Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2018

Reclassification, Policy [Policy Text Block]

Certain reclassifications have been made to the condensed consolidated financial statements of prior periods to conform to the current period presentation. These reclassifications do

not

affect net income or total shareholders’ equity as previously reported.

Finance, Loans and Leases Receivable, Policy [Policy Text Block]

Loans and Interest Income

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their unpaid principal amount outstanding adjusted for any charge-offs, deferred fees or costs on originated loans, and unamortized premiums and discounts on purchased loans. Interest income on loans is recognized using the interest method based on loan principal amounts outstanding during the period. Interest income also includes amortization and accretion of any premiums or discounts over the expected life of acquired loans at the time of purchase or business acquisition. Loan origination fees, net of certain direct origination costs, are deferred and amortized as yield adjustments over the contractual term of the loans.

The Company disaggregates certain disclosure information related to loans, the related allowance for loan losses, and credit quality measures by either portfolio segment or by loan class. The Company segregates its loan portfolio segments based on similar risk characteristics as follows: real estate loans, commercial loans, and consumer loans. Portfolio segments are further disaggregated into classes for certain required disclosures as follows:

Portfolio Segment	Class

Real estate loans	Real estate mortgage – construction and land development Real estate mortgage – residential Real estate mortgage – farmland and other commercial enterprises
Commercial loans	Commercial and industrial Depository institutions Agriculture production and other loans to farmers States and political subdivisions Other
Consumer loans	Secured Unsecured

The Company has a loan policy in place that is amended and approved from time to time as needed to reflect current economic conditions and product offerings in its markets. The policy establishes written procedures concerning areas such as the lending authorities of loan officers, committee review and approval of certain credit requests, underwriting criteria, policy exceptions, appraisal requirements, and loan review. Credit is extended to borrowers based primarily on their ability to repay as demonstrated by income and cash flow analysis.

Loans secured by real estate make up the largest segment of the Company’s loan portfolio. If a borrower fails to repay a loan secured by real estate, the Company

may

liquidate the collateral in order to satisfy the amount owed. Determining the value of real estate is a key component to the lending process for real estate backed loans. If the fair value of real estate (less estimated cost to sell) securing a collateral dependent loan declines below the outstanding loan amount, the Company will write down the carrying value of the loan and thereby incur a loss. The Company uses independent

third

party state certified or licensed appraisers in accordance with its loan policy to mitigate risk when underwriting real estate loans. Cash flow analysis of the borrower, loan to value limits as adopted by loan policy, and other customary underwriting standards are also in place which are designed to maximize credit quality and mitigate risks associated with real estate lending.

Commercial loans are made to businesses and are secured mainly by assets such as inventory, accounts receivable, machinery, fixtures and equipment, or other business assets. Commercial lending involves significant risk, as loan repayments are more dependent on the successful operation or management of the business and its cash flows. Consumer lending includes loans to individuals mainly for personal autos, boats, or a variety of other personal uses and

may

be secured or unsecured. Loan repayment associated with consumer loans is highly dependent upon the borrower’s continuing financial stability, which is heavily influenced by local unemployment rates. The Company mitigates its risk exposure to each of its loan segments by analyzing the borrower’s repayment capacity, imposing restrictions on the amount it will loan compared to estimated collateral values, limiting the payback periods, and following other customary underwriting practices as adopted in its loan policy.

The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for

days or more, unless such loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan. Interest accrued but

not

received for a loan placed on nonaccrual status is reversed against interest income. Cash payments received on nonaccrual loans generally are applied to principal until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company’s policy for placing a loan on nonaccrual status or subsequently returning a loan to accrual status does

not

differ based on its portfolio class or segment.

Commercial and real estate loans delinquent in excess of

120

days and consumer loans delinquent in excess of

180

days are charged off, unless the collateral securing the debt is of such value that any loss appears to be unlikely. In all cases, loans are charged off at an earlier date if classified as loss under the Company’s loan grading process or as a result of regulatory examination. The Company’s charge-off policy for impaired loans does

not

differ from the charge-off policy for loans outside the definition of impaired.

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

Provision and Allowance for Loan Losses

The provision for loan losses represents charges or credits made to earnings to maintain an allowance for loan losses at a level considered adequate to provide for probable incurred credit losses at the balance sheet date. The allowance for loan losses is a valuation allowance increased by the provision for loan losses and decreased by net charge-offs. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company estimates the adequacy of the allowance using a risk-rated methodology which is based on the Company’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that

may

affect the borrower’s ability to repay, the estimated value of any underlying collateral securing loans, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires significant judgment and the use of estimates that

may

be susceptible to change.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current risk factors. Allocations of the allowance

may

be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Actual loan losses could differ significantly from the amounts estimated by management.

The general portion of the Company’s loan portfolio is segregated into portfolio segments having similar risk characteristics identified as follows: real estate loans, commercial loans, and consumer loans. Each of these portfolio segments is assigned a loss percentage based on their respective

twelve

quarter rolling historical loss rates, adjusted for the qualitative risk factors summarized below.

The qualitative risk factors used in the methodology are consistent with the guidance in the most recent Interagency Policy Statement on the Allowance for Loan Losses issued. Each factor is supported by a detailed analysis and is both measurable and supportable. Some factors include a minimum allocation in instances where loss levels are extremely low and it is determined to be prudent from a safety and soundness perspective. Qualitative risk factors that are used in the methodology include the following for each loan portfolio segment:

●

Delinquency trends

●

Trends in net charge-offs

●

Trends in loan volume

●

Lending philosophy risk

●

Management experience risk

●

Concentration of credit risk

●

Economic conditions risk

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are

not

classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company accounts for impaired loans in accordance with Accounting Standards Codification (“ASC”) Topic

310,

“Receivables

”

ASC Topic

310

requires that impaired loans be measured at the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impaired loans

may

also be classified as nonaccrual. In many circumstances, however, the Company continues to accrue interest on an impaired loan. Cash receipts on accruing impaired loans are applied to the recorded investment in the loan, including any accrued interest receivable. Cash payments received on nonaccrual impaired loans generally are applied to principal until qualifying for return to accrual status. Loans that are part of a large group of smaller-balance homogeneous loans, such as residential mortgage, consumer, and smaller-balance commercial loans, are collectively evaluated for impairment. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception, or at the fair value of collateral. The Company determines the amount of reserve for troubled debt restructurings that subsequently default in accordance with its accounting policy for the allowance for loan losses.

New Accounting Pronouncements, Policy [Policy Text Block]

Adoption of New

Accounting

Standards

May 2014,

the Financial Accounting Standards Board (“FASB”) issued ASU

No.

2014

09,

Revenue from Contracts with Customers (Topic

606

)

, and subsequently issued several amendments to the standard during

2015,

2016,

and

2017.

The primary principle of ASU

No.

2014

is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The majority of the Company’s revenues earned are excluded from the scope of the new standard. Revenue streams within the scope of this ASU include services charges and fees on deposits, allotment processing fees, trust income, and certain components of other service charges, commission, and fees. The Company has analyzed each revenue stream under Topic

606

and determined that there were

material changes to existing recognition practices. The Company adopted ASU

No.

2014

effective

January 1, 2018

using a modified retrospective approach and

cumulative-effect adjustment was recorded. Additional disclosures required by the new standard are included in Note

January 2016,

the FASB issued ASU

No.

2016

01,

Financial Instruments – Overall (Subtopic

825

): Recognition and Measurement of Financial Assets and Financial Liabilities

and, in

February 2018,

issued an amendment for technical corrections and improvements related to this ASU. The amendments in this ASU require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). In addition, this ASU eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. Public business entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public business entities, the amendments in this ASU are effective for fiscal years beginning after

December 15, 2017,

including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU

No.

2016

effective

January 1, 2018,

recorded a cumulative-effect adjustment of

$56

thousand, and began using the exit price notion rather than entrance price to determine the fair value for disclosure purposes. Additional information related to the cumulative-effect adjustment can be found in Note

and Note

Fair value disclosures can be found in Note

13.

March 2017,

the FASB issued ASU

No.

2017

07,

“

Compensation—Retirement Benefits (Topic

715

): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,

” which requires that employers offering benefit plans accounted for under Topic

715

report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. If a separate line item or items are

not

used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The Company retrospectively adopted ASU

2017

effective

January 1, 2018,

which did

not

have a material impact on its consolidated financial position, results of operations, or cash flows upon adoption. For prior periods, the interest cost, recognized actuarial loss, and recognized curtailment gain have been reclassified from salaries and employee benefits to other noninterest expense.

February 2018,

the FASB issued ASU

No.

2018

02,

“

Income Statement—Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,”

which allows entities to reclassify the stranded tax effects caused by the Tax Cuts and Jobs Act (“Tax Act”), which was enacted in

December 2017,

from accumulated other comprehensive income (“AOCI”) to retained earnings. This ASU is effective for annual and interim periods beginning after

December 15, 2018,

with early adoption permitted. The Company early adopted this standard, resulting in the reclassification of

$633

thousand from AOCI to retained earnings for the year ended

December 31, 2017.

There was

impact on total equity.

Recently Issued

Accounting

Standards

February 2016,

the FASB issued ASU

No.

2016

02,

“Leases (Topic

842

),”

to improve financial reporting about leasing transactions. This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with terms of more than

twelve

months. A lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s right to use, or control use of, a specified asset for the lease term. The amendments in this ASU simplify the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. This ASU leaves the accounting for the organizations that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic

606,

Revenue from Contracts with Customers

For public companies, ASU

No.

2016

is effective for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would

not

require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors

may

not

apply a full retrospective transition approach. The Company has identified a project team and is in the process of reviewing its leases and assessing the impact of ASU

No.

2016

on its consolidated financial position, results of operations, and cash flows.

June 2016,

the FASB issued ASU

No.

2016

13,

“

Financial Instruments—Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments

”

to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU requires enhanced disclosures, including qualitative and quantitative requirements, which provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

ASU

No.

2016

is effective for the Company in annual and interim reporting periods beginning after

December 15, 2019.

Although early adoption is permitted for fiscal years beginning after

December 15, 2018,

the Company does

not

plan to early adopt. The Company has been preserving certain historical loan information from its core processing system in anticipation of adopting the standard. The Company has identified a project team to assess the impact of this ASU on its consolidated financial position, results of operations, and cash flows. The project team has developed a timeline for implementing the standard, has begun working with a

third

party software solution provider, and has identified an independent

third

party for validation of the impending changes to our credit loss methodologies and processes. The team continues to assess the impact of the standard; however, the Company expects adopting this ASU will result in an increase in its allowance for loan losses. The amount of the increase in the allowance for loan losses upon adoption will be dependent upon the characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that date. A cumulative effect adjustment will be made to retained earnings for the impact of the standard at the beginning of the period the standard is adopted.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are

not

expected to have a material impact on the Company’s financial position, results of operations or cash flows.

- Definition

Disclosure of accounting policy for finance, loan and lease receivables, including those held for investment and those held for sale. This disclosure may include (1) the basis at which such receivables are carried in the entity's statements of financial position (2) how the level of the allowance for loan and lease losses is determined (3) when impairments, charge-offs or recoveries are recognized for such receivables (4) the treatment of origination fees and costs, including the amortization method for net deferred fees or costs (5) the treatment of any premiums or discounts or unearned income (6) the entity's income recognition (revenues, expenses and gains and losses arising from committing to issue, issuing, granting, collecting, terminating, modifying and holding loans) policies for such receivables, including those that are impaired, past due or placed on nonaccrual status and (7) the treatment of foreclosures or repossessions.

+ References + Details