(3) Loans

The following table presents the composition of loans segregated by class of loans, as of March 31, 2015 and December 31, 2014.

	March 31, 2015		December 31, 2014
Commercial and Agricultural
Commercial	$	51,774	$	50,960
Agricultural		19,188		16,689

Real Estate
Commercial Constuction		48,611		51,259
Residential Construction		10,030		11,221
Commercial		341,845		332,231
Residential		202,878		203,753
Farmland		51,572		49,951

Consumer and Other
Consumer		21,705		22,820
Other		6,031		7,210

Total Loans	$	753,634	$	746,094

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 March 31, 2015 and December 31, 2014. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

March 31, 2015
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	47,730	$	2,329	$	1,715	$	51,774
Agricultural		19,005		27		156		19,188

Real Estate
Commercial Construction		42,481		1,665		4,465		48,611
Residential Construction		10,030		-		-		10,030
Commercial		322,579		9,198		10,068		341,845
Residential		182,105		10,838		9,935		202,878
Farmland		49,247		767		1,558		51,572

Consumer and Other
Consumer		21,049		203		453		21,705
Other		5,835		2		194		6,031

Total Loans	$	700,061	$	25,029	$	28,544	$	753,634

December 31, 2014
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	46,230	$	2,905	$	1,825	$	50,960
Agricultural		16,504		27		158		16,689

Real Estate
Commercial Construction		45,063		1,741		4,455		51,259
Residential Construction		11,221		-		-		11,221
Commercial		309,828		11,220		11,183		332,231
Residential		180,550		10,582		12,621		203,753
Farmland		47,548		415		1,988		49,951

Consumer and Other
Consumer		22,115		249		456		22,820
Other		7,013		-		197		7,210

Total Loans	$	686,072	$	27,139	$	32,883	$	746,094

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 March 31, 2015 and December 31, 2014:

March 31, 2015
	Accruing Loans
	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans
Commercial and Agricultural
Commercial	$	484	$	-	$	484	$	558	$	50,732	$	51,774
Agricultural		77		-		77		156		18,955		19,188

Real Estate
Commercial Construction		383		-		383		3,223		45,005		48,611
Residential Construction		105		-		105		-		9,925		10,030
Commercial		1,754		-		1,754		5,018		335,073		341,845
Residential		4,025		-		4,025		4,021		194,832		202,878
Farmland		446		-		446		1,417		49,709		51,572

Consumer and Other
Consumer		343		8		351		192		21,162		21,705
Other		35		-		35		194		5,802		6,031

Total Loans	$	7,652	$	8	$	7,660	$	14,779	$	731,195	$	753,634

December 31, 2014
	Accruing Loans
	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans
Commercial and Agricultural
Commercial	$	872	$	-	$	872	$	405	$	49,683	$	50,960
Agricultural		-		-		-		45		16,644		16,689

Real Estate
Commercial Construction		142		-		142		3,251		47,866		51,259
Residential Construction		-		-		-		-		11,221		11,221
Commercial		2,309		-		2,309		5,325		324,597		332,231
Residential		5,783		-		5,783		7,462		190,508		203,753
Farmland		282		-		282		1,449		48,220		49,951

Consumer and Other
Consumer		313		7		320		202		22,298		22,820
Other		-		-		-		195		7,015		7,210

Total Loans	$	9,701	$	7	$	9,708	$	18,334	$	718,052	$	746,094

The following table details impaired loan data as of March 31, 2015:

March 31, 2015	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected

With No Related Allowance Recorded
Commercial	$	492	$	464	$	-	$	464	$	(7	)	$	5
Agricultural		174		156		-		156		(10	)		10
Commercial Construction		9,537		3,428		-		3,428		6			7
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		17,531		17,037		-		17,037		157			163
Residential Real Estate		6,141		5,195		-		5,195		42			47
Farmland		1,419		1,417		-		1,417		3			3
Consumer		200		192		-		192		1			4
Other		205		194		-		194		2			2

		35,699		28,083		-		28,083		194			241

With An Allowance Recorded
Commercial		94		94		94		94		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		206		134		49		134		-			-
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		5,463		5,463		209		5,463		45			45
Residential Real Estate		1,209		1,103		330		1,103		13			6
Farmland		394		394		53		394		5			5
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		7,366		7,188		735		7,188		63			56

Total
Commercial		586		558		94		558		(7	)		5
Agricultural		174		156		-		156		(10	)		10
Commercial Construction		9,743		3,562		49		3,562		6			7
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		22,994		22,500		209		22,500		202			208
Residential Real Estate		7,350		6,298		330		6,298		55			53
Farmland		1,813		1,811		53		1,811		8			8
Consumer		200		192		-		192		1			4
Other		205		194		-		194		2			2

	$	43,065	$	35,271	$	735	$	35,271	$	257		$	297

The following table details impaired loan data as of December 31, 2014:


December 31, 2014	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected

With No Related Allowance Recorded
Commercial	$	310	$	308	$	-	$	679	$	9		$	18
Agricultural		50		45		-		51		(6	)		3
Commercial Construction		9,573		3,464		-		3,376		13			13
Commercial Real Estate		17,130		16,228		-		18,350		462			474
Residential Real Estate		9,137		7,600		-		5,691		312			306
Farmland		1,451		1,449		-		949		(8	)		18
Consumer		202		202		-		212		14			16
Other		207		195		-		197		6			11

		38,060		29,491		-		29,505		802			859

With An Allowance Recorded
Commercial		97		97		97		420		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		207		136		54		1,529		-			-
Commercial Real Estate		6,135		6,135		457		6,415		61			51
Residential Real Estate		2,073		2,065		414		1,829		84			87
Farmland		396		396		29		529		13			12
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		8,908		8,829		1,051		10,722		158			150

Total
Commercial		407		405		97		1,099		9			18
Agricultural		50		45		-		51		(6	)		3
Commercial Construction		9,780		3,600		54		4,905		13			13
Commercial Real Estate		23,265		22,363		457		24,765		523			525
Residential Real Estate		11,210		9,665		414		7,520		396			393
Farmland		1,847		1,845		29		1,478		5			30
Consumer		202		202		-		212		14			16
Other		207		195		-		197		6			11

	$	46,968	$	38,320	$	1,051	$	40,227	$	960		$	1,009

The following table details impaired loan data as of March 31, 2014:

March 31, 2014	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected

With No Related Allowance Recorded
Commercial	$	599	$	599	$	-	$	599	$	5		$	13
Agricultural		56		51		-		51		(9	)		-
Commercial Construction		7,460		4,354		-		4,354		8			8
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		21,196		20,686		-		20,686		130			132
Residential Real Estate		7,113		5,642		-		5,642		46			46
Farmland		349		348		-		348		(2	)		1
Consumer		256		251		-		251		4			5
Other		203		203		-		203		2			2

		37,232		32,134		-		32,134		184			207

With An Allowance Recorded
Commercial		1,380		1,380		423		1,380		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		5,922		3,470		1,548		3,470		-			-
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		6,466		6,109		407		6,109		46			46
Residential Real Estate		962		954		289		954		11			15
Farmland		1,324		1,324		233		1,324		-			-
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		16,054		13,237		2,900		13,237		57			61

Total
Commercial		1,979		1,979		423		1,979		5			13
Agricultural		56		51		-		51		(9	)		-
Commercial Construction		13,382		7,824		1,548		7,824		8			8
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		27,662		26,795		407		26,795		176			178
Residential Real Estate		8,075		6,596		289		6,596		57			61
Farmland		1,673		1,672		233		1,672		(2	)		1
Consumer		256		251		-		251		4			5
Other		203		203		-		203		2			2

	$	53,286	$	45,371	$	2,900	$	45,371	$	241		$	268

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 March 31, 2015. The following tables present the number of loan contracts restructured during the three month period ended March 31, 2015 and 2014. 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 March 31, 2015
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification

Residential Real Estate		1	$	881	$	897

Total Loans		1	$	881	$	897


	Three Months Ended March 31, 2014
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification

Commercial Real Estate		2	$	1,771	$	1,775

Total Loans		2	$	1,771	$	1,775

The company did not have any TDRs that subsequently defaulted for the three months ended March 31, 2015.