Note 5:

Loans and Allowance for Loan Losses

A summary of loans at June 30, 2019 and December 31, 2018, are as follows (dollars in thousands):

	June 30, 2019			December 31, 2018

Construction & development	$	83,291		$	87,267
1-4 family commercial		36,165			33,278
Commercial real estate - other		188,142			156,396
Total commercial real estate		307,598			276,941

Commercial & industrial		256,100			248,394
Agricultural		56,167			62,844
Consumer		13,093			13,723

Gross loans		632,958			601,902

Less allowance for loan losses		(7,836	)		(7,832	)
Less deferred loan fees		(1,508	)		(1,992	)

Net loans	$	623,614		$	592,078

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three months ended June 30, 2019 and 2018 (dollars in thousands):

	Construction & Development			1 - 4 Family Commercial			Commercial Real Estate - Other		Commercial & Industrial		Agricultural			Consumer			Total

June 30, 2019
Balance, beginning of period	$	1,290		$	452		$	2,087	$	3,068	$	760		$	178		$	7,835

Charge-offs		-			-			-		-		(10	)		-			(10	)
Recoveries		-			1			-		7		3			-			11

Net recoveries		-			1					7		(7	)		-			1

Provision (credit) for loan losses		(259	)		(5	)		242		96		(58	)		(16	)		-

Balance, end of period	$	1,031		$	448		$	2,329	$	3,171	$	695		$	162		$	7,836

	Construction & Development			1 - 4 Family Commercial			Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer			Total

June 30, 2018
Balance, beginning of period	$	1,465		$	497		$	1,556	$	3,108		$	872		$	201		$	7,699

Charge-offs		-			(25	)		-		(6	)		-			-			(31	)
Recoveries		-			2			2		29			-			1			34

Net recoveries		-			(23	)		2		23			-			1			3

Provision (credit) for loan losses		(182	)		(39	)		414		(118	)		(64	)		(11	)		-

Balance, end of period	$	1,283		$	435		$	1,972	$	3,013		$	808		$	191		$	7,702

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the six months ended June 30, 2019 and 2018 (dollars in thousands):

	Construction & Development			1 - 4 Family Commercial		Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer			Total

June 30, 2019
Balance, beginning of period	$	1,136		$	433	$	2,035	$	3,231		$	818		$	179		$	7,832

Charge-offs		-			-		-		(4	)		(10	)		-			(14	)
Recoveries		-			2		-		13			3			-			18

Net charge-offs		-			2		-		9			(7	)		-			4

Provision (credit) for loan losses		(105	)		13		294		(69	)		(116	)		(17	)		-

Balance, end of period	$	1,031		$	448	$	2,329	$	3,171		$	695		$	162		$	7,836

	Construction & Development			1 - 4 Family Commercial			Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer		Total

June 30, 2018
Balance, beginning of period	$	1,407		$	431		$	1,865	$	2,779		$	1,015		$	157	$	7,654

Charge-offs		-			(25	)		-		(61	)		-			-		(86	)
Recoveries		-			2			2		29			-			1		34

Net charge-offs		-			(23	)		2		(32	)		-			1		(52	)

Provision (credit) for loan losses		(124	)		27			105		266			(207	)		33		100

Balance, end of period	$	1,283		$	435		$	1,972	$	3,013		$	808		$	191	$	7,702

The following table presents, by portfolio segment, the balance in allowance for loan losses and the gross loans based upon portfolio segment and impairment method as of June 30, 2019 and December 31, 2018 (dollars in thousands):

	Construction & Development		1 - 4 Family Commercial		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total

June 30, 2019 Allowance Balance

Ending balance Individually evaluated for impairment	$	-	$	3	$	32	$	-	$	-	$	-	$	35
Collectively evaluated for impairment		1,031		445		2,297		3,171		695		162		7,801

Total	$	1,031	$	448	$	2,329	$	3,171	$	695	$	162	$	7,836

Gross Loans
Ending balance Individually evaluated for impairment	$	-	$	8	$	1,911	$	5,309	$	2,641	$	-	$	9,869
Collectively evaluated for impairment		83,291		36,157		186,231		250,791		53,526		13,093		623,089

Total	$	83,291	$	36,165	$	188,142	$	256,100	$	56,167	$	13,093	$	632,958

December 31, 2018 Allowance Balance
Ending balance Individually evaluated for impairment	$	-	$	-	$	32	$	14	$	-	$	-	$	46
Collectively evaluated for impairment		1,136		433		2,003		3,217		818		179		7,786

Total	$	1,136	$	433	$	2,035	$	3,231	$	818	$	179	$	7,832

Gross Loans
Ending balance Individually evaluated for impairment	$	-	$	115	$	484	$	7,381	$	1,097	$	-	$	9,077
Collectively evaluated for impairment		87,267		33,163		155,912		241,013		61,747		13,723		592,825

Total	$	87,267	$	33,278	$	156,396	$	248,394	$	62,844	$	13,723	$	601,902

Internal Risk Categories

Certain loan segments were reclassified during 2018. Each loan segment is made up of loan categories possessing similar risk characteristics. The Company’s re-alignment of the segments primarily consisted of reclassifying consumer-related and agricultural-related real estate loans from the real estate category to the consumer and agricultural categories, respectively. Management believes this accurately represents the risk profile of each loan segment. In addition, the real estate segment was renamed to commercial real estate, and the commercial segment was renamed to commercial & industrial. The prior period amounts have been revised to conform to the current period presentation. These reclassifications did not have a significant impact on the allowance for loan losses.

Risk characteristics applicable to each segment of the loan portfolio are described as follows:

Real Estate – The real estate portfolio consists of residential and commercial properties. Residential loans are generally secured by owner occupied 1–4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Commercial real estate loans in this category typically involve larger principal amounts and are repaid primarily from the cash flow of a borrower’s principal business operation, the sale of the real estate or income independent of the loan purpose. Credit risk in these loans is driven by the creditworthiness of a borrower, property values, the local economy and other economic conditions impacting a borrower’s business or personal income.

Commercial & Industrial – The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Agricultural – Loans secured by agricultural assets are generally made for the purpose of acquiring land devoted to crop production, cattle or poultry or the operation of a similar type of business on the secured property. Sources of repayment for these loans generally include income generated from operations of a business on the property, rental income or sales of the property. Credit risk in these loans may be impacted by crop and commodity prices, the creditworthiness of a borrower, and changes in economic conditions which might affect underlying property values and the local economies in the Company’s market areas.

Consumer – The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors, such as unemployment and general economic conditions in the Company’s market area and the creditworthiness of a borrower.

Loan grades are numbered 1 through 4. Grade 1 is considered satisfactory. The grades of 2 and 3, or Watch and Special Mention, respectively, represent loans of lower quality and are considered criticized. Grade of 4, or Substandard, refers to loans that are classified.

•

Grade 1 (Pass) – These loans generally conform to Bank policies, and are characterized by policy conforming advance rates on collateral, and have well-defined repayment sources. In addition, these credits are extended to Borrowers and/or Guarantors with a strong balance sheet and either substantial liquidity or a reliable income history.

•

Grade 2 (Watch) – These loans are still considered “Pass” credits; however, various factors such as industry stress, material changes in cash flow or financial conditions, or deficiencies in loan documentation, or other risk issues determined by the Lending Officer, Commercial Loan Committee (CLC), or Credit Quality Committee (CQC) warrant a heightened sense and frequency of monitoring.

•

Grade 3 (Special Mention) – These loans must have observable weaknesses or evidence imprudent handling or structural issues. The weaknesses require close attention and the remediation of those weaknesses is necessary. No risk of probable loss exists. Credits in this category are expected to quickly migrate to a “2” or a “4” as this is viewed as a transitory loan grade.

•

Grade 4 (Substandard) – These loans are not adequately protected by the sound worth and debt service capacity of the Borrower, but may be well secured. They have defined weaknesses relative to cash flow, collateral, financial condition, or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if weaknesses are not remediated.

The Company evaluates the definitions of loan grades and the allowance for loan losses methodology on an ongoing basis. No changes were made to either during period ended June 30, 2019.

The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of June 30, 2019 and December 31, 2018 (dollars in thousands):

	Construction & Development		1 - 4 Family Commercial		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total

June 30, 2019
Grade
1 (Pass)	$	81,053	$	35,463	$	182,645	$	216,425	$	51,287	$	13,093	$	579,966
2 (Watch)		2,238		694		1,510		33,489		110		-		38,041
3 (Special Mention)		-		-		2,076		877		2,129		-		5,082
4 (Substandard)		-		8		1,911		5,309		2,641		-		9,869

Total	$	83,291	$	36,165	$	188,142	$	256,100	$	56,167	$	13,093	$	632,958

	Construction & Development		1 - 4 Family Commercial		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total

December 31, 2018
Grade
1 (Pass)	$	84,485	$	29,942	$	154,353	$	204,671	$	57,782	$	13,723	$	544,956
2 (Watch)		2,782		3,221		1,559		36,342		758		-		44,662
3 (Special Mention)		-		-		-		-		3,207		-		3,207
4 (Substandard)		-		115		484		7,381		1,097		-		9,077

Total	$	87,267	$	33,278	$	156,396	$	248,394	$	62,844	$	13,723	$	601,902

The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of June 30, 2019 and December 31, 2018 (dollars in thousands):

	Past Due												Total Loans
	30–59 Days		60–89 Days		Greater than 90 Days		Total		Current		Total Loans		> 90 Days & Accruing

June 30, 2019
Construction & development	$	-	$	-	$	-	$	-	$	83,291	$	83,291	$	-
1 - 4 Family Real Estate		69		-		8		77		36,088		36,165		-
Commercial Real Estate - other		-		-		-		-		188,142		188,142		-
Commercial & industrial		-		-		-		-		256,100		256,100		-
Agricultural		541		-		1,097		1,638		54,529		56,167		1,097
Consumer		99		-		-		99		12,994		13,093		-

Total	$	709	$	-	$	1,105	$	1,814	$	631,144	$	632,958	$	1,097

December 31, 2018
Construction & development	$	-	$	-	$	-	$	-	$	87,267	$	87,267	$	-
1 - 4 Family Real Estate		8		-		-		8		33,270		33,278		-
Commercial Real Estate - other		-		-		-		-		156,396		156,396		-
Commercial & industrial		-		5		-		5		248,389		248,394		-
Agricultural		-		-		-		-		62,844		62,844		-
Consumer		41		-		-		41		13,682		13,723		-

Total	$	49	$	5	$	-	$	54	$	601,848	$	601,902	$	-

The following table presents impaired loans as of June 30, 2019 and December 31, 2018 (dollars in thousands):

	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with an Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
											Three Months Ended June 30, 2019				Six Months Ended June 30, 2019
June 30, 2019
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
1 - 4 Family Real Estate		8		-		8		8		3		713		-		414		-
Commercial Real Estate - other		1,911		-		1,911		1,911		32		1,335		33		1,147		66
Commercial & industrial		5,309		5,309		-		5,309		-		5,290		55		5,940		178
Agricultural		2,641		2,641		-		2,641		-		2,548		48		2,190		105
Consumer		-		-		-		-		-		193		-		193		-

Total	$	9,869	$	7,950	$	1,919	$	9,869	$	35	$	10,079	$	136	$	9,884	$	349

											Three Months Ended June 30, 2018				Six Months Ended June 30, 2018
December 31, 2018
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
1 - 4 Family Real Estate		115		115		-		115		-		71		8		90		-
Commercial Real Estate - other		1,990		1,506		484		1,990		32		414		144		500		18
Commercial & industrial		7,614		7,359		22		7,381		14		8,880		7		6,207		284
Agricultural		1,097		1,097		-		1,097		-		1,497		-		1,529		40
Consumer		5		-		-		-		-		41		-		37		-

Total	$	10,821	$	10,077	$	506	$	10,583	$	46	$	10,903	$	159	$	8,363	$	342

Impaired loans include nonperforming loans and also include loans modified in troubled-debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired. At June 30, 2019, the Company had $321,000 of commercial loans, $1,911,000 of commercial real estate loans, and $674,000 of agricultural loans that were modified in troubled-debt restructurings and impaired and $501,000 in commercial loan modifications as of December 31, 2018. There were $2.9 million in newly modified troubled-debt restructurings during the six month period ended June 30, 2019, consisting of $1.9 million of commercial real estate loans, and $1.0 million of agricultural loans, and no newly modified troubled-debt restructurings during the three month period ended June 30, 2019. There were no newly modified TDRs during the year ended December 31, 2018. The modification of the terms of the TDR loans included one or a combination of the following: a reduction of the stated interest rate of the loan; or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. These modifications did not result in any increase or decrease to the allowance for loan losses for the period ending June 30, 2019, primarily due to collateral support provided by the secondary source of repayment and/or the ability of the borrower to service restructured payments. These TDRs resulted in no charge offs during the period ended June 30, 2019.

There were no troubled-debt restructurings modified in the past three months that subsequently defaulted for the period ended June 30, 2019.

The following table represents information regarding nonperforming assets at June 30, 2019 and December 31, 2018 (dollars in thousands):

	As of

	June 30, 2019		December 31, 2018
Nonaccrual loans	$	2,240	$	2,615
Troubled-debt restructurings (1)		674		-
Accruing loans 90 or more days past due		1,097		-
Total nonperforming loans	$	4,011	$	2,615

(1)

$2.2 million and $501,000 of TDRs as of June 30, 2019 and December 31, 2018, respectively, are included in the nonaccrual loans balance in the line above