(

)

Loans

The following table presents the composition of loans segregated by class of loans, as of

March 31, 2019

and

December 31, 2018.

	March 31, 2019		December 31, 2018
Commercial and Agricultural
Commercial	$	51,368	$	57,410
Agricultural		15,290		16,799

Real Estate
Commercial Construction		44,305		47,849
Residential Construction		14,947		12,500
Commercial		373,263		373,534
Residential		181,004		187,714
Farmland		64,056		62,709

Consumer and Other
Consumer		17,907		18,485
Other		17,851		5,027

Total Loans	$	779,991	$	782,027

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

A description of the general characteristics of the grades is as follows:

●

Grades

and

– 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

and

– Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with

significant weaknesses in repayment capacity and collateral protection to acceptable loans with

one

or more risk factors considered to be more than average.

●

Grade

– 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

March 31, 2019

and

December 31, 2018.

Those loans with a risk grade of

have been combined in the pass column for presentation purposes. For the period ending

March 31, 2019,

the Company did

not

have any loans classified as “doubtful” or a “loss”.

March 31, 2019
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	49,378	$	1,277	$	713	$	51,368
Agricultural		13,554		1,215		521		15,290

Real Estate
Commercial Construction		43,876		128		301		44,305
Residential Construction		14,947		-		-		14,947
Commercial		357,401		7,681		8,181		373,263
Residential		166,641		4,147		10,216		181,004
Farmland		59,805		1,825		2,426		64,056

Consumer and Other
Consumer		17,555		91		261		17,907
Other		17,848		-		3		17,851

Total Loans	$	741,005	$	16,364	$	22,622	$	779,991

December 31, 2018
	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	55,808	$	729	$	873	$	57,410
Agricultural		15,664		637		498		16,799

Real Estate
Commercial Construction		47,087		45		717		47,849
Residential Construction		12,500		-		-		12,500
Commercial		358,139		7,662		7,733		373,534
Residential		170,050		7,107		10,557		187,714
Farmland		58,713		1,912		2,084		62,709

Consumer and Other
Consumer		18,104		59		322		18,485
Other		5,018		5		4		5,027

Total Loans	$	741,083	$	18,156	$	22,788	$	782,027

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

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

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.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of

March 31, 2019

and

December 31, 2018:

March 31, 2019
	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	$	106	$	-	$	106	$	537	$	50,725	$	51,368
Agricultural		22		-		22		504		14,764		15,290

Real Estate
Commercial Construction		22		-		22		40		44,243		44,305
Residential Construction		-		-		-		-		14,947		14,947
Commercial		228		-		228		1,740		371,295		373,263
Residential		2,546		-		2,546		2,569		175,889		181,004
Farmland		929		-		929		2,015		61,112		64,056

Consumer and Other
Consumer		143		-		143		133		17,631		17,907
Other		-		-		-		3		17,848		17,851

Total Loans	$	3,996	$	-	$	3,996	$	7,541	$	768,454	$	779,991

December 31, 2018
	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	$	282	$	-	$	282	$	637	$	56,491	$	57,410
Agricultural		117		-		117		413		16,269		16,799

Real Estate
Commercial Construction		88		-		88		463		47,298		47,849
Residential Construction		-		-		-		-		12,500		12,500
Commercial		679		-		679		2,966		369,889		373,534
Residential		6,882		-		6,882		2,734		178,098		187,714
Farmland		76		-		76		2,052		60,581		62,709

Consumer and Other
Consumer		110		-		110		213		18,162		18,485
Other		-		-		-		4		5,023		5,027

Total Loans	$	8,234	$	-	$	8,234	$	9,482	$	764,311	$	782,027

The following table details impaired loan data as of

March 31, 2019:

March 31, 2019
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	594	$	537	$	-	$	566	$	8	$	8
Agricultural		525		504		-		459		11		14
Commercial Construction		107		107		-		120		2		2
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		12,599		12,543		-		12,354		143		145
Residential Real Estate		4,481		3,958		-		4,044		7		59
Farmland		2,017		2,016		-		2,034		-		5
Consumer		134		134		-		173		2		2
Other		3		3		-		3		-		-

		20,460		19,802		-		19,753		173		235

With An Allowance Recorded
Commercial		-		-		-		21		-		-
Agricultural		-		-		-		-		-		-
Commercial Construction		-		-		-		199		-		-
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		1,985		1,985		819		2,838		16		16
Residential Real Estate		267		267		52		271		8		8
Farmland		361		361		34		362		6		6
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-

		2,613		2,613		905		3,691		30		30

Total
Commercial		594		537		-		587		8		8
Agricultural		525		504		-		459		11		14
Commercial Construction		107		107		-		319		2		2
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		14,584		14,528		819		15,192		159		161
Residential Real Estate		4,748		4,225		52		4,315		15		67
Farmland		2,378		2,377		34		2,396		6		11
Consumer		134		134		-		173		2		2
Other		3		3		-		3		-		-

	$	23,073	$	22,415	$	905	$	23,444	$	203	$	265

The following table details impaired loan data as of

December 31, 2018:

December 31, 2018
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	595	$	595	$	-	$	526	$	21	$	24
Agricultural		434		413		-		383		18		25
Commercial Construction		132		132		-		69		8		8
Residential Contruction		-		-				-		-		-
Commercial Real Estate		12,164		12,164		-		11,040		582		583
Residential Real Estate		4,214		4,130		-		4,067		208		213
Farmland		2,054		2,052		-		1,361		53		82
Consumer		213		213		-		197		14		14
Other		4		4		-		1		-		-

		19,810		19,703		-		17,644		904		949

With An Allowance Recorded
Commercial		42		42		6		8		2		2
Agricultural		-		-		-		-		-		-
Commercial Construction		399		399		39		466		-		-
Residential Contruction		-		-		-		-		-		-
Commercial Real Estate		3,691		3,691		1,276		5,121		135		142
Residential Real Estate		274		274		61		98		8		8
Farmland		364		364		36		368		24		25
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-

		4,770		4,770		1,418		6,061		169		177

Total
Commercial		637		637		6		534		23		26
Agricultural		434		413		-		383		18		25
Commercial Construction		531		531		39		535		8		8
Residential Contruction		-		-		-		-		-		-
Commercial Real Estate		15,855		15,855		1,276		16,161		717		725
Residential Real Estate		4,488		4,404		61		4,165		216		221
Farmland		2,418		2,416		36		1,729		77		107
Consumer		213		213		-		197		14		14
Other		4		4		-		1		-		-

	$	24,580	$	24,473	$	1,418	$	23,705	$	1,073	$	1,126

The following table details impaired loan data as of

March 31, 2018:

March 31, 2018
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	595	$	595	$	-	$	596	$	8	$	8
Agricultural		411		390		-		394		8		12
Commercial Construction		42		42		-		48		1		1
Commercial Real Estate		10,438		10,438		-		11,538		118		112
Residential Real Estate		4,379		3,956		-		4,268		46		49
Farmland		873		872		-		855		7		7
Consumer		210		210		-		199		3		3

		16,948		16,503		-		17,898		191		192

With An Allowance Recorded
Commercial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial Construction		485		485		57		489		1		1
Commercial Real Estate		5,337		5,337		1,662		5,533		53		45
Residential Real Estate		36		36		21		72		1		1
Farmland		369		369		30		371		5		6
Consumer		-		-		-		-		-		-

		6,227		6,227		1,770		6,465		60		53

Total
Commercial		595		595		-		596		8		8
Agricultural		411		390		-		394		8		12
Commercial Construction		527		527		57		537		2		2
Commercial Real Estate		15,775		15,775		1,662		17,071		171		157
Residential Real Estate		4,415		3,992		21		4,340		47		50
Farmland		1,242		1,241		30		1,226		12		13
Consumer		210		210		-		199		3		3

	$	23,175	$	22,730	$	1,770	$	24,363	$	251	$	245

TDRs are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower’s financial condition. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time.

Not

all loan modifications are TDRs. Loan modifications are reviewed and approved by the Company’s senior lending staff, who then determine whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:

●

Interest rate reductions – Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would

not

be able to obtain elsewhere under similar circumstances.

●

Amortization or maturity date changes – Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

●

Principal reductions – These are often the result of commercial real estate loan workouts where

two

new notes are created. The primary note is underwritten based upon our normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note. The terms of the secondary note vary by situation and often involve that note being charged-off, or the principal and interest payments being deferred until after the primary note has been repaid. In situations where a portion of the note is charged-off during modification there is often

specific reserve allocated to those loans. This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is

additional exposure on those loans.

As discussed in Note

Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had

unfunded commitments to lend to a customer that has a troubled debt restructured loan as of

March 31, 2019.

The Company had

loan contracts restructured during the

three

month period ended

March 31, 2019

and

2018.

Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes

days past due. A TDR

may

cease being classified as impaired if the loan is subsequently modified at market terms and, has performed according to the modified terms for at least

six

months, and there has

not

been any prior principal forgiveness on a cumulative basis.

The Company had

loans that subsequently defaulted during the

three

months ended

March 31, 2019.

The Company had

one

loan that subsequently defaulted during the

three

months ended

March 31, 2018.

The loan totaling

$131,067

failed to continue to perform as agreed and was moved to non-accrual status.