LOANS

Loans are summarized by category as follows:

	June 30, 2019			December 31, 2018

Commercial real estate	$	533,680		$	538,037
Commercial - specialized		294,188			305,022
Commercial - general		391,434			427,728
Consumer:
1-4 family residential		348,569			346,153
Auto loans		206,777			191,647
Other consumer		71,559			70,209
Construction		89,446			78,401
		1,935,653			1,957,197
Allowance for loan losses		(24,171	)		(23,126	)
Loans, net	$	1,911,482		$	1,934,071

The Company has certain lending policies, underwriting standards, and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies, underwriting standards, and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial – General and Specialized – Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations, as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and include personal guarantees. Owner-occupied real estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties. Commercial loans are grouped into two distinct sub-categories: specialized and general. Commercial related segments that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related segments that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries.

Commercial Real Estate – Commercial real estate loans are also subject to underwriting standards and processes similar to commercial loans. These loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Construction – Loans for residential construction are for single-family properties to developers, builders, or end-users. These loans are underwritten based on estimates of costs and completed value of the project. Funds are advanced based on estimated percentage of completion for the project. Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects.

Consumer – Loans to consumers include 1-4 family residential loans, auto loans, and other loans for recreational vehicles or other purposes. The Company utilizes a computer-based credit scoring analysis to supplement its policies and procedures in underwriting consumer loans. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimize the Company’s risk. The Company generally requires mortgage title insurance and hazard insurance on 1-4 family residential loans.

The following table details the activity in the allowance for loan losses. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	Beginning Balance		Provision for loan losses			Charge-offs			Recoveries		Ending Balance
For the three months ended June 30, 2019
For the three months ended June 30, 2019
Commercial real estate	$	5,335	$	(28	)	$	-		$	108	$	5,415
Commercial - specialized		2,327		985			(5	)		39		3,346
Commercial - general		8,504		(324	)		(60	)		205		8,325
Consumer:
1-4 family residential		2,416		(127	)		-			21		2,310
Auto loans		3,067		202			(248	)		46		3,067
Other consumer		1,174		216			(233	)		42		1,199
Construction		558		(49	)		-			-		509
Total	$	23,381	$	875		$	(546	)	$	461	$	24,171

For the three months ended June 30, 2018

Commercial real estate	$	5,129	$	746		$	(1,539	)	$	-	$	4,336
Commercial - specialized		2,650		265			-			9		2,924
Commercial - general		8,925		(313	)		(28	)		149		8,733
Consumer:
1-4 family residential		1,427		160			(140	)		4		1,451
Auto loans		2,386		372			(184	)		29		2,603
Other consumer		1,053		184			(140	)		61		1,158
Construction		399		126			(15	)		-		510
Total	$	21,969	$	1,540		$	(2,046	)	$	252	$	21,715

	Beginning Balance		Provision for loan losses			Charge-offs			Recoveries		Ending Balance
For the six months ended June 30, 2019
Commercial real estate	$	5,579	$	(379	)	$	-		$	215	$	5,415
Commercial - specialized		2,516		804			(37	)		63		3,346
Commercial - general		8,173		(60	)		(65	)		277		8,325
Consumer:
1-4 family residential		2,249		28			(19	)		52		2,310
Auto loans		2,994		500			(506	)		79		3,067
Other consumer		1,192		429			(513	)		91		1,199
Construction		423		161			(75	)		-		509

Total	$	23,126	$	1,483		$	(1,215	)	$	777	$	24,171

For the six months ended June 30, 2018
Commercial real estate	$	3,769	$	2,106		$	(1,539	)	$	-	$	4,336
Commercial - specialized		2,367		530			(38	)		65		2,924
Commercial - general		10,151		(1,626	)		(127	)		335		8,733
Consumer:
1-4 family residential		1,787		(199	)		(141	)		4		1,451
Auto loans		2,068		892			(418	)		61		2,603
Other consumer		971		438			(349	)		98		1,158
Construction		348		177			(15	)		-		510

Total	$	21,461	$	2,318		$	(2,627	)	$	563	$	21,715

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment:

	Recorded Investment				Allowance for Loan Losses
	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated

June 30, 2019
Commercial real estate	$	403	$	533,277	$	-	$	5,415
Commercial - specialized		1,922		292,266		68		3,278
Commercial - general		2,667		388,767		333		7,992
Consumer:
1-4 family residential		2,432		346,137		35		2,275
Auto loans		-		206,777		-		3,067
Other consumer		-		71,559		-		1,199
Construction		-		89,446		-		509

Total	$	7,424	$	1,928,229	$	436	$	23,735

December 31, 2018
Commercial real estate	$	1,819	$	536,218	$	-	$	5,579
Commercial - specialized		2,116		302,906		-		2,516
Commercial - general		2,950		424,778		233		7,940
Consumer:
1-4 family residential		2,475		343,678		8		2,241
Auto loans		-		191,647		-		2,994
Other consumer		-		70,209		-		1,192
Construction		-		78,401		-		423

Total	$	9,360	$	1,947,837	$	241	$	22,885

Impaired loan information follows:

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment

June 30, 2019
Commercial real estate	$	858	$	403	$	-	$	403	$	-	$	1,111
Commercial - specialized		3,137		1,875		47		1,922		68		2,019
Commercial - general		3,260		-		2,667		2,667		333		2,809
Consumer:
1-4 family		2,851		1,976		456		2,432		35		2,454
Auto loans		-		-		-		-		-		-
Other consumer		-		-		-		-		-		-
Construction		-		-		-		-		-		-

Total	$	10,106	$	4,254	$	3,170	$	7,424	$	436	$	8,393

December 31, 2018
Commercial real estate	$	2,274	$	1,819	$	-	$	1,819	$	-	$	4,590
Commercial - specialized		2,116		2,116		-		2,116		-		3,742
Commercial - general		4,758		240		2,710		2,950		233		3,963
Consumer:
1-4 family		2,894		2,111		364		2,475		8		2,881
Auto loans		-		-		-		-		-		-
Other consumer		-		-		-		-		-		-
Construction		-		-		-		-		-		-

Total	$	12,042	$	6,286	$	3,074	$	9,360	$	241	$	15,176

All impaired loans $250,000 and greater were specifically evaluated for impairment. Interest income recognized using a cash-basis method on impaired loans for the period ended June 30, 2019 and the year ended December 31, 2018 was not significant. Additional funds committed to be advanced on impaired loans are not significant.

The table below provides an age analysis on accruing past-due loans and nonaccrual loans:

	30-89 Days Past Due		90 Days or More Past Due		Nonaccrual

June 30, 2019
Commercial real estate	$	545	$	309	$	294
Commercial - specialized		1,717		224		2,445
Commercial - general		777		650		2,096
Consumer:
1-4 Family residential		1,488		111		1,749
Auto loans		616		24		-
Other consumer		539		44		-
Construction		1,186		-		-

Total	$	6,868	$	1,362	$	6,584

December 31, 2018
Commercial real estate	$	1,748	$	-	$	217
Commercial - specialized		992		-		2,550
Commercial - general		2,625		-		2,134
Consumer:
1-4 Family residential		1,611		440		1,489
Auto loans		825		50
Other consumer		883		74
Construction		-		-		-

Total	$	8,684	$	564	$	6,390

The Company grades its loans on a thirteen-point grading scale. These grades fit in one of the following categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful, or (v) loss. Loans categorized as loss are charged-off immediately. The grading of loans reflect a judgment about the risks of default associated with the loan. The Company reviews the grades on loans as part of our on-going monitoring of the credit quality of our loan portfolio.

Pass loans have financial factors or nature of collateral that are considered reasonable credit risks in the normal course of lending and encompass several grades that are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loans at some future date.

Substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize collection and present the distinct possibility that some loss will be sustained if the deficiencies are not corrected. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Substandard loans can be accruing or can be nonaccrual depending on the circumstances of the individual loans.

Doubtful loans have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. All doubtful loans are on nonaccrual.

The following table summarizes the internal classifications of loans:

	Pass		Special Mention		Substandard		Doubtful		Total

June 30, 2019
Commercial real estate	$	509,597	$	21,096	$	2,987	$	-	$	533,680
Commercial - specialized		282,369		-		11,819		-		294,188
Commercial - general		380,703		1,304		9,427		-		391,434
Consumer:
1-4 family residential		343,337		-		5,232		-		348,569
Auto loans		206,396		-		381		-		206,777
Other consumer		71,334		-		225		-		71,559
Construction		89,446		-		-		-		89,446

Total	$	1,883,182	$	22,400	$	30,071	$	-	$	1,935,653

December 31, 2018
Commercial real estate	$	514,249	$	17,300	$	6,488	$	-	$	538,037
Commercial - specialized		301,289		-		3,733		-		305,022
Commercial - general		415,675		1,449		10,604		-		427,728
Consumer:
1-4 family residential		340,836		-		5,317		-		346,153
Auto loans		191,435		-		212		-		191,647
Other consumer		70,075		-		134		-		70,209
Construction		78,401		-		-		-		78,401

Total	$	1,911,960	$	18,749	$	26,488	$	-	$	1,957,197

There were no loans restructured as troubled debt restructurings during the six-month period ended June 30, 2019 and the year ended December 31, 2018.