LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands:

	March 31,			December 31,
	2019			2018

Commercial	$	42,707		$	49,563
Agricultural		70,041			69,160
Real estate – residential		16,413			15,900
Real estate – commercial		282,533			271,710
Real estate – construction and land development		37,637			40,161
Equity lines of credit		37,519			38,490
Auto		82,737			77,135
Other		3,859			4,080
Total loans		573,446			566,199
Deferred loan costs, net		3,399			3,257
Allowance for loan losses		(7,067	)		(6,958	)
Total net loans	$	569,778		$	562,498

Changes in the allowance for loan losses, in thousands, were as follows:

	March 31,			December 31,
	2019			2018

Balance, beginning of period	$	6,958		$	6,669
Provision charged to operations		400			1,000
Losses charged to allowance		(351	)		(1,191	)
Recoveries		60			480
Balance, end of period	$	7,067		$	6,958

The recorded investment in impaired loans totaled

$1,738,000

and

$1,275,000

March 31, 2019

and

December 31, 2018,

respectively. The Company had specific allowances for loan losses of

$229,000

on impaired loans of

$897,000

March 31, 2019

as compared to specific allowances for loan losses of

$181,000

on impaired loans of

$424,000

December 31, 2018.

The balance of impaired loans in which

specific reserves were required totaled

$841,000

and

$851,000

March 31, 2019

and

December 31, 2018,

respectively. The average recorded investment in impaired loans for the

three

months ended

March 31, 2019

and

March 31, 2018

was

$1,352,000

and

$2,002,000,

respectively. The Company recognized

$18,000

in interest income for impaired loans during the

three

months ended

March 31, 2019

and

2018.

interest was recognized on nonaccrual loans accounted for on a cash basis during the

three

months ended

March 31, 2019

and

2018.

Included in impaired loans are troubled debt restructurings. A troubled debt restructuring is a formal restructure of a loan where the Company for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions

may

be granted in various forms to include

one

or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

The carrying value of troubled debt restructurings at

March 31, 2019

and

December 31, 2018

was

$1,071,000

and

$1,080,000,

respectively. The Company has allocated

$53,000

of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of

March 31, 2019

and

December 31, 2018.

The Company has

not

committed to lend additional amounts on loans classified as troubled debt restructurings at

March 31, 2019

and

December 31, 2018.

There were

troubled debt restructurings that occurred during the

three

months ending

March 31, 2019

March 31, 2018.

There were

troubled debt restructurings for which there was a payment default within

twelve

months following the modification during the

three

months ended

March 31, 2019

and

2018,

respectively.

March 31, 2019

and

December 31, 2018,

nonaccrual loans totaled

$1,457,000

and

$1,117,000,

respectively. Interest foregone on nonaccrual loans totaled

$26,000

and

$15,000

for the

three

months ended

March 31, 2019

and

2018,

respectively. There were

loans past due

days or more and on accrual status at

March 31, 2019

and

December 31, 2018.

Salaries and employee benefits totaling

$598,000

and

$498,000

have been deferred as loan origination costs during the

three

months ended

March 31, 2019

and

2018,

respectively.

The Company assigns a risk rating to all loans and periodically, but

not

less than annually, performs detailed reviews of all criticized and classified loans over

$100,000

to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.

The risk ratings can be grouped into

three

major categories, defined as follows:

Special Mention

– Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses

may

result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard

– A substandard loan is

not

adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are

not

corrected.

Doubtful

– Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loans

not

meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following table shows the loan portfolio allocated by management's internal risk ratings at the dates indicated, in thousands:

March 31, 201 9	Commercial Credit Exposure
	Credit Risk Profile by Internally Assigned Grade
Grade:	Commercial		Agricultural		Real Estate- Residential		Real Estate- Commercial		Real Estate- Construction		Equity LOC		Total
Pass	$	42,011	$	69,791	$	16,144	$	278,359	$	37,547	$	37,341	$	481,193
Special Mention		540		250		120		3,564		-		-		4,474
Substandard		156		-		149		610		90		178		1,183
Doubtful		-		-		-		-		-		-		-
Total	$	42,707	$	70,041	$	16,413	$	282,533	$	37,637	$	37,519	$	486,850

December 31, 201 8	Commercial Credit Exposure
	Credit Risk Profile by Internally Assigned Grade
Grade:	Commercial		Agricultural		Real Estate- Residential		Real Estate- Commercial		Real Estate- Construction		Equity LOC		Total
Pass	$	48,905	$	68,910	$	15,621	$	268,159	$	40,069	$	38,304	$	479,968
Special Mention		481		250		124		3,420		-		-		4,275
Substandard		177		-		155		131		92		186		741
Doubtful		-		-		-		-		-		-		-
Total	$	49,563	$	69,160	$	15,900	$	271,710	$	40,161	$	38,490	$	484,984

	Consumer Credit Exposure						Consumer Credit Exposure
	Credit Risk Profile Based on Payment Activity						Credit Risk Profile Based on Payment Activity
	March 31, 201 9						December 31, 201 8
	Auto		Other		Total		Auto		Other		Total
Grade:
Performing	$	82,430	$	3,859	$	86,289	$	76,734	$	4,071	$	80,805
Non-performing		307		-		307		401		9		410
Total	$	82,737	$	3,859	$	86,596	$	77,135	$	4,080	$	81,215

The following tables show the allocation of the allowance for loan losses at the dates indicated, in thousands:

							Real			Real		Real
Three months ended March 31, 201 9 :	Commercial			Agricultural			Estate- Residential			Estate- Commercial		Estate-Construction			Equity LOC			Auto			Other			Total
Allowance for Loan Losses
Beginning balance	$	914		$	538		$	214		$	2,686	$	758		$	464		$	1,289		$	95		$	6,958
Charge-offs		(16	)		-			-			-		-			-			(312	)		(23	)		(351	)
Recoveries		9			-			1			-		-			1			47			2			60
Provision		(111	)		4			(20	)		283		(117	)		(15	)		360			16			400
Ending balance	$	796		$	542		$	195		$	2,969	$	641		$	450		$	1,384		$	90		$	7,067
Three months ended March 31, 201 8 :
Allowance for Loan Losses
Beginning balance	$	725		$	623		$	231		$	2,729	$	783		$	533		$	946		$	99		$	6,669
Charge-offs		(265	)		-			-			-		-			-			(165	)		(19	)		(449	)
Recoveries		7			-			91			17		2			1			82			2			202
Provision		305			(129	)		(110	)		13		6			(24	)		114			25			200
Ending balance	$	772		$	494		$	212		$	2,759	$	791		$	510		$	977		$	107		$	6,622
March 31, 201 9 :
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	123		$	-		$	35		$	61	$	10		$	-		$	-		$	-		$	229
Ending balance: collectively evaluated for impairment		673			542			160			2,908		631			450			1,384			90			6,838
Ending balance	$	796		$	542		$	195		$	2,969	$	641		$	450		$	1,384		$	90		$	7,067
Loans
Ending balance: individually evaluated for impairment		123			250			639			611		115			-			-			-			1,738
Ending balance: collectively evaluated for impairment	$	42,584		$	69,791		$	15,774		$	281,922	$	37,522		$	37,519		$	82,737		$	3,859		$	571,708
Ending balance	$	42,707		$	70,041		$	16,413		$	282,533	$	37,637		$	37,519		$	82,737		$	3,859		$	573,446
December 31, 2018:
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	128		$	-			41		$	-	$	12		$	-		$	-		$	-		$	181
Ending balance: collectively evaluated for impairment	$	786		$	538		$	173		$	2,686	$	746		$	464		$	1,289		$	95		$	6,777
Ending Balance	$	914		$	538		$	214		$	2,686	$	758		$	464		$	1,289		$	95		$	6,958
Loans
Ending balance: individually evaluated for impairment	$	128		$	250		$	649		$	131	$	117		$	-		$	-		$	-		$	1,275
Ending balance: collectively evaluated for impairment		49,435			68,910			15,251			271,579		40,044			38,490			77,135			4,080			564,924
Ending balance	$	49,563		$	69,160		$	15,900		$	271,710	$	40,161		$	38,490		$	77,135		$	4,080		$	566,199

The following table shows an aging analysis of the loan portfolio by the time past due, in thousands:

							Total
March 31, 201 9	30-89 Days		90 Days and Still				Past Due and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total

Commercial	$	192	$	-	$	123	$	315	$	42,392	$	42,707
Agricultural		69		-		-		69		69,972		70,041
Real estate – residential		7		-		149		156		16,257		16,413
Real estate – commercial		154		-		610		764		281,769		282,533
Real estate - construction & land		-		-		90		90		37,547		37,637
Equity Lines of Credit		384		-		178		562		36,957		37,519
Auto		1,164		-		307		1,471		81,266		82,737
Other		42		-		-		42		3,817		3,859
Total	$	2,012	$	-	$	1,457	$	3,469	$	569,977	$	573,446

							Total
December 31, 201 8	30-89 Days		90 Days and Still				Past Due and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total

Commercial	$	11	$	-	$	144	$	155	$	49,408	$	49,563
Agricultural		-		-		-		-		69,160		69,160
Real estate – residential		154		-		155		309		15,591		15,900
Real estate - commercial		-		-		131		131		271,579		271,710
Real estate - construction & land		-		-		92		92		40,069		40,161
Equity Lines of Credit		596		-		186		782		37,708		38,490
Auto		1,725		-		401		2,126		75,009		77,135
Other		85		-		8		93		3,987		4,080
Total	$	2,571	$	-	$	1,117	$	3,688	$	562,511	$	566,199

The following tables show information related to impaired loans at

March 31, 2019,

in thousands:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of March 31, 201 9 :	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		250		250		-		250		5
Real estate – residential		460		471		-		462		9
Real estate – commercial		131		144		-		131		-
Real estate – construction & land		-		-		-		-		-
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
With an allowance recorded:
Commercial	$	123	$	128	$	123	$	123	$	-
Agricultural		-		-		-		-		-
Real estate – residential		179		179		35		179		2
Real estate – commercial		480		480		61		91		-
Real estate – construction & land		115		115		10		116		2
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total:
Commercial	$	123	$	128	$	123	$	123	$	-
Agricultural		250		250		-		250		5
Real estate – residential		639		650		35		641		11
Real estate – commercial		611		624		61		222		-
Real estate – construction & land		115		115		10		116		2
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total	$	1,738	$	1,767	$	229	$	1,352	$	18

The following tables show information related to impaired loans at

December 31, 2018,

in thousands:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of December 31, 201 8 :	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		250		250		-		252		19
Real estate – residential		470		481		-		470		38
Real estate – commercial		131		144		-		136		-
Real estate – construction & land		-		-		-		-		-
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
With an allowance recorded:
Commercial	$	128	$	128	$	128	$	1	$	-
Agricultural		-		-		-		-		-
Real estate – residential		179		179		41		181		7
Real estate – commercial		-		-		-		-		-
Real estate – construction & land		117		117		12		120		7
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total:
Commercial	$	128	$	128	$	128	$	1	$	-
Agricultural		250		250		-		252		19
Real estate – residential		649		660		41		651		45
Real estate – commercial		131		144		-		136		-
Real estate – construction & land		117		117		12		120		7
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total	$	1,275	$	1,299	$	181	$	1,160	$	71