(

)

Loans

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

September 30, 2019

and

December 31, 2018.

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

	September 30, 2019
	Legacy Loans		Purchased Loans		Total
Commercial and Agricultural
Commercial	$	52,085	$	24,147	$	76,232
Agricultural		20,462		279		20,741

Real Estate
Commercial Construction		64,280		9,720		74,000
Residential Construction		15,080		4,959		20,039
Commercial		392,681		58,019		450,700
Residential		172,853		25,801		198,654
Farmland		71,206		3,135		74,341

Consumer and Other
Consumer		18,071		4,685		22,756
Other		19,591		1,669		21,260

Total Loans	$	826,309	$	132,414	$	958,723

	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

September 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

September 30, 2019,

the Company did

not

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

	Pass		Special Mention		Substandard		Total Loans
September 30, 2019

Commercial and Agricultural
Commercial	$	50,098	$	1,379	$	608	$	52,085
Agricultural		17,997		1,211		1,254		20,462

Real Estate
Commercial Construction		63,776		224		280		64,280
Residential Construction		15,080		-		-		15,080
Commercial		376,850		9,502		6,329		392,681
Residential		160,763		4,388		7,702		172,853
Farmland		64,291		3,787		3,128		71,206

Consumer and Other
Consumer		17,680		172		219		18,071
Other		19,591		-		-		19,591

Total Loans	$	786,126	$	20,663	$	19,520	$	826,309

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

September 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

September 30, 2019,

the Company did

not

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

	Pass		Special Mention		Substandard		Total Loans
September 30, 2019

Commercial and Agricultural
Commercial	$	22,473	$	1,232	$	442	$	24,147
Agricultural		279		-		-		279

Real Estate
Commercial Construction		9,654		-		66		9,720
Residential Construction		4,959		-		-		4,959
Commercial		57,634		385		-		58,019
Residential		25,384		382		35		25,801
Farmland		3,098		-		37		3,135

Consumer and Other
Consumer		4,682		-		3		4,685
Other		1,669		-		-		1,669

Total Loans	$	129,832	$	1,999	$	583	$	132,414

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

September 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
September 30, 2019

Commercial and Agricultural
Commercial	$	165	$	-	$	165	$	460	$	51,460	$	52,085
Agricultural		71		-		71		1,214		19,177		20,462

Real Estate
Commercial Construction		89		-		89		10		64,181		64,280
Residential Construction		59		-		59		-		15,021		15,080
Commercial		497		-		497		1,567		390,617		392,681
Residential		1,083		-		1,083		3,605		168,165		172,853
Farmland		150		-		150		2,592		68,464		71,206

Consumer and Other
Consumer		109		-		109		124		17,838		18,071
Other		-		-		-		-		19,591		19,591

Total Loans	$	2,223	$	-	$	2,223	$	9,572	$	814,514	$	826,309

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

September 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
September 30, 2019

Commercial and Agricultural
Commercial	$	491	$	-	$	491	$	442	$	23,214	$	24,147
Agricultural		-		-		-		-		279		279

Real Estate
Commercial Construction		-		-		-		66		9,654		9,720
Residential Construction		-		-		-		-		4,959		4,959
Commercial		-		-		-		-		58,019		58,019
Residential		35		-		35		23		25,743		25,801
Farmland		-		-		-		37		3,098		3,135

Consumer and Other
Consumer		4		-		4		3		4,678		4,685
Other		-		-		-		-		1,669		1,669

Total Loans	$	530	$	-	$	530	$	571	$	131,313	$	132,414

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

September 30, 2019.

September 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	$	460	$	459	$	-	$	508	$	29		$	30
Agricultural		648		628		-		565		9			20
Commercial Construction		77		77		-		105		3			3
Residential Construction		-		-		-		89		-			-
Commercial Real Estate		9,300		9,300		-		11,581		346			352
Residential Real Estate		3,908		3,817		-		3,939		129			148
Farmland		2,593		2,591		-		2,332		(23	)		14
Consumer		163		128		-		151		4			5
Other		-		-		-		2		-			-

		17,149		17,000		-		19,272		497			572

With An Allowance Recorded
Commercial		398		403		152		111		8			8
Agricultural		587		587		586		294		9			33
Commercial Construction		-		-		-		100		-			-
Residential Construction		-		-		-		-		-			-
Commercial Real Estate		2,956		2,956		823		2,916		95			95
Residential Real Estate		266		266		48		268		17			17
Farmland		357		357		30		360		20			19
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-

		4,564		4,569		1,639		4,049		149			172

Purchased Credit Impaired Loans
Commercial		67		39		-		20		-			-
Commercial Construction		120		66		-		34		1			1
Residential Real Estate		21		13		8		7		-			-
Farmland		237		37		-		19		1			1
Consumer		195		-		-		-		-			-

		640		155		8		80		2			2

Total
Commercial		925		901		152		639		37			38
Agricultural		1,235		1,215		586		859		18			53
Commercial Construction		197		143		-		239		4			4
Residential Construction		-		-		-		89		-			-
Commercial Real Estate		12,256		12,256		823		14,497		441			447
Residential Real Estate		4,195		4,096		56		4,214		146			165
Farmland		3,187		2,985		30		2,711		(2	)		34
Consumer		358		128		-		151		4			5
Other		-		-		-		2		-			-

	$	22,353	$	21,724	$	1,647	$	23,401	$	648		$	746

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

September 30, 2018.

There were

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

September 30, 2018.

September 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	$	472	$	472	$	-	$	508	$	13	$	15
Agricultural		444		423		-		375		14		21
Commercial Construction		102		102		-		54		3		3
Residential Contruction		-		-		-		-		-		-
Commercial Real Estate		9,758		9,758		-		10,759		345		352
Residential Real Estate		3,954		3,868		-		4,052		141		145
Farmland		2,067		2,065		-		1,189		46		75
Consumer		175		175		-		193		9		10
Other		-		-		-		-		-		-

		16,972		16,863		-		17,130		571		621

With An Allowance Recorded
Commercial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial Construction		471		471		44		483		3		3
Residential Contruction		-		-		-		-		-		-
Commercial Real Estate		5,800		5,800		1,394		5,478		185		187
Residential Real Estate		35		35		20		54		2		2
Farmland		366		366		29		368		18		18
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-

		6,672		6,672		1,487		6,383		208		210

Total
Commercial		472		472		-		508		13		15
Agricultural		444		423		-		375		14		21
Commercial Construction		573		573		44		537		6		6
Residential Contruction		-		-		-		-		-		-
Commercial Real Estate		15,558		15,558		1,394		16,237		530		539
Residential Real Estate		3,989		3,903		20		4,106		143		147
Farmland		2,433		2,431		29		1,557		64		93
Consumer		175		175		-		193		9		10
Other		-		-		-		-		-		-

	$	23,644	$	23,535	$	1,487	$	23,513	$	779	$	831

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

September 30, 2019.

The Company had

loan contracts restructured during the

three

month period ended and the

nine

month period ended

September 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

one

loan totaling

$859

thousand that subsequently defaulted during the

three

months ended

September 30, 2019

and

loans that subsequently defaulted during the

three

months ended

September 30, 2018.

The Company had

one

loan totaling

$859

thousand that subsequently defaulted during the

nine

months ended

September 30, 2019

and

one

loan totaling

$131

thousand that subsequently defaulted during the

nine

months ended

September 30, 2018.

The loan totaling

$859

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

$131

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