LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands:

	March 31,			December 31,
	2020			2019

Commercial	$	49,246		$	47,892
Agricultural		76,044			78,785
Real estate – residential		13,820			14,530
Real estate – commercial		332,294			316,986
Real estate – construction and land development		19,674			31,181
Equity lines of credit		35,262			35,471
Auto		92,862			90,310
Other		4,541			4,563
Total loans		623,743			619,718
Deferred loan costs, net		3,548			3,561
Allowance for loan losses		(7,804	)		(7,243	)
Total net loans	$	619,487		$	616,036

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

	March 31,			December 31,
	2020			2019

Balance, beginning of period	$	7,243		$	6,958
Provision charged to operations		750			1,500
Losses charged to allowance		(268	)		(1,521	)
Recoveries		79			306
Balance, end of period	$	7,804		$	7,243

The recorded investment in impaired loans totaled

$2,247,000

and

$2,244,000

March 31, 2020

and

December 31, 2019

, respectively. The Company had specific allowances for loan losses of

$154,000

on impaired loans of

$538,000

March 31, 2020

as compared to specific allowances for loan losses of

$154,000

on impaired loans of

$539,000

December 31, 2019

. The balance of impaired loans in which

specific reserves were required totaled

$1,709,000

and

$1,705,000

March 31, 2020

and

December 31, 2019

, respectively. The average recorded investment in impaired loans for the

three

months ended

March 31, 2020

and

March 31, 2019

was

$2,256,000

and

$1,352,000,

respectively. The Company recognized

$15,000

and

$18,000

in interest income for impaired loans during the

three

months ended

March 31, 2020

and

2019

, respectively.

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

three

months ended

March 31, 2020

and

2019

Included in impairied loans are troubled debt restructurings. Section

4013

of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualifying loan modification or extension is exempt by law from classification as a Troubled Debt Restructuring ("TDR") pursuant to FASB ASC

340

10.

In addition, FIL-

2020

issued by the FDIC on

April 7, 2020

provides more limited circumstances in which a loan modification or extension is

not

subject to classification as a TDR pursuant to FASB ASC

340

10.

The Company evaluates loan extensions or modifications

not

qualified under Section

4013

of the CARES Act or under FIL-

2020

in accordance with FASB ASC

340

with respect to the classification of the loan as a TDR. Under ASC

340

10,

if the Company grants a loan extension or modification to a borrower experiencing financial difficulties for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above. 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, 2020

and

December 31, 2019

was

$1,012,000

and

$1,016,000,

respectively. The Company has allocated

$33,000

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

March 31, 2020

and

December 31, 2019

. The Company has

not

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

March 31, 2020

and

December 31, 2019

There were

troubled debt restructurings that occurred during the

three

months ending

March 31, 2020

March 31, 2019

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, 2020

and

2019

, respectively.

March 31, 2020

and

December 31, 2019

, nonaccrual loans totaled

$2,310,000

and

$2,050,000,

respectively. Interest foregone on nonaccrual loans totaled

33,000

and

$26,000

for the

three

months ended

March 31, 2020

and

2019

, respectively. There were

loans past due

days or more and on accrual status at

March 31, 2020

and

December 31, 2019

Salaries and employee benefits totaling

$496,000

and

$598,000

have been deferred as loan origination costs during the

three

months ended

March 31, 2020

and

2019

, 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, 2020	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	$	48,784	$	73,909	$	13,553	$	326,468	$	19,592	$	34,688	$	516,994
Special Mention		415		2,135		-		4,935		-		-		7,485
Substandard		47		-		267		891		82		574		1,861
Doubtful		-		-		-		-		-		-		-
Total	$	49,246	$	76,044	$	13,820	$	332,294	$	19,674	$	35,262	$	526,340

December 31, 2019	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	$	47,334	$	76,620	$	14,253	$	309,785	$	31,097	$	34,855	$	513,944
Special Mention		478		2,165		-		4,954		-		-		7,597
Substandard		80		-		277		2,247		84		616		3,304
Doubtful		-		-		-		-		-		-		-
Total	$	47,892	$	78,785	$	14,530	$	316,986	$	31,181	$	35,471	$	524,845

	Consumer Credit Exposure						Consumer Credit Exposure
	Credit Risk Profile Based on Payment Activity						Credit Risk Profile Based on Payment Activity
	March 31, 2020						December 31, 2019
	Auto		Other		Total		Auto		Other		Total
Grade:
Performing	$	92,448	$	4,506	$	96,954	$	90,128	$	4,559	$	94,687
Non-performing		414		35		449		182		4		186
Total	$	92,862	$	4,541	$	97,403	$	90,310	$	4,563	$	94,873

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

Three Months Ended March 31, 2020:	Commercial			Agricultural			Real Estate-Residential			Real Estate-Commercial		Real Estate-Construction			Equity LOC			Auto			Other			Total
Allowance for Loan Losses
Beginning balance	$	617		$	653		$	163		$	3,426	$	481		$	393		$	1,409		$	101		$	7,243
Charge-offs		(131	)		-			-			-		-			-			(134	)		(3	)		(268	)
Recoveries		2			-			1			1		-			1			70			4			79
Provision		226			(31	)		7			403		(84	)		28			196			5			750
Ending balance	$	714		$	622		$	171		$	3,830	$	397		$	422		$	1,541		$	107		$	7,804
Three Months Ended March 31, 2019:
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
March 31, 2020:
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	-		$	-		$	28		$	121	$	5		$	-		$	-		$	-		$	154
Ending balance: collectively evaluated for impairment		714			622			143			3,709		392			422			1,541			107			7,650
Ending balance	$	714		$	622		$	171		$	3,830	$	397		$	422		$	1,541		$	107		$	7,804
Loans
Ending balance: individually evaluated for impairment	$	-		$	247		$	656		$	805	$	109		$	430		$	-		$	-		$	2,247
Ending balance: collectively evaluated for impairment		49,246			75,797			13,164			331,489		19,565			34,832			92,862			4,541			621,496
Ending balance	$	49,246		$	76,044		$	13,820		$	332,294	$	19,674		$	35,262		$	92,862		$	4,541		$	623,743

December 31, 2019:	Commercial		Agricultural		Real Estate-Residential		Real Estate-Commercial		Real Estate-Construction		Equity LOC		Auto		Other		Total
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	-	$	-	$	28	$	121	$	5	$	-	$	-	$	-	$	154
Ending balance: collectively evaluated for impairment		617		653		135		3,305		476		393		1,409		101		7,089
Ending Balance	$	617	$	653	$	163	$	3,426	$	481	$	393	$	1,409	$	101	$	7,243
Loans
Ending balance: individually evaluated for impairment	$	25	$	248	$	612	$	815	$	110	$	434	$	-	$	-	$	2,244
Ending balance: collectively evaluated for impairment		47,867		78,537		13,918		316,171		31,071		35,037		90,310		4,563		617,474
Ending balance	$	47,892	$	78,785	$	14,530	$	316,986	$	31,181	$	35,471	$	90,310	$	4,563	$	619,718

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

							Total
March 31, 2020			90 Days				Past Due
	30-89 Days		and Still				and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total

Commercial	$	213	$	-	$	47	$	260	$	48,986	$	49,246
Agricultural		130		-		-		130		75,914		76,044
Real estate – residential		111		-		267		378		13,442		13,820
Real estate – commercial		828		-		891		1,719		330,575		332,294
Real estate - construction & land		-		-		82		82		19,592		19,674
Equity Lines of Credit		326		-		574		900		34,362		35,262
Auto		1,275		-		414		1,689		91,173		92,862
Other		40		-		35		75		4,466		4,541
Total	$	2,923	$	-	$	2,310	$	5,233	$	618,510	$	623,743

							Total
December 31, 2019			90 Days				Past Due
	30-89 Days		and Still				and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total

Commercial	$	333	$	-	$	58	$	391	$	47,501	$	47,892
Agricultural		199		-		-		199		78,586		78,785
Real estate – residential		-		-		277		277		14,253		14,530
Real estate - commercial		1,467		-		830		2,297		314,689		316,986
Real estate - construction & land		-		-		83		83		31,098		31,181
Equity Lines of Credit		288		-		616		904		34,567		35,471
Auto		1,281		-		182		1,463		88,847		90,310
Other		87		-		4		91		4,472		4,563
Total	$	3,655	$	-	$	2,050	$	5,705	$	614,013	$	619,718

The following tables show information related to impaired loans at

March 31, 2020

, in thousands:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of March 31, 2020:	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		247		247		-		248		5
Real estate – residential		479		489		-		480		7
Real estate – commercial		553		611		-		558		-
Real estate – construction & land		-		-		-		-		-
Equity Lines of Credit		430		458		-		432		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
With an allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		-		-		-		-		-
Real estate – residential		177		176		28		177		2
Real estate – commercial		252		265		121		252		-
Real estate – construction & land		109		109		5		109		1
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		247		247		-		248		5
Real estate – residential		656		665		28		657		9
Real estate – commercial		805		876		121		810		0
Real estate – construction & land		109		109		5		109		1
Equity Lines of Credit		430		458		-		432		0
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total	$	2,247	$	2,355	$	154	$	2,256	$	15

The following tables show information related to impaired loans at

December 31, 2019

, in thousands:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of December 31, 2019:	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial	$	25	$	85	$	-	$	23	$	-
Agricultural		248		248		-		249		19
Real estate – residential		435		447		-		385		29
Real estate – commercial		563		614		-		476		-
Real estate – construction & land		-		-		-		-		-
Equity Lines of Credit		434		457		-		213		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
With an allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		-		-		-		-		-
Real estate – residential		177		177		28		178		7
Real estate – commercial		252		261		121		139		-
Real estate – construction & land		110		110		5		114		7
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total:
Commercial	$	25	$	85	$	-	$	23	$	-
Agricultural		248		248		-		249		19
Real estate – residential		612		624		28		563		36
Real estate – commercial		815		875		121		615		-
Real estate – construction & land		110		110		5		114		7
Equity Lines of Credit		434		457		-		213		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total	$	2,244	$	2,399	$	154	$	1,777	$	62