Non Purchased Loans | Note 4. 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 4, all references to “loans” mean non purchased loans and include in LHFI in the consolidated statements of financial condition. The composition of LHFI, net at December 31, 2021 and 2020 is as follows: 2021 (1) 2020 Real Estate: Land Development and Construction $ 71,898 $ 42,677 Farmland 13,114 15,616 1-4 98,525 94,280 Commercial Real Estate 281,239 306,875 Total Real Estate Loans 464,776 459,448 Business Loans: Commercial and Industrial Loans (2) 92,501 115,679 Farm Production and Other Farm Loans 621 541 Total Business Loans 93,122 116,220 Consumer Loans: Credit Cards 1,963 1,878 Other Consumer Loans 11,986 10,929 Total Consumer Loans 13,949 12,807 Total Gross Loans 571,847 588,475 Unearned Income — (1 ) Allowance for Loan Losses (4,513 ) (4,735 ) Loans, net $ 567,334 $ 583,739 (1) Reclassifications from acquired loans to loans held for investment. (2) Includes Paycheck Protection Program (“PPP”) loans of $5,789 and $29,523 as of December 31, 2021 and December 31, 2020, r 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 2021 is presented in the following table. Balance outstanding at December 31, 2020 $ 846 Principal additions 3,061 Principal reductions (24 ) Balance outstanding at December 31, 2021 $ 3,883 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 Year-end non-accrual 2021 2020 Real Estate: Land Development and Construction $ 171 $ 308 Farmland 118 287 1-4 1,891 1,809 Commercial Real Estate 1,249 5,600 Total Real Estate Loans 3,429 8,004 Business Loans: Commercial and Industrial Loans 386 413 Farm Production and Other Farm Loans 3 9 Total Business Loans 389 422 Consumer Loans: Other Consumer Loans 8 33 Total Consumer Loans 8 33 Total non-accrual $ 3,826 $ 8,459 In the event that non-accrual An age analysis of past due loans, segregated by class of loans, as of December 31, 2021 is as follows: Loans 30-89 Days Loans Total Past Current Total Accruing Real Estate: Land Development and Construction $ 6 $ — $ 6 $ 71,892 $ 71,898 $ — Farmland 130 33 163 12,951 13,114 — 1-4 1,678 292 1,970 96,555 98,525 140 Commercial Real Estate 157 570 727 280,512 281,239 — Total Real Estate Loans 1,971 895 2,866 461,910 464,776 140 Business Loans: Commercial and Industrial Loans 205 376 581 91,920 92,501 — Farm Production and Other Farm Loans 3 — 3 618 621 — Total Business Loans 208 376 584 92,538 93,122 — Consumer Loans: Credit Cards 35 12 47 1,916 1,963 12 Other Consumer Loans 76 2 78 11,908 11,986 2 Total Consumer Loans 111 14 125 13,824 13,949 14 Total Loans $ 2,290 $ 1,285 $ 3,575 $ 568,272 $ 571,847 $ 154 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 $ — $ 736 $ 65,692 $ 42,677 $ — Farmland 183 75 210 15,385 15,616 — 1-4 1,301 246 3,893 83,738 94,280 — Commercial Real Estate 1,407 700 10,591 197,013 306,875 — Total Real Estate Loans 3,003 1,021 15,430 361,828 459,448 — 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 $ 16,034 $ 490,251 $ 588,475 $ 14 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: 2021 Unpaid Recorded Recorded Total Related Average Real Estate: Land Development and Construction $ 171 $ 171 $ — $ 171 $ — $ 240 Farmland 33 33 — 33 — 72 1-4 767 767 — 767 — 892 Commercial Real Estate 1,294 1,019 112 1,131 3 3,479 Total Real Estate Loans 2,265 1,990 112 2,102 3 4,683 Business: Commercial and Industrial 304 72 160 232 36 323 Total Business Loans 304 72 160 232 36 323 Total Loans $ 2,569 $ 2,062 $ 272 $ 2,334 $ 39 $ 5,006 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 9,128 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 $ 9,407 The Company did not have any new troubled debt restructurings as of December 31, 2021, 2020, and 2019, respectively. Changes in the Company’s troubled debt restructurings are set forth in the table below: Number Recorded Total at January 1, 2019 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 Reductions due to: Reclassification to OREO 2 (1,788 ) Principal paydowns (112 ) Total at December 31, 2021 1 $ 213 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, 2021. 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 not align with peers. Grade 5. MANAGEMENT ATTENTION—Borrower has potential 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 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, 2021. The following table details the amount of gross loans by loan grade and class for the year ended December 31, 2021: Satisfactory Special Substandard Doubtful Loss Total Real Estate: Land Development and Construction $ 69,758 $ 1,547 $ 593 $ — $ — $ 71,898 Farmland 12,365 297 452 — — 13,114 1-4 89,120 3,590 5,815 — — 98,525 Commercial Real Estate 238,561 8,055 34,623 — — 281,239 Total Real Estate Loans 409,804 13,489 41,483 — — 464,776 Business Loans: Commercial and Industrial Loans 85,138 1,483 5,877 — 3 92,501 Farm Production and Other Farm Loans 606 — 12 — 3 621 Total Business Loans 85,744 1,483 5,889 — 6 93,122 Consumer Loans: Credit Cards 1,916 — 47 — — 1,963 Other Consumer Loans 11,903 20 58 3 2 11,986 Total Consumer Loans 13,819 20 105 3 2 13,949 Total Loans $ 509,367 $ 14,992 $ 47,477 $ 3 $ 8 $ 571,847 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 |