Note 3 - Loans

3 Months Ended

Mar. 31, 2016

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

(3)

Loans

The following table presents the composition of loans segregated by class of loans, as of March 31, 2016 and December 31, 2015.

	March 31, 2016		December 31, 2015
Commercial and Agricultural
Commercial	$	45,115	$	47,782
Agricultural		18,562		19,193
Real Estate
Commercial Constuction		35,970		40,107
Residential Construction		9,849		9,413
Commercial		347,372		346,262
Residential		195,679		197,002
Farmland		66,285		61,780
Consumer and Other
Consumer		19,661		20,605
Other		15,768		16,492
Total Loans	$	754,261	$	758,636

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, 2016 and December 31, 2015. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes. For the period ending March 31, 2016, the Company did not have any loans classified as “doubtful” or a “loss”.

March 31, 2016
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	41,878	$	1,749	$	1,488	$	45,115
Agricultural		18,240		75		247		18,562
Real Estate
Commercial Construction		33,618		1,001		1,351		35,970
Residential Construction		9,849		-		-		9,849
Commercial		322,522		6,565		18,285		347,372
Residential		176,393		8,418		10,868		195,679
Farmland		61,104		1,029		4,152		66,285
Consumer and Other
Consumer		19,129		119		413		19,661
Other		15,746		-		22		15,768
Total Loans	$	698,479	$	18,956	$	36,826	$	754,261

December 31, 2015
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	44,274	$	1,927	$	1,581	$	47,782
Agricultural		18,970		18		205		19,193
Real Estate
Commercial Construction		36,516		913		2,678		40,107
Residential Construction		9,413		-		-		9,413
Commercial		320,566		13,653		12,043		346,262
Residential		177,054		8,546		11,402		197,002
Farmland		56,798		930		4,052		61,780
Consumer and Other
Consumer		20,038		156		411		20,605
Other		16,467		-		25		16,492
Total Loans	$	700,096	$	26,143	$	32,397	$	758,636

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, 2016 and December 31, 2015:

March 31, 2016
	Accruing Loans
					Total
			90 Days		Accruing
	30-89 Days		or More		Loans Past		Nonaccrual		Current
	Past Due		Past Due		Due		Loans		Loans		Total Loans
Commercial and Agricultural
Commercial	$	286	$	-	$	286	$	529	$	44,300	$	45,115
Agricultural		777		-		777		193		17,592		18,562
Real Estate
Commercial Construction		177		-		177		228		35,565		35,970
Residential Construction		-		-		-		-		9,849		9,849
Commercial		5,385		-		5,385		6,755		335,232		347,372
Residential		2,199		-		2,199		2,874		190,606		195,679
Farmland		191		-		191		1,327		64,767		66,285
Consumer and Other
Consumer		223		8		231		195		19,235		19,661
Other		-		-		-		-		15,768		15,768
Total Loans	$	9,238	$	8	$	9,246	$	12,101	$	732,914	$	754,261

December 31, 2015
	Accruing Loans
					Total
			90 Days		Accruing
	30-89 Days		or More		Loans Past		Nonaccrual		Current
	Past Due		Past Due		Due		Loans		Loans		Total Loans
Commercial and Agricultural
Commercial	$	491	$	-	$	491	$	577	$	46,714	$	47,782
Agricultural		71		-		71		178		18,944		19,193
Real Estate
Commercial Construction		90		-		90		1,643		38,374		40,107
Residential Construction		-		-		-		-		9,413		9,413
Commercial		6,031		-		6,031		7,565		332,666		346,262
Residential		3,683		-		3,683		3,164		190,155		197,002
Farmland		123		-		123		1,103		60,554		61,780
Consumer and Other
Consumer		470		8		478		178		19,949		20,605
Other		-		-		-		-		16,492		16,492
Total Loans	$	10,959	$	8	$	10,967	$	14,408	$	733,261	$	758,636

The following table details impaired loan data as of March 31, 2016:

March 31, 2016
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected
With No Related Allowance Recorded
Commercial	$	502	$	500	$	-	$	477	$	2		$	3
Agricultural		213		193		-		185		7			10
Commercial Construction		466		466		-		1,182		4			3
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		10,439		9,992		-		12,557		89			93
Residential Real Estate		5,209		4,288		-		4,432		52			48
Farmland		1,328		1,327		-		1,215		(4	)		-
Consumer		207		195		-		187		1			4
Other		-		-		-		-		-			-
		18,364		16,961		-		20,235		151			161
With An Allowance Recorded
Commercial		29		28		4		76		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		75		75		24		76		-			-
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		7,279		7,265		1,940		8,110		50			52
Residential Real Estate		971		964		528		1,019		1			1
Farmland		386		386		35		387		5			5
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-
		8,740		8,718		2,531		9,668		56			58
Total
Commercial		531		528		4		553		2			3
Agricultural		213		193		-		185		7			10
Commercial Construction		541		541		24		1,258		4			3
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		17,718		17,257		1,940		20,667		139			145
Residential Real Estate		6,180		5,252		528		5,451		53			49
Farmland		1,714		1,713		35		1,602		1			5
Consumer		207		195		-		187		1			4
Other		-		-		-		-		-			-
	$	27,104	$	25,679	$	2,531	$	29,903	$	207		$	219

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

December 31, 2015
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected
With No Related Allowance Recorded
Commercial	$	454	$	454	$	-	$	535	$	17		$	21
Agricultural		196		178		-		163		(10	)		10
Commercial Construction		6,888		1,897		-		2,867		26			27
Commercial Real Estate		15,569		15,122		-		15,430		529			531
Residential Real Estate		5,429		4,576		-		4,715		176			159
Farmland		1,105		1,103		-		1,340		1			2
Consumer		180		178		-		191		14			15
Other		-		-		-		48		-			-
		29,821		23,508		-		25,289		753			765
With An Allowance Recorded
Commercial		123		123		95		100		2			3
Agricultural		-		-		-		-		-			-
Commercial Construction		77		77		25		92		-			-
Commercial Real Estate		8,969		8,956		1,608		6,673		214			209
Residential Real Estate		1,083		1,075		308		1,089		16			16
Farmland		388		388		37		391		21			21
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-
		10,640		10,619		2,073		8,345		253			249
Total
Commercial		577		577		95		635		19			24
Agricultural		196		178		-		163		(10	)		10
Commercial Construction		6,965		1,974		25		2,959		26			27
Commercial Real Estate		24,538		24,078		1,608		22,103		743			740
Residential Real Estate		6,512		5,651		308		5,804		192			175
Farmland		1,493		1,491		37		1,731		22			23
Consumer		180		178		-		191		14			15
Other		-		-		-		48		-			-
	$	40,461	$	34,127	$	2,073	$	33,634	$	1,006		$	1,014

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

March 31, 2015
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected
With No Related Allowance Recorded
Commercial	$	492	$	464	$	-	$	386	$	(7	)	$	5
Agricultural		174		156		-		101		(10	)		10
Commercial Construction		9,537		3,428		-		3,446		6			7
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		17,531		17,037		-		16,632		157			163
Residential Real Estate		6,141		5,195		-		6,397		42			47
Farmland		1,419		1,417		-		1,433		3			3
Consumer		200		192		-		197		1			4
Other		205		194		-		195		2			2
		35,699		28,083		-		28,787		194			241
With An Allowance Recorded
Commercial		94		94		94		95		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		206		134		49		136		-			-
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		5,463		5,463		209		5,799		45			45
Residential Real Estate		1,209		1,103		330		1,584		13			6
Farmland		394		394		53		395		5			5
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-
		7,366		7,188		735		8,009		63			56
Total
Commercial		586		558		94		481		(7	)		5
Agricultural		174		156		-		101		(10	)		10
Commercial Construction		9,743		3,562		49		3,582		6			7
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		22,994		22,500		209		22,431		202			208
Residential Real Estate		7,350		6,298		330		7,981		55			53
Farmland		1,813		1,811		53		1,828		8			8
Consumer		200		192		-		197		1			4
Other		205		194		-		195		2			2
	$	43,065	$	35,271	$	735	$	36,796	$	257		$	297

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, 2016. The following tables present the number of loan contracts restructured during the three month period ended March 31, 2016. 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. A TDR may cease being classified as impaired if the loan is subsequently modified at market terms and, has performed according to the modified terms for at least six months, and there has not been any prior principal forgiveness on a cumulative basis.

	Three Months Ended March 31, 2016
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification
Residential Real Estate		1	$	91	$	91
Total Loans		1	$	91	$	91

	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

The company did not have any TDRs that subsequently defaulted for the three months ended March 31, 2016.