Estate Mortgage – Farmland and Other Commercial Enterprises		Commercial and Industrial		States and Political Subdivisions		Other
Credit risk profile by internally assigned rating grades
Pass	$	104,383	$	324,333	$	343,894	$	46,934	$	17,643	$	23,777
Special Mention		1,651		16,225		22,859		937		-		-
Substandard		9,482		14,576		19,633		508		-		21
Doubtful		-		-		-		-		-		-
Total	$	115,516	$	355,134	$	386,386	$	48,379	$	17,643	$	23,798

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the consumer loans outstanding based on payment activity as of September 30, 2016 and December 31, 2015.

	September 30, 2016				December 31, 2015
	Consumer				Consumer
(In thousands)	Secured		Unsecured		Secured		Unsecured
Credit risk profile based on payment activity
Performing	$	4,589	$	5,102	$	6,655	$	5,611
Nonperforming		8		136		10		143
Total	$	4,597	$	5,238	$	6,665	$	5,754