(

)

Loans

The following table presents the composition of loans segregated by class of loans, as of

June 30, 2017

and

December 31, 2016.

	June 30, 2017		December 31, 2016
Commercial and Agricultural
Commercial	$	44,883	$	47,025
Agricultural		21,810		17,080

Real Estate
Commercial Construction		35,151		30,358
Residential Construction		9,230		11,830
Commercial		355,801		349,090
Residential		200,572		195,580
Farmland		70,194		66,877

Consumer and Other
Consumer		19,134		19,695
Other		18,791		16,748

Total Loans	$	775,566	$	754,283

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

A description of the general characteristics of the grades is as follows:

●

Grades

and

– 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

and

– Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with

significant weaknesses in repayment capacity and collateral protection to acceptable loans with

one

or more risk factors considered to be more than average.

●

Grade

– 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

– 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

and

– 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

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

The following table presents the loan portfolio by credit quality indicator (risk grade) as of

June 30, 2017

and

December 31, 2016.

Those loans with a risk grade of

have been combined in the pass column for presentation purposes. For the period ending

June 30, 2017,

the Company did

not

have any loans classified as “doubtful” or a “loss”.

June 30, 2017
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	42,156	$	1,864	$	863	$	44,883
Agricultural		21,110		163		537		21,810

Real Estate
Commercial Construction		31,324		1,211		2,616		35,151
Residential Construction		9,031		-		199		9,230
Commercial		341,986		4,158		9,657		355,801
Residential		185,981		3,636		10,955		200,572
Farmland		68,144		1,102		948		70,194

Consumer and Other
Consumer		18,649		114		371		19,134
Other		18,791		-		-		18,791

Total Loans	$	737,172	$	12,248	$	26,146	$	775,566

December 31, 2016
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	44,250	$	1,862	$	913	$	47,025
Agricultural		16,586		192		302		17,080

Real Estate
Commercial Construction		28,425		1,349		584		30,358
Residential Construction		11,630		-		200		11,830
Commercial		327,561		9,403		12,126		349,090
Residential		178,618		5,659		11,303		195,580
Farmland		65,075		839		963		66,877

Consumer and Other
Consumer		19,072		226		397		19,695
Other		16,748		-		-		16,748

Total Loans	$	707,965	$	19,530	$	26,788	$	754,283

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

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

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

June 30, 2017

and

December 31, 2016:

June 30, 2017
	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	$	615	$	-	$	615	$	608	$	43,660	$	44,883
Agricultural		202		-		202		348		21,260		21,810

Real Estate
Commercial Construction		792		-		792		102		34,257		35,151
Residential Construction		-		-		-		199		9,031		9,230
Commercial		1,233		-		1,233		3,079		351,489		355,801
Residential		2,984		-		2,984		3,013		194,575		200,572
Farmland		187		-		187		678		69,329		70,194

Consumer and Other
Consumer		205		-		205		149		18,780		19,134
Other		-		-		-		-		18,791		18,791

Total Loans	$	6,218	$	-	$	6,218	$	8,176	$	761,172	$	775,566

December 31, 2016
	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	$	420	$	-	$	420	$	635	$	45,970	$	47,025
Agricultural		33		-		33		209		16,838		17,080

Real Estate
Commercial Construction		54		-		54		190		30,114		30,358
Residential Construction		-		-		-		-		11,830		11,830
Commercial		492		-		492		6,360		342,238		349,090
Residential		3,179		-		3,179		3,944		188,457		195,580
Farmland		95		-		95		800		65,982		66,877

Consumer and Other
Consumer		196		-		196		212		19,287		19,695
Other		-		-		-		-		16,748		16,748

Total Loans	$	4,469	$	-	$	4,469	$	12,350	$	737,464	$	754,283

The following table details impaired loan data as of

June 30, 2017:

June 30, 2017
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected

With No Related Allowance Recorded
Commercial	$	608	$	608	$	-	$	639	$	11		$	15
Agricultural		370		349		-		254		11			13
Commercial Construction		102		102		-		159		1			1
Residential Construction		199		199				66		5			5
Commercial Real Estate		10,454		10,454		-		13,543		226			222
Residential Real Estate		5,667		4,871		-		4,511		98			115
Farmland		679		678		-		759		56			56
Consumer		149		149		-		188		3			3
Other		-		-		-		-		-			-

		18,228		17,410		-		20,119		411			430

With An Allowance Recorded
Commercial		-		-		-		-		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		71		71		4		72		2			2
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		7,169		7,169		1,517		6,714		135			134
Residential Real Estate		49		41		20		755		(2	)		2
Farmland		376		376		26		378		11			11
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		7,665		7,657		1,567		7,919		146			149

Total
Commercial		608		608		-		639		11			15
Agricultural		370		349		-		254		11			13
Commercial Construction		173		173		4		231		3			3
Residential Construction		199		199		-		66		5			5
Commercial Real Estate		17,623		17,623		1,517		20,257		361			356
Residential Real Estate		5,716		4,912		20		5,266		96			117
Farmland		1,055		1,054		26		1,137		67			67
Consumer		149		149		-		188		3			3
Other		-		-		-		-		-			-

	$	25,893	$	25,067	$	1,567	$	28,038	$	557		$	579

The following table details impaired loan data as of

December 31, 2016:

December 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	$	635	$	635	$	-	$	539	$	24	$	27
Agricultural		229		209		-		210		9		12
Commercial Construction		191		191		-		698		7		7
Commercial Real Estate		14,358		14,276		-		14,275		567		560
Residential Real Estate		4,261		3,952		-		4,553		73		191
Farmland		921		799		-		1,016		22		26
Consumer		212		212		-		213		10		12

		20,807		20,274		-		21,504		712		835

With An Allowance Recorded
Commercial		-		-		-		30		-		-
Agricultural		-		-		-		-		-		-
Commercial Construction		72		72		21		74		1		2
Commercial Real Estate		8,557		8,467		3,022		8,340		239		236
Residential Real Estate		1,476		1,468		363		1,043		28		32
Farmland		380		380		29		384		21		21
Consumer		-		-		-		-		-		-

		10,485		10,387		3,435		9,871		289		291

Total
Commercial		635		635		-		569		24		27
Agricultural		229		209		-		210		9		12
Commercial Construction		263		263		21		772		8		9
Commercial Real Estate		22,915		22,743		3,022		22,615		806		796
Residential Real Estate		5,737		5,420		363		5,596		101		223
Farmland		1,301		1,179		29		1,400		43		47
Consumer		212		212		-		213		10		12

	$	31,292	$	30,661	$	3,435	$	31,375	$	1,001	$	1,126

The following table details impaired loan data as of

June 30, 2016:

June 30, 2016
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected

With No Related Allowance Recorded
Commercial	$	460	$	460	$	-	$	472	$	4		$	5
Agricultural		213		192		-		188		9			13
Commercial Construction		453		428		-		930		8			7
Residential Construction		-		-				-		-			-
Commercial Real Estate		16,383		15,615		-		13,577		271			270
Residential Real Estate		5,227		4,956		-		4,606		(7	)		119
Farmland		935		933		-		1,121		(3	)		1
Consumer		248		240				205		4			6
Other		-		-		-		-		-			-

		23,919		22,824		-		21,099		286			421

With An Allowance Recorded
Commercial		-		-		-		50		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		74		74		22		75		-			-
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		8,709		8,695		2,886		8,305		127			124
Residential Real Estate		864		856		440		965		3			3
Farmland		384		384		33		386		10			11
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		10,031		10,009		3,381		9,781		140			138

Total
Commercial		460		460		-		522		4			5
Agricultural		213		192		-		188		9			13
Commercial Construction		527		502		22		1,005		8			7
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		25,092		24,310		2,886		21,882		398			394
Residential Real Estate		6,091		5,812		440		5,571		(4	)		122
Farmland		1,319		1,317		33		1,507		7			12
Consumer		248		240		-		205		4			6
Other		-		-		-		-		-			-

	$	33,950	$	32,833	$	3,381	$	30,880	$	426		$	559

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

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

additional exposure on those loans.

As discussed in Note

Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had

unfunded commitments to lend to a customer that has a troubled debt restructured loan as of

June 30, 2017.

The following tables present the number of loan contracts restructured during the

three

month and

six

month period ended

June 30, 2017

and

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

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 June 30, 2017

Six Months Ended June 30, 2017

Troubled Debt Restructurings

# of Contracts

Pre-Modification

Post-Modification

# of Contracts

Pre-Modification

Post-Modification

Residential Real Estate

Total Loans

	Three Months Ended June 30, 2016						Six Months Ended June 30, 2016
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification		# of Contracts		Pre-Modification		Post-Modification

Residential Real Estate		1	$	91	$	91		1	$	91	$	91

Total Loans		1	$	91	$	91		1	$	91	$	91

The company did

not

have any TDRs that subsequently defaulted for the

three

months and

six

months ended

June 30, 2017.