Note

Allowance for Loan Losses and Impaired Loans

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed to be sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’s comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency levels, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability

may

not

be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific and general components. The specific component is calculated on an individual basis for larger-balance, non-homogeneous loans, which are considered impaired. A specific allowance is established when the discounted cash flows, collateral value (less disposal costs), or observable market price of the impaired loan is lower than its carrying value. The specific component of the allowance for smaller-balance loans whose terms have been modified in a troubled debt restructuring (TDR) is calculated on a pooled basis considering historical experience adjusted for qualitative factors. These smaller-balance TDRs were collectively evaluated for impairment. The general component covers the remaining loan portfolio, and is based on historical loss experience adjusted for qualitative factors. The appropriateness of the allowance for loan losses on loans is estimated based upon these factors and trends identified by management at the time financial statements are prepared.

A provision for loan losses is charged against operations and is added to the allowance for loan losses based on quarterly comprehensive analyses of the loan portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. While management has allocated the allowance for loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety.

The following table presents activity in the allowance by loan category and information on the loans evaluated individually for impairment and collectively evaluated for impairment as of

December 31, 2019

and

December 31, 2018:

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)	Construction & Development			Farmland			Residential			Commercial Mortgage			Commercial & Agricultural			Consumer & Other			Total
December 31, 2019
Allowance for loan losses:
Beginning Balance	$	246		$	385		$	1,807		$	682		$	281		$	94		$	3,495
Charge-offs		-			(13	)		(55	)		(41	)		(77	)		(212	)		(398	)
Recoveries		-			-			8			69			10			54			141
Provision		59			115			62			214			(3	)		208			655
Ending Balance	$	305		$	487		$	1,822		$	924		$	211		$	144		$	3,893

Ending balance: individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-		$	-		$	-
Ending balance: collectively evaluated for impairment	$	305		$	487		$	1,822		$	924		$	211		$	144		$	3,893

Loans outstanding:
Ending Balance	$	39,649		$	34,166		$	253,674		$	190,817		$	32,426		$	19,621		$	570,353
Ending balance: individually evaluated for impairment	$	-		$	3,240		$	909		$	-		$	-		$	-		$	4,149
Ending balance: collectively evaluated for impairment	$	39,649		$	30,926		$	252,765		$	190,817		$	32,426		$	19,621		$	566,204

December 31, 2018
Allowance for loan losses:
Beginning Balance	$	239		$	358		$	1,875		$	619		$	282		$	80		$	3,453
Charge-offs		(20	)		-			(117	)		(142	)		(23	)		(175	)		(477	)
Recoveries		-			34			44			69			9			38			194
Provision		27			(7	)		5			136			13			151			325
Ending Balance	$	246		$	385		$	1,807		$	682		$	281		$	94		$	3,495

Ending balance: individually evaluated for impairment	$	-		$	29		$	12		$	-		$	-		$	-		$	41
Ending balance: collectively evaluated for impairment	$	246		$	356		$	1,795		$	682		$	281		$	94		$	3,454

Loans outstanding:
Ending Balance	$	33,449		$	33,291		$	235,689		$	176,192		$	37,491		$	20,353		$	536,465
Ending balance: individually evaluated for impairment	$	-		$	4,552		$	1,018		$	-		$	-		$	-		$	5,570
Ending balance: collectively evaluated for impairment	$	33,449		$	28,739		$	234,671		$	176,192		$	37,491		$	20,353		$	530,895

As of

December 31, 2019

and

December 31, 2018,

the Bank had

unallocated reserves included in the allowance for loan losses.

Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Bank’s loan portfolio. The Bank’s loan ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are

not

corrected. Assets classified as Doubtful have all the weaknesses inherent in assets classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible, and of such little value that its continuance on the books is

not

warranted. Assets that do

not

currently expose the insured financial institutions to sufficient risk to warrant classification in

one

of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.” Management also maintains a listing of loans designated “Watch”. These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk. As of

December 31, 2019

and

December 31, 2018,

respectively, the Bank had

loans graded “Doubtful” or “Loss” included in the balance of total loans outstanding.

The following table lists the loan grades utilized by the Bank and the corresponding total of outstanding loans in each category as of

December 31, 2019

and

December 31, 2018:

Credit Risk Profile by Internally Assigned Grades

	Loan Grades
(dollars in thousands)	Pass		Watch		Special Mention		Substandard		Total

December 31, 2019
Real Estate Secured:
Construction & development	$	34,701	$	4,801	$	-	$	147	$	39,649
Farmland		22,969		4,059		673		6,465		34,166
Residential		231,629		19,887		176		1,982		253,674
Commercial mortgage		163,584		21,960		930		4,343		190,817
Non-Real Estate Secured:
Commercial & agricultural		27,503		4,346		103		474		32,426
Consumer & other		19,314		300		-		7		19,621
Total	$	499,700	$	55,353	$	1,882	$	13,418	$	570,353

December 31, 2018
Real Estate Secured:
Construction & development	$	31,237	$	2,044	$	147	$	21	$	33,449
Farmland		23,250		4,933		750		4,358		33,291
Residential		213,670		18,794		299		2,926		235,689
Commercial mortgage		148,179		23,468		1,212		3,333		176,192
Non-Real Estate Secured:
Commercial & agricultural		33,537		2,908		70		976		37,491
Consumer & other		18,975		1,364		-		14		20,353
Total	$	468,848	$	53,511	$	2,478	$	11,628	$	536,465

Loans

may

be placed in nonaccrual status when, in management’s opinion, the borrower

may

be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received are

first

applied to principal, and any remaining funds are then applied to interest. Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof.

The following table presents an age analysis of nonaccrual and past due loans by category as of

December 31, 2019

and

December 31, 2018:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90+ Days Past Due and Still Accruing		Nonaccrual Loans

December 31, 2019
Real Estate Secured:
Construction & development	$	-	$	-	$	10	$	10	$	39,639	$	39,649	$	-	$	10
Farmland		893		-		971		1,864		32,302		34,166		-		4,192
Residential		292		48		365		705		252,969		253,674		-		412
Commercial mortgage		185		-		-		185		190,632		190,817		-		198
Non-Real Estate Secured:
Commercial & agricultural		135		8		163		306		32,120		32,426		-		165
Consumer & other		2		6		2		10		19,611		19,621		-		2
Total	$	1,507	$	62	$	1,511	$	3,080	$	567,273	$	570,353	$	-	$	4,979

December 31, 2018
Real Estate Secured:
Construction & development	$	29	$	-	$	-	$	29	$	33,420	$	33,449	$	-	$	-
Farmland		71		100		989		1,160		32,131		33,291		-		3,914
Residential		762		145		241		1,148		234,541		235,689		-		653
Commercial mortgage		-		-		604		604		175,588		176,192		-		740
Non-Real Estate Secured:
Commercial & agricultural		7		-		264		271		37,220		37,491		-		264
Consumer & other		12		18		8		38		20,315		20,353		-		8
Total	$	881	$	263	$	2,106	$	3,250	$	533,215	$	536,465	$	-	$	5,579

Impaired Loans

A loan is considered impaired when it is probable that the Bank will be unable to collect all contractual principal and interest payments due in accordance with the original or modified terms of the loan agreement. Smaller balance homogenous loans

may

be collectively evaluated for impairment. Non-homogenous impaired loans are either measured based on the estimated fair value of the collateral less estimated cost to sell if the loan is considered collateral dependent, or measured based on the present value of expected future cash flows if

not

collateral dependent. The valuation of real estate collateral is subjective in nature and

may

be adjusted in future periods because of changes in economic conditions. Management considers

third

-party appraisals, as well as independent fair market value assessments in determining the estimated fair value of particular properties. In addition, as certain of these

third

-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties

may

have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

As of

December 31, 2019

and

December 31, 2018,

respectively, the recorded investment in impaired loans totaled

$7.8

million and

$10.3

million. The total amount of collateral-dependent impaired loans at

December 31, 2019

and

December 31, 2018,

respectively, was

$2.9

million and

$2.8

million. As of

December 31, 2019

and

December 31, 2018,

respectively,

$4.1

million and

$3.4

million of the recorded investment in impaired loans did

not

have a related allowance. The Bank had

$4.8

million and

$7.3

million in troubled debt restructured loans included in impaired loans at

December 31, 2019

and

December 31, 2018,

respectively.

The categories of non-accrual loans and impaired loans overlap, although they are

not

coextensive. The Bank considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on non-accrual status, such as the financial strength of the borrower, the estimated collateral value, reasons for the delay, payment record, the amount past due and the number of days past due.

2015,

management began collectively evaluating performing TDRs with a loan balance of

$250,000

or less for impairment. As of

December 31, 2019

and

December 31, 2018,

respectively,

$3.6

million and

$4.7

million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have

$174

thousand and

$259

thousand of related allowance.

The following table is a summary of information related to impaired loans as of

December 31, 2019

and

December 31, 2018:

Impaired Loans

(dollars in thousands)	Recorded Investment 1		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

December 31, 2019
With no related allowance recorded:
Construction & development	$	-	$	-	$	-	$	-	$	-
Farmland		3,240		3,240		-		3,505		25
Residential		909		909		-		921		40
Commercial mortgage		-		-		-		-		-
Commercial & agricultural		-		-		-		-		-
Consumer & other		-		-		-		-		-
Subtotal		4,149		4,149		-		4,426		65

With an allowance recorded:
Construction & development		72		72		3		76		6
Farmland		150		150		2		1,545		70
Residential		3,345		3,495		166		4,161		225
Commercial mortgage		11		56		1		268		11
Commercial & agricultural		31		31		1		34		2
Consumer & other		3		3		1		4		-
Subtotal		3,612		3,807		174		6,088		314

Totals:
Construction & development		72		72		3		76		6
Farmland		3,390		3,390		2		5,050		95
Residential		4,254		4,404		166		5,082		265
Commercial mortgage		11		56		1		268		11
Commercial & agricultural		31		31		1		34		2
Consumer & other		3		3		1		4		-
Total	$	7,761	$	7,956	$	174	$	10,514	$	379

Recorded investment is the loan balance, net of any charge-offs

(dollars in thousands)	Recorded Investment 1		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

December 31, 2018
With no related allowance recorded:
Construction & development	$	-	$	-	$	-	$	-	$	-
Farmland		3,284		3,284		-		3,523		23
Residential		85		85		-		448		13
Commercial mortgage		-		-		-		-		-
Commercial & agricultural		-		24		-		-		-
Consumer & other		-		-		-		-		-
Subtotal		3,369		3,393		-		3,971		36

With an allowance recorded:
Construction & development		69		69		4		306		11
Farmland		1,539		1,539		38		1,568		86
Residential		5,005		5,162		241		5,348		266
Commercial mortgage		275		358		15		522		27
Commercial & agricultural		37		37		2		47		3
Consumer & other		4		4		-		4		-
Subtotal		6,929		7,169		300		7,795		393

Totals:
Construction & development		69		69		4		306		11
Farmland		4,823		4,823		38		5,091		109
Residential		5,090		5,247		241		5,796		279
Commercial mortgage		275		358		15		522		27
Commercial & agricultural		37		61		2		47		3
Consumer & other		4		4		-		4		-
Total	$	10,298	$	10,562	$	300	$	11,766	$	429

Recorded investment is the loan balance, net of any charge-offs

Troubled Debt Restructuring

A troubled debt restructured loan is a loan for which the Bank, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Bank would

not

otherwise consider.

The loan terms which have been modified or restructured due to a borrower’s financial difficulty, include but are

not

limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals. The Bank had

$4.8

million and

$7.3

million in troubled debt restructured loans at

December 31, 2019

and

December 31, 2018,

respectively. Troubled debt restructured loans are considered impaired loans.

The following table sets forth information with respect to the Bank’s troubled debt restructurings as of

December 31, 2019

and

December 31, 2018:

	TDRs identified during the period						TDRs identified in the last twelve months that subsequently defaulted (1)
(dollars in thousands)	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment

December 31, 2019
Construction & development		1	$	9	$	11		-	$	-	$	-
Farmland		1		38		37		-		-		-
Residential		1		117		128		-		-		-
Commercial mortgage		-		-		-		-		-		-
Commercial & agricultural		-		-		-		-		-		-
Consumer & other		-		-		-		-		-		-
Total		3	$	164	$	176		-	$	-	$	-

During the

twelve

months ended

December 31, 2019,

three

loans were modified that were considered to be TDRs. Term concessions were granted on all the loans and

two

loans had additional funds advanced for legal expenses and property taxes.

TDRs identified in the last

twelve

months subsequently defaulted in the year ended

December 31, 2019.

(

)

Loans past due

days or more are considered to be in default.

	TDRs identified during the period						TDRs identified in the last twelve months that subsequently defaulted (1)
(dollars in thousands)	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment

December 31, 2018
Construction & development		-	$	-	$	-		-	$	-	$	-
Farmland		-		-		-		-		-		-
Residential		2		80		95		-		-		-
Commercial mortgage		-		-		-		-		-		-
Commercial & agricultural		-		-		-		-		-		-
Consumer & other		1		5		4		-		-		-
Total		3	$	85	$	99		-	$	-	$	-

During the

twelve

months ended

December 31, 2018,

three

loans were modified that were considered to be TDRs. Term concessions were granted and additional funds were advanced for legal expenses and property taxes.

TDRs identified in the last

twelve

months subsequently defaulted in the year ended

December 31, 2018.

(

)

Loans past due

days or more are considered to be in default.

Purchased Credit Impaired Loans

During

2018,

the Company acquired loans as a result of the Great State merger, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would

not

be collected. The carrying amount of those loans at

December 31, 2019

and

December 31, 2018

are as follows:

(dollars in thousands)	2019		2018

Residential	$	150	$	167
Commercial mortgage		321		347
Commercial & agricultural		146		200
Outstanding balance	$	617	$	714

Carrying amount	$	617	$	714

There was

accretable yield on purchased credit impaired loans for the periods presented.

There were

purchased credit impaired loans acquired during the year ended

December 31, 2019.

Purchased credit impaired loans acquired during the year ended

December 31, 2018

for which it was probable at acquisition that all contractually required payments would

not

be collected are as follows:

(dollars in thousands)	December 31, 2018
Contractually required payments receivable of loans purchased during the year:
Residential	$	233
Commercial mortgage		1,724
Commercial & agricultural		221
	$	2,178

Cash flows expected to be collected at acquisition	$	1,781
Fair value of acquired loans at acquisition	$	1,781

Income is

not

recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amounts of such loans as of

December 31, 2019

and

December 31, 2018

are as follows:

(dollars in thousands)	2019		2018

Loans at beginning of year	$	714	$	-
Loans purchased during the year	$	-	$	1,781
Loans at end of period	$	617	$	714