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, 2021 and December 31, 2020 were comprised of the following (dollars in thousands): March 31, 2021 December 31, 2020 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1‑4 family $ 184,286 15.32 % $ 197,228 16.68 % Commercial 504,846 41.98 474,856 40.16 Construction and land development 161,825 13.45 182,277 15.42 Second mortgages 6,526 0.54 6,360 0.54 Multifamily 87,624 7.29 78,158 6.61 Agriculture 7,947 0.66 6,662 0.56 Total real estate loans 953,054 79.24 945,541 79.97 Commercial loans 239,782 19.94 225,386 19.06 Consumer installment loans 8,595 0.71 9,996 0.85 All other loans 1,292 0.11 1,439 0.12 Total loans $ 1,202,723 100.00 % $ 1,182,362 100.00 % The Company held $10.6 million and $10.7 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, 2021 and December 31, 2020, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $776,000 and $804,000 million at March 31, 2021 and December 31, 2020, 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. The Company originated loans under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA). These PPP loans totaled $67.7 million and $49.3 million at March 31, 2021 and December 31, 2020, respectively, 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 five 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 $2.3 million and $920,000 at March 31, 2021 and December 31, 2020, respectively, 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 March 31, 2021 and December 31, 2020, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310, Receivables, with FASB ASC 450, Contingencies The following table summarizes information related to impaired loans at and for the three months ended March 31, 2021 (dollars in thousands): Three months ended March 31, 2021 March 31, 2021 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 $ 308 $ 412 $ — $ 466 $ 3 Commercial 3,421 4,174 — 3,002 33 Total real estate loans 3,729 4,586 — 3,468 36 Subtotal impaired loans with no valuation allowance 3,729 4,586 — 3,468 36 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 2,253 2,645 660 2,226 11 Commercial 191 582 55 196 — Construction and land development 5 113 2 25 — Agriculture 45 47 13 45 — Total real estate loans 2,494 3,387 730 2,492 11 Commercial loans 1,462 1,474 385 2,005 1 Consumer installment loans 12 12 3 15 — Subtotal impaired loans with a valuation allowance 3,968 4,873 1,118 4,512 12 Total: Mortgage loans on real estate: Residential 1‑4 family 2,561 3,057 660 2,692 14 Commercial 3,612 4,756 55 3,198 33 Construction and land development 5 113 2 25 — Agriculture 45 47 13 45 — Total real estate loans 6,223 7,973 730 5,960 47 Commercial loans 1,462 1,474 385 2,005 1 Consumer installment loans 12 12 3 15 — Total impaired loans $ 7,697 $ 9,459 $ 1,118 $ 7,980 $ 48 (1) The amount of the investment in a loan is not net of a valuation allowance, but does reflect any direct write-down of the investment. (2) The contractual amount due reflects paydowns applied in accordance with loan documents, but does not reflect any direct write-downs or valuation allowances. The following table summarizes information related to impaired loans as of December 31, 2020 and for the three months ended March 31, 2021 (dollars in thousands): Three months ended December 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 $ 624 $ 787 $ — $ 1,322 $ 10 Commercial 3,458 4,198 — 3,179 34 Construction and land development — — — 328 — Multifamily — 1,231 — Total real estate loans 4,082 4,985 — 6,060 44 Subtotal impaired loans with no valuation allowance 4,082 4,985 — 6,060 44 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 2,200 2,573 640 1,690 11 Commercial 200 715 57 238 2 Construction and land development 44 149 12 749 — Agriculture 45 46 13 — — Total real estate loans 2,489 3,483 722 2,677 13 Commercial loans 2,549 2,549 437 1,042 4 Consumer installment loans 19 19 6 9 — Subtotal impaired loans with a valuation allowance 5,057 6,051 1,165 3,728 17 Total: Mortgage loans on real estate: Residential 1‑4 family 2,824 3,360 640 3,012 21 Commercial 3,658 4,913 57 3,417 36 Construction and land development 44 149 12 1,077 — Multifamily — — — 1,231 — Agriculture 45 46 13 — — Total real estate loans 6,571 8,468 722 8,737 57 Commercial loans 2,549 2,549 437 1,042 4 Consumer installment loans 19 19 6 9 — Total impaired loans $ 9,139 $ 11,036 $ 1,165 $ 9,788 $ 61 (1) The amount of the investment in a loan is not net of a valuation allowance, but does reflect any direct write-down of the investment. (2) The contractual amount due reflects paydowns applied in accordance with loan documents, but 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, 2021 and December 31, 2020, is set forth in the table below (dollars in thousands): March 31, 2021 December 31, 2020 Nonaccruals $ 3,496 $ 4,460 Trouble debt restructure and still accruing 4,201 4,679 Total impaired $ 7,697 $ 9,139 Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was $103,000 in cash basis income recognized during the three months ended March 31, 2021. There was an insignificant amount of cash basis income recognized during the three months ended March 31, 2020. For the three months ended March 31, 2021 and 2020, estimated interest income of $50,000 and $97,000, 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, 2021 and December 31, 2020 (dollars in thousands): March 31, 2021 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 $ 704 $ 33 $ 1,422 $ 2,159 $ 182,127 $ 184,286 Commercial — — 711 711 504,135 504,846 Construction and land development 83 — 5 88 161,737 161,825 Second mortgages 229 — — 229 6,297 6,526 Multifamily — — — — 87,624 87,624 Agriculture — — 45 45 7,902 7,947 Total real estate loans 1,016 33 2,183 3,232 949,822 953,054 Commercial loans 216 — 1,301 1,517 238,265 239,782 Consumer installment loans 39 — 12 51 8,544 8,595 All other loans — — — — 1,292 1,292 Total loans $ 1,271 $ 33 $ 3,496 $ 4,800 $ 1,197,923 $ 1,202,723 December 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 $ 1,324 $ 33 $ 1,357 $ 2,714 $ 194,514 $ 197,228 Commercial 438 — 730 1,168 473,688 474,856 Construction and land development 157 — 44 201 182,076 182,277 Second mortgages 227 — — 227 6,133 6,360 Multifamily — — — — 78,158 78,158 Agriculture — — 45 45 6,617 6,662 Total real estate loans 2,146 33 2,176 4,355 941,186 945,541 Commercial loans 60 — 2,264 2,324 223,062 225,386 Consumer installment loans — 12 20 32 9,964 9,996 All other loans — — — — 1,439 1,439 Total loans $ 2,206 $ 45 $ 4,460 $ 6,711 $ 1,175,651 $ 1,182,362 Activity in the allowance for loan losses on loans by segment for the three months ended March 31, 2021 and 2020 is presented in the following tables (dollars in thousands): Three Months Ended March 31, 2021 Provision December 31, 2020 Allocation Charge-offs Recoveries March 31, 2021 Mortgage loans on real estate: Residential 1‑4 family $ 2,638 $ (772) $ — $ 38 $ 1,904 Commercial 4,568 (1,059) — 3 3,512 Construction and land development 2,545 (758) — 20 1,807 Second mortgages 18 (7) — 8 19 Multifamily 508 (201) — — 307 Agriculture 40 19 — — 59 Total real estate loans 10,317 (2,778) — 69 7,608 Commercial loans 1,897 379 (167) 24 2,133 Consumer installment loans 119 86 (79) 41 167 All other loans 7 — — — 7 Unallocated — 913 — — 913 Total loans $ 12,340 $ (1,400) $ (246) $ 134 $ 10,828 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 The increase in provision expense for the three months ended March 31, 2020 reflected the significant increase in commercial real estate and commercial loans classified as special mention due to the inherent economic impact COVID-19 was expected to have on these borrowers. The subsequent recovery of loan loss provision for the three months ended March 31, 2021 reflected a more stable economic climate in the first quarter of 2021 compared with each quarter in 2020. This is evidenced by the level of charge-offs and delinquencies, which have remained relatively low. Also, the majority of loans that were granted COVID-19 related payment relief have resumed normal payments. 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, 2021 and December 31, 2020 (dollars in thousands): March 31, 2021 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 $ 660 $ 1,244 $ 1,904 $ 2,561 $ 181,725 $ 184,286 Commercial 55 3,457 3,512 3,612 501,234 504,846 Construction and land development 2 1,805 1,807 5 161,820 161,825 Second mortgages — 19 19 — 6,526 6,526 Multifamily — 307 307 — 87,624 87,624 Agriculture 13 70 83 45 7,902 7,947 Total real estate loans 730 6,902 7,632 6,223 946,831 953,054 Commercial loans 385 1,724 2,109 1,462 238,320 239,782 Consumer installment loans 3 164 167 12 8,583 8,595 All other loans — 7 7 — 1,292 1,292 Unallocated — 913 913 — — — Total loans $ 1,118 $ 9,710 $ 10,828 $ 7,697 $ 1,195,026 $ 1,202,723 December 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 $ 640 $ 1,998 $ 2,638 $ 2,824 $ 194,404 $ 197,228 Commercial 57 4,511 4,568 3,658 471,198 474,856 Construction and land development 12 2,533 2,545 44 182,233 182,277 Second mortgages — 18 18 — 6,360 6,360 Multifamily — 508 508 — 78,158 78,158 Agriculture 13 27 40 45 6,617 6,662 Total real estate loans 722 9,595 10,317 6,571 938,970 945,541 Commercial loans 437 1,460 1,897 2,549 222,837 225,386 Consumer installment loans 6 113 119 19 9,977 9,996 All other loans — 7 7 — 1,439 1,439 Unallocated — — — — — — Total loans $ 1,165 $ 11,175 $ 12,340 $ 9,139 $ 1,173,223 $ 1,182,362 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 March 31, 2021 and December 31, 2020 (dollars in thousands): March 31, 2021 Special Pass Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 177,591 $ 5,280 $ 1,415 $ — $ 184,286 Commercial 459,805 44,330 711 — 504,846 Construction and land development 149,809 12,011 5 — 161,825 Second mortgages 5,903 623 — — 6,526 Multifamily 86,539 1,085 — — 87,624 Agriculture 6,491 34 1,422 — 7,947 Total real estate loans 886,138 63,363 3,553 — 953,054 Commercial loans 217,059 14,739 7,984 — 239,782 Consumer installment loans 8,569 14 12 — 8,595 All other loans 1,277 15 — — 1,292 Total loans $ 1,113,043 $ 78,131 $ 11,549 $ — $ 1,202,723 December 31, 2020 Special Pass Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 189,617 $ 6,253 $ 1,358 $ — $ 197,228 Commercial 433,748 39,001 2,107 — 474,856 Construction and land development 173,668 8,565 44 — 182,277 Second mortgages 5,495 865 — — 6,360 Multifamily 71,923 6,235 — — 78,158 Agriculture 6,208 409 45 — 6,662 Total real estate loans 880,659 61,328 3,554 — 945,541 Commercial loans 199,762 17,843 7,781 — 225,386 Consumer installment loans 9,959 18 19 — 9,996 All other loans 1,424 15 — — 1,439 Total loans $ 1,091,804 $ 79,204 $ 11,354 $ — $ 1,182,362 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 March 31, 2021 and 2020. 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, 2021, the Company had 1-4 family mortgages in the amount of $78.0 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $65.7 million. |