(

)

Loans

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

loans, as of

September 30, 2017

and

December 31, 2016.

	September 30, 2017		December 31, 2016
Commercial and Agricultural
Commercial	$	45,363	$	47,025
Agricultural		25,246		17,080

Real Estate
Commercial Construction		36,533		30,358
Residential Construction		8,905		11,830
Commercial		346,251		349,090
Residential		196,332		195,580
Farmland		71,903		66,877

Consumer and Other
Consumer		18,677		19,695
Other		20,836		16,748

Total Loans	$	770,046	$	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

September 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

September 30, 2017,

the Company did

not

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

September 30, 2017
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	43,641	$	838	$	884	$	45,363
Agricultural		24,759		164		323		25,246

Real Estate
Commercial Construction		32,100		1,206		3,227		36,533
Residential Construction		8,707		-		198		8,905
Commercial		332,075		4,744		9,432		346,251
Residential		180,695		4,921		10,716		196,332
Farmland		70,111		923		869		71,903

Consumer and Other
Consumer		18,206		102		369		18,677
Other		20,827		9		-		20,836

Total Loans	$	731,121	$	12,907	$	26,018	$	770,046

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

September 30, 2017

and

December 31, 2016:

September 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	$	301	$	-	$	301	$	653	$	44,409	$	45,363
Agricultural		75		-		75		321		24,850		25,246

Real Estate
Commercial Construction		56		-		56		602		35,875		36,533
Residential Construction		-		-		-		198		8,707		8,905
Commercial		1,501		-		1,501		3,146		341,604		346,251
Residential		2,917		-		2,917		2,868		190,547		196,332
Farmland		158		-		158		839		70,906		71,903

Consumer and Other
Consumer		242		-		242		180		18,255		18,677
Other		-		-		-		-		20,836		20,836

Total Loans	$	5,250	$	-	$	5,250	$	8,807	$	755,989	$	770,046

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 follo

wing table details impaired loan data as of

September 30, 2017:

September 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	$	653	$	653	$	-	$	642	$	28		$	28
Agricultural		342		322		-		271		5			12
Commercial Construction		176		176		-		163		4			5
Residential Construction		198		198				99		5			5
Commercial Real Estate		10,775		10,775		-		12,851		368			356
Residential Real Estate		5,506		4,718		-		4,563		156			176
Farmland		841		839		-		779		54			58
Consumer		180		179		-		186		5			5
Other		-		-		-		-		-			-

		18,671		17,860		-		19,554		625			645

With An Allowance Recorded
Commercial		-		-		-		-		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		497		497		69		178		22			32
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		7,124		7,124		1,471		6,817		201			202
Residential Real Estate		37		37		21		575		(1	)		2
Farmland		373		373		24		377		17			16
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		8,031		8,031		1,585		7,947		239			252

Total
Commercial		653		653		-		642		28			28
Agricultural		342		322		-		271		5			12
Commercial Construction		673		673		69		341		26			37
Residential Construction		198		198		-		99		5			5
Commercial Real Estate		17,899		17,899		1,471		19,668		569			558
Residential Real Estate		5,543		4,755		21		5,138		155			178
Farmland		1,214		1,212		24		1,156		71			74
Consumer		180		179		-		186		5			5
Other		-		-		-		-		-			-

	$	26,702	$	25,891	$	1,585	$	27,501	$	864		$	897

The following table details impaired loan data as o

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
Residential Construction		-		-		-		-		-		-
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
Residential Construction		-		-		-		-		-		-
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
Residential Construction		-		-		-		-		-		-
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

September 30, 2016:

September 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	$	646	$	646	$	-	$	515	$	15		$	18
Agricultural		301		280		-		211		5			13
Commercial Construction		508		508		-		825		16			15
Residential Construction		-		-				-		-			-
Commercial Real Estate		16,457		16,367		-		14,274		490			480
Residential Real Estate		5,321		4,995		-		4,704		56			178
Farmland		921		919		-		1,071		(4	)		1
Consumer		241		241				214		7			9
Other		-		-		-		-		-			-

		24,395		23,956		-		21,814		585			714

With An Allowance Recorded
Commercial		-		-		-		38		-			-
Agricultural		-		-		-		-		-			-
Commercial Construction		73		73		22		74		-			-
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		8,316		8,316		2,470		8,308		177			173
Residential Real Estate		858		851		435		936		4			6
Farmland		382		382		33		385		16			14
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		9,629		9,622		2,960		9,741		197			193

Total
Commercial		646		646		-		553		15			18
Agricultural		301		280		-		211		5			13
Commercial Construction		581		581		22		899		16			15
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		24,773		24,683		2,470		22,582		667			653
Residential Real Estate		6,179		5,846		435		5,640		60			184
Farmland		1,303		1,301		33		1,456		12			15
Consumer		241		241		-		214		7			9
Other		-		-		-		-		-			-

	$	34,024	$	33,578	$	2,960	$	31,555	$	782		$	907

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

September 30, 2017.

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

three

month and

nine

month period ended

September 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 September 30, 2017

Nine Months Ended September 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 September 30, 2016						Nine Months Ended September 30, 2016
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification		# of Contracts		Pre-Modification		Post-Modification

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

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

The company did

not

have any TDRs

that subsequently defaulted for the

three

months and

nine

months ended

September 30, 2017.