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, 2021 and December 31, 2020 were comprised of the following (dollars in thousands): September 30, 2021 December 31, 2020 Amount % of Loans Amount % of Loans Mortgage loans on real estate: Residential 1‑4 family $ 178,099 14.47 % $ 197,228 16.68 % Commercial 542,418 44.06 474,856 40.16 Construction and land development 200,878 16.32 182,277 15.42 Second mortgages 7,078 0.57 6,360 0.54 Multifamily 80,245 6.52 78,158 6.61 Agriculture 7,748 0.63 6,662 0.56 Total real estate loans 1,016,466 82.57 945,541 79.97 Commercial loans 206,801 16.80 225,386 19.06 Consumer installment loans 6,841 0.56 9,996 0.85 All other loans 873 0.07 1,439 0.12 Total loans $ 1,230,981 100.00 % $ 1,182,362 100.00 % The Company held $10.4 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 September 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 $722,000 and $804,000 million at September 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 $32.8 million and $49.3 million at September 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 $1.1 million and $920,000 at September 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 September 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 nine months ended September 30, 2021 (dollars in thousands): Three months ended Nine months ended September 30, 2021 September 30, 2021 September 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 $ 302 $ 412 $ — $ 303 $ 3 $ 385 $ 10 Commercial 2,984 3,770 — 3,392 28 3,415 83 Total real estate loans 3,286 4,182 — 3,695 31 3,800 93 Subtotal impaired loans with no valuation allowance 3,286 4,182 — 3,695 31 3,800 93 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 1,982 2,367 581 2,061 11 2,144 32 Commercial 351 720 101 190 3 193 10 Construction and land development 2 4 1 2 — 13 — Agriculture — — — — — 23 — Total real estate loans 2,335 3,091 683 2,253 14 2,373 42 Commercial loans 2,150 2,187 317 1,795 1 1,900 2 Consumer installment loans — — — — — 8 — Subtotal impaired loans with a valuation allowance 4,485 5,278 1,000 4,048 15 4,281 44 Total: Mortgage loans on real estate: Residential 1‑4 family 2,284 2,779 581 2,364 14 2,529 42 Commercial 3,335 4,490 101 3,582 31 3,608 93 Construction and land development 2 4 1 2 — 13 — Agriculture — — — — — 23 — Total real estate loans 5,621 7,273 683 5,948 45 6,173 135 Commercial loans 2,150 2,187 317 1,795 1 1,900 2 Consumer installment loans — — — — — 8 — Total impaired loans $ 7,771 $ 9,460 $ 1,000 $ 7,743 $ 46 $ 8,081 $ 137 (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 nine months ended September 30, 2020 (dollars in thousands): Three months ended Nine months ended December 31, 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 $ 624 $ 787 $ — $ 888 $ 7 $ 1,105 $ 22 Commercial 3,458 4,198 — 3,080 34 3,129 101 Construction and land development — — — — — 164 — Multifamily — — — 616 — Total real estate loans 4,082 4,985 — 3,968 41 5,014 123 Commercial loans — — — 175 — 88 — Subtotal impaired loans with no valuation allowance 4,082 4,985 — 4,143 41 5,102 123 With an allowance recorded: Mortgage loans on real estate: Residential 1‑4 family 2,200 2,573 640 2,156 13 1,923 37 Commercial 200 715 57 152 2 195 6 Construction and land development 44 149 12 847 — 798 — Agriculture 45 46 13 51 — 26 — Total real estate loans 2,489 3,483 722 3,206 15 2,942 43 Commercial loans 2,549 2,549 437 1,243 3 1,142 9 Consumer installment loans 19 19 6 15 — 12 — Subtotal impaired loans with a valuation allowance 5,057 6,051 1,165 4,464 18 4,096 52 Total: Mortgage loans on real estate: Residential 1‑4 family 2,824 3,360 640 3,044 20 3,028 59 Commercial 3,658 4,913 57 3,232 36 3,324 107 Construction and land development 44 149 12 847 — 962 — Multifamily — — — — — 616 — Agriculture 45 46 13 51 — 26 — Total real estate loans 6,571 8,468 722 7,174 56 7,956 166 Commercial loans 2,549 2,549 437 1,418 3 1,230 9 Consumer installment loans 19 19 6 15 — 12 — Total impaired loans $ 9,139 $ 11,036 $ 1,165 $ 8,607 $ 59 $ 9,198 $ 175 (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 September 30, 2021 and December 31, 2020, is set forth in the table below (dollars in thousands): September 30, 2021 December 31, 2020 Nonaccruals $ 3,770 $ 4,460 Troubled debt restructure and still accruing 4,001 4,679 Total impaired $ 7,771 $ 9,139 Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was $17,000 and $185,000 recognized during the three and nine months ended September 30, 2021, respectively. There was an insignificant amount of cash basis income recognized during the three and nine months ended September 30, 2020. For the three months ended September 30, 2021 and 2020, estimated interest income of $50,000 and $61,000, 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, 2021 and 2020, estimated interest income of $151,000 and $152,000, 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, 2021 and December 31, 2020 (dollars in thousands): September 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 $ 816 $ — $ 1,168 $ 1,984 $ 176,115 $ 178,099 Commercial 250 — 602 852 541,566 542,418 Construction and land development — — 2 2 200,876 200,878 Second mortgages 226 — — 226 6,852 7,078 Multifamily — — — — 80,245 80,245 Agriculture — — — — 7,748 7,748 Total real estate loans 1,292 — 1,772 3,064 1,013,402 1,016,466 Commercial loans 91 — 1,998 2,089 204,712 206,801 Consumer installment loans — — — — 6,841 6,841 All other loans — — — — 873 873 Total loans $ 1,383 $ — $ 3,770 $ 5,153 $ 1,225,828 $ 1,230,981 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 nine months ended September 30, 2021 and 2020 is presented in the following tables (dollars in thousands): Three Months Ended September 30, 2021 Provision June 30, 2021 Allocation Charge-offs Recoveries September 30, 2021 Mortgage loans on real estate: Residential 1‑4 family $ 2,004 $ (263) $ — $ 24 $ 1,765 Commercial 3,782 514 — 5 4,301 Construction and land development 2,040 (763) — 152 1,429 Second mortgages 20 (10) — 10 20 Multifamily 366 (74) — — 292 Agriculture 43 (10) — — 33 Total real estate loans 8,255 (606) — 191 7,840 Commercial loans 1,482 (242) — — 1,241 Consumer installment loans 110 (2) (49) 31 90 All other loans 8 (3) — — 4 Unallocated 1,151 (397) — — 754 Total loans $ 11,006 $ (1,250) $ (49) $ 222 $ 9,929 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 Nine Months Ended September 30, 2021 Provision December 31, 2020 Allocation Charge-offs Recoveries September 30, 2021 Mortgage loans on real estate: Residential 1‑4 family $ 2,638 $ (975) $ (11) $ 113 $ 1,765 Commercial 4,568 (279) — 12 4,301 Construction and land development 2,545 (1,403) — 287 1,429 Second mortgages 18 (18) — 20 20 Multifamily 508 (216) — — 292 Agriculture 40 (7) — — 33 Total real estate loans 10,317 (2,898) (11) 432 7,840 Commercial loans 1,897 (538) (167) 49 1,241 Consumer installment loans 119 35 (174) 110 90 All other loans 7 (3) — 4 Unallocated — 754 — — 754 Total loans $ 12,340 $ (2,650) $ (352) $ 591 $ 9,929 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 The increase in provision expense for the three and nine months ended September 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 nine months ended September 30, 2021 reflected a more stable economic climate in the first nine 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, although diminishing, potential effects of COVID-19, the Company changed the look back period related to the qualitative factor measuring credit quality deterioration trends for the September 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 $560,000 to the unallocated component with corresponding increases of $483,000 and $221,000 to the commercial real estate and construction and land development, respectively, offset by a $116,000 decrease in residential 1-4 family, 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 September 30, 2021 and December 31, 2020 (dollars in thousands): September 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 $ 581 $ 1,184 $ 1,765 $ 2,284 $ 175,815 $ 178,099 Commercial 101 4,200 4,301 2,150 540,268 542,418 Construction and land development 1 1,428 1,429 2 200,876 200,878 Second mortgages — 20 20 — 7,078 7,078 Multifamily — 292 292 — 80,245 80,245 Agriculture — 33 33 — 7,748 7,748 Total real estate loans 683 7,157 7,840 4,436 1,012,030 1,016,466 Commercial loans 317 924 1,241 3,335 203,466 206,801 Consumer installment loans — 90 90 — 6,841 6,841 All other loans — 4 4 — 873 873 Unallocated — 754 754 — — — Total loans $ 1,000 $ 8,929 $ 9,929 $ 7,771 $ 1,223,210 $ 1,230,981 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 September 30, 2021 and December 31, 2020 (dollars in thousands): September 30, 2021 Special Pass Mention Substandard Doubtful Total Mortgage loans on real estate: Residential 1‑4 family $ 173,361 $ 3,509 $ 1,229 $ — $ 178,099 Commercial 499,588 42,325 505 — 542,418 Construction and land development 197,497 3,379 2 — 200,878 Second mortgages 6,465 613 — — 7,078 Multifamily 80,245 — — — 80,245 Agriculture 6,319 1,429 — — 7,748 Total real estate loans 963,475 51,255 1,736 — 1,016,466 Commercial loans 189,623 13,597 3,581 — 206,801 Consumer installment loans 6,830 11 — — 6,841 All other loans 859 14 — — 873 Total loans $ 1,160,787 $ 64,877 $ 5,317 $ — $ 1,230,981 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 September 30, 2021. During the nine months ended September 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. 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 and nine months ended September 30, 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 September 30, 2021, the Company had 1-4 family mortgages in the amount of $77.0 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 $63.3 million. |