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 March 31, 2020 and December 31, 2019 were comprised of the following (dollars in thousands): March 31, 2020 December 31, 2019 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1‑4 family $ 219,735 20.36 % $ 223,538 21.12 % Commercial 410,438 38.03 396,858 37.50 Construction and land development 149,833 13.88 146,566 13.85 Second mortgages 5,954 0.55 6,639 0.63 Multifamily 76,206 7.06 72,978 6.90 Agriculture 7,038 0.65 8,346 0.79 Total real estate loans 869,204 80.53 854,925 80.79 Commercial loans 198,544 18.40 191,183 18.06 Consumer installment loans 10,446 0.97 11,163 1.05 All other loans 1,035 0.10 1,052 0.10 Total loans $ % $ 100.00 % The Company held $12. 1 million and $12. 7 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 March 31, 2020 and December 31, 2019, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $974,000 and $1. 0 million at March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB 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 FASB ASC 310. The following table summarizes information related to impaired loans as of and for the three months ended March 31, 2020 (dollars in thousands): Three months ended March 31, 2020 March 31, 2020 Unpaid Recorded Principal Related Average Interest Investment (1) Balance (2) Allowance Investment Recognized With no related allowance recorded: Mortgage loans on real estate: Residential 1‑4 family $ 1,160 $ 1,485 $ — $ 1,322 $ 10 Commercial 3,132 3,835 — 3,179 34 Construction and land development 328 328 — 328 — Multifamily — — — 1,231 — Total real estate loans 4,620 5,648 — 6,060 44 Subtotal impaired loans with no valuation allowance 4,620 5,648 — 6,060 44 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 1,883 2,286 490 1,690 11 Commercial 97 559 24 238 2 Construction and land development 1,450 1,551 136 749 — Total real estate loans 3,430 4,396 650 2,677 13 Commercial loans 1,629 1,629 909 1,042 4 Consumer installment loans 10 10 3 9 — Subtotal impaired loans with a valuation allowance 5,069 6,035 1,562 3,728 17 Total: Mortgage loans on real estate: Residential 1‑4 family 3,043 3,771 490 3,012 21 Commercial 3,229 4,394 24 3,417 36 Construction and land development 1,778 1,879 136 1,077 — Multifamily — — — 1,231 — Total real estate loans 8,050 10,044 650 8,737 57 Commercial loans 1,629 1,629 909 1,042 4 Consumer installment loans 10 10 3 9 — Total impaired loans $ 9,689 $ 11,683 $ 1,562 $ 9,788 $ 61 (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, 2019 and for the three months ended March 31, 2019 (dollars in thousands): Three months ended December 31, 2019 March 31, 2019 Unpaid Recorded Principal Related Average Interest Investment (1) Balance (2) Allowance Investment Recognized With no related allowance recorded: Mortgage loans on real estate: Residential 1‑4 family $ 1,483 $ 1,850 $ — $ 1,555 $ 11 Commercial 3,226 3,966 — 3,435 35 Construction and land development 328 328 — — — Multifamily 2,463 2,463 — 2,555 — Total real estate loans 7,500 8,607 — 7,545 46 Subtotal impaired loans with no valuation allowance 7,500 8,607 — 7,545 46 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 1,498 1,808 380 2,067 20 Commercial 378 876 87 1,143 4 Construction and land development 48 147 11 4,336 — Total real estate loans 1,924 2,831 478 7,546 24 Commercial loans 454 460 105 2,157 9 Consumer installment loans 7 7 1 3 — Subtotal impaired loans with a valuation allowance 2,385 3,298 584 9,706 33 Total: Mortgage loans on real estate: Residential 1‑4 family 2,981 3,658 380 3,622 31 Commercial 3,604 4,842 87 4,578 39 Construction and land development 376 475 11 4,336 — Multifamily 2,463 2,463 — 2,555 — Total real estate loans 9,424 11,438 478 15,091 70 Commercial loans 454 460 105 2,157 9 Consumer installment loans 7 7 1 3 — Total impaired loans $ 9,885 $ 11,905 $ 584 $ 17,251 $ 79 (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 March 31, 2020 and December 31, 2019, is set forth in the table below (dollars in thousands): March 31, 2020 December 31, 2019 Nonaccrual loans $ 5,172 $ 5,292 Trouble debt restructure and still accruing 4,517 4,593 Total impaired $ 9,689 $ 9,885 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 months ended March 31, 2020 and 2019. For the three months ended March 31, 2020 and 2019, estimated interest income of $97,000 and $223,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. The following tables present an age analysis of past due status of loans by category as of March 31, 2020 and December 31, 2019 (dollars in thousands): March 31, 2020 30‑89 Days 90+ Days Past Total Past Total Loans Past Due Due and Accruing Nonaccrual Due Current Receivable Mortgage loans on real estate: Residential 1‑4 family $ 1,268 $ — $ 1,456 $ 2,724 $ 217,011 $ 219,735 Commercial 1,689 — 657 2,346 408,092 410,438 Construction and land development — — 1,778 1,778 148,055 149,833 Second mortgages 459 — — 459 5,495 5,954 Multifamily — — — — 76,206 76,206 Agriculture — — — — 7,038 7,038 Total real estate loans 3,416 — 3,891 7,307 861,897 869,204 Commercial loans 731 — 1,270 2,001 196,543 198,544 Consumer installment loans 27 — 11 38 10,408 10,446 All other loans — — — — 1,035 1,035 Total loans $ 4,174 $ — $ 5,172 $ 9,346 $ 1,069,883 $ 1,079,229 December 31, 2019 30‑89 Days 90+ Days Past Total Past Total Loans Past Due Due and Accruing Nonaccrual Due Current Receivable Mortgage loans on real estate: Residential 1‑4 family $ 1,308 $ — $ 1,378 $ 2,686 $ 220,852 $ 223,538 Commercial 552 — 1,006 1,558 395,300 396,858 Construction and land development 166 — 376 542 146,024 146,566 Second mortgages 229 — — 229 6,410 6,639 Multifamily — — 2,463 2,463 70,515 72,978 Agriculture — — — — 8,346 8,346 Total real estate loans 2,255 — 5,223 7,478 847,447 854,925 Commercial loans 1,085 946 62 2,093 189,090 191,183 Consumer installment loans 41 — 7 48 11,115 11,163 All other loans — — — — 1,052 1,052 Total loans $ 3,381 $ 946 $ 5,292 $ 9,619 $ 1,048,704 $ 1,058,323 Activity in the allowance for loan losses on loans by segment for the three months ended March 31, 2020 and 2019 is presented in the following tables (dollars in thousands): Three Months Ended March 31, 2020 Provision December 31, 2019 Allocation Charge-offs Recoveries March 31, 2020 Mortgage loans on real estate: Residential 1‑4 family $ 2,685 $ 234 $ — $ 16 $ 2,935 Commercial 2,196 2,000 — 44 4,240 Construction and land development 1,044 227 — 83 1,354 Second mortgages 79 (10) — 1 70 Multifamily 248 19 — — 267 Agriculture 38 7 — — 45 Total real estate loans 6,290 2,477 — 144 8,911 Commercial loans 1,980 582 (19) 3 2,546 Consumer installment loans 114 35 (75) 37 111 All other loans 7 1 — — 8 Unallocated 38 205 — — 243 Total loans $ 8,429 $ 3,300 $ (94) $ 184 $ 11,819 Three Months Ended March 31, 2019 Provision December 31, 2018 Allocation Charge-offs Recoveries March 31, 2019 Mortgage loans on real estate: Residential 1‑4 family $ 2,281 $ 855 $ — $ 203 $ 3,339 Commercial 1,810 (32) (277) 7 1,508 Construction and land development 1,161 43 (12) 18 1,210 Second mortgages 20 40 — 2 62 Multifamily 371 (10) — — 361 Agriculture 17 6 — — 23 Total real estate loans 5,660 902 (289) 230 6,503 Commercial loans 1,894 291 (229) 2 1,958 Consumer installment loans 152 72 (60) 24 188 All other loans 12 (6) — — 6 Unallocated 1,265 (1,259) — — 6 Total loans $ 8,983 $ — $ (578) $ 256 $ 8,661 The increase in provision expense reflects the significant increase in commercial real estate and commercial loans classified as special mention due to the possible economic impact COVID-19 may have on these borrowers. The allowance for loan losses could be further impacted by COVID-19; however, the amount of that impact is not currently estimable. The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of March 31, 2020 and December 31, 2019 (dollars in thousands): March 31, 2020 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 $ 490 $ 2,445 $ 2,935 $ 3,043 $ 216,692 $ 219,735 Commercial 24 4,216 4,240 3,229 407,209 410,438 Construction and land development 136 1,218 1,354 1,778 148,055 149,833 Second mortgages — 70 70 — 5,954 5,954 Multifamily — 267 267 — 76,206 76,206 Agriculture — 45 45 — 7,038 7,038 Total real estate loans 650 8,261 8,911 8,050 861,154 869,204 Commercial loans 909 1,637 2,546 1,629 196,915 198,544 Consumer installment loans 3 108 111 10 10,436 10,446 All other loans — 8 8 — 1,035 1,035 Unallocated — 243 243 — — — Total loans $ 1,562 $ 10,257 $ 11,819 $ 9,689 $ 1,069,540 $ 1,079,229 December 31, 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 $ 380 $ 2,305 $ 2,685 $ 2,981 $ 220,557 $ 223,538 Commercial 87 2,109 2,196 3,604 393,254 396,858 Construction and land development 11 1,033 1,044 376 146,190 146,566 Second mortgages — 79 79 — 6,639 6,639 Multifamily — 248 248 2,463 70,515 72,978 Agriculture — 38 38 — 8,346 8,346 Total real estate loans 478 5,812 6,290 9,424 845,501 854,925 Commercial loans 105 1,875 1,980 454 190,729 191,183 Consumer installment loans 1 113 114 7 11,156 11,163 All other loans — 7 7 — 1,052 1,052 Unallocated — 38 38 — — — Total loans $ 584 $ 7,845 $ 8,429 $ 9,885 $ 1,048,438 $ 1,058,323 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 $12. 1 million and $12. 7 million at March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019 (dollars in thousands): March 31, 2020 Special Pass Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 210,368 $ 8,135 $ 1,232 $ — $ 219,735 Commercial 357,877 50,505 2,056 — 410,438 Construction and land development 143,507 4,548 1,778 — 149,833 Second mortgages 5,257 697 — — 5,954 Multifamily 76,206 — — — 76,206 Agriculture 6,938 100 — — 7,038 Total real estate loans 800,153 63,985 5,066 — 869,204 Commercial loans 157,026 37,372 4,146 — 198,544 Consumer installment loans 10,414 22 10 — 10,446 All other loans 1,018 17 — — 1,035 Total loans $ 968,611 $ 101,396 $ 9,222 $ — $ 1,079,229 December 31, 2019 Special Pass Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 219,210 $ 2,964 $ 1,364 $ — $ 223,538 Commercial 391,251 3,188 2,419 — 396,858 Construction and land development 145,782 408 376 — 146,566 Second mortgages 6,096 543 — — 6,639 Multifamily 70,515 — 2,463 — 72,978 Agriculture 8,098 248 — — 8,346 Total real estate loans 840,952 7,351 6,622 — 854,925 Commercial loans 185,123 2,770 3,290 — 191,183 Consumer installment loans 11,140 16 7 — 11,163 All other loans 1,052 — — — 1,052 Total loans $ 1,038,267 $ 10,137 $ 9,919 $ — $ 1,058,323 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 18 and 2 5 loans that met the definition of a TDR at March 31, 2020 and 2019, respectively. The Company had no loan modifications considered to be TDRs during the three months ended March 31, 2020 and 2019. 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 March 31, 2020. During the three months ended March 31, 2019, one loan defaulted that had been restructured during the previous 12 months prior to the default. This multifamily real estate loan had a recorded investment of $2.6 million. 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 March 31, 2020, the Company had 1‑4 family mortgages in the amount of $102. 0 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $86. 2 million. |