Non Purchased Loans | Note 8. Non Purchased Loans (in thousands, except number loans “Purchased” loans are those acquired in any of the Corporation’s previous acquisitions. “Non Purchased” loans include all of the Corporation’s other loans. For purposes of Note 8, all references to “loans” mean non purchased loans. The composition of net loans at September 30, 2020 and December 31, 2019 was as follows: September 30, December 31, Real Estate: Land Development and Construction $ 85,684 $ 66,428 Farmland 14,728 15,595 1-4 90,040 87,631 Commercial Real Estate 242,070 207,604 Total Real Estate Loans 432,522 377,258 Business Loans: Commercial and Industrial Loans (1) 136,559 84,611 Farm Production and Other Farm Loans 572 683 Total Business Loans 137,131 85,294 Consumer Loans: Credit Cards 1,742 1,833 Other Consumer Loans 11,055 12,060 Total Consumer Loans 12,797 13,893 Total Gross Loans 582,450 476,445 Unearned Income (2 ) (8 ) Allowance for Loan Losses (4,494 ) (3,755 ) Loans, net $ 577,954 $ 472,682 (1) Includes PPP loans of $48,830 and $-0- Loans are considered to be past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual non-accrual Period-end, non-accrual class follows September 30, December 31, Real Estate: Land Development and Construction $ 315 $ 111 Farmland 346 232 1-4 1,975 2,160 Commercial Real Estate 7,077 9,082 Total Real Estate Loans 9,713 11,585 Business Loans: Commercial and Industrial Loans 442 338 Farm Production and Other Farm Loans 10 10 Total Business Loans 452 348 Consumer Loans: Other Consumer Loans 40 60 Total Consumer Loans 40 60 Total Nonaccrual Loans $ 10,205 $ 11,993 An aging analysis of past due loans, segregated by class, as of September 30, 2020, was as follows: Loans 30-89 Days Loans Total Past Current Total Accruing Real Estate: Land Development and Construction $ 5 $ — $ 5 $ 85,679 $ 85,684 $ — Farmland 171 — 171 14,557 14,728 — 1-4 1,418 490 1,908 88,132 90,040 130 Commercial Real Estate 312 1,145 1,457 240,613 242,070 116 Total Real Estate Loans 1,906 1,635 3,541 428,981 432,522 246 Business Loans: Commercial and Industrial Loans 116 415 531 136,028 136,559 — Farm Production and Other Farm Loans 8 — 8 564 572 — Total Business Loans 124 415 539 136,592 137,131 — Consumer Loans: Credit Cards 12 — 12 1,730 1,742 — Other Consumer Loans 34 — 34 11,021 11,055 — Total Consumer Loans 46 — 46 12,751 12,797 — Total Loans $ 2,076 $ 2,050 $ 4,126 $ 578,324 $ 582,450 $ 246 An aging analysis of past due loans, segregated by class, as of December 31, 2019 was as follows: Loans 30-89 Days Loans Total Past Current Total Accruing Real Estate: Land Development and Construction $ 736 $ — $ 736 $ 65,692 $ 66,428 $ — Farmland 171 39 210 15,385 15,595 39 1-4 3,116 777 3,893 83,738 87,631 147 Commercial Real Estate 8,511 2,080 10,591 197,013 207,604 18 Total Real Estate Loans 12,534 2,896 15,430 361,828 377,258 204 Business Loans: Commercial and Industrial Loans 586 312 898 83,713 84,611 52 Farm Production and Other Farm Loans 17 — 17 666 683 — Total Business Loans 603 312 915 84,379 85,294 52 Consumer Loans: Credit Cards 45 18 63 1,770 1,833 18 Other Consumer Loans 172 42 214 11,846 12,060 — Total Consumer Loans 217 60 277 13,616 13,893 18 Total Loans $ 13,354 $ 3,268 $ 16,622 $ 459,823 $ 476,445 $ 274 Loans are considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. In determining which loans to evaluate for impairment, management looks at all loans over $100 that are past due loans, bankruptcy filings and any situation that might lend itself to cause a borrower to be unable to repay the loan according to the original agreement terms. If a loan is determined to be impaired and the collateral is deemed to be insufficient to fully repay the loan, a specific reserve will be established. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off Impaired loans as of September 30, 2020, segregated by class, were as follows: Unpaid Recorded Recorded Total Related Average Real Estate: Land Development and Construction $ 316 $ 263 $ 53 $ 316 $ 13 $ 214 Farmland 152 152 — 152 — 202 1-4 1,042 1,036 6 1,042 3 941 Commercial Real Estate 7,984 3,273 4,519 7,792 649 8,791 Total Real Estate Loans 9,494 4,724 4,578 9,302 665 10,147 Business Loans: Commercial and Industrial Loans 416 56 360 416 129 280 Total Business Loans 416 56 360 416 129 280 Total Loans $ 9,910 $ 4,780 $ 4,938 $ 9,718 $ 794 $ 10,427 Impaired loans as of December 31, 2019, segregated by class, were as follows: Unpaid Recorded Recorded Total Related Average Real Estate: Land Development and Construction $ 111 $ 58 $ 53 $ 111 $ 16 $ 56 Farmland 252 252 — 252 — 261 1-4 839 740 99 839 28 996 Commercial Real Estate 11,506 5,949 3,840 9,789 566 9,337 Total Real Estate Loans 12,708 6,999 3,992 10,991 610 10,650 Business Loans: Commercial and Industrial Loans 144 — 144 144 72 72 Total Business Loans 144 — 144 144 72 72 Total Loans $ 12,852 $ 6,999 $ 4,136 $ 11,135 $ 682 $ 10,722 The following table presents troubled debt restructurings, segregated by class: September 30, 2020 Number of Pre-Modification Post-Modification Commercial real estate 3 $ 4,871 $ 2,377 Total 3 $ 4,871 $ 2,377 December 31, 2019 Number of Pre-Modification Post-Modification Commercial real estate 3 $ 4,871 $ 2,495 Total 3 $ 4,871 $ 2,495 Changes in the Corporation’s troubled debt restructurings are set forth in the table below: Number Recorded Totals at January 1, 2019 3 $ 2,782 Reductions due to: Principal paydowns (287 ) Totals at January 1, 2020 3 $ 2,495 Reductions due to: Principal paydowns (118 ) Total at September 30, 2020 3 $ 2,377 The allocated allowance for loan losses attributable to restructured loans was $-0- The Corporation utilizes a risk grading matrix to assign a risk grade to each of its loans when originated and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades follows. Grade 1. MINIMAL RISK - These loans are without loss exposure to the Corporation. This classification is reserved for only the best, well secured loans to borrowers with significant capital strength, low leverage, stable earnings and growth and other readily available financing alternatives. This type of loan would also include loans secured by a program of the government. Grade 2. MODEST RISK - These loans include borrowers with solid credit quality and moderate risk of loss. These loans may be fully secured by certificates of deposit with another reputable financial institution, or secured by readily marketable securities with acceptable margins. Grade 3. AVERAGE RISK - This is the rating assigned to the majority of the loans held by the Corporation. This includes loans with average loss exposure and average overall quality. These loans should liquidate through possessing adequate collateral and adequate earnings of the borrower. In addition, these loans are properly documented and are in accordance with all aspects of the current loan policy. Grade 4. ACCEPTABLE RISK - Borrower generates sufficient cash flow to fund debt service but most working asset and capital expansion needs are provided from external sources. Profitability and key balance sheet ratios are usually close to peers but one or more may be higher than peers. Grade 5. MANAGEMENT ATTENTION - Borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the borrower has taken a negative turn and may be temporarily strained. Cash flow is weak but cash reserves remain adequate to meet debt service. Management weakness is evident. Grade 6. OTHER LOANS ESPECIALLY MENTIONED (“OLEM”) - Loans in this category are fundamentally sound but possess some weaknesses. OLEM loans have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the bank’s credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss. Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss. This classification does not mean that the loan will incur a total or partial loss. Substandard loans may or may not be impaired. Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. A doubtful classification could reflect the fact that the primary source of repayment is gone and serious doubt exists as to the quality of a secondary source of repayment. Grade 9. LOSS - Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Also included in this classification is the defined loss portion of loans rated substandard assets and doubtful assets. These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at September 30, 2020. The following table details the amount of gross loans, segregated by loan grade and class, as of September 30, 2020: Satisfactory Special Substandard Doubtful Loss Total Real Estate: Land Development and Construction $ 82,960 $ 1,921 $ 803 $ — $ — $ 85,684 Farmland 13,825 91 812 — — 14,728 1-4 81,766 2,274 6,000 — — 90,040 Commercial Real Estate 206,592 20,711 14,767 — — 242,070 Total Real Estate Loans 385,143 24,997 22,382 — — 432,522 Business Loans: Commercial and Industrial Loans 128,017 4,776 3,759 — 7 136,559 Farm Production and Other Farm Loans 530 8 24 — 10 572 Total Business Loans 128,547 4,784 3,783 — 17 137,131 Consumer Loans: Credit Cards 1,730 — 12 — — 1,742 Other Consumer Loans 10,930 48 46 31 — 11,055 Total Consumer Loans 12,660 48 58 31 — 12,797 Total Loans $ 526,350 $ 29,829 $ 26,223 $ 31 $ 17 $ 582,450 The following table details the amount of gross loans segregated by loan grade and class, as of December 31, 2019: Satisfactory Special Substandard Doubtful Loss Total Real Estate: Land Development and Construction $ 64,112 $ 1,682 $ 634 $ — $ — $ 66,428 Farmland 14,533 331 731 — — 15,595 1-4 79,068 1,917 6,646 — — 87,631 Commercial Real Estate 169,270 21,266 17,068 — — 207,604 Total Real Estate Loans 326,983 25,196 25,079 — — 377,258 Business Loans: Commercial and Industrial Loans 80,289 128 4,194 — — 84,611 Farm Production and Other Farm Loans 669 — 4 — 10 683 Total Business Loans 80,958 128 4,198 — 10 85,294 Consumer Loans: Credit Cards 1,770 — 63 — — 1,833 Other Consumer Loans 11,907 59 53 41 — 12,060 Total Consumer Loans 13,677 59 116 41 — 13,893 Total Loans $ 421,618 $ 25,383 $ 29,393 $ 41 $ 10 $ 476,445 |