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, 2021 and December 31, 2020 were comprised of the following (dollars in thousands): June 30, 2021 December 31, 2020 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1‑4 family $ 182,929 15.35 % $ 197,228 16.68 % Commercial 506,951 42.53 474,856 40.16 Construction and land development 180,215 15.12 182,277 15.42 Second mortgages 6,893 0.58 6,360 0.54 Multifamily 72,918 6.12 78,158 6.61 Agriculture 7,841 0.66 6,662 0.56 Total real estate loans 957,747 80.36 945,541 79.97 Commercial loans 224,437 18.83 225,386 19.06 Consumer installment loans 8,452 0.71 9,996 0.85 All other loans 1,205 0.10 1,439 0.12 Total loans $ 1,191,841 100.00 % $ 1,182,362 100.00 % The Company held $10.5 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 June 30, 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 $748,000 and $804,000 million at June 30, 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 originates loans under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA). These PPP loans totaled $53.9 million and $49.3 million at June 30, 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 $1.9 million and $920,000 at June 30, 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 June 30, 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310, Receivables, Contingencies The following table summarizes information related to impaired loans at and for the three and six months ended June 30, 2021 (dollars in thousands): Three months ended Six months ended June 30, 2021 June 30, 2021 June 30, 2021 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 $ 304 $ 412 $ — $ 306 $ 3 $ 411 $ 7 Commercial 3,800 4,578 — 3,610 33 3,686 65 Total real estate loans 4,104 4,990 — 3,916 36 4,097 72 Subtotal impaired loans with no valuation allowance 4,104 4,990 — 3,916 36 4,097 72 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 2,141 2,517 632 2,197 11 2,160 21 Commercial 29 391 8 110 — 86 — Construction and land development 2 4 1 3 — 16 — Agriculture — — — 23 — 15 — Total real estate loans 2,172 2,912 641 2,333 11 2,277 21 Commercial loans 1,440 1,465 273 1,451 1 1,810 2 Consumer installment loans — — — 6 — 6 — Subtotal impaired loans with a valuation allowance 3,612 4,377 914 3,790 12 4,093 23 Total: Mortgage loans on real estate: Residential 1‑4 family 2,445 2,929 632 2,503 14 2,571 28 Commercial 3,829 4,969 8 3,720 33 3,772 65 Construction and land development 2 4 1 3 — 16 — Agriculture — — — 23 — 15 — Total real estate loans 6,276 7,902 641 6,249 47 6,374 93 Commercial loans 1,440 1,465 273 1,451 1 1,810 2 Consumer installment loans — — — 6 — 6 — Total impaired loans $ 7,716 $ 9,367 $ 914 $ 7,706 $ 48 $ 8,190 $ 95 (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 at December 31, 2020 and for the three and six months ended June 30, 2020 (dollars in thousands): Three months ended Six months ended December 31, 2020 June 30, 2020 June 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 $ 624 $ 787 $ — $ 1,152 $ 10 $ 1,263 $ 21 Commercial 3,458 4,198 — 3,114 34 3,151 68 Construction and land development — — — 164 — 219 — Multifamily — — — 821 — Total real estate loans 4,082 4,985 — 4,430 44 5,454 89 Commercial loans — — — 175 — 117 — Subtotal impaired loans with no valuation allowance 4,082 4,985 — 4,605 44 5,571 89 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 2,200 2,573 640 2,003 11 1,834 22 Commercial 200 715 57 92 2 187 4 Construction and land development 44 149 12 1,286 — 873 — Agriculture 45 46 13 26 — 17 — Total real estate loans 2,489 3,483 722 3,407 13 2,911 26 Commercial loans 2,549 2,549 437 1,164 3 928 7 Consumer installment loans 19 19 6 11 — 10 — Subtotal impaired loans with a valuation allowance 5,057 6,051 1,165 4,582 16 3,849 33 Total: Mortgage loans on real estate: Residential 1‑4 family 2,824 3,360 640 3,155 21 3,097 43 Commercial 3,658 4,913 57 3,206 36 3,338 72 Construction and land development 44 149 12 1,450 — 1,092 — Multifamily — — — — — 821 — Agriculture 45 46 13 26 — 17 — Total real estate loans 6,571 8,468 722 7,837 57 8,365 115 Commercial loans 2,549 2,549 437 1,339 3 1,045 7 Consumer installment loans 19 19 6 11 — 10 — Total impaired loans $ 9,139 $ 11,036 $ 1,165 $ 9,187 $ 60 $ 9,420 $ 122 (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 June 30, 2021 and December 31, 2020, is set forth in the table below (dollars in thousands): June 30, 2021 December 31, 2020 Nonaccruals $ 3,555 $ 4,460 Trouble debt restructure and still accruing 4,161 4,679 Total impaired $ 7,716 $ 9,139 Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was $65,000 and $168,000 recognized during the three and six months ended June 30, 2021, respectively. There was an insignificant amount of cash basis income recognized during the three and six months ended June 30, 2020. For the three months ended June 30, 2021 and 2020, estimated interest income of $54,000 and $100,000, 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, 2021 and 2020, estimated interest income of $110,000 and $168,000, 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 June 30, 2021 and December 31, 2020 (dollars in thousands): June 30, 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 $ 753 $ — $ 1,316 $ 2,069 $ 180,860 $ 182,929 Commercial 98 — 953 1,051 505,900 506,951 Construction and land development 227 — 2 229 179,986 180,215 Second mortgages 22 — — 22 6,871 6,893 Multifamily — — — — 72,918 72,918 Agriculture 32 — — 32 7,809 7,841 Total real estate loans 1,132 — 2,271 3,403 954,344 957,747 Commercial loans 39 — 1,284 1,323 223,114 224,437 Consumer installment loans 1 — — 1 8,451 8,452 All other loans — — — — 1,205 1,205 Total loans $ 1,172 $ — $ 3,555 $ 4,727 $ 1,187,114 $ 1,191,841 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 and six months ended June 30, 2021 and 2020 is presented in the following tables (dollars in thousands): Three Months Ended June 30, 2021 Provision March 31, 2021 Allocation Charge-offs Recoveries June 30, 2021 Mortgage loans on real estate: Residential 1‑4 family $ 1,904 $ 60 $ (11) $ 51 $ 2,004 Commercial 3,512 266 — 4 3,782 Construction and land development 1,807 118 — 115 2,040 Second mortgages 19 (1) — 2 20 Multifamily 307 59 — — 366 Agriculture 59 (16) — — 43 Total real estate loans 7,608 486 (11) 172 8,255 Commercial loans 2,133 (676) — 25 1,482 Consumer installment loans 167 (49) (46) 38 110 All other loans 7 1 — — 8 Unallocated 913 238 — — 1,151 Total loans $ 10,828 $ — $ (57) $ 235 $ 11,006 Three Months Ended June 30, 2020 Provision March 31, 2020 Allocation Charge-offs Recoveries June 30, 2020 Mortgage loans on real estate: Residential 1‑4 family $ 2,935 $ 547 $ — $ 13 $ 3,495 Commercial 4,240 337 — 35 4,612 Construction and land development 1,354 (13) — 1 1,342 Second mortgages 70 (26) — 1 45 Multifamily 267 232 — — 499 Agriculture 45 (1) — — 44 Total real estate loans 8,911 1,076 — 50 10,037 Commercial loans 2,546 37 (589) 64 2,058 Consumer installment loans 111 5 (29) 23 110 All other loans 8 — — — 8 Unallocated 243 (218) — — 25 Total loans $ 11,819 $ 900 $ (618) $ 137 $ 12,238 Six Months Ended June 30, 2021 Provision December 31, 2020 Allocation Charge-offs Recoveries June 30, 2021 Mortgage loans on real estate: Residential 1‑4 family $ 2,638 $ (712) $ (11) $ 89 $ 2,004 Commercial 4,568 (793) — 7 3,782 Construction and land development 2,545 (640) — 135 2,040 Second mortgages 18 (8) — 10 20 Multifamily 508 (142) — — 366 Agriculture 40 3 — — 43 Total real estate loans 10,317 (2,292) (11) 241 8,255 Commercial loans 1,897 (297) (167) 49 1,482 Consumer installment loans 119 37 (125) 79 110 All other loans 7 1 — 8 Unallocated — 1,151 — — 1,151 Total loans $ 12,340 $ (1,400) $ (303) $ 369 $ 11,006 Six Months Ended June 30, 2020 Provision December 31, 2019 Allocation Charge-offs Recoveries June 30, 2020 Mortgage loans on real estate: Residential 1‑4 family $ 2,685 $ 781 $ — $ 29 $ 3,495 Commercial 2,196 2,337 — 79 4,612 Construction and land development 1,044 214 — 84 1,342 Second mortgages 79 (36) — 2 45 Multifamily 248 251 — — 499 Agriculture 38 6 — — 44 Total real estate loans 6,290 3,553 — 194 10,037 Commercial loans 1,980 619 (608) 67 2,058 Consumer installment loans 114 40 (104) 60 110 All other loans 7 1 — — 8 Unallocated 38 (13) — — 25 Total loans $ 8,429 $ 4,200 $ (712) $ 321 $ 12,238 The increase in provision expense for the three and six months ended June 30, 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 six months ended June 30, 2021 reflected a more stable economic climate in the first six months of 2021 compared with each quarter in 2020. This is evidenced by the level of charge-offs and delinquencies, which have remained relatively low, as well as decreases in special mention loans. 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. Due to the lingering potential effects of COVID-19, the Company changed the look back period related to the qualitative factor measuring credit quality deterioration trends for the June 30, 2021 loan loss allowance calculation. The factor was calculated based on an eight quarter look back period versus a four quarter look back period used in prior periods. This change accounted for the credit quality changes pre- and post-COVID-19, which span over the eight quarter period. The revised methodology resulted in a decrease of $900,000 to the unallocated component with corresponding increases of $607,000, $150,000 and $110,000 to the commercial real estate, residential 1-4 family and commercial loan components, respectively, as compared to the previous methodology. The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of June 30, 2021 and December 31, 2020 (dollars in thousands): June 30, 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 $ 632 $ 1,372 $ 2,004 $ 2,445 $ 180,484 $ 182,929 Commercial 8 3,774 3,782 3,829 503,122 506,951 Construction and land development 1 2,039 2,040 2 180,213 180,215 Second mortgages — 20 20 — 6,893 6,893 Multifamily — 366 366 — 72,918 72,918 Agriculture — 43 43 — 7,841 7,841 Total real estate loans 641 7,614 8,255 6,276 951,471 957,747 Commercial loans 273 1,209 1,482 1,440 222,997 224,437 Consumer installment loans — 110 110 — 8,452 8,452 All other loans — 8 8 — 1,205 1,205 Unallocated — 1,151 1,151 — — — Total loans $ 914 $ 10,092 $ 11,006 $ 7,716 $ 1,184,125 $ 1,191,841 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 June 30, 2021 and December 31, 2020 (dollars in thousands): June 30, 2021 Special Pass Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 177,280 $ 4,363 $ 1,286 $ — $ 182,929 Commercial 458,076 47,922 953 — 506,951 Construction and land development 175,406 4,807 2 — 180,215 Second mortgages 6,275 618 — — 6,893 Multifamily 72,732 186 — — 72,918 Agriculture 6,391 1,450 — — 7,841 Total real estate loans 896,160 59,346 2,241 — 957,747 Commercial loans 205,096 14,764 4,577 — 224,437 Consumer installment loans 8,442 10 — — 8,452 All other loans 1,191 14 — — 1,205 Total loans $ 1,110,889 $ 74,134 $ 6,818 $ — $ 1,191,841 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, During the three and six months ended June 30, 2021, the Company restructured the terms of one 1-4 family residential loan that was considered to be a TDR with a pre- and post-modification balance of $61,000. During the three and six months ended June 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. 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, 2021, the Company had 1-4 family mortgages in the amount of $79.7 million and cash in the amount of $6.5 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $67.8 million. |