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 September 30, 2019 and December 31, 2018 were comprised of the following (dollars in thousands): September 30, 2019 December 31, 2018 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1‑4 family $ 222,003 21.46 % $ 216,268 21.77 % Commercial 393,064 38.00 379,904 38.23 Construction and land development 130,977 12.66 120,413 12.12 Second mortgages 6,384 0.62 6,778 0.68 Multifamily 73,774 7.13 59,557 5.99 Agriculture 9,457 0.91 8,370 0.84 Total real estate loans 835,659 80.78 791,290 79.63 Commercial loans 185,999 17.98 188,722 18.99 Consumer installment loans 11,883 1.15 12,048 1.21 All other loans 981 0.09 1,645 0.17 Total loans $ 1,034,522 100.00 % $ 993,705 100.00 % The Company held $14. 9 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 September 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 September 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. Any unamortized purchase premium remaining on loans prepaid by the borrower is written off. At September 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 September 30, 2019 and for the three and nine months ended September 30, 2019 (dollars in thousands): Three months ended Nine months ended September 30, 2019 September 30, 2019 September 30, 2019 Unpaid Recorded Principal Related Average Interest Average Interest Investment (1) Balance (2) Allowance Investment Rcognized Investment Rcognized With no related allowance recorded: Mortgage loans on real estate: Residential 1‑4 family $ 1,506 $ 1,861 $ — $ 1,514 $ 11 $ 1,534 $ 32 Commercial 3,286 4,000 — 3,308 35 3,372 103 Construction and land development 329 329 — 164 — 82 — Multifamily 2,494 2,494 — 2,510 — 2,533 — Total real estate loans 7,615 8,684 — 7,496 46 7,521 135 Subtotal impaired loans with no valuation allowance 7,615 8,684 — 7,496 46 7,521 135 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 1,462 1,786 350 1,862 12 1,965 36 Commercial 396 883 84 552 2 847 6 Construction and land development 77 177 16 2,084 — 3,210 — Total real estate loans 1,935 2,846 450 4,498 14 6,022 42 Commercial loans 847 852 469 1,080 4 1,618 13 Consumer installment loans 7 7 1 6 — 5 — Subtotal impaired loans with a valuation allowance 2,789 3,705 920 5,584 18 7,645 55 Total: Mortgage loans on real estate: Residential 1‑4 family 2,968 3,647 350 3,376 23 3,499 68 Commercial 3,682 4,883 84 3,860 37 4,219 109 Construction and land development 406 506 16 2,248 — 3,292 — Multifamily 2,494 2,494 — 2,510 — 2,533 — Total real estate loans 9,550 11,530 450 11,994 60 13,543 177 Commercial loans 847 852 469 1,080 4 1,618 13 Consumer installment loans 7 7 1 6 — 5 — Total impaired loans $ 10,404 $ 12,389 $ 920 $ 13,080 $ 64 $ 15,166 $ 190 (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 for the three and nine months ended September 30, 2018 (dollars in thousands): Three months ended Nine months ended December 31, 2018 September 30, 2018 September 30, 2018 Unpaid Recorded Principal Related Average Interest Average Interest Investment (1) Balance (2) Allowance Investment Rcognized Investment Rcognized With no related allowance recorded: Mortgage loans on real estate: Residential 1‑4 family $ 1,563 $ 1,890 $ — $ 1,716 $ 11 $ 1,802 $ 33 Commercial 3,502 4,176 — 3,561 38 3,702 112 Construction and land development — — — 426 — 318 — Multifamily 2,559 2,559 — 2,559 31 1,279 92 Total real estate loans 7,624 8,625 — 8,262 80 7,101 237 Commercial loans — — — 136 — 589 — Subtotal impaired loans with no valuation allowance 7,624 8,625 — 8,398 80 7,690 237 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 2,131 2,538 349 2,298 20 2,266 57 Commercial 1,550 2,034 482 1,600 4 1,063 13 Construction and land development 4,571 5,840 515 4,471 — 4,589 — Agriculture — — — — — 34 — Total real estate loans 8,252 10,412 1,346 8,369 24 7,952 70 Commercial loans 1,983 1,991 900 478 1 383 3 Consumer installment loans — — — 3 — 4 — Subtotal impaired loans with a valuation allowance 10,235 12,403 2,246 8,850 25 8,339 73 Total: Mortgage loans on real estate: Residential 1‑4 family 3,694 4,428 349 4,014 31 4,068 90 Commercial 5,052 6,210 482 5,161 42 4,765 125 Construction and land development 4,571 5,840 515 4,897 — 4,907 — Multifamily 2,559 2,559 — 2,559 31 1,279 92 Agriculture — — — — — 34 — Total real estate loans 15,876 19,037 1,346 16,631 104 15,053 307 Commercial loans 1,983 1,991 900 614 1 972 3 Consumer installment loans — — — 3 — 4 — Total impaired loans $ 17,859 $ 21,028 $ 2,246 $ 17,248 $ 105 $ 16,029 $ 310 (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 September 30, 2019 and December 31, 2018, is set forth in the table below (dollars in thousands): September 30, 2019 December 31, 2018 Nonaccruals $ 5,746 $ 9,500 Trouble debt restructure and still accruing 4,658 8,359 Total impaired $ 10,404 $ 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 nine months ended September 30, 2019 and 2018. For the three months ended September 30, 2019 and 2018, estimated interest income of $92,000 and $167,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the nine months ended September 30, 2019 and 2018, estimated interest income of $284,000 and $471,000, 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 September 30, 2019 and December 31, 2018. The following tables present an age analysis of past due status of loans by category as of September 30, 2019 and December 31, 2018 (dollars in thousands): September 30, 2019 30‑89 Days Total Past Total Loans Past Due Nonaccrual Due Current Receivable Mortgage loans on real estate: Residential 1‑4 family $ 1,141 $ 1,349 $ 2,490 $ 219,513 $ 222,003 Commercial 107 1,059 1,166 391,898 393,064 Construction and land development — 406 406 130,571 130,977 Second mortgages 229 — 229 6,155 6,384 Multifamily — 2,494 2,494 71,280 73,774 Agriculture 50 — 50 9,407 9,457 Total real estate loans 1,527 5,308 6,835 828,824 835,659 Commercial loans — 431 431 185,568 185,999 Consumer installment loans 13 7 20 11,863 11,883 All other loans — — — 981 981 Total loans $ 1,540 $ 5,746 $ 7,286 $ 1,027,236 $ 1,034,522 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 nine months ended September 30, 2019 and 2018 is presented in the following tables (dollars in thousands): Three Months Ended September 30, 2019 Provision June 30, 2019 Allocation Charge-offs Recoveries September 30, 2019 Mortgage loans on real estate: Residential 1‑4 family $ 2,894 $ (35) $ (144) $ 26 $ 2,741 Commercial 2,026 1 — 7 2,034 Construction and land development 1,399 (587) (200) 18 630 Second mortgages 81 (7) — 2 76 Multifamily 192 17 — 41 250 Agriculture 32 15 — — 47 Total real estate loans 6,624 (596) (344) 94 5,778 Commercial loans 1,999 (229) (98) 3 1,675 Consumer installment loans 185 32 (134) 53 136 All other loans 8 — — — 8 Unallocated 3 793 — — 796 Total loans $ 8,819 $ — $ (576) $ 150 $ 8,393 Three Months Ended September 30, 2018 Provision June 30, 2018 Allocation Charge-offs Recoveries September 30, 2018 Mortgage loans on real estate: Residential 1‑4 family $ 3,551 $ (392) $ (35) $ 42 $ 3,166 Commercial 2,189 (477) — 7 1,719 Construction and land development 1,429 (270) (116) 1 1,044 Second mortgages 32 (2) — 2 32 Multifamily 326 (2) — — 324 Agriculture 6 — — — 6 Total real estate loans 7,533 (1,143) (151) 52 6,291 Commercial loans 1,162 380 (6) 31 1,567 Consumer installment loans 169 20 (33) 11 167 All other loans 3 2 — — 5 Unallocated 222 741 — — 963 Total loans $ 9,089 $ — $ (190) $ 94 $ 8,993 Nine Months Ended September 30, 2019 Provision December 31, 2018 Allocation Charge-offs Recoveries September 30, 2019 Mortgage loans on real estate: Residential 1‑4 family $ 2,281 $ 394 $ (178) $ 244 $ 2,741 Commercial 1,810 430 (277) 71 2,034 Construction and land development 1,161 (390) (212) 71 630 Second mortgages 20 51 — 5 76 Multifamily 371 (162) — 41 250 Agriculture 17 30 — — 47 Total real estate loans 5,660 353 (667) 432 5,778 Commercial loans 1,894 129 (355) 7 1,675 Consumer installment loans 152 116 (234) 102 136 All other loans 12 (4) — — 8 Unallocated 1,265 (469) — — 796 Total loans $ 8,983 $ 125 $ (1,256) $ 541 $ 8,393 Nine Months Ended September 30, 2018 Provision December 31, 2017 Allocation Charge-offs Recoveries September 30, 2018 Mortgage loans on real estate: Residential 1‑4 family $ 3,466 $ (327) $ (88) $ 115 $ 3,166 Commercial 2,423 (731) — 27 1,719 Construction and land development 1,247 (124) (116) 37 1,044 Second mortgages 24 4 — 4 32 Multifamily 496 (172) — — 324 Agriculture 14 (8) — — 6 Total real estate loans 7,670 (1,358) (204) 183 6,291 Commercial loans 1,139 427 (45) 46 1,567 Consumer installment loans 110 16 (145) 186 167 All other loans 3 (1) — 3 5 Unallocated 47 916 — — 963 Total loans $ 8,969 $ — $ (394) $ 418 $ 8,993 The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of September 30, 2019 and December 31, 2018 (dollars in thousands): September 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 $ 350 $ 2,391 $ 2,741 $ 2,968 $ 219,035 $ 222,003 Commercial 84 1,950 2,034 3,682 389,382 393,064 Construction and land development 16 614 630 406 130,571 130,977 Second mortgages — 76 76 — 6,384 6,384 Multifamily — 250 250 2,494 71,280 73,774 Agriculture — 47 47 — 9,457 9,457 Total real estate loans 450 5,328 5,778 9,550 826,109 835,659 Commercial loans 469 1,206 1,675 847 185,152 185,999 Consumer installment loans 1 135 136 7 11,876 11,883 All other loans — 8 8 — 981 981 Unallocated — 796 796 — — — Total loans $ 920 $ 7,473 $ 8,393 $ 10,404 $ 1,024,118 $ 1,034,522 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 $14. 9 million and $17.4 million at September 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 September 30, 2019 and December 31, 2018 (dollars in thousands): September 30, 2019 Pass Special Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 217,189 $ 3,523 $ 1,291 $ — $ 222,003 Commercial 387,245 3,325 2,494 — 393,064 Construction and land development 130,156 415 406 — 130,977 Second mortgages 5,839 545 — — 6,384 Multifamily 71,280 — 2,494 — 73,774 Agriculture 9,403 54 — — 9,457 Total real estate loans 821,112 7,862 6,685 — 835,659 Commercial loans 180,282 1,811 3,906 — 185,999 Consumer installment loans 11,862 14 7 — 11,883 All other loans 981 — — — 981 Total loans $ 1,014,237 $ 9,687 $ 10,598 $ — $ 1,034,522 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 2 4 loans that met the definition of a TDR at September 30, 2019 and 2018, respectively. The Company had no loan modifications considered to be TDRs during the three and nine months ended September 30, 2019. During the three months ended September 30, 2018, the Company modified one commercial real estate 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 $126,000. During the nine months ended September 30, 2018, the Company modified one multifamily loan and one commercial real estate loan that were considered to be TDRs, which had a total pre- and post-modification balance of $2.6 million and $126,000, respectively. The Company restructured the terms for both loans. 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 September 30, 2019. During the nine months ended September 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 nine months ended September 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 September 30, 2019, the Company had 1‑4 family mortgages in the amount of $112.3 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $93. 7 million. |