LOANS AND THE

ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands:

	June 30 ,			December 31,
	2017			2016

Commercial	$	39,394		$	41,293
Agricultural		54,974			51,103
Real estate – residential		18,952			21,283
Real estate – commercial		236,791			226,136
Real estate – construction and land development		24,819			21,904
Equity lines of credit		42,211			42,338
Auto		55,255			53,553
Other		3,695			3,513
		476,091			461,123
Deferred loan costs, net		2,182			2,006
Allowance for loan losses		(6,855	)		(6,549	)
Loans, net	$	471,418		$	456,580

Changes in the allowance for loan losses, in thousands, were as follows:

	June 30 ,			December 31,
	2017			2016

Balance, beginning of year	$	6,549		$	6,078
Provision charged to operations		400			800
Losses charged to allowance		(175	)		(979	)
Recoveries		81			650
Balance, end of period	$	6,855		$	6,549

The recorded investment in impaired loans totaled

$5,

300,000

and

$5,442,000

June 30, 2017

and

December 31, 2016,

respectively. The Company had specific allowances for loan losses of

$480,000

on impaired loans of

$1,600,000

June 30, 2017

as compared to specific allowances for loan losses of

$366,000

on impaired loans of

$1,534,000

December 31, 2016.

The balance of impaired loans in which

specific reserves were required totaled

$3,700,000

and

$3,908,000

June 30, 2017

and

December 31, 2016,

respectively. The average recorded investment in impaired loans for the

six

months ended

June 30, 2017

and

June 30, 2016

was

$4,890,000

and

$5,421,000,

respectively. The Company recognized

$79,000

and

$61,000

in interest income for impaired loans during the

six

months ended

June 30, 2017

and

2016,

respectively.

interest was recognized on nonaccrual loans accounted for on a cash basis during the

six

months ended

June 30, 2017

and

2016.

Included in impaired loans are troubled debt restructurings. A troubled debt restructuring is a formal restructure of a loan where the Company for economic or legal reasons related to the borrower

’s financial difficulties, grants a concession to the borrower. The concessions

may

be granted in various forms to include

one

or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company

’s internal underwriting policy.

The carrying value of troubled debt restructurings at

June 30, 2017

and

December 31, 2016

was

$4,132,000

and

$4,616,000,

respectively. The Company has allocated

$328,000

and

$342,000

of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of

June 30, 2017

and

December 31, 2016,

respectively. The Company has

not

committed to lend additional amounts on loans classified as troubled debt restructurings at

June 30, 2017

and

December 31, 2016.

There were

troubled debt restructurings that occurred during the

six

months ending

June 30, 2017

June 30, 2016.

There were

troubled debt restructurings for which there was a payment default within

twelve

months following the modification during the

six

months ended

June 30, 2017

and

2016,

respectively.

June 30, 2017

and

December 31, 2016,

nonaccrual loans totaled

$2,910,000

and

$2,724,000,

respectively. Interest foregone on nonaccrual loans totaled

$89,000

and

$106,000

for the

six

months ended

June 30, 2017

and

2016,

respectively. Interest foregone on nonaccrual loans totaled

$38,000

and

$31,000

for the

three

months ended

June 30, 2017

and

2016,

respectively. There were

loans past due

days or more and on accrual status at

June 30, 2017

and

December 31, 2016.

Salaries and employee benefits totaling

36,000

and

$942,000

have been deferred as loan origination costs during the

six

months ended

June 30, 2017

and

2016,

respectively. Salaries and employee benefits totaling

$541,000

and

$569,000

have been deferred as loan origination costs during the

three

months ended

June 30, 2017

and

2016,

respectively.

The Company assigns a risk rating to all loans, with the exception of automobile and other loans and periodically, but

not

less than annually, performs detailed reviews of all such loans over

$100,000

to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company

’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.

The risk ratings can be grouped into

five

major categories, defined as follows:

Pass

– A pass loan is a strong credit with

existing or known potential weaknesses deserving of management's close attention.

Watch

– A Watch loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses

may

result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Watch loans are

not

adversely classified and do

not

expose the Company to sufficient risk to warrant adverse classification.

Substandard

– A substandard loan is

not

adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are

not

corrected.

Doubtful

– Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loss

– Loans classified as loss are considered uncollectible and charged off immediately.

The following table shows the loan portfolio allocated by management's internal risk ratings at the dates indicated, in thousands:

June 30, 201 7	Commercial Credit Exposure
	Credit Risk Profile by Internally Assigned Grade
Grade:	Commercial		Agricultural		Real Estate- Residential		Real Estate- Commercial		Real Estate- Construction		Equity LOC		Total
Pass	$	38,221	$	51,320	$	18,688	$	234,800	$	24,123	$	41,951	$	409,103
Watch		811		3,654		133		343		-		-		4,941
Substandard		362		-		131		1,648		696		260		3,097
Doubtful		-		-		-		-		-		-		-
Total	$	39,394	$	54,974	$	18,952	$	236,791	$	24,819	$	42,211	$	417,141

December 31, 201 6	Commercial Credit Exposure
	Credit Risk Profile by Internally Assigned Grade
Grade:	Commercial		Agricultural		Real Estate- Residential		Real Estate- Commercial		Real Estate- Construction		Equity LOC		Total
Pass	$	40,459	$	50,790	$	21,125	$	223,854	$	21,201	$	41,983	$	399,412
Watch		565		280		-		400		-		-		1,245
Substandard		269		33		158		1,882		703		355		3,400
Doubtful		-		-		-		-		-		-		-
Total	$	41,293	$	51,103	$	21,283	$	226,136	$	21,904	$	42,338	$	404,057

	Consumer Credit E xposure						Consumer Credit Exposure
	Credit Risk Profile Based on Payment Activity						Credit Risk Profile Based on Payment Activity
	June 30, 201 7						December 31, 201 6
	Auto		Other		Total		Auto		Other		Total
Grade:
Performing	$	54,947	$	3,693	$	58,640	$	53,474	$	3,511	$	56,985
Non-performing		308		2		310		79		2		81
Total	$	55,255	$	3,695	$	58,950	$	53,553	$	3,513	$	57,066

The following tables show the allocation of the allowance for loan losses at the dates indicated, in thousan

ds:

	Commercial			Agricultural		Real Estate- Residential			Real Estate- Commercial			Real Estate- Construction			Equity LOC			Auto			Other			Total
Six months ended 6/30/1 7 :
Allowance for Loan Losses
Beginning balance	$	655		$	466	$	280		$	2,740		$	927		$	575		$	815		$	91		$	6,549
Charge-offs		(67	)		-		-			-			-			-			(90	)		(18	)		(175	)
Recoveries		19			-		2			3			-			2			50			5			81
Provision		98			48		(30	)		69			144			(16	)		70			17			400
Ending balance	$	705		$	514	$	252		$	2,812		$	1,071		$	561		$	845		$	95		$	6,855
Three months ended 6/30/1 7 :
Allowance for Loan Losses
Beginning balance	$	788		$	473	$	268		$	2,919		$	838		$	561		$	806		$	90		$	6,743
Charge-offs		(67	)		-		-			-			-			-			(40	)		(13	)		(120	)
Recoveries		11			-		1			1			-			2			16			1			32
Provision		(27	)		41		(17	)		(108	)		233			(2	)		63			17			200
Ending balance	$	705		$	514	$	252		$	2,812		$	1,071		$	561		$	845		$	95		$	6,855
Six months ended 6/30/ 1 6 :
Allowance for Loan Losses
Beginning balance	$	639		$	294	$	341		$	2,525		$	874		$	528		$	784		$	93		$	6,078
Charge-offs		(73	)		-		-			(252	)		-			(23	)		(158	)		(24	)		(530	)
Recoveries		17			-		36			2			329			1			82			15			482
Provision		252			122		(55	)		190			(320	)		67			133			11			400
Ending balance	$	835		$	416	$	322		$	2,465		$	883		$	573		$	841		$	95		$	6,430
Three months ended 6/30/1 6 :
Allowance for Loan Losses
Beginning balance	$	637		$	311	$	318		$	2,762		$	800		$	524		$	763		$	83		$	6,198
Charge-offs		-			-		-			(252	)		-			1			(53	)		(6	)		(310	)
Recoveries		6			-		1			2			300			1			25			7			342
Provision		192			105		3			(47	)		(217	)		47			106			11			200
Ending balance	$	835		$	416	$	322		$	2,465		$	883		$	573		$	841		$	95		$	6,430
June 30, 201 7 :
Allowance for Loan Losses
Ending balance: individually e valuated for impairment	$	93		$	-	$	53		$	76		$	218		$	22		$	16		$	2		$	480
Ending balance: collectively evaluated for impairment	$	612		$	514	$	199		$	2,736		$	853		$	539		$	829		$	93		$	6,375
Loans
Ending balance	$	39,394		$	54,974	$	18,952		$	236,791		$	24,819		$	42,211		$	55,255		$	3,695		$	476,091
Ending balance: individually evaluated for impairment	$	105		$	256	$	1,288		$	2,258		$	823		$	260		$	308		$	2		$	5,300
Ending balance: collectively evaluated for impairment	$	39,289		$	54,718	$	17,664		$	234,533		$	23,996		$	41,951		$	54,947		$	3,693		$	470,791
December 31, 201 6 :
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	2		$	-		53		$	81		$	206		$	24		$	-		$	-		$	366
Ending balance: collectively evaluated for impairment	$	653		$	466	$	227		$	2,659		$	721		$	551		$	815		$	91		$	6,183
Loans
Ending balance	$	41,293		$	51,103	$	21,283		$	226,136		$	21,904		$	42,338		$	53,553		$	3,513		$	461,123
Ending balance: individually evaluated for impairment	$	16		$	258	$	1,615		$	2,323		$	833		$	326		$	69		$	2		$	5,442
Ending balance: collectively evaluated for impairment	$	41,277		$	50,845	$	19,668		$	223,813		$	21,071		$	42,012		$	53,484		$	3,511		$	455,681

The following table shows an aging analysis of the loan portfolio by the time pa

st due, in thousands:

June 30, 201 7	30-89 Days		90 Days and Still				Total Past Due and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total

Commercial	$	618	$	-	$	90	$	708	$	38,686	$	39,394
Agricultural		302		-		-		302		54,672		54,974
Real estate – residential		153		-		131		284		18,668		18,952
Real estate – commercial		1,590		-		1,422		3,012		233,779		236,791
Real estate – construction & land		-		-		696		696		24,123		24,819
Equity Lines of Credit		595		-		260		855		41,356		42,211
Auto		872		-		308		1,180		54,075		55,255
Other		31		-		3		34		3,661		3,695
Total	$	4,161	$	-	$	2,910	$	7,071	$	469,020	$	476,091

December 31, 201 6	30-89 Days		90 Days and Still				Total Past Due and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total

Commercial	$	77	$	-	$	-	$	77	$	41,216	$	41,293
Agricultural		-		-		-		-		51,103		51,103
Real estate – residential		179		-		145		324		20,959		21,283
Real estate – commercial		519		-		1,479		1,998		224,138		226,136
Real estate – construction & land		10		-		703		713		21,191		21,904
Equity Lines of Credit		276		-		326		602		41,736		42,338
Auto		919		-		69		988		52,565		53,553
Other		23		-		2		25		3,488		3,513
Total	$	2,003	$	-	$	2,724	$	4,727	$	456,396	$	461,123

The following tables show information

related to impaired loans at the dates indicated, in thousands:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of June 30, 201 7 :	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	-	$	-			$	-	$	-
Agricultura l		256		256				257		10
Real estate – residential		1,048		1,059				1,060		30
Real estate – commercial		1,731		2,169				1,618		29
Real estate – construction & land		171		171				176		-
Equity Lines of Credit		219		219				207		-
Auto		275		275				87		-
Other		-		-				-		-
With an all owance recorded:
Commercial	$	105	$	105	$	93	$	35	$	1
Agricult ural		-		-		-		-		-
Real est ate – residential		240		240		53		241		5
Real est ate – commercial		527		735		76		530		-
Real est ate – construction & land		652		652		218		664		4
Equity Lines of Credit		41		41		22		13		-
Auto		33		34		16		1		-
Other		2		2		2		1		-
Total:
Commercial	$	105	$	105	$	93	$	35	$	1
Agricult ural		256		256		-		257		10
Real estate – residential		1,288		1,299		53		1,301		35
Real est ate – commercial		2,258		2,904		76		2,148		29
Real est ate – construction & land		823		823		218		840		4
Equity Lines of Credit		260		260		22		220		-
Auto		308		309		16		88		-
Other		2		2		2		1		-
Total	$	5,300	$	5,958	$	480	$	4,890	$	79

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of December 31, 2016:	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial	$	-	$	-			$	-	$	-
Agricultural		258		258				259		19
Real estate – residential		1,373		1,385				1,291		77
Real estate – commercial		1,789		2,227				1,589		33
Real estate – construction & land		198		198				210		-
Equity Lines of Credit		219		219				121		-
Auto		69		69				46		-
Other		2		2				-		-
With an allowance recorded:
Commercial	$	16	$	16	$	2	$	16	$	1
Agricultural		-		-		-		-		-
Real estate – residential		242		242		53		243		11
Real estate – commercial		534		742		81		534		-
Real estate – construction & land		635		635		206		658		8
Equity Lines of Credit		107		107		24		110		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total:
Commercial	$	16	$	16	$	2	$	16	$	1
Agricultural		258		258		-		259		19
Real estate – residential		1,615		1,627		53		1,534		88
Real estate – commercial		2,323		2,969		81		2,123		33
Real estate – construction & land		833		833		206		868		8
Equity Lines of Credit		326		326		24		231		-
Auto		69		69		-		46		-
Other		2		2		-		-		-
Total	$	5,442	$	6,100	$	366	$	5,077	$	149