Non Purchased Loans | Note 5. Non Purchased Loans (In Thousands, Except Number of Loans) “Purchased” loans are those acquired in any of the Company’s previous acquisitions. “Non purchased” loans include all of the Company’s other loans. For purposes of this Note 5, all references to “loans” mean non purchased loans. The composition of loans, net at December 31, 2020 and 2019 is as follows: 2020 2019 Real Estate: Land Development and Construction (1) $ 42,677 $ 66,428 Farmland 15,616 15,595 1-4 Family Mortgages 94,280 87,631 Commercial Real Estate 306,875 207,604 Total Real Estate Loans 459,448 377,258 Business Loans: Commercial and Industrial Loans (2) 115,679 84,611 Farm Production and Other Farm Loans 541 683 Total Business Loans 116,220 85,294 Consumer Loans: Credit Cards 1,878 1,833 Other Consumer Loans 10,929 12,060 Total Consumer Loans 12,807 13,893 Total Gross Loans 588,475 476,445 Unearned Income (1 ) (8 ) Allowance for Loan Losses (4,735 ) (3,755 ) Loans, net $ 583,739 $ 472,682 (1) Reclassifications to other loan segments due to changes in loan risk characteristics that occurred in 2020. (2) Includes PPP loans of $29,523 and $-0- as of December 31, 2020 and December 31, 2019, respectively. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews these policies and procedures and submits them to the Company’s Board of Directors for its approval when needed, but no less frequently than annually. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of this review are presented to management with quarterly reports made to the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by the lenders and credit personnel, as well as the Company’s policies and procedures. Loans are made principally to customers in the Company’s market. The Company’s lending policy provides that loans collateralized by real estate are normally made with loan-to-value In the ordinary course of business, the Company has granted loans to certain directors, significant shareholders and their affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Activity in related party loans during 2020 is presented in the following table. Balance outstanding at December 31, 2019 $ 387 Principal additions 690 Principal reductions (231 ) Balance outstanding at December 31, 2020 $ 846 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 Year-end non-accrual 2020 2019 Real Estate: Land Development and Construction $ 308 $ 111 Farmland 287 232 1-4 Family Mortgages 1,809 2,160 Commercial Real Estate 5,600 9,082 Total Real Estate Loans 8,004 11,585 Business Loans: Commercial and Industrial Loans 413 338 Farm Production and Other Farm Loans 9 10 Total Business Loans 422 348 Consumer Loans: Other Consumer Loans 33 60 Total Consumer Loans 33 60 Total non-accrual Loans $ 8,459 $ 11,993 In the event that non-accrual An age analysis of past due loans, segregated by class of loans, as of December 31, 2020 is as follows: Loans 30-89 Days Loans Total Past Current Total Accruing Real Estate: Land Development and Construction $ 112 $ — $ 112 $ 42,565 $ 42,677 $ — Farmland 183 75 258 15,358 15,616 — 1-4 1,301 246 1,547 92,733 94,280 — Commercial Real Estate 1,407 700 2,107 304,768 306,875 — Total Real Estate Loans 3,003 1,021 4,024 455,424 459,448 — Business Loans: Commercial and Industrial Loans 97 405 502 115,177 115,679 5 Farm Production and Other Farm Loans 2 — 2 539 541 — Total Business Loans 99 405 504 115,716 116,220 5 Consumer Loans: Credit Cards 25 9 34 1,844 1,878 9 Other Consumer Loans 66 — 66 10,863 10,929 — Total Consumer Loans 91 9 100 12,707 12,807 9 Total Loans $ 3,193 $ 1,435 $ 4,628 $ 583,847 $ 588,475 $ 14 An age analysis of past due loans, segregated by class of loans, as of December 31, 2019 is 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 the Company will be unable to collect all the 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 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 contract terms on those loans in excess of $100. 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 December 31, by class of loans, are as follows: 2020 Unpaid Recorded Recorded Total Related Average Real Estate: Land Development and Construction $ 308 $ 256 $ 52 $ 308 $ 13 $ 210 Farmland 111 111 — 111 — 182 1-4 1,016 1,012 4 1,016 1 928 Commercial Real Estate 6,021 3,323 2,504 5,827 768 7,808 Total Real Estate Loans 7,456 4,702 2,560 7,262 782 9,127 Business: Commercial and Industrial 413 54 359 413 125 279 Total Business Loans 413 54 359 413 125 279 Total Loans $ 7,869 $ 4,756 $ 2,919 $ 7,675 $ 907 $ 9,405 2019 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 10,649 Business: Commercial and Industrial 144 — 144 144 72 72 Total Business Loans 144 — 144 144 72 72 Total Loans $ 12,852 $ 6,999 $ 4,136 $ 11,135 $ 682 $ 10,721 The Company did not have any new troubled debt restructurings as of December 31, 2020, 2019, and 2018, respectively. Changes in the Company’s troubled debt restructurings are set forth in the table below: Number Recorded Total at January 1, 2018 3 $ 3,047 Reductions due to: Principal paydowns (265 ) Total at December 31, 2018 3 2,782 Reductions due to: Principal paydowns (287 ) Total at December 31, 2019 3 2,495 Reductions due to: Principal paydowns (382 ) Total at December 31, 2020 3 $ 2,113 The allocated allowance for loan losses attributable to restructured loans was $-0- The Company had no commitments to lend additional funds on these troubled debt restructurings at December 31, 2020. The Company 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 is as follows. Grade 1. MINIMAL RISK - These loans are without loss exposure to the Company. 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 most of the loans held by the Company. 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. 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 that 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 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 December 31, 2020. The following table details the amount of gross loans by loan grade and class for the year ended December 31, 2020: Satisfactory Special Substandard Doubtful Loss Total Real Estate: Land Development and Construction $ 41,775 $ 120 $ 782 $ — $ — $ 42,677 Farmland 14,801 95 720 — — 15,616 1-4 85,203 3,210 5,867 — — 94,280 Commercial Real Estate 258,339 35,769 12,767 — — 306,875 Total Real Estate Loans 400,118 39,194 20,136 — — 459,448 Business Loans: Commercial and Industrial Loans 109,525 4,409 1,738 — 7 115,679 Farm Production and Other Farm Loans 512 — 20 — 9 541 Total Business Loans 110,037 4,409 1,758 — 16 116,220 Consumer Loans: Credit Cards 1,845 — 33 — — 1,878 Other Consumer Loans 10,820 43 41 25 — 10,929 Total Consumer Loans 12,665 43 74 25 — 12,807 Total Loans $ 522,820 $ 43,646 $ 21,968 $ 25 $ 16 $ 588,475 The following table details the amount of gross loans by loan grade and class for the year ended December 31, 2019: Satisfactory 1,2,3,4 Special Mention 5,6 Substandard 7 Doubtful 8 Loss 9 Total Loans Real Estate: Land Development and Construction $ 64,112 $ 1,682 $ 634 $ — $ — $ 66,428 Farmland 14,533 331 731 — — 15,595 1-4 Family Mortgages 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 |