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, 2020 and December 31, 2019 were comprised of the following (dollars in thousands): September 30, 2020 December 31, 2019 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1‑4 family $ 204,366 17.35 % $ 223,538 21.12 % Commercial 452,677 38.44 396,858 37.50 Construction and land development 159,766 13.57 146,566 13.85 Second mortgages 6,488 0.55 6,639 0.63 Multifamily 77,787 6.60 72,978 6.90 Agriculture 7,138 0.61 8,346 0.79 Total real estate loans 908,222 77.12 854,925 80.79 Commercial loans 257,362 21.85 191,183 18.06 Consumer installment loans 10,606 0.90 11,163 1.05 All other loans 1,519 0.13 1,052 0.10 Total loans $ 1,177,709 100.00 % $ 1,058,323 100.00 % The Company held $11.9 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 September 30, 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 $906,000 and $1.0 million at September 30, 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. During the second and third quarters of 2020, the Company originated loans under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA). These PPP loans totaled $85.1 million at September 30, 2020 and are included in commercial loans. As these loans are 100% guaranteed by the SBA, no loan loss allowance is required. The majority of the PPP loans have a two year term; however, most are expected to be forgiven by the SBA as borrowers use the funds for qualified expenses. These loan balances included net fees of $2.0 million at September 30, 2020, which are being 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 net fee remaining on loans forgiven or prepaid by the borrower is recorded as income. At September 30, 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, Contingencies The following table summarizes information related to impaired loans as of September 30, 2020 and for the three and nine months ended September 30, 2020 (dollars in thousands): Three months ended Nine months ended September 30, 2020 September 30, 2020 September 30, 2020 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 $ 631 $ 789 $ — $ 888 $ 7 $ 1,105 $ 22 Commercial 3,501 4,226 — 3,080 34 3,129 101 Construction and land development — — — — — 164 — Multifamily — — — — — 616 — Total real estate loans 4,132 5,015 — 3,968 41 5,014 123 Commercial loans — — — 175 — 88 — Subtotal impaired loans with no valuation allowance 4,132 5,015 — 4,143 41 5,102 123 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 2,190 2,621 615 2,156 13 1,923 37 Commercial 217 722 59 152 2 195 6 Construction and land development 572 675 153 847 — 798 — Agriculture 51 51 14 51 — 26 — Total real estate loans 3,030 4,069 841 3,206 15 2,942 43 Commercial loans 1,786 1,786 334 1,243 3 1,142 9 Consumer installment loans 19 19 5 15 — 12 — Subtotal impaired loans with a valuation allowance 4,835 5,874 1,180 4,464 18 4,096 52 Total: Mortgage loans on real estate: Residential 1‑4 family 2,821 3,410 615 3,044 20 3,028 59 Commercial 3,718 4,948 59 3,232 36 3,324 107 Construction and land development 572 675 153 847 — 962 — Multifamily — — — — — 616 — Agriculture 51 51 14 51 — 26 — Total real estate loans 7,162 9,084 841 7,174 56 7,956 166 Commercial loans 1,786 1,786 334 1,418 3 1,230 9 Consumer installment loans 19 19 5 15 — 12 — Total impaired loans $ 8,967 $ 10,889 $ 1,180 $ 8,607 $ 59 $ 9,198 $ 175 (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 and nine months ended September 30, 2019 (dollars in thousands): Three months ended Nine months ended December 31, 2019 September 30, 2019 September 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 $ 1,483 $ 1,850 $ — $ 1,514 $ 11 $ 1,534 $ 32 Commercial 3,226 3,966 — 3,308 35 3,372 103 Construction and land development 328 328 — 164 — 82 — Multifamily 2,463 2,463 — 2,510 — 2,533 — Total real estate loans 7,500 8,607 — 7,496 46 7,521 135 Subtotal impaired loans with no valuation allowance 7,500 8,607 — 7,496 46 7,521 135 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 1,498 1,808 380 1,862 12 1,965 36 Commercial 378 876 87 552 2 847 6 Construction and land development 48 147 11 2,084 — 3,210 — Total real estate loans 1,924 2,831 478 4,498 14 6,022 42 Commercial loans 454 460 105 1,080 4 1,618 13 Consumer installment loans 7 7 1 6 — 5 — Subtotal impaired loans with a valuation allowance 2,385 3,298 584 5,584 18 7,645 55 Total: Mortgage loans on real estate: Residential 1‑4 family 2,981 3,658 380 3,376 23 3,499 68 Commercial 3,604 4,842 87 3,860 37 4,219 109 Construction and land development 376 475 11 2,248 — 3,292 — Multifamily 2,463 2,463 — 2,510 — 2,533 — Total real estate loans 9,424 11,438 478 11,994 60 13,543 177 Commercial loans 454 460 105 1,080 4 1,618 13 Consumer installment loans 7 7 1 6 — 5 — Total impaired loans $ 9,885 $ 11,905 $ 584 $ 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. 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, 2020 and December 31, 2019, is set forth in the table below (dollars in thousands): September 30, 2020 December 31, 2019 Nonaccruals $ 4,214 $ 5,292 Trouble debt restructure and still accruing 4,753 4,593 Total impaired $ 8,967 $ 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 and nine months ended September 30, 2020 and 2019. For the three months ended September 30, 2020 and 2019, estimated interest income of $61,000 and $92,000, 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, 2020 and 2019, estimated interest income of $152,000 and $284,000, 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 September 30, 2020 and December 31, 2019 (dollars in thousands): September 30, 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 $ 1,279 $ — $ 1,338 $ 2,617 $ 201,749 $ 204,366 Commercial — — 764 764 451,913 452,677 Construction and land development — — 572 572 159,194 159,766 Second mortgages 227 — — 227 6,261 6,488 Multifamily — — — — 77,787 77,787 Agriculture — — 51 51 7,087 7,138 Total real estate loans 1,506 — 2,725 4,231 903,991 908,222 Commercial loans 635 — 1,470 2,105 255,257 257,362 Consumer installment loans 20 — 19 39 10,567 10,606 All other loans — — — — 1,519 1,519 Total loans $ 2,161 $ — $ 4,214 $ 6,375 $ 1,171,334 $ 1,177,709 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 and nine months ended September 30, 2020 and 2019 is presented in the following tables (dollars in thousands): Three Months Ended September 30, 2020 Provision June 30, 2020 Allocation Charge-offs Recoveries September 30, 2020 Mortgage loans on real estate: Residential 1‑4 family $ 3,495 $ (954) $ — $ 14 $ 2,555 Commercial 4,612 (1,606) — 5 3,011 Construction and land development 1,342 (254) — 75 1,163 Second mortgages 45 (9) — 2 38 Multifamily 499 28 — — 527 Agriculture 44 7 — — 51 Total real estate loans 10,037 (2,788) — 96 7,345 Commercial loans 2,058 (288) — 19 1,789 Consumer installment loans 110 31 (42) 17 116 All other loans 8 2 — — 10 Unallocated 25 3,043 — — 3,068 Total loans $ 12,238 $ — $ (42) $ 132 $ 12,328 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 Nine Months Ended September 30, 2020 Provision December 31, 2019 Allocation Charge-offs Recoveries September 30, 2020 Mortgage loans on real estate: Residential 1‑4 family $ 2,685 $ (173) $ — $ 43 $ 2,555 Commercial 2,196 731 — 84 3,011 Construction and land development 1,044 (40) — 159 1,163 Second mortgages 79 (45) — 4 38 Multifamily 248 279 — — 527 Agriculture 38 13 — — 51 Total real estate loans 6,290 765 — 290 7,345 Commercial loans 1,980 331 (608) 86 1,789 Consumer installment loans 114 71 (146) 77 116 All other loans 7 3 — — 10 Unallocated 38 3,030 — — 3,068 Total loans $ 8,429 $ 4,200 $ (754) $ 453 $ 12,328 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 The increase in provision expense reflects the significant increase in commercial real estate and commercial loans classified as special mention due to the inherent 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 September 30, 2020 and December 31, 2019 (dollars in thousands): September 30, 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 $ 615 $ 1,940 $ 2,555 $ 2,821 $ 201,545 $ 204,366 Commercial 59 2,952 3,011 3,718 448,959 452,677 Construction and land development 153 1,010 1,163 572 159,194 159,766 Second mortgages — 38 38 — 6,488 6,488 Multifamily — 527 527 — 77,787 77,787 Agriculture 14 37 51 51 7,087 7,138 Total real estate loans 841 6,504 7,345 7,162 901,060 908,222 Commercial loans 334 1,455 1,789 1,786 255,576 257,362 Consumer installment loans 5 111 116 19 10,587 10,606 All other loans — 10 10 — 1,519 1,519 Unallocated — 3,068 3,068 — — — Total loans $ 1,180 $ 11,148 $ 12,328 $ 8,967 $ 1,168,742 $ 1,177,709 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 Special Mention Substandard Doubtful The following tables present the composition of loans by credit quality indicator at September 30, 2020 and December 31, 2019 (dollars in thousands): September 30, 2020 Special Pass Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 189,923 $ 13,104 $ 1,339 $ — $ 204,366 Commercial 357,037 93,500 2,140 — 452,677 Construction and land development 158,447 747 572 — 159,766 Second mortgages 5,286 1,202 — — 6,488 Multifamily 70,964 6,823 — — 77,787 Agriculture 6,713 374 51 — 7,138 Total real estate loans 788,370 115,750 4,102 — 908,222 Commercial loans 222,378 27,653 7,331 — 257,362 Consumer installment loans 10,537 50 19 — 10,606 All other loans 1,503 16 — — 1,519 Total loans $ 1,022,788 $ 143,469 $ 11,452 $ — $ 1,177,709 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 had no loan modifications considered to be TDRs during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company modified one commercial real estate loan that was considered to be a TDR. The Company granted the borrower six months interest only payment relief and no other changes were made to the loan structure. The loan is 100% guaranteed by the USDA and had a pre- and post-modification balance of $438,000. The Company had no loan modifications considered to be TDRs during the three 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, 2020, the Company had 1-4 family mortgages in the amount of $92.4 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $76.7 million. |