10-Q 1 form10q.htm COLONY BANKCORP, INC. 10-Q 9-30-2014

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR QUARTER ENDED SEPTEMBER 30, 2014
COMMISSION FILE NUMBER 0-12436
 
COLONY BANKCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

GEORGIA
 
58-1492391
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
 
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)

115 SOUTH GRANT STREET, FITZGERALD, GEORGIA 31750
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES

229/426-6000
REGISTRANT’S TELEPHONE NUMBER INCLUDING AREA CODE

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED REPORTS REQUIRED TO BE FILED BY SECTIONS 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES    x           NO       o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED AND POSTED PURSUANT TO RULE 405 OF REGULATION S-T (§232.405 OF THIS CHAPTER) DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES).

YES    x           NO       o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER OR A SMALLER REPORTING COMPANY.   SEE DEFINITIONS OF “ACCELERATED FILER”, “LARGE ACCELERATED FILER” AND “SMALLER REPORTING COMPANY” IN RULE 12b-2 OF THE EXCHANGE ACT.
 
 
LARGE ACCELERATED FILER o
ACCELERATED FILER o
 
NON-ACCELERATED FILER o
SMALLER REPORTING COMPANY   x
 
(DO NOT CHECK IF A SMALLER REPORTING COMPANY)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).

YES   o       NO  x     
 
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
 
CLASS
OUTSTANDING AT NOVEMBER 3, 2014
COMMON STOCK, $1 PAR VALUE
8,439,258
 


TABLE OF CONTENTS
 
  Page
PART I – Financial Information
       
 
3
       
 
Item 1.
4
 
Item 2.
39
 
Item 3.
53
 
Item 4.
54
       
       
PART II – Other Information
       
 
Item 1.
55
 
Item 1A.
55
 
Item 2.
55
 
Item 3.
55
 
Item 4.
55
 
Item 5.
55
 
Item 6.
56
   
58
 

 
Forward Looking Statement Disclosure

Certain statements contained in this Quarterly Report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act), not withstanding that such statements are not specifically identified.  In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act.  Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Colony Bankcorp, Inc. or its management or Board of Directors, including those relating to products or services; (ii) statements of future economic performance; and (iv) statements of assumptions underlying such statements.  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements.  Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

Loss and regional economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.

Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board.

Inflation, interest rate, market and monetary fluctuations.

Political instability.

Acts of war or terrorism.

The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

Changes in consumer spending, borrowings and savings habits.

Technological changes.

Acquisitions and integration of acquired businesses.

The ability to increase market share and control expenses.

The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiary must comply.

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters.

Changes in the Company’s organization, compensation and benefit plans.

The costs and effects of litigation and of unexpected or adverse outcomes in such litigation.

Greater than expected costs or difficulties related to the integration of new lines of business.

The Company’s success at managing the risks involved in the foregoing items.

Restrictions or conditions imposed by our regulators on our operations.

Forward-looking statements speak only as of the date on which such statements are made.  The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission (SEC).
 
PART 1. FINANCIAL INFORMATION
ITEM 1

FINANCIAL STATEMENTS

THE FOLLOWING FINANCIAL STATEMENTS ARE PROVIDED FOR COLONY BANKCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY BANK, COLONY BANK

A. CONSOLIDATED BALANCE SHEETS – SEPTEMBER 30, 2014 (UNAUDITED) AND DECEMBER 31, 2013 (AUDITED).

B. CONSOLIDATED STATEMENTS OF INCOME – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (UNAUDITED).

C. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (UNAUDITED).

D. CONSOLIDATED STATEMENTS OF CASH FLOWS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (UNAUDITED).

THE CONSOLIDATED FINANCIAL STATEMENTS FURNISHED HAVE NOT BEEN AUDITED BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS, BUT REFLECT, IN THE OPINION OF MANAGEMENT, ALL ADJUSTMENTS (CONSISTING SOLELY OF NORMAL RECURRING ADJUSTMENTS) NECESSARY FOR A FAIR PRESENTATION OF THE RESULTS OF OPERATIONS FOR THE PERIODS PRESENTED.

THE RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2014 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED FOR THE FULL YEAR.
 
Part I (Continued)
Item 1  (Continued)
 
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2014 AND DECEMBER 31, 2013
(DOLLARS IN THOUSANDS)
 
   
September 30, 2014
   
December 31, 2013
 
ASSETS
 
(Unaudited)
   
(Audited)
 
         
Cash and Cash Equivalents
       
Cash and Due from Banks
 
$
17,120
   
$
25,692
 
Federal Funds Sold
   
6,712
     
20,495
 
     
23,832
     
46,187
 
Interest-Bearing Deposits
   
10,682
     
21,960
 
Investment Securities
               
Available for Sale, at Fair Value
   
273,547
     
263,258
 
Held to Maturity, at Cost (Fair Value of $33 and $37, as of September 30, 2014 and December 31, 2013, Respectively)
   
33
     
37
 
     
273,580
     
263,295
 
                 
Federal Home Loan Bank Stock, at Cost
   
2,831
     
3,164
 
Loans
   
743,281
     
751,218
 
Allowance for Loan Losses
   
(9,788
)
   
(11,806
)
Unearned Interest and Fees
   
(354
)
   
(360
)
     
733,139
     
739,052
 
Premises and Equipment
   
24,976
     
24,876
 
Other Real Estate (Net of Allowance of $3,026 and $3,986 as of September 30, 2014 and December 31, 2013, Respectively)
   
10,833
     
15,502
 
Other Intangible Assets
   
161
     
188
 
Other Assets
   
34,380
     
34,327
 
Total Assets
 
$
1,114,414
   
$
1,148,551
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Noninterest-Bearing
 
$
116,131
   
$
115,261
 
Interest-Bearing
   
825,069
     
872,269
 
     
941,200
     
987,530
 
Borrowed Money
               
Subordinated Debentures
   
24,229
     
24,229
 
Other Borrowed Money
   
40,000
     
40,000
 
     
64,229
     
64,229
 
                 
Other Liabilities
   
12,713
     
6,838
 
                 
Stockholders' Equity
               
Preferred Stock, Stated Value $1,000 a Share; Authorized 10,000,000 Shares, Issued 28,000 Shares
   
28,000
     
28,000
 
Common Stock, Par Value $1 a Share; Authorized 20,000,000 Shares, Issued 8,439,258 Shares as of September 30, 2014 and December 31, 2013
   
8,439
     
8,439
 
Paid-In Capital
   
29,145
     
29,145
 
Retained Earnings
   
36,978
     
33,445
 
Accumulated Other Comprehensive (Loss), Net of Tax Benefits
   
(6,290
)
   
(9,075
)
     
96,272
     
89,954
 
Total Liabilities and Stockholders' Equity
 
$
1,114,414
   
$
1,148,551
 

The accompanying notes are an integral part of these statements.
 
Part I (Continued)
Item 1  (Continued)
 
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(UNAUDITED)
(DOLLARS IN THOUSANDS)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2014
   
September 30, 2013
   
September 30, 2014
   
September 30, 2013
 
Interest Income
               
Loans, Including Fees
 
$
10,170
   
$
10,303
   
$
29,815
   
$
31,023
 
Federal Funds Sold
   
6
     
7
     
23
     
27
 
Deposits with Other Banks
   
9
     
5
     
32
     
21
 
Investment Securities
                               
U.S. Government Agencies
   
1,165
     
880
     
3,574
     
2,454
 
State, County and Municipal
   
24
     
30
     
75
     
94
 
Corporate Obligations & Asset-Backed Securities
   
-
     
14
     
-
     
42
 
Dividends on Other Investments
   
26
     
21
     
85
     
59
 
     
11,400
     
11,260
     
33,604
     
33,720
 
Interest Expense
                               
Deposits
   
1,260
     
1,361
     
3,869
     
4,452
 
Borrowed Money
   
402
     
405
     
1,275
     
1,273
 
     
1,662
     
1,766
     
5,144
     
5,725
 
                                 
Net Interest Income
   
9,738
     
9,494
     
28,460
     
27,995
 
Provision for Loan Losses
   
500
     
1,500
     
1,308
     
4,200
 
Net Interest Income After Provision for Loan Losses
   
9,238
     
7,994
     
27,152
     
23,795
 
                                 
Noninterest Income
                               
Service Charges on Deposits
   
1,231
     
1,236
     
3,369
     
3,484
 
Other Service Charges, Commissions and Fees
   
622
     
442
     
1,842
     
1,289
 
Mortgage Fee Income
   
130
     
117
     
311
     
377
 
Securities Gains (Losses)
   
-
     
-
     
1
     
(2
)
Other
   
427
     
314
     
1,195
     
1,211
 
     
2,410
     
2,109
     
6,718
     
6,359
 
Noninterest Expenses
                               
Salaries and Employee Benefits
   
4,432
     
4,178
     
13,149
     
12,496
 
Occupancy and Equipment
   
1,049
     
974
     
3,069
     
2,842
 
Other
   
3,053
     
3,336
     
9,473
     
10,281
 
     
8,534
     
8,488
     
25,691
     
25,619
 
                                 
Income Before Income Taxes
   
3,114
     
1,615
     
8,179
     
4,535
 
Income Taxes
   
1,033
     
535
     
2,625
     
1,532
 
Net Income
   
2,081
     
1,080
     
5,554
     
3,003
 
Preferred Stock Dividends
   
697
     
379
     
2,021
     
1,124
 
Net Income Available to Common Stockholders
 
$
1,384
   
$
701
   
$
3,533
   
$
1,879
 
Net Income Per Share of Common Stock
                               
Basic
 
$
0.16
   
$
0.08
   
$
0.42
   
$
0.22
 
Diluted
 
$
0.16
   
$
0.08
   
$
0.42
   
$
0.22
 
Cash Dividends Declared Per Share of Common Stock
 
$
0.00
   
$
0.00
   
$
0.00
   
$
0.00
 
Weighted Average Basic Shares Outstanding
   
8,439,258
     
8,439,258
     
8,439,258
     
8,439,258
 
Weighted Average Diluted Shares Outstanding
   
8,439,258
     
8,439,258
     
8,439,258
     
8,439,258
 

The accompanying notes are an integral part of these statements.
 
Part I (Continued)
Item 1 (Continued)
 
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(UNAUDITED)
(DOLLARS IN THOUSANDS)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2014
   
September 30, 2013
   
September 30, 2014
   
September 30, 2013
 
                 
Net Income
 
$
2,081
   
$
1,080
   
$
5,554
   
$
3,003
 
                                 
Other Comprehensive Income (Loss):
                               
Investment securities available-for-sale:
                               
Unrealized holding gains (losses)
   
(488
)
   
(2,464
)
   
4,220
     
(10,338
)
Tax Effect
   
166
     
838
     
(1,435
)
   
3,515
 
Reclassification of gains recognized in net income
   
-
     
(2
)
   
-
     
-
 
Tax Effect
   
-
     
1
     
-
     
-
 
     
(322
)
   
(1,627
)
   
2,785
     
(6,823
)
                                 
Comprehensive Income (Loss)
 
$
1,759
   
$
(547
)
 
$
8,339
   
$
(3,820
)

The accompanying notes are an integral part of these statements.
 
Part I (Continued)
Item 1 (Continued)
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(UNAUDITED)
(DOLLARS IN THOUSANDS)

   
Nine Months Ended
 
   
September 30, 2014
   
September 30, 2013
 
CASH FLOWS FROM OPERATING ACTIVITIES
       
Net Income
 
$
5,554
   
$
3,003
 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
               
Depreciation
   
1,207
     
1,172
 
Provision for Loan Losses
   
1,308
     
4,200
 
Securities (Gains) Losses
   
(1
)
   
2
 
Amortization and Accretion
   
979
     
2,277
 
Losses on Sale of Other Real Estate and Repossessions
   
501
     
796
 
Provision for Losses on Other Real Estate
   
605
     
1,049
 
Increase in Cash Surrender Value of Life Insurance
   
(431
)
   
(178
)
Gain on Sale of Premises and Equipment
   
(12
)
   
-
 
Other Prepaids, Deferrals and Accruals, Net
   
2,745
     
2,939
 
     
12,455
     
15,260
 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of Investment Securities Available for Sale
   
(34,062
)
   
(78,604
)
Proceeds from Maturities, Calls, and Paydowns of
               
Investment Securities:
               
Available for Sale
   
27,072
     
40,794
 
Held for Maturity
   
8
     
8
 
Proceeds from Sale of Investment Securities
               
Available for Sale
   
-
     
36,217
 
Interest-Bearing Deposits in Other Banks
   
11,278
     
17,678
 
Net Loans to Customers
   
1,864
     
(13,442
)
Purchase of Premises and Equipment
   
(1,308
)
   
(1,089
)
Proceeds from Sale of Other Real Estate and Repossessions
   
6,321
     
6,514
 
Proceeds from Sale of Federal Home Loan Bank Stock
   
333
     
200
 
Proceeds from Sale of Fixed Assets
   
14
     
-
 
Purchase of Bank Owned Life Insurance
   
-
     
(10,000
)
     
11,520
     
(1,724
)
CASH FLOWS FROM FINANCING ACTIVITIES
               
Noninterest-Bearing Customer Deposits
   
870
     
(13,097
)
Interest-Bearing Customer Deposits
   
(47,200
)
   
(17,126
)
Proceeds from Other Borrowed Money
   
-
     
(16,500
)
Principal Payments on Other Borrowed Money
   
-
     
21,500
 
     
(46,330
)
   
(25,223
)
                 
Net Decrease in Cash and Cash Equivalents
   
(22,355
)
   
(11,687
)
Cash and Cash Equivalents at Beginning of Period
   
46,187
     
49,246
 
Cash and Cash Equivalents at End of Period
 
$
23,832
   
$
37,559
 

The accompanying notes are an integral part of these statements.
 
Part I (Continued)
Item 1 (Continued)
 
COLONY BANKCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Summary of Significant Accounting Policies

Presentation

Colony Bankcorp, Inc. (the Company) is a bank holding company located in Fitzgerald, Georgia. The consolidated financial statements include the accounts of Colony Bankcorp, Inc. and its wholly-owned subsidiary, Colony Bank, Fitzgerald, Georgia.  All significant intercompany accounts have been eliminated in consolidation. The accounting and reporting policies of Colony Bankcorp, Inc. conform to generally accepted accounting principles and practices utilized in the commercial banking industry.

All dollars in notes to consolidated financial statements are rounded to the nearest thousand.

The consolidated financial statements in this report are unaudited, except for the December 31, 2013 consolidated balance sheet.  All adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary for fair presentation of the interim consolidated financial statements have been included and fairly and accurately present the financial position, results of operations and cash flows of the Company.  The results of operations for the nine months ended September 30, 2014, are not necessarily indicative of the results which may be expected for the entire year.

Nature of Operations

The Bank provides a full range of retail and commercial banking services for consumers and small- to medium-size businesses located primarily in central, south and coastal Georgia. Colony Bank is headquartered in Fitzgerald, Georgia with banking offices in Albany, Ashburn, Broxton, Centerville, Chester, Columbus, Cordele, Douglas, Eastman, Fitzgerald, Leesburg, Moultrie, Pitts, Quitman, Rochelle, Savannah, Soperton, Sylvester, Thomaston, Tifton, Valdosta and Warner Robins.  Lending and investing activities are funded primarily by deposits gathered through its retail banking office network.

Use of Estimates

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to statement presentations selected for 2014.   Such reclassifications had no effect on previously reported stockholders’ equity or net income.

Concentrations of Credit Risk

Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions.  The Company has a concentration in real estate loans as well as a geographic concentration that could pose an adverse credit risk, particularly with the current economic downturn in the real estate market.  At September 30, 2014, approximately 86 percent of the Company’s loan portfolio was concentrated in loans secured by real estate.  A substantial portion of borrowers’ ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector.  Declining collateral real estate values that secure land development, construction and speculative real estate loans in the Company’s larger MSA markets have resulted in high loan loss provisions in recent years.  In addition, a large portion of the Company’s foreclosed assets are also located in these same geographic markets, making the recovery of the carrying amount of foreclosed assets susceptible to changes in market conditions.  Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis.
 
Part I (Continued)
Item 1 (Continued)
 
(1)  Summary of Significant Accounting Policies (Continued)

Concentrations of Credit Risk (Continued)

The success of the Company is dependent, to a certain extent, upon the economic conditions in the geographic markets it serves. Adverse changes in the economic conditions in these geographic markets would likely have a material adverse effect on the Company’s results of operations and financial condition. The operating results of Colony depend primarily on its net interest income. Accordingly, operations are subject to risks and uncertainties surrounding the exposure to changes in the interest rate environment.

At times, the Company may have cash and cash equivalents at financial institutions in excess of federal deposit insurance limits.  The Company places its cash and cash equivalents with high credit quality financial institutions whose credit ratings are monitored by management to minimize credit risk.

Investment Securities

The Company classifies its investment securities as trading, available for sale or held to maturity.  Securities that are held principally for resale in the near term are classified as trading.  Trading securities are carried at fair value, with realized and unrealized gains and losses included in noninterest income.  Currently, no securities are classified as trading.  Securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost.  All securities not classified as trading or held to maturity are considered available for sale.  Securities available for sale are reported at estimated fair value. Unrealized gains and losses on securities available for sale are excluded from earnings and are reported, net of deferred taxes, in accumulated other comprehensive income (loss), a component of stockholders’ equity.  Gains and losses from sales of securities available for sale are computed using the specific identification method. Securities available for sale includes securities, which may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital requirements, or unforeseen changes in market conditions.

The Company evaluates each held to maturity and available for sale security in a loss position for other-than-temporary impairment (OTTI).  In estimating other-than-temporary impairment losses, management considers such factors as the length of time and the extent to which the market value has been below cost, the financial condition of the issuer and the Company’s intent to sell and whether it is more likely than not that the Company will be required to sell the security before anticipated recovery of the amortized cost basis.  If the Company intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery, the OTTI write-down is recognized in earnings.  If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings and an amount related to all other factors, which is recognized in other comprehensive income (loss).

Federal Home Loan Bank Stock

Investment in stock of a Federal Home Loan Bank (FHLB) is required for every federally insured institution that utilizes its services. FHLB stock is considered restricted, as defined in the accounting standards.  The FHLB stock is reported in the consolidated financial statements at cost. Dividend income is recognized when earned.

Loans

Loans that the Company has the ability and intent to hold for the foreseeable future or until maturity are recorded at their principal amount outstanding, net of unearned interest and fees.  Loan origination fees, net of certain direct origination costs, are deferred and amortized over the estimated terms of the loans using the straight-line method.  Interest income on loans is recognized using the effective interest method.

A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date.

When management believes there is sufficient doubt as to the collectibility of principal or interest on any loan or generally when loans are 90 days or more past due, the accrual of applicable interest is discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of collection. Interest payments received on nonaccrual loans are either applied against principal or reported as income, according to management’s judgment as to the collectibility of principal. Loans are returned to an accrual status when factors indicating doubtful collectibility on a timely basis no longer exist.
 
Part I (Continued)
Item 1 (Continued)
 
(1)  Summary of Significant Accounting Policies (Continued)

Loans Modified in a Troubled Debt Restructuring (TDR)

Loans are considered to have been modified in a TDR when due to a borrower’s financial difficulty, the Company makes certain concessions to the borrower that it would not otherwise consider for new debt with similar risk characteristics.  Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of the collateral.  Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of 6 months to demonstrate that the borrower is able to meet the terms of the modified loan.  However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period.  If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.  Once a loan is modified in a troubled debt restructuring it is accounted for as an impaired loan, regardless of its accrual status, until the loan is paid in full, sold or charged off.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.

The allowance consists of specific, historical and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The historical component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. A general component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and historical losses in the portfolio.  General valuation allowances are based on internal and external qualitative risk factors such as (i) changes in the composition of the loan portfolio, (ii) the extent of loan concentrations within the portfolio, (iii) the effectiveness of the Company’s lending policies, procedures and internal controls, (iv) the experience, ability and effectiveness of the Company’s lending management and staff, and (v) national and local economics and business conditions.

Loans identified as losses by management, internal loan review and/or regulatory agencies are charged off.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

A significant portion of the Company’s impaired loans are deemed to be collateral dependent.  Management therefore measures impairment on these loans based on the fair value of the collateral.  Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company or by senior members of the Company’s credit administration staff.  The decision whether or not to obtain an external third-party appraisal usually depends on the type of property being evaluated.  External appraisals are usually obtained on more complex, income producing properties such as hotels, shopping centers and businesses.  Less complex properties such as residential lots, farm land and single family houses may be evaluated internally by senior credit administration staff.
 
Part I (Continued)
Item 1 (Continued)
 
(1)  Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

When the Company does obtain appraisals from external third-parties, the values utilized in the impairment calculation are “as is” or current market values.  The appraisals, whether prepared internally or externally, may utilize a single valuation approach or a combination of approaches including the comparable sales, income and cost approach.  Appraised amounts used in the impairment calculation are typically discounted 10 percent to account for selling and marketing costs, if the repayment of the loan is to come from the sale of the collateral.  Although appraisals are not obtained each year on all impaired loans, the collateral values used in the impairment calculations are evaluated quarterly by management.  Based on management’s knowledge of the collateral and the current real estate market conditions, appraised values may be further discounted to reflect facts and circumstances known to management since the initial appraisal was performed.

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are typically significant and result in a level 3 classification of the inputs for determining fair value.  Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, we consider the fair value of impaired loans to be highly sensitive to changes in market conditions.

Premises and Equipment

Premises and equipment are recorded at acquisition cost net of accumulated depreciation.

Depreciation is charged to operations over the estimated useful lives of the assets. The estimated useful lives and methods of depreciation are as follows:
 
Description
 
Life in Years.
 
Method
Banking Premises
 
15-40
 
Straight-Line and Accelerated
Furniture and Equipment
 
5-10
 
Straight-Line and Accelerated

Expenditures for major renewals and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. When property and equipment are retired or sold, the cost and accumulated depreciation are removed from the respective accounts and any gain or loss is reflected in other income or expense.

Intangible Assets

Intangible assets consist of core deposit intangibles acquired in connection with a business combination.  The core deposit intangible is initially recognized based on a valuation performed as of the consummation date.  The core deposit intangible is amortized by the straight-line method over the average remaining life of the acquired customer deposits.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Statement of Cash Flows

For reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing amounts due from banks and federal funds sold. Cash flows from demand deposits, interest-bearing checking accounts, savings accounts, loans and certificates of deposit are reported net.

Advertising Costs

The Company expenses the cost of advertising in the periods in which those costs are incurred.
 
Part I (Continued)
Item 1 (Continued)
 
(1)  Summary of Significant Accounting Policies (Continued)

Income Taxes

The provision for income taxes is based upon income for financial statement purposes, adjusted for nontaxable income and nondeductible expenses. Deferred income taxes have been provided when different accounting methods have been used in determining income for income tax purposes and for financial reporting purposes.

Deferred tax assets and liabilities are recognized based on future tax consequences attributable to differences arising from the financial statement carrying values of assets and liabilities and their tax bases. The differences relate primarily to depreciable assets (use of different depreciation methods for financial statement and income tax purposes) and allowance for loan losses (use of the allowance method for financial statement purposes and the direct write-off method for tax purposes). In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with effects included in the income tax provision. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The Company and its subsidiary file a consolidated federal income tax return. The subsidiary pays its proportional share of federal income taxes to the Company based on its taxable income.

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination.  Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.  Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts.  The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities.  Interest expense is recognized beginning in the first period that such interest would begin accruing.  Penalties are recognized in the period that the Company claims the position in the tax return.  Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income.

Other Real Estate

Other real estate generally represents real estate acquired through foreclosure and is initially recorded at estimated fair value at the date of acquisition less the cost of disposal.  Losses from the acquisition of property in full or partial satisfaction of debt are recorded as loan losses. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and valuation allowances are recorded as necessary to reduce the carrying amount to fair value less estimated cost of disposal.  Routine holding costs and gains or losses upon disposition are included in other noninterest expense.

Bank-Owned Life Insurance

The Company has purchased life insurance on the lives of certain key members of management and directors.  The life insurance policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement, if applicable.  Increases in the cash surrender value are recorded as other income in the consolidated statements of income.  The cash surrender value of the insurance contracts is recorded in other assets on the consolidated balance sheets in the amount of $14,371 and $13,940 as of September 30, 2014 and December 31, 2013, respectively.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, represent equity changes from economic events of the period other than transactions with owners and are not reported in the consolidated statements of operations but as a separate component of the equity section of the consolidated balance sheets. Such items are considered components of other comprehensive income (loss).  Accounting standards codification requires the presentation in the consolidated financial statements of net income and all items of other comprehensive income (loss) as total comprehensive income (loss).

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
 
Part I (Continued)
Item 1 (Continued)

(1)  Summary of Significant Accounting Policies (Continued)

Changes in Accounting Principles and Effects of New Accounting Pronouncements

Adoption of New Accounting Standards

In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.

(2)  Investment Securities

Investment securities as of September 30, 2014 and December 31, 2013 are summarized as follows:

September 30, 2014
     
Gross
   
Gross
     
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Securities Available for Sale:
               
U.S. Government Agencies
               
Mortgage-Backed
 
$
279,533
   
$
182
   
$
(9,705
)
 
$
270,010
 
State, County & Municipal
   
3,544
     
21
     
(28
)
   
3,537
 
   
$
283,077
   
$
203
   
$
(9,733
)
 
$
273,547
 
Securities Held to Maturity:
                               
State, County and Municipal
 
$
33
   
$
-
   
$
-
   
$
33
 
                                 
December 31, 2013
         
Gross
   
Gross
         
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Securities Available for Sale:
                               
U.S. Government Agencies
                               
Mortgage-Backed
 
$
273,029
   
$
119
   
$
(13,800
)
 
$
259,348
 
State, County & Municipal
   
3,979
     
15
     
(84
)
   
3,910
 
   
$
277,008
   
$
134
   
$
(13,884
)
 
$
263,258
 
Securities Held to Maturity:
                               
State, County and Municipal
 
$
37
   
$
-
   
$
-
   
$
37
 
 
Part I (Continued)
Item 1 (Continued)
 
(2)  Investment Securities (Continued)

The amortized cost and fair value of investment securities as of September 30, 2014, by contractual maturity, are shown hereafter.  Expected maturities will differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.  This is often the case with mortgage-backed securities, which are disclosed separately in the table below.

   
Securities
 
   
Available for Sale
   
Held to Maturity
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
                 
Due In One Year or Less
 
$
718
   
$
721
   
$
-
   
$
-
 
Due After One Year Through Five Years
   
734
     
745
     
33
     
33
 
Due After Five Years Through Ten Years
   
1,169
     
1,160
     
-
     
-
 
Due After Ten Years
   
923
     
911
     
-
     
-
 
   
$
3,544
   
$
3,537
   
$
33
   
$
33
 
                                 
Mortgage-Backed Securities
   
279,533
     
270,010
     
-
     
-
 
   
$
283,077
   
$
273,547
   
$
33
   
$
33
 

Proceeds from the sale of investments available for sale during the first nine months of 2014 totaled $0 compared to $36,217 for the first nine months of 2013.  The sale of investments available for sale during the first nine months of 2014 resulted in gross realized gains of $0 and losses of $0.  The gross realized gain of $1 for the first nine months of 2014 was due to a gain on a call for a held to maturity investment.  The sale of investments available for sale during the first nine months of 2013 resulted in gross realized gains of $191 and losses of $(193).

Investment securities having a carry value approximating $113,540 and $112,913 as of September 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits and for other purposes.

Information pertaining to securities with gross unrealized losses at September 30, 2014 and December 31, 2013 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
                         
       
Gross
       
Gross
       
Gross
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
                         
September 30, 2014
                       
U.S. Government Agencies
                       
Mortgage-Backed
 
$
74,078
   
$
(602
)
 
$
178,358
   
$
(9,103
)
 
$
252,436
   
$
(9,705
)
State, County and Municipal
   
474
     
(6
)
   
1,380
     
(22
)
   
1,854
     
(28
)
   
$
74,552
   
$
(608
)
 
$
179,738
   
$
(9,125
)
 
$
254,290
   
$
(9,733
)
                                                 
December 31, 2013
                                               
U.S. Government Agencies
                                               
Mortgage-Backed
 
$
190,064
   
$
(9,441
)
 
$
63,194
   
$
(4,359
)
 
$
253,258
   
$
(13,800
)
State, County and Municipal
   
1,647
     
(84
)
   
-
     
-
     
1,647
     
(84
)
   
$
191,711
   
$
(9,525
)
 
$
63,194
   
$
(4,359
)
 
$
254,905
   
$
(13,884
)
Part I (Continued)
Item 1 (Continued)
 
(2)  Investments (Continued)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At September 30, 2014, the debt securities with unrealized losses have depreciated 3.69 percent from the Company’s amortized cost basis.  These securities are guaranteed by either the U.S. Government, other governments or U.S. corporations.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.  The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other than temporary.

(3)  Loans

The following table presents the composition of loans segregated by class of loans, as of September 30, 2014 and December 31, 2013.

   
September 30, 2014
   
December 31, 2013
 
Commercial and Agricultural
       
Commercial
 
$
46,481
   
$
48,107
 
Agricultural
   
23,017
     
10,666
 
                 
Real Estate
               
Commercial Construction
   
50,455
     
52,739
 
Residential Construction
   
9,700
     
6,549
 
Commercial
   
327,498
     
341,783
 
Residential
   
204,313
     
206,258
 
Farmland
   
50,401
     
47,035
 
                 
Consumer and Other
               
Consumer
   
23,448
     
25,676
 
Other
   
7,968
     
12,405
 
                 
Total Loans
 
$
743,281
   
$
751,218
 

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 1 to 8.  A description of the general characteristics of the grades is as follows:
 
Part I (Continued)
Item 1 (Continued)

(3)  Loans (Continued)

Grades 1 and 2 – 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 3 and 4 – Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk.  The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

Grade 5 – 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 6 – 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 7 and 8 – 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 no 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 6.

The following table presents the loan portfolio by credit quality indicator (risk grade) as of September 30, 2014 and December 31, 2013.  Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

September 30, 2014
               
   
Pass
   
Special Mention
   
Substandard
   
Total Loans
 
Commercial and Agricultural
               
Commercial
 
$
41,379
   
$
3,058
   
$
2,044
   
$
46,481
 
Agricultural
   
22,825
     
35
     
157
     
23,017
 
                                 
Real Estate
                               
Commercial Construction
   
44,084
     
1,979
     
4,392
     
50,455
 
Residential Construction
   
9,591
     
109
     
-
     
9,700
 
Commercial
   
306,612
     
9,959
     
10,927
     
327,498
 
Residential
   
180,906
     
10,480
     
12,927
     
204,313
 
Farmland
   
48,428
     
475
     
1,498
     
50,401
 
                                 
Consumer and Other
                               
Consumer
   
22,710
     
226
     
512
     
23,448
 
Other
   
7,764
     
-
     
204
     
7,968
 
                                 
Total Loans
 
$
684,299
   
$
26,321
   
$
32,661
   
$
743,281
 

Part I (Continued)
Item 1 (Continued)
 
(3)  Loans (Continued)

December 31, 2013
               
   
Pass
   
Special Mention
   
Substandard
   
Total Loans
 
Commercial and Agricultural
               
Commercial
 
$
41,759
   
$
2,770
   
$
3,578
   
$
48,107
 
Agricultural
   
10,638
     
17
     
11
     
10,666
 
                                 
Real Estate
                               
Commercial Construction
   
42,669
     
1,512
     
8,558
     
52,739
 
Residential Construction
   
6,341
     
208
     
-
     
6,549
 
Commercial
   
317,567
     
10,760
     
13,456
     
341,783
 
Residential
   
182,977
     
13,524
     
9,757
     
206,258
 
Farmland
   
44,777
     
507
     
1,751
     
47,035
 
                                 
Consumer and Other
                               
Consumer
   
24,609
     
320
     
747
     
25,676
 
Other
   
12,355
     
1
     
49
     
12,405
 
                                 
Total Loans
 
$
683,692
   
$
29,619
   
$
37,907
   
$
751,218
 

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 6 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 90 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.
 
Part I (Continued)
Item 1 (Continued)
 
(3)  Loans (Continued)

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of September 30, 2014 and December 31, 2013:

September 30, 2014
                       
   
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
 
$
457
   
$
-
   
$
457
   
$
492
   
$
45,532
   
$
46,481
 
Agricultural
   
19
     
-
     
19
     
45
     
22,953
     
23,017
 
                                                 
Real Estate
                                               
Commercial Construction
   
500
     
-
     
500
     
3,239
     
46,716
     
50,455
 
Residential Construction
   
-
     
-
     
-
     
-
     
9,700
     
9,700
 
Commercial
   
3,230
     
-
     
3,230
     
3,473
     
320,795
     
327,498
 
Residential
   
7,585
     
-
     
7,585
     
4,563
     
192,165
     
204,313
 
Farmland
   
292
     
-
     
292
     
984
     
49,125
     
50,401
 
                                                 
Consumer and Other
                                               
Consumer
   
476
     
7
     
483
     
173
     
22,792
     
23,448
 
Other
   
-
     
-
     
-
     
202
     
7,766
     
7,968
 
                                                 
Total Loans
 
$
12,559
   
$
7
   
$
12,566
   
$
13,171
   
$
717,544
   
$
743,281
 

December 31, 2013
                       
   
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
 
$
581
   
$
-
   
$
581
   
$
1,646
   
$
45,880
   
$
48,107
 
Agricultural
   
81
     
-
     
81
     
-
     
10,585
     
10,666
 
                                                 
Real Estate
                                               
Commercial Construction
   
140
     
-
     
140
     
8,222
     
44,377
     
52,739
 
Residential Construction
   
-
     
-
     
-
     
-
     
6,549
     
6,549
 
Commercial
   
2,287
     
-
     
2,287
     
7,367
     
332,129
     
341,783
 
Residential
   
5,274
     
-
     
5,274
     
4,933
     
196,051
     
206,258
 
Farmland
   
351
     
-
     
351
     
1,630
     
45,054
     
47,035
 
                                                 
Consumer and Other
                                               
Consumer
   
454
     
4
     
458
     
307
     
24,911
     
25,676
 
Other
   
198
     
-
     
198
     
9
     
12,198
     
12,405
 
                                                 
Total Loans
 
$
9,366
   
$
4
   
$
9,370
   
$
24,114
   
$
717,734
   
$
751,218
 

Part I (Continued)
Item 1 (Continued)
   
 (3) Loans (Continued)

The following table details impaired loan data as of September 30, 2014:
 
September 30, 2014
                       
   
Unpaid
                     
   
Contractual
           
Average
   
Interest
   
Interest
 
   
Principal
   
Impaired
   
Related
   
Recorded
   
Income
   
Income
 
   
Balance
   
Balance
   
Allowance
   
Investment
   
Recognized
   
Collected
 
                         
With No Related Allowance Recorded
                       
Commercial
 
$
394
   
$
394
   
$
-
   
$
803
   
$
6
   
$
14
 
Agricultural
   
50
     
45
     
-
     
53
     
(4
)
   
6
 
Commercial Construction
   
9,210
     
3,101
     
-
     
3,347
     
2
     
2
 
Residential Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate
   
17,346
     
16,656
     
-
     
19,058
     
427
     
445
 
Residential Real Estate
   
4,729
     
3,953
     
-
     
5,054
     
150
     
142
 
Farmland
   
1,330
     
984
     
-
     
782
     
(19
)
   
11
 
Consumer
   
181
     
173
     
-
     
215
     
7
     
10
 
Other
   
212
     
201
     
-
     
198
     
3
     
8
 
                                                 
     
33,452
     
25,507
     
-
     
29,510
     
572
     
638
 
                                                 
With An Allowance Recorded
                                               
Commercial
   
99
     
99
     
99
     
527
     
-
     
-
 
Agricultural
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Construction
   
210
     
139
     
59
     
1,993
     
-
     
-
 
Residential Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate
   
5,931
     
5,931
     
283
     
6,508
     
142
     
143
 
Residential Real Estate
   
4,106
     
3,349
     
605
     
1,751
     
66
     
70
 
Farmland
   
398
     
398
     
31
     
574
     
8
     
7
 
Consumer
   
-
     
-
     
-
     
-
     
-
     
-
 
Other
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
     
10,744
     
9,916
     
1,077
     
11,353
     
216
     
220
 
                                                 
Total
                                               
Commercial
   
493
     
493
     
99
     
1,330
     
6
     
14
 
Agricultural
   
50
     
45
     
-
     
53
     
(4
)
   
6
 
Commercial Construction
   
9,420
     
3,240
     
59
     
5,340
     
2
     
2
 
Residential Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate
   
23,277
     
22,587
     
283
     
25,566
     
569
     
588
 
Residential Real Estate
   
8,835
     
7,302
     
605
     
6,805
     
216
     
212
 
Farmland
   
1,728
     
1,382
     
31
     
1,356
     
(11
)
   
18
 
Consumer
   
181
     
173
     
-
     
215
     
7
     
10
 
Other
   
212
     
201
     
-
     
198
     
3
     
8
 
                                                 
   
$
44,196
   
$
35,423
   
$
1,077
   
$
40,863
   
$
788
   
$
858
 
 
Part I (Continued)
Item 1 (Continued)
  
(3) Loans (Continued)

The following table details impaired loan data as of December 31, 2013:
 
December 31, 2013
                       
   
Unpaid
                     
   
Contractual
           
Average
   
Interest
   
Interest
 
   
Principal
   
Impaired
   
Related
   
Recorded
   
Income
   
Income
 
   
Balance
   
Balance
   
Allowance
   
Investment
   
Recognized
   
Collected
 
                       
With No Related Allowance Recorded
                       
Commercial
 
$
305
   
$
305
   
$
-
   
$
216
   
$
24
   
$
25
 
Agricultural
   
-
     
-
     
-
     
10
     
-
     
-
 
Commercial Construction
   
7,856
     
4,750
     
-
     
4,106
     
35
     
41
 
Residential Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate
   
20,121
     
19,253
     
-
     
13,199
     
494
     
504
 
Residential Real Estate
   
7,837
     
6,362
     
-
     
4,564
     
224
     
209
 
Farmland
   
303
     
303
     
-
     
1,859
     
1
     
1
 
Consumer
   
313
     
307
     
-
     
253
     
18
     
21
 
Other
   
9
     
9
     
-
     
2
     
1
     
1
 
                                                 
     
36,744
     
31,289
     
-
     
24,209
     
797
     
802
 
                                                 
With An Allowance Recorded
                                               
Commercial
   
1,453
     
1,453
     
434
     
1,689
     
15
     
21
 
Agricultural
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Construction
   
5,923
     
3,472
     
830
     
5,025
     
-
     
-
 
Residential Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate
   
5,874
     
5,874
     
424
     
11,072
     
157
     
148
 
Residential Real Estate
   
1,949
     
1,849
     
526
     
3,662
     
26
     
24
 
Farmland
   
1,327
     
1,327
     
85
     
664
     
45
     
47
 
Consumer
   
-
     
-
     
-
     
-
     
-
     
-
 
Other
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
     
16,526
     
13,975
     
2,299
     
22,112
     
243
     
240
 
                                                 
Total
                                               
Commercial
   
1,758
     
1,758
     
434
     
1,905
     
39
     
46
 
Agricultural
   
-
     
-
     
-
     
10
     
-
     
-
 
Commercial Construction
   
13,779
     
8,222
     
830
     
9,131
     
35
     
41
 
Residential Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate
   
25,995
     
25,127
     
424
     
24,271
     
651
     
652
 
Residential Real Estate
   
9,786
     
8,211
     
526
     
8,226