NOTE

LOANS

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

December 31, 2019

and

2018.

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

	December 31, 2019
(dollars in thousands)	Legacy Loans		Purchased Loans		Total

Construction, land & land development	$	83,036	$	13,061	$	96,097
Other commercial real estate		481,943		58,296		540,239
Total commercial real estate		564,979		71,357		636,336
Residential real estate		171,341		23,455		194,796
Commercial , financial, & agricultural		91,535		22,825		114,360
Consumer & other		19,245		4,077		23,322
Total loans	$	847,100	$	121,714	$	968,814

	December 31, 2018
(dollars in thousands)	Legacy Loans		Purchased Loans		Total

Construction, land & land development	$	58,812	$	1,498	$	60,310
Other commercial real estate		429,184		6,777		435,961
Total commercial real estate		487,996		8,275		496,271
Residential real estate		185,577		2,015		187,592
Commercial , financial, & agricultural		66,131		8,035		74,166
Consumer & other		23,435		62		23,497
Total loans	$	763,139	$	18,387	$	781,526

Commercial and agricultural 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 (

) the risk grade assigned to commercial and consumer loans, (

) the level of classified commercial loans, (

) net charge-offs, (

) nonperforming loans, and (

) 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 tables present the loan portfolio, excluding purchased loans, by credit quality indicator (risk grade) as of

December 31, 2019.

Those loans with a risk grade of

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

December 31, 2019,

the Company did

not

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

	Pass		Special Mention		Substandard		Total Loans
(dollars in thousands)

Construction, land & land development	$	82,322	$	445	$	269	$	83,036
Other commercial real estate		459,064		13,438		9,441		481,943
Total commercial real estate		541,386		13,883		9,710		564,979
Residential real estate		159,194		4,632		7,515		171,341
Commercial , financial, & agricultural		86,558		1,973		3,004		91,535
Consumer & other		18,883		148		214		19,245
Total loans	$	806,021	$	20,636	$	20,443	$	847,100

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

December 31, 2019.

	Pass		Special Mention		Substandard		Total Loans
(dollars in thousands)

Construction, land & land development	$	12,996	$	-	$	65	$	13,061
Other commercial real estate		57,881		381		34		58,296
Total commercial real estate		70,877		381		99		71,357
Residential real estate		23,097		249		109		23,455
Commercial , financial, & agricultural		19,443		2,949		433		22,825
Consumer & other		4,077		-		-		4,077
Total loans		117,494		3,579		641		121,714

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

December 31, 2018.

Those loans with a risk grade of

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

December 31, 2018,

the Company did

not

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

	Pass		Special Mention		Substandard		Total Loans
(dollars in thousands)

Construction, land & land development	$	58,050	$	45	$	717	$	58,812
Other commercial real estate		409,793		9,574		9,817		429,184
Total commercial real estate		467,843		9,619		10,534		487,996
Residential real estate		167,913		7,107		10,557		185,577
Commercial , financial, & agricultural		63,394		1,366		1,371		66,131
Consumer & other		23,045		64		326		23,435
Total loans	$	722,195	$	18,156	$	22,788	$	763,139

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

December 31, 2018.

	Pass		Special		Substandard		Total Loans
(dollars in thousands)

Construction, land & land development	$	1,498	$	-	$	-	$	1,498
Other commercial real estate		6,777		-		-		6,777
Total commercial real estate		8,275		-		-		8,275
Residential real estate		2,015		-		-		2,015
Commercial , financial, & agricultural		8,035		-		-		8,035
Consumer & other		62		-		-		62
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 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, excluding purchased loans, as of

December 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
(dollars in thousands)

Construction, land & land development	$	50	$	-	$	50	$	32	$	82,954	$	83,036
Other commercial real estate		335		-		335		3,738		477,870		481,943
Total commercial real estate		385		-		385		3,770		560,824		564,979
Residential real estate		1,296		-		1,296		3,643		166,402		171,341
Commercial , financial, & agricultural		212		-		212		1,628		89,695		91,535
Consumer & other		21		-		21		138		19,086		19,245
Total loans	$	1,914	$	-	$	1,914	$	9,179	$	836,007	$	847,100

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

December 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
(dollars in thousands)

Construction, land & land development	$	-	$	-	$	-	$	96	$	12,965	$	13,061
Other commercial real estate		83		-		83		34		58,179		58,296
Total commercial real estate		83		-		83		130		71,144		71,357
Residential real estate		57		-		57		85		23,313		23,455
Commercial , financial, & agricultural		553		-		553		433		21,839		22,825
Consumer & other		8		-		8		-		4,069		4,077
Total loans	$	701	$	-	$	701	$	648	$	120,365	$	121,714

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

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
(dollars in thousands)

Construction, land & land development	$	88	$	-	$	88	$	463	$	58,349	$	58,812
Other commercial real estate		755		-		755		5,018		424,166		429,184
Total commercial real estate		843		-		843		5,481		482,515		487,996
Residential real estate		6,882		-		6,882		2,734		182,843		185,577
Commercial , financial, & agricultural		399		-		399		1,050		65,081		66,131
Consumer & other		110		-		110		217		23,218		23,435
Total loans	$	8,234	$	-	$	8,234	$	9,482	$	753,657	$	763,139

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

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
(dollars in thousands)

Construction, land & land development	$	-	$	-	$	-	$	-	$	1,498	$	1,498
Other commercial real estate		-		-		-		-		6,777		6,777
Total commercial real estate		-		-		-		-		8,275		8,275
Residential real estate		-		-		-		-		2,015		2,015
Commercial , financial, & agricultural		-		-		-		-		8,035		8,035
Consumer & other		-		-		-		-		62		62
Total loans	$	-	$	-	$	-	$	-	$	18,387	$	18,387

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

December 31, 2019:

	Unpaid
	Contractual						Average
	Principal		Recorded		Related		Recorded
(dollars in thousands)	Balance		investment		allowance		Investment

With No Related Allowance Recorded
Construction, land & land development	$	67	$	67	$	-	$	168
Commercial real estate		12,455		11,639		-		13,924
Residential real estate		2,706		2,711		-		3,693
Commercial, financial & agricultural		257		257		-		910
Consumer & other		-		-		-		123
Total Impaired Loans with no Allowance		15,485		14,674		-		18,818

With An Allowance Recorded
Construction, land & land development		-		-		-		80
Commercial real estate		6,379		6,385		1,939		3,898
Residential real estate		757		760		137		367
Commercial, financial & agricultural		2,189		1,989		1,073		722
Consumer & other		-		-		-		-
Total Impaired Loans with Allowance		9,325		9,134		3,149		5,067

Purchased Credit Impaired Loans
Construction, land & land development		65		65		-		80
Commercial real estate		34		34		-		35
Residential real estate		11		11		6		24
Commercial, financial & agricultural		37		37		-		47
Consumer & other		-		-		-		-
Total Purchased Credit Impaired Loans		147		147		6		186

Total
Construction, land & land development		132		132		-		328
Commercial real estate		18,868		18,058		1,939		17,857
Residential real estate		3,474		3,482		143		4,084
Commercial, financial & agricultural		2,483		2,283		1,073		1,679
Consumer & other		-		-		-		123
	$	24,957	$	23,955	$	3,155	$	24,071

Interest income recorded on impaired loans during the year ended

December 31, 2019

was

$175,000

and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on TDRs. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately

$221,000

for the year ended

December 31, 2019.

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.

	Unpaid
	Contractual						Average
	Principal		Recorded		Related		Recorded
(dollars in thousands)	Balance		Investment		Allowance		Investment

With No Related
Allowance Recorded
Construction, land & land development	$	132	$	132	$	-	$	69
Commercial real estate		14,218		14,216		-		12,401
Residential real estate		4,214		4,130		-		4,067
Commercial, financial & agricultural		1,029		1,008		-		909
Consumer & other		217		217		-		198
		19,810		19,703		-		17,644

With An Allowance Recorded
Construction, land & land development		399		399		39		466
Commercial real estate		4,055		4,055		1,312		5,489
Residential real estate		274		274		61		98
Commercial, financial & agricultural		42		42		6		8
Consumer & other		-		-		-		-
		4,770		4,770		1,418		6,061

Total
Construction, land & land development		531		531		39		535
Commercial real estate		18,273		18,271		1,312		17,890
Residential real estate		4,488		4,404		61		4,165
Commercial, financial & agricultural		1,071		1,050		6		917
Consumer & other		217		217		-		198
	$	24,580	$	24,473	$	1,418	$	23,705

Interest income recorded on impaired loans during the year ended

December 31, 2018

was

$320,000,

$226,000

for the year ended

December 31,

2018.

Troubled Debt Restructurings (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 the Company’s 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

December 31, 2019.

The Company had

loan contracts restructured during

2019.

The Company had

one

loan contract in the amount of

$402,000

restructured during

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.

During

2019,

the Company had

one

loan totaling

$859,000

that subsequently defaulted. This loan failed to continue to perform as agreed and was moved to non-accrual status. During

2018,

the Company had

one

loan

$131,000

that subsequently defaulted. This loan failed to continue to perform as agreed and was moved to non-accrual status.