Loans | (4) Loans The composition of the Company's loan portfolio, by loan class, at December 31, is as follows: 2016 2015 Commercial $ 126,311 $ 136,095 Commercial Real Estate 344,210 292,316 Agriculture 101,905 84,813 Residential Mortgage 40,237 43,375 Residential Construction 23,650 12,110 Consumer 43,250 45,386 679,563 614,095 Allowance for loan losses (10,899 ) (9,251 ) Net deferred origination fees and costs 1,106 1,009 Loans, net $ 669,770 $ 605,853 The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit risk rating standards and criteria similar to those employed by state and federal banking regulatory agencies. Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses. These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above. Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner-occupied real estate are primarily susceptible to changes in the market conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles. These same risks apply to Commercial loans whether secured by equipment, receivables or other personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space. Losses are dependent on the value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means. Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or service. Agricultural loans are generally secured by inventory, receivables, equipment, and other real property. Agricultural loans primarily are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions such as drought or floods. Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks; non-payment due to diminished or lost income, over-extension of credit, a lack of borrower's cash flow to sustain payments, and shortfalls in collateral value. In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts. Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the related risks described above but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion. Losses are primarily related to underlying collateral value and changes therein as described above. Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower. Based on this information the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower's cash flow to sustain payments, and shortfall in collateral value. In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment rate, loss of collateral value, and demand shifts. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Collateral valuations are obtained at origination of the credit and periodically thereafter (generally every 3 – 6 months depending on the collateral type), once repayment is questionable, and the loan has been deemed classified. As of December 31, 2016, approximately 51% in principal amount of the Company's loans were secured by commercial real estate, which consists primarily of loans secured by commercial properties and construction and land development loans. Approximately 6% in principal amount of the Company's loans were residential mortgage loans. Approximately 3% in principal amount of the Company's loans were residential construction loans. Approximately 15% in principal amount of the Company's loans were for agriculture and 19% in principal amount of the Company's loans were for general commercial uses, including professional, retail and small businesses. Approximately 6% in principal amount of the Company's loans were consumer loans. Once a loan becomes delinquent and repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral or a principal payment. If this is not forthcoming and payment of principal and interest in accordance with the contractual terms of the loan agreement becomes unlikely, the Company will consider the loan to be impaired and will estimate its probable loss, using the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. For collateral dependent loans, the Company will obtain an updated valuation of the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount. Depending on the length of time until final collection, the Company may periodically revalue the estimated loss and take additional charge-offs or specific reserves as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is confirmed. Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or judgment liens on the borrower's other assets. At December 31, 2016 and December 31, 2015, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank. Non-accrual and Past Due Loans The Company's non-accrual loans by loan class, at December 31, were as follows: 2016 2015 Commercial $ 5,000 $ 112 Commercial Real Estate 540 964 Agriculture — — Residential Mortgage 654 1,092 Residential Construction — — Consumer 103 560 $ 6,297 $ 2,728 Non-accrual loans amounted to $6,297 at December 31, 2016 and were comprised of three residential mortgage loans totaling $654, two commercial real estate loans totaling $540, one commercial loan totaling $5,000, and one consumer loan totaling $103. Non-accrual loans amounted to $2,728 at December 31, 2015 and were comprised of four residential mortgage loans totaling $1,092, four commercial real estate loans totaling $964, four commercial loans totaling $112 and four consumer loans totaling $560. It is generally the Company's policy to charge-off the portion of any non-accrual loan for which the Company does not expect to collect by writing the loan down to estimated net realizable value of the underlying collateral. An aging analysis of past due loans, segregated by loan class, as of December 31, 2016 and December 31, 2015 was as follows: 30-59 Days Past Due 60-89 Days Past Due 90 Days or more Past Due Total Past Due Current Total Loans December 31, 2016 Commercial $ — $ — $ 5,000 $ 5,000 $ 121,311 $ 126,311 Commercial Real Estate 484 — — 484 343,726 344,210 Agriculture — — — — 101,905 101,905 Residential Mortgage — 120 643 763 39,474 40,237 Residential Construction — — — — 23,650 23,650 Consumer — 41 — 41 43,209 43,250 Total $ 484 $ 161 $ 5,643 $ 6,288 $ 673,275 $ 679,563 December 31, 2015 Commercial $ 218 $ — $ 57 $ 275 $ 135,820 $ 136,095 Commercial Real Estate 130 — 232 362 291,954 292,316 Agriculture — — — — 84,813 84,813 Residential Mortgage — — — — 43,375 43,375 Residential Construction — — — — 12,110 12,110 Consumer 19 5 429 453 44,933 45,386 Total $ 367 $ 5 $ 718 $ 1,090 $ 613,005 $ 614,095 The Company had no loans 90 days past due and still accruing at December 31, 2016 and one loan totaling $2 that was 90 days past due and still accruing at December 31, 2015. Included in the aging loan category labeled "current" are non-accrual loans that were not delinquent with respect to contractual principal and interest payments as of December 31, 2016 or 2015. These loans are categorized as non-accrual loans and are not accruing interest as of December 31, 2016 and 2015. Non-accrual loans outstanding at December 31, 2016 and 2015 are disclosed in the table above. Impaired Loans A loan is considered 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, including scheduled interest payments. Loans to be considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 6 (substandard) or worse. Once identified, impaired loans are measured individually for impairment using one of three methods: present value of expected cash flows discounted at the loan's effective interest rate; the loan's observable market price; or fair value of collateral if the loan is collateral dependent. In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, and is promptly charged-off against the allowance for loan losses. Impaired loans, segregated by loan class, as of December 31, 2016 and December 31, 2015 were as follows: Unpaid Contractual Principal Balance Recorded Investment with no Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance December 31, 2016 Commercial $ 5,578 $ — $ 5,578 $ 5,578 $ 898 Commercial Real Estate 885 540 283 823 39 Agriculture — — — — — Residential Mortgage 3,392 654 2,380 3,034 584 Residential Construction 820 — 820 820 98 Consumer 708 103 601 704 25 Total $ 11,383 $ 1,297 $ 9,662 $ 10,959 $ 1,644 December 31, 2015 Commercial $ 933 $ 97 $ 821 $ 918 $ 43 Commercial Real Estate 1,292 964 294 1,258 42 Agriculture — — — — — Residential Mortgage 3,968 1,092 2,484 3,576 615 Residential Construction 1,005 — 1,005 1,005 119 Consumer 1,625 631 690 1,321 33 Total $ 8,823 $ 2,784 $ 5,294 $ 8,078 $ 852 The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the years ended December 31, 2016, 2015, and 2014 was as follows: December 31, 2016 December 31, 2015 December 31, 2014 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial $ 3,276 $ 33 $ 1,794 $ 46 $ 3,292 $ 53 Commercial Real Estate 857 16 1,251 42 2,632 291 Agriculture — — — — 257 75 Residential Mortgage 3,131 93 3,836 123 5,157 124 Residential Construction 945 44 906 37 914 38 Consumer 736 71 1,376 39 1,545 54 Total $ 8,945 $ 257 $ 9,163 $ 287 $ 13,797 $ 635 None of the interest on impaired loans was recognized using a cash basis of accounting for the years ended December 31, 2016, 2015, and 2014. Troubled Debt Restructurings The Company's loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), which are loans on which concessions in terms have been granted because of the borrowers' financial difficulties. These concessions may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. TDRs are generally placed on non-accrual status at the time of restructure and may only be returned to accruing status after considering the borrower's sustained repayment performance under the restructured terms for a reasonable period, generally six months. When a loan is modified as a TDR, it is measured for impairment based upon the present value of future cash flows discounted at the contractual interest rate of the original loan agreement, or the fair value of collateral less selling costs if the loan is collateral dependent. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off. The Company had $9,663 and $5,414 in TDR loans as of December 31, 2016 and December 31, 2015, respectively. Specific reserves for TDR loans totaled $1,644 and $852 as of December 31, 2016 and December 31, 2015, respectively. TDR loans performing in compliance with modified terms totaled $4,662 and $5,350 as of December 31, 2016 and December 31, 2015, respectively. There were no commitments to advance additional funds on existing TDR loans as of December 31, 2016. Loans modified as troubled debt restructurings during the year ended December 31, 2016, 2015, and 2014 were as follows: Year Ended December 31, 2016 Number of Contracts Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Commercial 2 $ 5,180 $ 5,180 Total 2 $ 5,180 $ 5,180 Year Ended December 31, 2015 Number of Contracts Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Commercial 1 $ 419 $ 419 Consumer 1 109 109 Total 2 $ 528 $ 528 Year Ended December 31, 2014 Number of Contracts Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Commercial 2 $ 151 $ 151 Residential Mortgage 1 102 102 Consumer 2 498 498 Total 5 $ 751 $ 751 The loan modifications generally involved reductions in the interest rate, payment extensions, forgiveness of principal, and forbearance. There was one commercial loan with a recorded investment of $5,000 that was modified as a troubled debt restructuring within the previous 12 months and for which there was a payment default during the year ended December 31, 2016. There were no troubled debt restructurings modified within the previous 12 months and for which there was a payment default during the year ended December 31, 2015. There was one consumer loan with a recorded investment of $49 that was modified as a troubled debt restructuring within the previous 12 months and for which there was a payment default during the year ended December 31, 2014. The Company considers a loan to be in payment default when it is 90 days or more past due. Credit Quality Indicators All new loans are rated using the credit risk ratings and criteria adopted by the Company. Risk ratings are adjusted as future circumstances warrant. All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss. General definitions for each risk rating are as follows: Risk Rating "1" – Pass (High Quality): Risk Rating "2" – Pass (Above Average Quality): Risk Rating "3" – Pass (Average Quality): Risk Rating "4" – Pass (Below Average Quality): Risk Rating "5" – Special Mention (Criticized): Risk Rating "6" – Substandard (Classified): Risk Rating "7" – Doubtful (Classified): Risk Rating "8" – Loss (Classified): Active Charge-Off. Inactive Charge-Off. The following table presents the risk ratings by loan class as of December 31, 2016 and December 31, 2015. Pass Special Mention Substandard Doubtful Loss Total December 31, 2016 Commercial $ 112,656 $ 7,294 $ 6,361 $ — $ — $ 126,311 Commercial Real Estate 331,653 11,058 1,499 — — 344,210 Agriculture 101,820 — 85 — — 101,905 Residential Mortgage 37,831 1,751 655 — — 40,237 Residential Construction 23,070 436 144 — — 23,650 Consumer 41,826 547 877 — — 43,250 Total $ 648,856 $ 21,086 $ 9,621 $ — $ — $ 679,563 December 31, 2015 Commercial $ 125,562 $ 6,842 $ 3,691 $ — $ — $ 136,095 Commercial Real Estate 268,707 8,301 15,308 — — 292,316 Agriculture 84,813 — — — — 84,813 Residential Mortgage 40,231 1,847 1,297 — — 43,375 Residential Construction 11,593 452 65 — — 12,110 Consumer 42,990 1,025 1,371 — — 45,386 Total $ 573,896 $ 18,467 $ 21,732 $ — $ — $ 614,095 Allowance for Loan Losses The following table details activity in the allowance for loan losses by loan category for the years ended December 31, 2016, 2015 and 2014. Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Unallocated Total Balance as of December 31, 2015 $ 3,097 $ 3,343 $ 1,060 $ 739 $ 334 $ 641 $ 37 $ 9,251 Provision for loan losses 883 582 121 (67 ) 101 (341 ) 521 1,800 Charge-offs (446 ) (15 ) — (13 ) — (65 ) — (539 ) Recoveries 37 — 81 1 5 263 — 387 Net charge-offs (409 ) (15 ) 81 (12 ) 5 198 — (152 ) Ending Balance 3,571 3,910 1,262 660 440 498 558 10,899 Period-end amount allocated to: Loans individually evaluated for impairment 898 39 — 584 98 25 — 1,644 Loans collectively evaluated for impairment 2,673 3,871 1,262 76 342 473 558 9,255 Balance as of December 31, 2016 $ 3,571 $ 3,910 $ 1,262 $ 660 $ 440 $ 498 $ 558 $ 10,899 Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Unallocated Total Balance as of December 31, 2014 $ 3,581 $ 1,825 $ 580 $ 1,181 $ 161 $ 886 $ 369 $ 8,583 Provision for loan losses (542 ) 1,507 480 (450 ) 113 (126 ) (332 ) 650 Charge-offs (44 ) (7 ) — (211 ) — (175 ) — (437 ) Recoveries 102 18 — 219 60 56 — 455 Net recoveries 58 11 — 8 60 (119 ) — 18 Ending Balance 3,097 3,343 1,060 739 334 641 37 9,251 Period-end amount allocated to: Loans individually evaluated for impairment 43 42 — 615 119 33 — 852 Loans collectively evaluated for impairment 3,054 3,301 1,060 124 215 608 37 8,399 Balance as of December 31, 2015 $ 3,097 $ 3,343 $ 1,060 $ 739 $ 334 $ 641 $ 37 $ 9,251 Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Unallocated Total Balance as of December 31, 2013 $ 3,199 $ 2,290 $ 557 $ 1,216 $ 441 $ 1,023 $ 627 $ 9,353 Provision for loan losses 2,612 (396 ) 23 36 (366 ) 149 (258 ) 1,800 Charge-offs (2,288 ) (69 ) — (71 ) — (393 ) — (2,821 ) Recoveries 58 — — — 86 107 — 251 Net charge-offs (2,230 ) (69 ) — (71 ) 86 (286 ) — (2,570 ) Ending Balance 3,581 1,825 580 1,181 161 886 369 8,583 Period-end amount allocated to: Loans individually evaluated for impairment 39 45 — 646 107 23 — 860 Loans collectively evaluated for impairment 3,542 1,780 580 535 54 863 369 7,723 Balance as of December 31, 2014 $ 3,581 $ 1,825 $ 580 $ 1,181 $ 161 $ 886 $ 369 $ 8,583 The Company's investment in loans as of December 31, 2016, 2015, and 2014 related to each balance in the allowance for loan losses by loan category and disaggregated on the basis of the Company's impairment methodology was as follows: Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Total December 31, 2016 Loans individually evaluated for impairment $ 5,578 $ 823 $ — $ 3,034 $ 820 $ 704 $ 10,959 Loans collectively evaluated for impairment 120,733 343,387 101,905 37,203 22,830 42,546 668,604 Ending Balance $ 126,311 $ 344,210 $ 101,905 $ 40,237 $ 23,650 $ 43,250 $ 679,563 December 31, 2015 Loans individually evaluated for impairment $ 918 $ 1,258 $ — $ 3,576 $ 1,005 $ 1,321 $ 8,078 Loans collectively evaluated for impairment 135,177 291,058 84,813 39,799 11,105 44,065 606,017 Ending Balance $ 136,095 $ 292,316 $ 84,813 $ 43,375 $ 12,110 $ 45,386 $ 614,095 December 31, 2014 Loans individually evaluated for impairment $ 2,678 $ 976 $ — $ 4,647 $ 897 $ 1,506 $ 10,704 Loans collectively evaluated for impairment 118,073 255,979 61,144 45,864 5,066 48,405 534,531 Ending Balance $ 120,751 $ 256,955 $ 61,144 $ 50,511 $ 5,963 $ 49,911 $ 545,235 |