(3) Loans

The following table presents the composition of loans segregated by class of loans, as of September 30, 2014 and December 31, 2013.

	September 30, 2014		December 31, 2013
Commercial and Agricultural
Commercial	$	46,481	$	48,107
Agricultural		23,017		10,666

Real Estate
Commercial Construction		50,455		52,739
Residential Construction		9,700		6,549
Commercial		327,498		341,783
Residential		204,313		206,258
Farmland		50,401		47,035

Consumer and Other
Consumer		23,448		25,676
Other		7,968		12,405

Total Loans	$	743,281	$	751,218

Commercial and industrial loans are extended to a diverse group of businesses within the Company’s market area. These loans are often underwritten based on the borrower’s ability to service the debt from income from the business. Real estate construction loans often require loan funds to be advanced prior to completion of the project. Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans. Consumer loans are originated at the bank level. These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade assigned to commercial and consumer loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions in the Company’s geographic markets.

The Company uses a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the grades is as follows:

●

Grades 1 and 2 – Borrowers with these assigned grades range in risk from virtual absence of risk to minimal risk. Such loans may be secured by Company-issued and controlled certificates of deposit or properly margined equity securities or bonds. Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans. Loans in this category fall into the “pass” classification.

●

Grades 3 and 4 – Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

●

Grade 5 – This grade includes “special mention” loans on management’s watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.

●

Grade 6 – This grade includes “substandard” loans in accordance with regulatory guidelines. This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms. Loans considered to be impaired are assigned this grade, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses. Generally, loans on which interest accrual has been stopped would be included in this grade.

●

Grades 7 and 8 – These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively. In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades. Management manages the Company’s problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

The following table presents the loan portfolio by credit quality indicator (risk grade) as of September 30, 2014 and December 31, 2013. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

September 30, 2014
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	41,379	$	3,058	$	2,044	$	46,481
Agricultural		22,825		35		157		23,017

Real Estate
Commercial Construction		44,084		1,979		4,392		50,455
Residential Construction		9,591		109		-		9,700
Commercial		306,612		9,959		10,927		327,498
Residential		180,906		10,480		12,927		204,313
Farmland		48,428		475		1,498		50,401

Consumer and Other
Consumer		22,710		226		512		23,448
Other		7,764		-		204		7,968

Total Loans	$	684,299	$	26,321	$	32,661	$	743,281

December 31, 2013
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	41,759	$	2,770	$	3,578	$	48,107
Agricultural		10,638		17		11		10,666

Real Estate
Commercial Construction		42,669		1,512		8,558		52,739
Residential Construction		6,341		208		-		6,549
Commercial		317,567		10,760		13,456		341,783
Residential		182,977		13,524		9,757		206,258
Farmland		44,777		507		1,751		47,035

Consumer and Other
Consumer		24,609		320		747		25,676
Other		12,355		1		49		12,405

Total Loans	$	683,692	$	29,619	$	37,907	$	751,218

A loan’s risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral. Loan risk grades are subject to reassessment at various times throughout the year as part of the Company’s ongoing loan review process. Loans with an assigned risk grade of 6 or below and an outstanding balance of $250,000 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

In assessing the overall economic condition of the markets in which it operates, the Company monitors the unemployment rates for its major service areas. The unemployment rates are reviewed on a quarterly basis as part of the allowance for loan loss determination.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or 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 provision. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of September 30, 2014 and December 31, 2013:

September 30, 2014
	Accruing Loans
			90 Days
	30-89 Days		or More		Total Accruing		Nonaccrual
	Past Due		Past Due		Loans Past Due		Loans		Current Loans		Total Loans
Commercial and Agricultural
Commercial	$	457	$	-	$	457	$	492	$	45,532	$	46,481
Agricultural		19		-		19		45		22,953		23,017

Real Estate
Commercial Construction		500		-		500		3,239		46,716		50,455
Residential Construction		-		-		-		-		9,700		9,700
Commercial		3,230		-		3,230		3,473		320,795		327,498
Residential		7,585		-		7,585		4,563		192,165		204,313
Farmland		292		-		292		984		49,125		50,401

Consumer and Other
Consumer		476		7		483		173		22,792		23,448
Other		-		-		-		202		7,766		7,968

Total Loans	$	12,559	$	7	$	12,566	$	13,171	$	717,544	$	743,281

December 31, 2013
	Accruing Loans
			90 Days
	30-89 Days		or More		Total Accruing		Nonaccrual
	Past Due		Past Due		Loans Past Due		Loans		Current Loans		Total Loans
Commercial and Agricultural
Commercial	$	581	$	-	$	581	$	1,646	$	45,880	$	48,107
Agricultural		81		-		81		-		10,585		10,666

Real Estate
Commercial Construction		140		-		140		8,222		44,377		52,739
Residential Construction		-		-		-		-		6,549		6,549
Commercial		2,287		-		2,287		7,367		332,129		341,783
Residential		5,274		-		5,274		4,933		196,051		206,258
Farmland		351		-		351		1,630		45,054		47,035

Consumer and Other
Consumer		454		4		458		307		24,911		25,676
Other		198		-		198		9		12,198		12,405

Total Loans	$	9,366	$	4	$	9,370	$	24,114	$	717,734	$	751,218

The following table details impaired loan data as of September 30, 2014:

September 30, 2014
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected

With No Related Allowance Recorded
Commercial	$	394	$	394	$	-	$	803	$	6		$	14
Agricultural		50		45		-		53		(4	)		6
Commercial Construction		9,210		3,101		-		3,347		2			2
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		17,346		16,656		-		19,058		427			445
Residential Real Estate		4,729		3,953		-		5,054		150			142
Farmland		1,330		984		-		782		(19	)		11
Consumer		181		173		-		215		7			10
Other		212		201		-		198		3			8

		33,452		25,507		-		29,510		572			638

With An Allowance Recorded
Commercial		99		99		99		527		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		210		139		59		1,993		-			-
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		5,931		5,931		283		6,508		142			143
Residential Real Estate		4,106		3,349		605		1,751		66			70
Farmland		398		398		31		574		8			7
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		10,744		9,916		1,077		11,353		216			220

Total
Commercial		493		493		99		1,330		6			14
Agricultural		50		45		-		53		(4	)		6
Commercial Construction		9,420		3,240		59		5,340		2			2
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		23,277		22,587		283		25,566		569			588
Residential Real Estate		8,835		7,302		605		6,805		216			212
Farmland		1,728		1,382		31		1,356		(11	)		18
Consumer		181		173		-		215		7			10
Other		212		201		-		198		3			8

	$	44,196	$	35,423	$	1,077	$	40,863	$	788		$	858

The following table details impaired loan data as of December 31, 2013:

December 31, 2013
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	305	$	305	$	-	$	216	$	24	$	25
Agricultural		-		-		-		10		-		-
Commercial Construction		7,856		4,750		-		4,106		35		41
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		20,121		19,253		-		13,199		494		504
Residential Real Estate		7,837		6,362		-		4,564		224		209
Farmland		303		303		-		1,859		1		1
Consumer		313		307		-		253		18		21
Other		9		9		-		2		1		1

		36,744		31,289		-		24,209		797		802

With An Allowance Recorded
Commercial		1,453		1,453		434		1,689		15		21
Agricultural		-		-		-		-		-		-
Commercial Construction		5,923		3,472		830		5,025		-		-
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		5,874		5,874		424		11,072		157		148
Residential Real Estate		1,949		1,849		526		3,662		26		24
Farmland		1,327		1,327		85		664		45		47
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-

		16,526		13,975		2,299		22,112		243		240

Total
Commercial		1,758		1,758		434		1,905		39		46
Agricultural		-		-		-		10		-		-
Commercial Construction		13,779		8,222		830		9,131		35		41
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		25,995		25,127		424		24,271		651		652
Residential Real Estate		9,786		8,211		526		8,226		250		233
Farmland		1,630		1,630		85		2,523		46		48
Consumer		313		307		-		253		18		21
Other		9		9		-		2		1		1

	$	53,270	$	45,264	$	2,299	$	46,321	$	1,040	$	1,042

The following table details impaired loan data as of September 30, 2013:

September 30, 2013
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	266	$	265	$	-	$	98	$	11	$	14
Agricultural		-		-		-		13		-		-
Commercial Construction		8,335		5,010		-		2,220		17		23
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		8,559		8,064		-		8,493		95		113
Residential Real Estate		7,378		5,830		-		2,022		157		152
Farmland		2,277		2,277		-		1,618		-		-
Consumer		295		281		-		141		12		14
Other		-		-		-		-		-		-

		27,110		21,727		-		14,605		292		316

With An Allowance Recorded
Commercial		1,465		1,465		108		1,280		14		19
Agricultural		-		-		-		-		-		-
Commercial Construction		5,924		3,473		573		4,386		-		-
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		15,061		15,061		1,559		7,785		287		285
Residential Real Estate		2,804		2,804		774		3,331		65		64
Farmland		1,329		1,329		202		-		44		47
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-

		26,583		24,132		3,216		16,782		410		415

Total
Commercial		1,731		1,730		108		1,378		25		33
Agricultural		-		-		-		13		-		-
Commercial Construction		14,259		8,483		573		6,606		17		23
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		23,620		23,125		1,559		16,278		382		398
Residential Real Estate		10,182		8,634		774		5,353		222		216
Farmland		3,606		3,606		202		1,618		44		47
Consumer		295		281		-		141		12		14
Other		-		-		-		-		-		-

	$	53,693	$	45,859	$	3,216	$	31,387	$	702	$	731

Troubled Debt Restructurings (TDRs) are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower’s financial condition. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time. Not all loan modifications are TDRs. Loan modifications are reviewed and approved by the Company’s senior lending staff, who then determine whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:

●

Interest rate reductions – Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

●

Amortization or maturity date changes – Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

●

Principal reductions – These are often the result of commercial real estate loan workouts where two new notes are created. The primary note is underwritten based upon our normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note. The terms of the secondary note vary by situation and often involve that note being charged-off, or the principal and interest payments being deferred until after the primary note has been repaid. In situations where a portion of the note is charged-off during modification there is often no specific reserve allocated to those loans. This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is no additional exposure on those loans.

As discussed in Note 1, Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of September 30, 2014. The following tables present the number of loan contracts restructured during the three month and nine month period ended September 30, 2014 and 2013. It shows the pre- and post-modification recorded investment as well as the number of contracts and the recorded investment for those TDRs modified during the previous twelve months which subsequently defaulted during the period. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due.

	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification		# of Contracts		Pre-Modification		Post-Modification

Commercial Real Estate		-	$	-	$	-		2	$	1,771	$	1,775
Residential Real Estate		-		-		-		1		49		49
Farmland		-		-		-		1		401		401

Total Loans		-	$	-	$	-		4	$	2,221	$	2,225

	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification		# of Contracts		Pre-Modification		Post-Modification
Commercial Construction		-	$	-	$	-		2		229		226
Commercial Real Estate		-		-		-		1		226		226
Residential Real Estate		-		-		-		2		1,025		1,001

Total Loans		-	$	-	$	-		5	$	1,480	$	1,453

The company did not have any TDRs that subsequently defaulted for the three months and the nine months ended September 30, 2014.