Note 3 – Loans

The following table summarizes loans at September 30, 2016 and December 31, 2015.

	September 30, 2016		December 31, 2015
	(Dollars in thousands)
Commercial, financial, and agricultural	$	216,316		210,712
Real estate:
Commercial		381,882		366,566
Residential		250,111		229,161
Acquisition, development and construction		168,396		184,292
Consumer installment		20,107		18,584
	$	1,036,812		1,009,315
Less allowance for loan losses		21,368		21,367
Less deferred loan origination fees (costs)		21		166
	$	1,015,423		987,782

The following tables present the activity in the allowance for loan losses by portfolio segment as of and for the three and nine month periods ended September 30, 2016 and 2015.

	Three Months Ended September 30, 2016
	Commercial,
	Financial, and			CRE - Owner		CRE - Non Owner		Residential		ADC			ADC
	Agricultural			Occupied		Occupied		Real Estate		CSRA			Other			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	5,589			4,431		2,617		5,107		2,050			940			667			21,401
Charge-offs		(29	)		—		—		—		—			—			(209	)		(238	)
Recoveries		7			5		—		3		—			51			46			112
Provision		(918	)		1,034		37		255		(310	)		(184	)		179			93
Ending balance	$	4,649			5,470		2,654		5,365		1,740			807			683			21,368

	Three Months Ended September 30, 2015
	Commercial,
	Financial, and			CRE - Owner			CRE - Non Owner			Residential			ADC		ADC
	Agricultural			Occupied			Occupied			Real Estate			CSRA		Other			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	4,427			5,441			3,841			6,336			1,805		921			601			23,372
Charge-offs		(32	)		—			(1,119	)		(77	)		—		—			(166	)		(1,394	)
Recoveries		6			2			—			5			—		4			53			70
Provision		27			(434	)		(93	)		597			162		(266	)		139			132
Ending balance	$	4,428			5,009			2,629			6,861			1,967		659			627			22,180

	Nine Months Ended September 30, 2016
	Commercial,
	Financial, and			CRE - Owner		CRE - Non Owner			Residential			ADC			ADC
	Agricultural			Occupied		Occupied			Real Estate			CSRA			Other			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	4,908			4,667		2,709			5,027			2,469			914			673			21,367
Charge-offs		(56	)		—		—			(139	)		(60	)		(200	)		(544	)		(999	)
Recoveries		25			8		100			13			3			51			239			439
Provision		(228	)		795		(155	)		464			(672	)		42			315			561
Ending balance	$	4,649			5,470		2,654			5,365			1,740			807			683			21,368

	Nine Months Ended September 30, 2015
	Commercial,
	Financial, and			CRE - Owner			CRE - Non Owner			Residential			ADC			ADC
	Agricultural			Occupied			Occupied			Real Estate			CSRA			Other			Consumer			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	5,407			4,805			3,817			6,591			1,943			2,320			623			25,506
Charge-offs		(1,166	)		(74	)		(1,119	)		(363	)		(255	)		(20	)		(427	)		(3,424	)
Recoveries		223			4			—			17			—			1,699			166			2,109
Provision		(36	)		274			(69	)		616			279			(3,340	)		265			(2,011	)
Ending balance	$	4,428			5,009			2,629			6,861			1,967			659			627			22,180

The following tables present the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2016 and December 31, 2015.

	September 30, 2016
	Commercial,
	Financial, and		CRE - Owner		CRE - Non Owner		Residential		ADC		ADC
	Agricultural		Occupied		Occupied		Real Estate		CSRA		Other		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	—		1,150		—		133		—		—		—		1,283
Collectively evaluated for impairment		4,649		4,320		2,654		5,232		1,740		807		683		20,085
	$	4,649		5,470		2,654		5,365		1,740		807		683		21,368

Loans:
Individually evaluated for impairment		742		7,789		3,256		2,573		935		—		—		15,295
Collectively evaluated for impairment		215,574		228,420		142,417		247,538		121,614		45,847		20,107		1,021,517
	$	216,316		236,209		145,673		250,111		122,549		45,847		20,107		1,036,812

	December 31, 2015
	Commercial,
	Financial, and		CRE - Owner		CRE - Non Owner		Residential		ADC		ADC
	Agricultural		Occupied		Occupied		Real Estate		CSRA		Other		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	—		—		—		—		—		—		—		—
Collectively evaluated for impairment		4,908		4,667		2,709		5,027		2,469		914		673		21,367
	$	4,908		4,667		2,709		5,027		2,469		914		673		21,367

Loans:
Individually evaluated for impairment		991		3,771		6,244		1,998		2,468		—		—		15,472
Collectively evaluated for impairment		209,721		225,592		130,959		227,163		138,649		43,175		18,584		993,843
	$	210,712		229,363		137,203		229,161		141,117		43,175		18,584		1,009,315

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2016 and December 31, 2015.

	September 30, 2016
	Unpaid				Allowance for		Average
	Principal		Recorded		Loan Losses		Recorded
	Balance		Investment (2)		Allocated		Investment
	(Dollars in thousands)
With no related allowance recorded: (1)
Commercial, financial, and agricultural:
Commerical	$	1,934		742		—		770
Financial		—		—		—		—
Agricultural		—		—		—		—
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		4,739		3,639		—		3,704
Non Owner occupied		3,527		3,256		—		3,314
Residential real estate:
Secured by first liens		2,541		1,918		—		1,963
Secured by junior liens		142		85		—		90
Acquisition, development and construction:
Residential		—		—		—		—
Other		1,288		935		—		1,003
Consumer		—		—		—		—
		14,171		10,575		—		10,844

With an allowance recorded:
Commercial real estate:
Owner occupied	$	4,150		4,150		1,150		4,160
Non Owner occupied		—		—		—		—
Residential real estate:
Secured by first liens		576		570		133		574
Secured by junior liens		—		—		—		—
		4,726		4,720		1,283		4,734
	$	18,897		15,295		1,283		15,578

(1) No specific allowance for credit losses is allocated to these loans since they are sufficiently collateralized or had sufficient cash flows

(2) Excludes accrued interest receivable and loan origination fees, net due to immateriality

	December 31, 2015
	Unpaid				Allowance for		Average
	Principal		Recorded		Loan Losses		Recorded
	Balance		Investment (2)		Allocated		Investment
	(Dollars in thousands)
With no related allowance recorded: (1)
Commercial, financial, and agricultural:
Commerical	$	1,948		810		—		1,222
Financial		—		—		—		—
Agricultural		251		181		—		193
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		4,773		3,771		—		4,656
Non Owner occupied		7,659		6,244		—		7,201
Residential real estate:
Secured by first liens		2,587		1,904		—		2,026
Secured by junior liens		147		94		—		100
Acquisition, development and construction:
Residential		—		—		—		—
Other		3,440		2,468		—		2,645
Consumer		—		—		—		—
		20,805		15,472		—		18,043

With an allowance recorded:		—		—		—		—

	$	20,805		15,472		—		18,043

(1) No specific allowance for credit losses is allocated to these loans since they are sufficiently collateralized or had sufficient cash flows

(2) Excludes accrued interest receivable and loan origination fees, net due to immateriality

The following tables present interest income on impaired loans for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended Sept. 30, 2016				Three Months Ended Sept. 30, 2015
	Interest		Cash Basis		Interest		Cash Basis
	Income		Interest Income		Income		Interest Income
	Recognized		Recognized		Recognized		Recognized
	(Dollars in thousands)				(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	—		—		—		—
Financial		—		—		—		—
Agricultural		—		—		—		—
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		4		4		43		43
Non Owner occupied		13		13		52		52
Residential real estate:
Secured by first liens		8		8		7		7
Secured by junior liens		—		—		—		—
Acquisition, development and construction:
Residential		—		—		—		—
Other		10		10		6		6
Consumer		—		—		—		—
	$	35		35		108		108

	Nine Months Ended Sept. 30, 2016				Nine Months Ended Sept. 30, 2015
	Interest		Cash Basis		Interest		Cash Basis
	Income		Interest Income		Income		Interest Income
	Recognized		Recognized		Recognized		Recognized
	(Dollars in thousands)				(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	—		—		—		—
Financial		—		—		—		—
Agricultural		—		—		—		—
Equity lines		—		—		—		—
Other		—		—		—		—
Commercial real estate:
Owner occupied		11		11		118		118
Non Owner occupied		58		58		161		161
Residential real estate:
Secured by first liens		39		39		37		37
Secured by junior liens		—		—		3		3
Acquisition, development and construction:
Residential		—		—		—		—
Other		26		26		19		19
Consumer		—		—		—		—
	$	134		134		338		338

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The sum of nonaccrual loans and loans past due 90 days still on accrual will differ from the total impaired loan amount.

The following tables present the aging of the recorded investment in past due loans as of September 30, 2016 and December 31, 2015 by class of loans.

	September 30, 2016
	30 - 89 Days		90 Days or		Nonaccrual		Total		Loans Not
	Past Due		More Past Due		Loans		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	—		—		742		742		137,587		138,329
Financial		—		—		—		—		3,871		3,871
Agricultural		—		—		—		—		10,141		10,141
Equity lines		15		—		87		102		41,034		41,136
Other		—		—		58		58		22,781		22,839
Commercial real estate:
Owner occupied		259		—		8,097		8,356		227,853		236,209
Non Owner occupied		1,199		—		2,210		3,409		142,264		145,673
Residential real estate:
Secured by first liens		507		—		3,963		4,470		241,205		245,675
Secured by junior liens		1		—		338		339		4,097		4,436
Acquisition, development and construction:
Residential		—		—		—		—		53,260		53,260
Other		778		—		745		1,523		113,613		115,136
Consumer		45		—		40		85		20,022		20,107
	$	2,804		—		16,280		19,084		1,017,728		1,036,812

	December 31, 2015
	30 - 89 Days		90 Days or		Nonaccrual		Total		Loans Not
	Past Due		More Past Due		Loans		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	39		—		831		870		125,735		126,605
Financial		—		—		—		—		4,678		4,678
Agricultural		—		—		182		182		10,712		10,894
Equity lines		—		—		75		75		40,536		40,611
Other		—		—		63		63		27,861		27,924
Commercial real estate:
Owner occupied		1,158		—		3,988		5,146		224,217		229,363
Non Owner occupied		226		127		2,775		3,128		134,075		137,203
Residential real estate:
Secured by first liens		2,207		—		3,192		5,399		218,742		224,141
Secured by junior liens		—		—		368		368		4,652		5,020
Acquisition, development and construction:
Residential		—		—		—		—		54,266		54,266
Other		8		—		2,537		2,545		127,481		130,026
Consumer		19		—		33		52		18,532		18,584
	$	3,657		127		14,044		17,828		991,487		1,009,315

Troubled Debt Restructurings:

The Company has troubled debt restructurings (TDRs) with a balance of $7,460 and $8,636 included in impaired loans at September 30, 2016 and December 31, 2015, respectively. No specific reserves were allocated to customers whose loan terms have been modified in TDRs as of September 30, 2016 and December 31, 2015. The Company is not committed to lend additional amounts as of September 30, 2016 and December 31, 2015 to customers with outstanding loans that are classified as TDRs.

The following tables present TDRs as of September 30, 2016 and December 31, 2015.

	September 30, 2016
	Number of		Recorded
	Loans		Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		1	$	742
Financial		-		-
Agricultural		-		-
Equity lines		-		-
Other		-		-
Commercial real estate:
Owner occupied		2		3,639
Non Owner occupied		3		1,694
Residential real estate:
Secured by first liens		9		1,009
Secured by junior liens		1		85
Acquisition, development and construction:
Residential		-		-
Other		1		291
Consumer		-		-
		17	$	7,460

	December 31, 2015
	Number of		Recorded
	Loans		Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		1	$	810
Financial		-		-
Agricultural		-		-
Equity lines		-		-
Other		-		-
Commercial real estate:
Owner occupied		1		273
Non Owner occupied		4		4,499
Residential real estate:
Secured by first liens		10		1,140
Secured by junior liens		1		94
Acquisition, development and construction:
Residential		-		-
Other		2		1,820
Consumer		-		-
		19	$	8,636

No loans were modified as TDRs during the three months ended September 30, 2016. During the nine months ended September 30, 2016, two loans were modified as TDRs. One modification involved a 2.25% reduction of the stated interest rate of the loan and an extension of the maturity date for 277 months while the other modification involved a 0.50% rate reduction.

During the three and nine months ended September 30, 2015, two loans were modified as TDRs. One modification involved a 2.50% reduction of the stated interest rate of the loan and an extension of the maturity date for 38 months while the other modification involved a 3.00% rate reduction and an extension of the maturity date for 42 months.

The following tables present loans by class modified as TDRs that occurred during the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30, 2016						Three Months Ended September 30, 2015
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number of		Outstanding		Outstanding		Number of		Outstanding		Outstanding
	Loans		Recorded Investment		Recorded Investment		Loans		Recorded Investment		Recorded Investment
	(Dollars in thousands)						(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		-	$	-	$	-		1	$	2,046	$	846
Financial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Equity lines		-		-		-		-		-		-
Other		-		-		-		-		-		-
Commercial real estate:
Owner occupied		-		-		-		-		-		-
Non Owner occupied		-		-		-		-		-		-
Residential real estate:
Secured by first liens		-		-		-		1		86		82
Secured by junior liens		-		-		-		-		-		-
Acquisition, development and construction:
Residential		-		-		-		-		-		-
Other		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
		-	$	-	$	-		2	$	2,132	$	928

	Nine Months Ended September 30, 2016						Nine Months Ended September 30, 2015
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number of		Outstanding		Outstanding		Number of		Outstanding		Outstanding
	Loans		Recorded Investment		Recorded Investment		Loans		Recorded Investment		Recorded Investment
	(Dollars in thousands)						(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, financial, and agricultural:
Commerical		-	$	-	$	-	$	1	$	2,046	$	846
Financial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Equity lines		-		-		-		-		-		-
Other		-		-		-		-		-		-
Commercial real estate:
Owner occupied		1		4,508		3,370		-		-		-
Non Owner occupied		1		1,824		1,335		-		-		-
Residential real estate:
Secured by first liens		-		-		-		1		86		82
Secured by junior liens		-		-		-		-		-		-
Acquisition, development and construction:
Residential		-		-		-		-		-		-
Other		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
		2	$	6,332	$	4,705		2	$	2,132	$	928

There was no increase to the allowance for loan losses or resultant charge-offs on the TDRs described in the previous two tables during the three and nine months ended September 30, 2016 and 2015.

Charge-offs on such loans are factored into the rolling historical loss rate, which is used in the calculation of the allowance for loan losses.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no TDRs with payment defaults during the three and nine months ended September 30, 2016.

During the three and nine months ended September 30, 2015, one ADC loan with a recorded investment of $1,372 defaulted during the third quarter of 2015 and the default occurred within the twelve month period following the loan modification.

The terms of certain other loans were modified during the three and nine month periods ended September 30, 2016 and 2015 that did not meet the definition of a TDR. Loans modified during the three month periods have a total recorded investment as of September 30, 2016 and 2015 of $1,265 and $2,791, respectively, and had delays in payment of 30 days in 2016 and delays of 30 days to 2 months in 2015. Loans modified during the nine month periods have a total recorded investment as of September 30, 2016 and 2015 of $4,862 and $6,810, respectively, and had delays in payment ranging from 30 days to 3 months in 2016 and 2015. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

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.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company, through its originating account officer, places an initial credit risk rating on every loan. An annual review and analysis of loan relationships (irrespective of loan types included in the overall relationship) with total related exposure of $500 or greater is performed by the Credit Administration department in order to update risk ratings given current available information.

Through the review of delinquency reports, updated financial statements or other relevant information in the normal course of business, the lending officer and/or Credit Administration review personnel may determine that a loan relationship has weakened to the point that a criticized (Watch grade) or classified (Substandard & Doubtful grades) status is warranted. When a loan relationship with total related exposure of $200 or greater is adversely graded (Watch or above), the lending officer is then charged with preparing a Classified/Watch report which outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assisting the borrower in moving the loans to another institution and/or collateral liquidation. All such Classified/Watch reports are reviewed on a quarterly basis by members of Executive Management at a regularly scheduled meeting in which each lending officer presents the workout plans for their criticized credit relationships.

The Company uses the following definitions for risk ratings.

Watch: Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as 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 existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of September 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows.

	September 30, 2016
	Pass		Watch		Substandard		Doubtful
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	132,336		4,882		1,111		—
Financial		3,871		—		—		—
Agricultural		6,315		1,065		2,761		—
Equity lines		39,654		1,176		306		—
Other		22,474		307		58		—
Commercial real estate:
Owner occupied		215,769		9,667		10,773		—
Non Owner occupied		135,485		6,779		3,409		—
Residential real estate:
Secured by first liens		236,950		3,433		5,292		—
Secured by junior liens		3,922		115		399		—
Acquisition, development and construction:
Residential		53,181		79		—		—
Other		108,515		5,260		1,361		—
Consumer		19,740		306		61		—
	$	978,212		33,069		25,531		—

	December 31, 2015
	Pass		Watch		Substandard		Doubtful
	(Dollars in thousands)
Commercial, financial, and agricultural:
Commerical	$	120,385		4,469		1,751		—
Financial		4,678		—		—		—
Agricultural		7,758		2,641		495		—
Equity lines		39,576		691		344		—
Other		27,532		329		63		—
Commercial real estate:
Owner occupied		208,370		14,545		6,448		—
Non Owner occupied		124,945		5,632		6,626		—
Residential real estate:
Secured by first liens		213,167		6,370		4,604		—
Secured by junior liens		4,455		134		431		—
Acquisition, development and construction:
Residential		54,168		98		—		—
Other		119,330		7,354		3,342		—
Consumer		18,156		358		70		—
	$	942,520		42,621		24,174		—