(

)

Loans

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

June 30, 2019

and

December 31, 2018.

Purchased loans are defined as loans that were acquired in bank acquisitions.

	June 30, 2019
	Legacy Loans		Purchased Loans		Total
Commercial and Agricultural
Commercial	$	43,561	$	24,974	$	68,535
Agricultural		18,561		300		18,861

Real Estate
Commercial Construction		60,949		12,029		72,978
Residential Construction		13,193		5,429		18,622
Commercial		376,063		57,753		433,816
Residential		177,183		28,005		205,188
Farmland		70,413		3,859		74,272

Consumer and Other
Consumer		17,860		5,206		23,066
Other		18,262		1,671		19,933

Total Loans	$	796,045	$	139,226	$	935,271

	December 31, 2018
	Legacy Loans		Purchased Loans		Total
Commercial and Agricultural
Commercial	$	50,181	$	7,229	$	57,410
Agricultural		15,993		806		16,799

Real Estate
Commercial Construction		46,609		1,240		47,849
Residential Construction		12,242		258		12,500
Commercial		366,792		6,742		373,534
Residential		185,699		2,015		187,714
Farmland		62,674		35		62,709

Consumer and Other
Consumer		18,423		62		18,485
Other		5,027		-		5,027

Total Loans	$	763,640	$	18,387	$	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

– 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

and

– 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

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

The following table presents the loan portfolio, excluding purchased loans, by credit quality indicator (risk grade) as of

June 30, 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

June 30, 2019,

the Company did

not

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

	Pass		Special Mention		Substandard		Total Loans
June 30, 2019

Commercial and Agricultural
Commercial	$	41,376	$	1,471	$	714	$	43,561
Agricultural		16,050		1,137		1,374		18,561

Real Estate
Commercial Construction		60,546		117		286		60,949
Residential Construction		12,839		-		354		13,193
Commercial		360,806		8,048		7,209		376,063
Residential		162,927		4,015		10,241		177,183
Farmland		64,519		3,000		2,894		70,413

Consumer and Other
Consumer		17,550		84		226		17,860
Other		18,262		-		-		18,262

Total Loans	$	754,875	$	17,872	$	23,298	$	796,045

December 31, 2018

Commercial and Agricultural
Commercial	$	48,579	$	729	$	873	$	50,181
Agricultural		14,858		637		498		15,993

Real Estate
Commercial Construction		45,847		45		717		46,609
Residential Construction		12,242		-		-		12,242
Commercial		351,397		7,662		7,733		366,792
Residential		168,035		7,107		10,557		185,699
Farmland		58,678		1,912		2,084		62,674

Consumer and Other
Consumer		18,042		59		322		18,423
Other		5,018		5		4		5,027

Total Loans	$	722,696	$	18,156	$	22,788	$	763,640

The following table presents the purchased loan portfolio by credit quality indicator (risk grade) as of

June 30, 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

June 30, 2019,

the Company did

not

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

	Pass		Special Mention		Substandard		Total Loans
June 30, 2019

Commercial and Agricultural
Commercial	$	24,632	$	121	$	221	$	24,974
Agricultural		300		-		-		300

Real Estate
Commercial Construction		11,960		-		69		12,029
Residential Construction		5,429		-		-		5,429
Commercial		57,364		389		-		57,753
Residential		27,682		298		25		28,005
Farmland		3,820		-		39		3,859

Consumer and Other
Consumer		5,202		-		4		5,206
Other		1,671		-		-		1,671

Total Loans	$	138,060	$	808	$	358	$	139,226

December 31, 2018

Commercial and Agricultural
Commercial	$	7,229	$	-	$	-	$	7,229
Agricultural		806		-		-		806

Real Estate
Commercial Construction		1,240		-		-		1,240
Residential Construction		258		-		-		258
Commercial		6,742		-		-		6,742
Residential		2,015		-		-		2,015
Farmland		35		-		-		35

Consumer and Other
Consumer		62		-		-		62
Other		-		-		-		-

Total Loans	$	18,387	$	-	$	-	$	18,387

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 for legacy loans, segregated by class of loans, excluding purchased loans as of

June 30, 2019

and

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
June 30, 2019

Commercial and Agricultural
Commercial	$	365	$	-	$	365	$	442	$	42,754	$	43,561
Agricultural		-		-		-		1,304		17,257		18,561

Real Estate
Commercial Construction		123		-		123		36		60,790		60,949
Residential Construction		-		-		-		354		12,839		13,193
Commercial		822		-		822		1,849		373,392		376,063
Residential		2,276		-		2,276		2,786		172,121		177,183
Farmland		139		-		139		2,669		67,605		70,413

Consumer and Other
Consumer		61		2		63		131		17,666		17,860
Other		-		-		-		-		18,262		18,262

Total Loans	$	3,786	$	2	$	3,788	$	9,571	$	782,686	$	796,045

December 31, 2018

Commercial and Agricultural
Commercial	$	282	$	-	$	282	$	637	$	49,262	$	50,181
Agricultural		117		-		117		413		15,463		15,993

Real Estate
Commercial Construction		88		-		88		463		46,058		46,609
Residential Construction		-		-		-		-		12,242		12,242
Commercial		679		-		679		2,966		363,147		366,792
Residential		6,882		-		6,882		2,734		176,083		185,699
Farmland		76		-		76		2,052		60,546		62,674

Consumer and Other
Consumer		110		-		110		213		18,100		18,423
Other		-		-		-		4		5,023		5,027

Total Loans	$	8,234	$	-	$	8,234	$	9,482	$	745,924	$	763,640

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

June 30, 2019

and

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
June 30, 2019

Commercial and Agricultural
Commercial	$	178	$	-	$	178	$	43	$	24,753	$	24,974
Agricultural		-		-		-		-		300		300

Real Estate
Commercial Construction		-		-		-		69		11,960		12,029
Residential Construction		-		-		-		-		5,429		5,429
Commercial		-		-		-		-		57,753		57,753
Residential		9		-		9		25		27,971		28,005
Farmland		-		-		-		39		3,820		3,859

Consumer and Other
Consumer		16		-		16		4		5,186		5,206
Other		-		-		-		-		1,671		1,671

Total Loans	$	203	$	-	$	203	$	180	$	138,843	$	139,226

December 31, 2018

Commercial and Agricultural
Commercial	$	-	$	-	$	-	$	-	$	7,229	$	7,229
Agricultural		-		-		-		-		806		806

Real Estate
Commercial Construction		-		-		-		-		1,240		1,240
Residential Construction		-		-		-		-		258		258
Commercial		-		-		-		-		6,742		6,742
Residential		-		-		-		-		2,015		2,015
Farmland		-		-		-		-		35		35

Consumer and Other
Consumer		-		-		-		-		62		62
Other		-		-		-		-		-		-

Total Loans	$	-	$	-	$	-	$	-	$	18,387	$	18,387

The following table details impaired loan data, including purchased credit impaired loans, as of

June 30, 2019.

June 30, 2019
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected

With No Related Allowance Recorded
Commercial	$	442	$	442	$	-	$	525	$	15		$	16
Agricultural		736		716		-		544		9			21
Commercial Construction		104		104		-		115		3			3
Residential Construction		354		354		-		118		4			4
Commercial Real Estate		12,372		11,504		-		12,341		291			293
Residential Real Estate		3,872		3,849		-		3,979		83			98
Farmland		2,670		2,668		-		2,246		(25	)		17
Consumer		132		132		-		159		3			4
Other		-		-		-		2		-			-

		20,682		19,769		-		20,029		383			456

With An Allowance Recorded
Commercial		-		-		-		14		-			-
Agricultural		588		588		588		196		9			33
Commercial Construction		-		-		-		133		-			-
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		3,031		3,031		897		2,902		61			62
Residential Real Estate		267		267		49		270		11			11
Farmland		359		359		32		361		13			12
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		4,245		4,245		1,566		3,876		94			118

Purchased Credit Impaired Loans
Commercial		68		42		-		14		-			-
Commercial Construction		122		69		-		23		-			-
Residential Real Estate		23		14		-		5		-			-
Farmland		237		40		-		13		-			-
Consumer		195		-		-		-		-			-

		645		165		-		55		-			-

Total
Commercial		510		484		-		553		15			16
Agricultural		1,324		1,304		588		740		18			54
Commercial Construction		226		173		-		271		3			3
Residential Construction		354		354		-		118		4			4
Commercial Real Estate		15,403		14,535		897		15,243		352			355
Residential Real Estate		4,162		4,130		49		4,254		94			109
Farmland		3,266		3,067		32		2,620		(12	)		29
Consumer		327		132		-		159		3			4
Other		-		-		-		2		-			-

	$	25,572	$	24,179	$	1,566	$	23,960	$	477		$	574

The following table details impaired loan data as of

December 31, 2018.

There were

purchased credit impaired loans and related allowance for loan losses 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

June 30, 2018.

There were

purchased credit impaired loans and related allowance for loan losses as of

June 30, 2018.

June 30, 2018
	Unpaid
	Contractual						Average		Interest		Interest
	Principal		Impaired		Related		Recorded		Income		Income
	Balance		Balance		Allowance		Investment		Recognized		Collected

With No Related Allowance Recorded
Commercial	$	367	$	367	$	-	$	520	$	5	$	5
Agricultural		311		290		-		360		9		12
Commercial Construction		16		16		-		38		1		1
Residential Contruction		-		-		-		-		-		-
Commercial Real Estate		10,201		10,201		-		11,092		235		236
Residential Real Estate		3,892		3,805		-		4,113		87		89
Farmland		980		978		-		896		5		7
Consumer		200		200		-		199		6		6
Other		-		-		-		-		-		-

		15,967		15,857		-		17,218		348		356

With An Allowance Recorded
Commercial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial Construction		482		482		54		487		2		2
Residential Contruction		-		-		-		-		-		-
Commercial Real Estate		5,047		5,047		1,371		5,371		106		99
Residential Real Estate		36		36		21		60		1		1
Farmland		367		367		28		369		12		12
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-

		5,932		5,932		1,474		6,287		121		114

Total
Commercial		367		367		-		520		5		5
Agricultural		311		290		-		360		9		12
Commercial Construction		498		498		54		525		3		3
Residential Contruction		-		-		-		-		-		-
Commercial Real Estate		15,248		15,248		1,371		16,463		341		335
Residential Real Estate		3,928		3,841		21		4,173		88		90
Farmland		1,347		1,345		28		1,265		17		19
Consumer		200		200		-		199		6		6
Other		-		-		-		-		-		-

	$	21,899	$	21,789	$	1,474	$	23,505	$	469	$	470

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

June 30, 2019.

The Company had

loan contracts restructured during the

three

month period ended and the

six

month period ended

June 30, 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

June 30, 2019

and

2018,

respectively. The Company had

loans that subsequently defaulted during the

six

months ended

June 30, 2019

and

one

loan that subsequently defaulted during the

six

months ended

June 30, 2018.

The loan totaling

$131

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