Loans and Related Allowance for Loan Losses | Note 3. Loans and Related Allowance for Loan Losses The Company’s loans, net of deferred fees and costs, at June 30, 2019 and December 31, 2018 were comprised of the following (dollars in thousands): June 30, 2019 December 31, 2018 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1‑4 family $ 219,690 21.45 % $ 216,268 21.77 % Commercial 388,750 37.95 379,904 38.23 Construction and land development 136,951 13.37 120,413 12.12 Second mortgages 6,803 0.66 6,778 0.68 Multifamily 57,251 5.59 59,557 5.99 Agriculture 10,617 1.04 8,370 0.84 Total real estate loans 820,062 80.06 791,290 79.63 Commercial loans 191,032 18.66 188,722 18.99 Consumer installment loans 11,603 1.13 12,048 1.21 All other loans 1,553 0.15 1,645 0.17 Total loans $ 1,024,250 100.00 % $ 993,705 100.00 % The Company held $16. 4 and $17.4 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at June 30, 2019 and December 31, 2018, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $1. 2 million at each of June 30, 2019 and December 31, 2018, respectively. The purchase premium is amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method. At June 30, 2019 and December 31, 2018, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310, Receivables, (ii) a general valuation component calculated in accordance with FASB ASC 450, Contingencies , based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with ASC 310. The following table summarizes information related to impaired loans as of June 30, 2019 and the three and six months ended June 30, 2019 (dollars in thousands): Three months ended Six months ended June 30, 2019 June 30, 2019 June 30, 2019 Unpaid Recorded Principal Related Average Interest Average Interest Investment (1) Balance (2) Allowance Investment Recognized Investment Recognized With no related allowance recorded: Mortgage loans on real estate: Residential 1‑4 family $ 1,521 $ 1,869 $ — $ 1,534 $ 11 $ 1,543 $ 21 Commercial 3,330 4,027 — 3,349 35 3,400 69 Multifamily 2,526 2,526 — 2,539 — 2,546 — Total real estate loans 7,377 8,422 — 7,422 46 7,489 90 Subtotal impaired loans with no valuation allowance 7,377 8,422 — 7,422 46 7,489 90 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 2,263 2,686 402 2,133 12 2,133 24 Commercial 708 1,217 118 722 2 998 4 Construction and land development 4,091 5,364 735 4,096 — 4,254 — Total real estate loans 7,062 9,267 1,255 6,951 14 7,385 28 Commercial loans 1,313 1,547 526 1,822 5 1,875 9 Consumer installment loans 6 6 1 6 — 4 — Subtotal impaired loans with a valuation allowance 8,381 10,820 1,782 8,779 19 9,264 37 Total: Mortgage loans on real estate: Residential 1‑4 family 3,784 4,555 402 3,667 23 3,676 45 Commercial 4,038 5,244 118 4,071 37 4,398 73 Construction and land development 4,091 5,364 735 4,096 — 4,254 — Multifamily 2,526 2,526 — 2,539 — 2,546 — Total real estate loans 14,439 17,689 1,255 14,373 60 14,874 118 Commercial loans 1,313 1,547 526 1,822 5 1,875 9 Consumer installment loans 6 6 1 6 — 4 — Total impaired loans $ 15,758 $ 19,242 $ 1,782 $ 16,201 $ 65 $ 16,753 $ 127 (1) The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment. (2) The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation allowances. The following table summarizes information related to impaired loans as of December 31, 2018 and the three and six months ended June 30, 2018 (dollars in thousands): Three months ended Six months ended December 31, 2018 June 30, 2018 June 30, 2018 Unpaid Recorded Principal Related Average Interest Average Interest Investment (1) Balance (2) Allowance Investment Recognized Investment Recognized With no related allowance recorded: Mortgage loans on real estate: Residential 1‑4 family $ 1,563 $ 1,890 $ — $ 1,863 $ 10 $ 1,876 $ 20 Commercial 3,502 4,176 — 3,702 38 3,755 75 Construction and land development — — — 403 — 268 — Multifamily 2,559 2,559 — 1,279 31 853 61 Total real estate loans 7,624 8,625 — 7,247 79 6,752 156 Commercial loans — — — 625 — 786 — Subtotal impaired loans with no valuation allowance 7,624 8,625 — 7,872 79 7,538 156 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 2,131 2,538 349 2,223 19 2,221 39 Commercial 1,550 2,034 482 1,032 2 866 4 Construction and land development 4,571 5,840 515 4,966 — 4,737 — Agriculture — — — 34 — 45 — Total real estate loans 8,252 10,412 1,346 8,255 21 7,869 43 Commercial loans 1,983 1,991 900 247 1 273 2 Consumer installment loans — — — 2 — 3 — Subtotal impaired loans with a valuation allowance 10,235 12,403 2,246 8,504 22 8,145 45 Total: Mortgage loans on real estate: Residential 1‑4 family 3,694 4,428 349 4,086 29 4,097 59 Commercial 5,052 6,210 482 4,734 40 4,621 79 Construction and land development 4,571 5,840 515 5,369 — 5,005 — Multifamily 2,559 2,559 — 1,279 31 853 61 Agriculture — — — 34 — 45 — Total real estate loans 15,876 19,037 1,346 15,502 100 14,621 199 Commercial loans 1,983 1,991 900 872 1 1,059 2 Consumer installment loans — — — 2 — 3 — Total impaired loans $ 17,859 $ 21,028 $ 2,246 $ 16,376 $ 101 $ 15,683 $ 201 (1) The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment. (2) The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation allowances. Troubled debt restructures still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. A reconciliation of impaired loans to nonaccrual loans at June 30, 2019 and December 31, 2018, is set forth in the table below (dollars in thousands): June 30, 2019 December 31, 2018 Nonaccruals $ 11,045 $ 9,500 Troubled debt restructure and still accruing 4,713 8,359 Total impaired $ 15,758 $ 17,859 Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the three and six months ended June 30, 2019 and 2018. For the three months ended June 30, 2019 and 2018, estimated interest income of $196,000 and $183,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the six months ended June 30, 2019 and 2018, estimated interest income of $410,000 and $322,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. There were no loans greater than 90 days past due and still accruing interest at each of June 30, 2019 and December 31, 2018. The following tables present an age analysis of past due status of loans by category as of June 30, 2019 and December 31, 2018 (dollars in thousands): June 30, 2019 30‑89 Days Total Past Total Loans Past Due Nonaccrual Due Current Receivable Mortgage loans on real estate: Residential 1‑4 family $ 737 $ 2,148 $ 2,885 $ 216,805 $ 219,690 Commercial 184 1,388 1,572 387,178 388,750 Construction and land development — 4,091 4,091 132,860 136,951 Second mortgages 229 — 229 6,574 6,803 Multifamily — 2,526 2,526 54,725 57,251 Agriculture — — — 10,617 10,617 Total real estate loans 1,150 10,153 11,303 808,759 820,062 Commercial loans 1,005 886 1,891 189,141 191,032 Consumer installment loans 193 6 199 11,404 11,603 All other loans — — — 1,553 1,553 Total loans $ 2,348 $ 11,045 $ 13,393 $ 1,010,857 $ December 31, 2018 30‑89 Days Total Past Total Loans Past Due Nonaccrual Due Current Receivable Mortgage loans on real estate: Residential 1‑4 family $ 495 $ 1,257 $ 1,752 $ 214,516 $ 216,268 Commercial 551 2,123 2,674 377,230 379,904 Construction and land development 59 4,571 4,630 115,783 120,413 Second mortgages — — — 6,778 6,778 Multifamily 2,559 — 2,559 56,998 59,557 Agriculture — — — 8,370 8,370 Total real estate loans 3,664 7,951 11,615 779,675 791,290 Commercial loans 80 1,549 1,629 187,093 188,722 Consumer installment loans 10 — 10 12,038 12,048 All other loans — — — 1,645 1,645 Total loans $ 3,754 $ 9,500 $ 13,254 $ 980,451 $ 993,705 Activity in the allowance for loan losses on loans by segment for the three and six months ended June 30, 2019 and 2018 is presented in the following tables (dollars in thousands): Three Months Ended June 30, 2019 Provision March 31, 2019 Allocation Charge-offs Recoveries June 30, 2019 Mortgage loans on real estate: Residential 1‑4 family $ 3,339 $ (426) $ (34) $ 15 $ 2,894 Commercial 1,508 461 — 57 2,026 Construction and land development 1,210 154 — 35 1,399 Second mortgages 62 18 — 1 81 Multifamily 361 (169) — — 192 Agriculture 23 (23) — — — Total real estate loans 6,503 15 (34) 108 6,592 Commercial loans 1,958 86 (28) 2 2,018 Consumer installment loans 188 12 (40) 25 185 All other loans 6 15 — — 21 Unallocated 6 (3) — — 3 Total loans $ 8,661 $ 125 $ (102) $ 135 $ 8,819 Three Months Ended June 30, 2018 Provision March 31, 2018 Allocation Charge-offs Recoveries June 30, 2018 Mortgage loans on real estate: Residential 1‑4 family $ 3,115 $ 431 $ (53) $ 58 $ 3,551 Commercial 2,620 (438) — 7 2,189 Construction and land development 1,612 (218) — 35 1,429 Second mortgages 34 (3) — 1 32 Multifamily 198 128 — — 326 Agriculture 33 (27) — — 6 Total real estate loans 7,612 (127) (53) 101 7,533 Commercial loans 962 199 — 1 1,162 Consumer installment loans 112 (12) (67) 136 169 All other loans 10 (10) — 3 3 Unallocated 272 (50) — — 222 Total loans $ 8,968 $ — $ (120) $ 241 $ 9,089 Six Months Ended June 30, 2019 Provision December 31, 2018 Allocation Charge-offs Recoveries June 30, 2019 Mortgage loans on real estate: Residential 1‑4 family $ 2,281 $ 429 $ (34) $ 218 $ 2,894 Commercial 1,810 429 (277) 64 2,026 Construction and land development 1,161 197 (12) 53 1,399 Second mortgages 20 58 — 3 81 Multifamily 371 (179) — — 192 Agriculture 17 (17) — — — Total real estate loans 5,660 917 (323) 338 6,592 Commercial loans 1,894 377 (257) 4 2,018 Consumer installment loans 152 84 (100) 49 185 All other loans 12 9 — — 21 Unallocated 1,265 (1,262) — — 3 Total loans $ 8,983 $ 125 $ (680) $ 391 $ 8,819 Six Months Ended June 30, 2018 Provision December 31, 2017 Allocation Charge-offs Recoveries June 30, 2018 Mortgage loans on real estate: Residential 1‑4 family $ 3,466 $ 65 $ (53) $ 73 $ 3,551 Commercial 2,423 (254) — 20 2,189 Construction and land development 1,247 146 — 36 1,429 Second mortgages 24 6 — 2 32 Multifamily 496 (170) — — 326 Agriculture 14 (8) — — 6 Total real estate loans 7,670 (215) (53) 131 7,533 Commercial loans 1,139 47 (39) 15 1,162 Consumer installment loans 110 (4) (112) 175 169 All other loans 3 (3) — 3 3 Unallocated 47 175 — — 222 Total loans $ 8,969 $ — $ (204) $ 324 $ 9,089 The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of June 30, 2019 and December 31, 2018 (dollars in thousands): June 30, 2019 Allowance for Loan Losses Recorded Investment in Loans Individually Collectively Individually Collectively Evaluated for Evaluated for Evaluated for Evaluated for Impairment Impairment Total Impairment Impairment Total Mortgage loans on real estate: Residential 1‑4 family $ 402 $ 2,492 $ 2,894 $ 3,784 $ 215,906 $ 219,690 Commercial 118 1,908 2,026 4,038 384,712 388,750 Construction and land development 735 664 1,399 4,091 132,860 136,951 Second mortgages — 81 81 — 6,803 6,803 Multifamily — 192 192 2,526 54,725 57,251 Agriculture — — — — 10,617 10,617 Total real estate loans 1,255 5,337 6,592 14,439 805,623 820,062 Commercial loans 526 1,492 2,018 1,313 189,719 191,032 Consumer installment loans 1 184 185 6 11,597 11,603 All other loans — 21 21 — 1,553 1,553 Unallocated — 3 3 — — — Total loans $ 1,782 $ 7,037 $ 8,819 $ 15,758 $ 1,008,492 $ 1,024,250 December 31, 2018 Allowance for Loan Losses Recorded Investment in Loans Individually Collectively Individually Collectively Evaluated for Evaluated for Evaluated for Evaluated for Impairment Impairment Total Impairment Impairment Total Mortgage loans on real estate: Residential 1‑4 family $ 349 $ 1,932 $ 2,281 $ 3,694 $ 212,574 $ 216,268 Commercial 482 1,328 1,810 5,052 374,852 379,904 Construction and land development 515 646 1,161 4,571 115,842 120,413 Second mortgages — 20 20 — 6,778 6,778 Multifamily — 371 371 2,559 56,998 59,557 Agriculture — 17 17 — 8,370 8,370 Total real estate loans 1,346 4,314 5,660 15,876 775,414 791,290 Commercial loans 900 994 1,894 1,983 186,739 188,722 Consumer installment loans — 152 152 — 12,048 12,048 All other loans — 12 12 — 1,645 1,645 Unallocated — 1,265 1,265 — — — Total loans $ 2,246 $ 6,737 $ 8,983 $ 17,859 $ 975,846 $ 993,705 Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows: Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $16. 4 million and $17.4 million at June 30, 2019 and December 31, 2018, respectively. Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification. Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected. Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full, highly questionable and improbable, on the basis of currently existing facts, conditions, and values. The possibility of loss is extremely high. The following tables present the composition of loans by credit quality indicator at June 30, 2019 and December 31, 2018 (dollars in thousands): June 30, 2019 Pass Special Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 214,019 $ 3,523 $ 2,148 $ — $ 219,690 Commercial 382,609 3,297 2,844 — 388,750 Construction and land development 132,654 205 4,092 — 136,951 Second mortgages 6,486 317 — — 6,803 Multifamily 54,725 — 2,526 — 57,251 Agriculture 10,561 56 — — 10,617 Total real estate loans 801,054 7,398 11,610 — 820,062 Commercial loans 184,819 3,065 3,148 — 191,032 Consumer installment loans 11,545 52 6 — 11,603 All other loans 1,553 — — — 1,553 Total loans $ 998,971 $ 10,515 $ 14,764 $ — $ 1,024,250 December 31, 2018 Pass Special Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 211,832 $ 3,179 $ 1,257 $ — $ 216,268 Commercial 372,745 3,551 3,608 — 379,904 Construction and land development 115,650 192 4,571 — 120,413 Second mortgages 6,686 92 — — 6,778 Multifamily 56,802 196 2,559 — 59,557 Agriculture 8,312 58 — — 8,370 Total real estate loans 772,027 7,268 11,995 — 791,290 Commercial loans 184,004 1,798 2,920 — 188,722 Consumer installment loans 12,042 6 — — 12,048 All other loans 1,645 — — — 1,645 Total loans $ 969,718 $ 9,072 $ 14,915 $ — $ 993,705 In accordance with FASB Accounting Standards Update (ASU) 2011‑02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 25 and 23 loans that met the definition of a TDR at June 30, 2019 and 2018, respectively. The Company had no loan modifications considered to be TDRs during the three and six months ended June 30, 2019. During the three and six months ended June 30, 2018, the Company modified one multifamily loan that was considered to be a TDR. The Company restructured the terms for this loan, which had a pre- and post-modification balance of $2.6 million. A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured during the previous 12 months that resulted in default during the three months ended June 30, 2019. During the six months ended June 30, 2019, one loan that had been restructured during the previous 12 months went into default. This multifamily real estate loan had a recorded investment of $2.6 million. There were no TDRs that had been restructured during the previous 12 months that resulted in default during either the three and six months ended June 30, 2018. In the determination of the allowance for loan losses, management considers TDRs and subsequent defaults in these restructures by reviewing for impairment in accordance with FASB ASC 310‑10‑35, Receivables, Subsequent Measurement . At June 30, 2019, the Company had 1‑4 family mortgages in the amount of $112. 2 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $92. 1 million. |