(

) Loans

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

September 30, 2018

and

December 31, 2017.

	September 30, 2018		December 31, 2017
Commercial and Agricultural
Commercial	$	47,292	$	48,122
Agricultural		21,415		16,443

Real Estate
Commercial Construction		53,570		45,214
Residential Construction		12,897		8,583
Commercial		349,408		351,172
Residential		189,153		194,049
Farmland		70,069		67,768

Consumer and Other
Consumer		18,623		18,956
Other		17,016		14,977

Total Loans	$	779,443	$	765,284

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, 2018

and

December 31, 2017.

Those loans with a risk grade of

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

September 30, 2018,

the Company did

not

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

September 30, 2018
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	45,612	$	847	$	833	$	47,292
Agricultural		20,026		919		470		21,415

Real Estate
Commercial Construction		52,181		631		758		53,570
Residential Construction		12,897		-		-		12,897
Commercial		335,844		7,000		6,564		349,408
Residential		173,987		4,543		10,623		189,153
Farmland		66,002		2,002		2,065		70,069

Consumer and Other
Consumer		18,239		38		346		18,623
Other		17,010		6		-		17,016

Total Loans	$	741,798	$	15,986	$	21,659	$	779,443

December 31, 2017
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	46,469	$	825	$	828	$	48,122
Agricultural		15,868		175		400		16,443

Real Estate
Commercial Construction		41,282		578		3,354		45,214
Residential Construction		8,583		-		-		8,583
Commercial		338,776		7,663		4,733		351,172
Residential		177,963		4,865		11,221		194,049
Farmland		66,335		444		989		67,768

Consumer and Other
Consumer		18,496		53		407		18,956
Other		14,969		8		-		14,977

Total Loans	$	728,741	$	14,611	$	21,932	$	765,284

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, 2018

and

December 31, 2017:

September 30, 2018
	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	$	376	$	-	$	376	$	471	$	46,445	$	47,292
Agricultural		65		-		65		423		20,927		21,415

Real Estate
Commercial Construction		141		-		141		505		52,924		53,570
Residential Construction		-		-		-		-		12,897		12,897
Commercial		895		-		895		2,277		346,236		349,408
Residential		2,485		-		2,485		2,219		184,449		189,153
Farmland		58		-		58		2,066		67,945		70,069

Consumer and Other
Consumer		141		1		142		175		18,306		18,623
Other		9		-		9		-		17,007		17,016

Total Loans	$	4,170	$	1	$	4,171	$	8,136	$	767,136	$	779,443

December 31, 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	$	329	$	-	$	329	$	598	$	47,195	$	48,122
Agricultural		111		-		111		399		15,933		16,443

Real Estate
Commercial Construction		27		-		27		477		44,710		45,214
Residential Construction		119		-		119		-		8,464		8,583
Commercial		919		-		919		2,172		348,081		351,172
Residential		2,482		-		2,482		2,830		188,737		194,049
Farmland		318		-		318		839		66,611		67,768

Consumer and Other
Consumer		246		-		246		188		18,522		18,956
Other		7		-		7		-		14,970		14,977

Total Loans	$	4,558	$	-	$	4,558	$	7,503	$	753,223	$	765,284

The following table details impaired loan data as of

September 30, 2018:

September 30, 2018
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	472	$	472	$	-	$	508	$	13	$	15
Agricultural		444		423		-		375		14		21
Commercial Construction		102		102		-		54		3		3
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		9,758		9,758		-		10,759		345		352
Residential Real Estate		3,954		3,868		-		4,052		141		145
Farmland		2,067		2,065		-		1,189		46		75
Consumer		175		175		-		193		9		10
Other		-		-		-		-		-		-

		16,972		16,863		-		17,130		571		621

With An Allowance Recorded
Commercial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial Construction		471		471		44		483		3		3
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		5,800		5,800		1,394		5,478		185		187
Residential Real Estate		35		35		20		54		2		2
Farmland		366		366		29		368		18		18
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-

		6,672		6,672		1,487		6,383		208		210

Total
Commercial		472		472		-		508		13		15
Agricultural		444		423		-		375		14		21
Commercial Construction		573		573		44		537		6		6
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		15,558		15,558		1,394		16,237		530		539
Residential Real Estate		3,989		3,903		20		4,106		143		147
Farmland		2,433		2,431		29		1,557		64		93
Consumer		175		175		-		193		9		10
Other		-		-		-		-		-		-

	$	23,644	$	23,535	$	1,487	$	23,513	$	779	$	831

The following table details impaired loan data as of

December 31, 2017:

December 31, 2017
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	599	$	599	$	-	$	634	$	33	$	34
Agricultural		485		398		-		297		11		19
Commercial Construction		54		54		-		141		3		4
Residential Contruction		-		-				79		-		-
Commercial Real Estate		12,637		12,637		-		12,808		560		550
Residential Real Estate		4,978		4,580		-		4,566		212		227
Farmland		840		839		-		791		54		58
Consumer		188		188		-		186		9		9

		19,781		19,295		-		19,502		882		901

With An Allowance Recorded
Commercial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial Construction		493		493		66		241		23		33
Residential Contruction		-		-		-		-		-		-
Commercial Real Estate		5,729		5,729		1,713		6,599		229		237
Residential Real Estate		109		109		27		482		4		7
Farmland		371		371		21		376		22		22
Consumer		-		-		-		-		-		-

		6,702		6,702		1,827		7,698		278		299

Total
Commercial		599		599		-		634		33		34
Agricultural		485		398		-		297		11		19
Commercial Construction		547		547		66		382		26		37
Residential Contruction		-		-		-		79		-		-
Commercial Real Estate		18,366		18,366		1,713		19,407		789		787
Residential Real Estate		5,087		4,689		27		5,048		216		234
Farmland		1,211		1,210		21		1,167		76		80
Consumer		188		188		-		186		9		9

	$	26,483	$	25,997	$	1,827	$	27,200	$	1,160	$	1,200

The following 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

		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		-		-		-		-		-			-

		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

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

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, 2018.

The Company had

one

commercial construction real estate loan totaling

$402

thousand that was restructured during the

three

month period ended

September 30, 2018

and for the

nine

month period ended

September 30, 2018.

There were

loan contracts restructured during the

three

month period ended and the

nine

month period ended

September 30, 2017.

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.

The Company did

not

have any TDRs that subsequently defaulted for the

three

months ended

September 30, 2018

and had

one

loan that subsequently defaulted during the

nine

months ended

September 30, 2018.

The loan totaling

$131

thousand failed to continue to perform as agreed and was moved to non-accrual status.