LOANS

The composition of the Company’s loan portfolio, by loan class, as of March 31, 2018 and December 31, 2017 was as follows:

($ in thousands)	March 31, 2018			December 31, 2017

Commercial	$	130,749		$	135,015
Commercial Real Estate		393,910			398,346
Agriculture		104,104			113,555
Residential Mortgage		44,788			42,081
Residential Construction		20,754			21,299
Consumer		36,930			38,900
		731,235			749,196
Allowance for loan losses		(11,715	)		(11,133	)
Net deferred origination fees and costs		1,039			1,049
Loans, net	$	720,559		$	739,112

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. Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site 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. 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 annually but may be more frequent depending on the collateral type), once repayment is questionable, and the loan has been deemed classified.

As of March 31, 2018, approximately 54% in principal amount of the Company’s loans were secured by commercial real estate, consisting 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 14% in principal amount of the Company’s loans were for agriculture and 18% in principal amount of the Company’s loans were for general commercial uses including professional, retail and small businesses. Approximately 5% in principal amount of the Company’s loans were consumer loans.

Once a loan becomes delinquent or 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 utilize a recent 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 the collateral is liquidated and the 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 March 31, 2018 and December 31, 2017, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank.

Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of March 31, 2018 and December 31, 2017, were as follows:

($ in thousands)	Current & Accruing		30-59 Days Past Due & Accruing		60-89 Days Past Due & Accruing		90 Days or more Past Due & Accruing		Nonaccrual		Total Loans
March 31, 2018
Commercial	$	129,831	$	39	$	—	$	—	$	879	$	130,749
Commercial Real Estate		392,137		97		—		—		1,676		393,910
Agriculture		104,104		—		—		—		—		104,104
Residential Mortgage		44,080		—		—		—		708		44,788
Residential Construction		20,754		—		—		—		—		20,754
Consumer		36,406		212		—		—		312		36,930
Total	$	727,312	$	348	$	—	$	—	$	3,575	$	731,235

December 31, 2017
Commercial	$	133,913	$	—	$	—	$	45	$	1,057	$	135,015
Commercial Real Estate		396,521		101		—		—		1,724		398,346
Agriculture		113,555		—		—		—		—		113,555
Residential Mortgage		40,354		349		597		—		781		42,081
Residential Construction		21,299		—		—		—		—		21,299
Consumer		38,656		1		38		—		205		38,900
Total	$	744,298	$	451	$	635	$	45	$	3,767	$	749,196

Non-accrual loans amounted to $3,575,000 at March 31, 2018 and were comprised of three commercial loans totaling $879,000, three commercial real estate loans totaling $1,676,000, three residential mortgage loans totaling $708,000 and two consumer loans totaling $312,000. Non-accrual loans amounted to $3,767,000 at December 31, 2017 and were comprised of three commercial loans totaling $1,057,000, three commercial real estate loans totaling $1,724,000, three residential mortgage loans totaling $781,000, and one consumer loan totaling $205,000. All non-accrual loans are measured for impairment based upon 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 collateral, if the loan is collateral dependent. If the measurement of the non-accrual loan is less than the recorded investment in the loan, an impairment is recognized through the establishment of a specific reserve sufficient to cover expected losses and/or a charge-off against the allowance for loan losses. If the loan is considered to be collateral dependent, it is generally the Company's policy to charge-off the portion of any non-accrual loan that the Company does not expect to collect by writing the loan down to the estimated net realizable value of the underlying collateral. There were no commitments to lend additional funds to borrowers whose loans were on non-accrual status at March 31, 2018.

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 5 (special mention) or worse and an aggregate exposure of five hundred thousand or greater. 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, is promptly charged-off against the allowance for loan losses.

Impaired loans, segregated by loan class, as of March 31, 2018 and December 31, 2017 were as follows:

($ in thousands)	Unpaid Contractual Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance
March 31, 2018
Commercial	$	3,420	$	879	$	2,312	$	3,191	$	47
Commercial Real Estate		2,088		1,676		270		1,946		36
Agriculture		—		—		—		—		—
Residential Mortgage		2,424		708		1,484		2,192		309
Residential Construction		644		—		644		644		71
Consumer		523		312		211		523		4
Total	$	9,099	$	3,575	$	4,921	$	8,496	$	467

December 31, 2017
Commercial	$	3,882	$	1,057	$	2,603	$	3,660	$	53
Commercial Real Estate		2,114		1,724		272		1,996		36
Agriculture		—		—		—		—		—
Residential Mortgage		2,628		781		1,496		2,277		302
Residential Construction		651		—		650		650		76
Consumer		418		205		213		418		3
Total	$	9,693	$	3,767	$	5,234	$	9,001	$	470

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the three months ended March 31, 2018 and March 31, 2017 was as follows:

($ in thousands)	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial	$	3,425	$	46	$	5,561	$	9
Commercial Real Estate		1,971		4		809		15
Agriculture		—		—		—		—
Residential Mortgage		2,234		15		3,028		31
Residential Construction		647		9		816		9
Consumer		470		3		649		9
Total	$	8,747	$	77	$	10,863	$	73

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 and, as a result, the Company receives less than the current market-based compensation for the loan. These concessions may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are placed on non-accrual status at the time of restructure and may be returned to accruing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.

When a loan is modified, it is measured 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 of the loan.

The Company had $4,921,000 and $5,896,000 in TDR loans as of March 31, 2018 and December 31, 2017, respectively. Specific reserves for TDR loans totaled $467,000 and $470,000 as of March 31, 2018 and December 31, 2017, respectively. TDR loans performing in compliance with modified terms totaled $4,921,000 and $5,234,000 as of March 31, 2018 and December 31, 2017, respectively. There were no commitments to advance additional funds on existing TDR loans as of March 31, 2018.

There were no loans modified as TDRs during the three months ended March 31, 2018 and March 31, 2017.

Loan modifications generally involve reductions in the interest rate, payment extensions, forgiveness of principal, or forbearance. There were no loans modified as a TDR within the previous twelve months and for which there was a payment default during the three months ended March 31, 2018 and March 31, 2017.

Credit Quality Indicators

All 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 bank 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. For the definitions of each risk rating, see Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.

The following table presents the risk ratings by loan class as of March 31, 2018 and December 31, 2017:

($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
March 31, 2018
Commercial	$	126,596	$	3,022	$	1,131	$	—	$	—	$	130,749
Commercial Real Estate		363,867		16,733		13,310		—		—		393,910
Agriculture		101,887		2,217		—		—		—		104,104
Residential Mortgage		42,534		1,533		721		—		—		44,788
Residential Construction		20,754		—		—		—		—		20,754
Consumer		35,635		945		350		—		—		36,930
Total	$	691,273	$	24,450	$	15,512	$	—	$	—	$	731,235

December 31, 2017
Commercial	$	132,846	$	1,050	$	1,119	$	—	$	—	$	135,015
Commercial Real Estate		378,632		16,101		3,613		—		—		398,346
Agriculture		110,370		3,140		45		—		—		113,555
Residential Mortgage		39,142		2,147		792		—		—		42,081
Residential Construction		21,299		—		—		—		—		21,299
Consumer		38,157		500		243		—		—		38,900
Total	$	720,446	$	22,938	$	5,812	$	—	$	—	$	749,196

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by loan class for the three months ended March 31, 2018 and March 31, 2017:

Three months ended March 31, 2018
($ in thousands)	Commercial			Commercial Real Estate			Agriculture			Residential Mortgage			Residential Construction			Consumer			Unallocated		Total
Balance as of December 31, 2017	$	2,625		$	5,460		$	1,547		$	628		$	360		$	342		$	171	$	11,133
Provision for (reversal of) loan losses		(85	)		(46	)		(124	)		(1	)		(13	)		(68	)		862		525

Charge-offs		—			—			—			—			—			(6	)		—		(6	)
Recoveries		9			—			—			16			1			37			—		63
Net charge-offs		9			—			—			16			1			31			—		57
Balance as of March 31, 2018	$	2,549		$	5,414		$	1,423		$	643		$	348		$	305		$	1,033	$	11,715
Period-end amount allocated to:
Loans individually evaluated for impairment		47			36			—			309			71			4			—		467
Loans collectively evaluated for impairment		2,502			5,378			1,423			334			277			301			1,033		11,248
Balance as of March 31, 2018	$	2,549		$	5,414		$	1,423		$	643		$	348		$	305		$	1,033	$	11,715

Three months ended March 31, 2017
($ in thousands)	Commercial		Commercial Real Estate		Agriculture		Residential Mortgage		Residential Construction		Consumer			Unallocated			Total
Balance as of December 31, 2016	$	3,571	$	3,910	$	1,262	$	660	$	440	$	498		$	558		$	10,899
Provision for (reversal of) loan losses		235		813		25		41		13		(114	)		(413	)		600

Charge-offs		—		—		—		—		—		(11	)		—			(11	)
Recoveries		2		—		—		—		1		8			—			11
Net charge-offs		2		—		—		—		1		(3	)		—			—
Balance as of March 31, 2017	$	3,808	$	4,723	$	1,287	$	701	$	454	$	381		$	145		$	11,499
Period-end amount allocated to:
Loans individually evaluated for impairment		1,341		38		—		578		98		24			—			2,079
Loans collectively evaluated for impairment		2,467		4,685		1,287		123		356		357			145			9,420
Balance as of March 31, 2017	$	3,808	$	4,723	$	1,287	$	701	$	454	$	381		$	145		$	11,499

The following table details activity in the allowance for loan losses and the amount allocated to loans individually and collectively evaluated for impairment as of and for the period ended December 31, 2017.

Year ended December 31, 2017
($ in thousands)	Commercial			Commercial Real Estate		Agriculture		Residential Mortgage			Residential Construction			Consumer			Unallocated			Total
Balance as of December 31, 2016	$	3,571		$	3,910	$	1,262	$	660		$	440		$	498		$	558		$	10,899
Provision for (reversal of) loan losses		(567	)		1,550		285		(7	)		(85	)		(189	)		(387	)		600

Charge-offs		(681	)		—		—		(121	)		—			(33	)		—			(835	)
Recoveries		302			—		—		96			5			66			—			469
Net charge-offs		(379	)		—		—		(25	)		5			33			—			(366	)
Ending Balance		2,625			5,460		1,547		628			360			342			171			11,133
Period-end amount allocated to:
Loans individually evaluated for impairment		53			36		—		302			76			3			—			470
Loans collectively evaluated for impairment		2,572			5,424		1,547		326			284			339			171			10,663
Balance as of December 31, 2017	$	2,625		$	5,460	$	1,547	$	628		$	360		$	342		$	171		$	11,133

The Company’s investment in loans as of March 31, 2018, March 31, 2017, and December 31, 2017 related to each balance in the allowance for loan losses by loan class and disaggregated on the basis of the Company’s impairment methodology was as follows:

($ in thousands)	Commercial		Commercial Real Estate		Agriculture		Residential Mortgage		Residential Construction		Consumer		Total
March 31, 2018
Loans individually evaluated for impairment	$	3,191	$	1,946	$	—	$	2,192	$	644	$	523	$	8,496
Loans collectively evaluated for impairment		127,558		391,964		104,104		42,596		20,110		36,407		722,739
Ending Balance	$	130,749	$	393,910	$	104,104	$	44,788	$	20,754	$	36,930	$	731,235

March 31, 2017
Loans individually evaluated for impairment	$	5,544	$	795	$	—	$	3,022	$	812	$	593	$	10,766
Loans collectively evaluated for impairment		115,509		341,385		94,652		40,154		21,926		39,531		653,157
Ending Balance	$	121,053	$	342,180	$	94,652	$	43,176	$	22,738	$	40,124	$	663,923

December 31, 2017
Loans individually evaluated for impairment	$	3,660	$	1,996	$	—	$	2,277	$	650	$	418	$	9,001
Loans collectively evaluated for impairment		131,355		396,350		113,555		39,804		20,649		38,482		740,195
Ending Balance	$	135,015	$	398,346	$	113,555	$	42,081	$	21,299	$	38,900	$	749,196