Loans and Allowance for Loan Losses | Note 5: Loans and Allowance for Loan Losses A summary of loans at December 31, 2020 and December 31, 2019, are as follows (dollars in thousands): December 31, 2020 December 31, 2019 Construction & development $ 107,855 $ 70,628 1 - 4 family real estate 29,079 34,160 Commercial real estate - other 290,489 273,278 Total commercial real estate 427,423 378,066 Commercial & industrial 351,248 260,762 Agricultural 50,519 57,945 Consumer 9,898 11,895 Gross loans 839,088 708,668 Less allowance for loan losses (9,639 ) (7,846 ) Less deferred loan fees (2,475 ) (1,364 ) Net loans $ 826,974 $ 699,458 Included in the commercial & industrial loan balance at December 31, 2020, are $44.9 million of loans that were originated under the SBA PPP program. The following table presents, by portfolio segment, the activity in the allowance for loan losses for the years ended December 31, 2020, 2019, and 2018 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2020 Balance, beginning of period $ 782 $ 378 $ 3,025 $ 2,887 $ 642 $ 132 $ 7,846 Charge-offs - - - (3,289 ) (300 ) (1 ) (3,590 ) Recoveries - 2 - 18 10 3 33 Net charge-offs - 2 - (3,271 ) (290 ) 2 (3,557 ) Provision (credit) for loan losses 457 (46 ) 312 4,419 228 (20 ) 5,350 Balance, end of period $ 1,239 $ 334 $ 3,337 $ 4,035 $ 580 $ 114 $ 9,639 Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2019 Balance, beginning of period $ 1,136 $ 433 $ 2,035 $ 3,231 $ 818 $ 179 $ 7,832 Charge-offs - (2 ) - (4 ) (11 ) (1 ) (18 ) Recoveries - 5 - 24 3 - 32 Net recoveries - 3 - 20 (8 ) (1 ) 14 Provision (credit) for loan losses (354 ) (58 ) 990 (364 ) (168 ) (46 ) - Balance, end of period $ 782 $ 378 $ 3,025 $ 2,887 $ 642 $ 132 $ 7,846 Construction & Development 1 - 4 Family Commercial Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2018 Balance, beginning of period $ 1,407 $ 431 $ 1,865 $ 2,779 $ 1,015 $ 157 $ 7,654 Charge-offs - (25 ) - (73 ) - - (98 ) Recoveries - 3 - 71 1 1 76 Net charge-offs - (22 ) - (2 ) 1 1 (22 ) Provision (credit) for loan losses (271 ) 24 170 454 (198 ) 21 200 Balance, end of period $ 1,136 $ 433 $ 2,035 $ 3,231 $ 818 $ 179 $ 7,832 The following table presents, by portfolio segment, the balance in allowance for loan losses and the gross loans based upon portfolio segment and impairment method as of December 31, 2020 and December 31, 2019 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2020 Allowance Balance Ending balance Individually evaluated for impairment $ - $ - $ - $ 177 $ - $ - $ 177 Collectively evaluated for impairment 1,239 334 3,337 3,858 580 114 9,462 Total $ 1,239 $ 334 $ 3,337 $ 4,035 $ 580 $ 114 $ 9,639 Gross Loans Ending balance Individually evaluated for impairment $ - $ - $ 8,054 $ 14,601 $ 468 $ - $ 23,123 Collectively evaluated for impairment 107,855 29,079 282,435 336,647 50,051 9,898 815,965 Total $ 107,855 $ 29,079 $ 290,489 $ 351,248 $ 50,519 $ 9,898 $ 839,088 December 31, 2019 Allowance Balance Ending balance Individually evaluated for impairment $ - $ - $ 26 $ - $ - $ - $ 26 Collectively evaluated for impairment 782 378 2,999 2,887 642 132 7,820 Total $ 782 $ 378 $ 3,025 $ 2,887 $ 642 $ 132 $ 7,846 Gross Loans Ending balance Individually evaluated for impairment $ - $ - $ 5,841 $ 2,750 $ 2,527 $ - $ 11,118 Collectively evaluated for impairment 70,628 34,160 267,437 258,012 55,418 11,895 697,550 Total $ 70,628 $ 34,160 $ 273,278 $ 260,762 $ 57,945 $ 11,895 $ 708,668 Internal Risk Categories Each loan segment is made up of loan categories possessing similar risk characteristics. Risk characteristics applicable to each segment of the loan portfolio are described as follows: Real Estate The real estate portfolio consists of residential and commercial properties. Residential loans are generally secured by owner occupied 1–4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Commercial real estate loans in this category typically involve larger principal amounts and are repaid primarily from the cash flow of a borrower’s principal business operation, the sale of the real estate or income independent of the loan purpose. Credit risk in these loans is driven by the creditworthiness of a borrower, property values, the local economy and other economic conditions impacting a borrower’s business or personal income. Commercial & Industrial The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. Agricultural Loans secured by agricultural assets are generally made for the purpose of acquiring land devoted to crop production, cattle or poultry or the operation of a similar type of business on the secured property. Sources of repayment for these loans generally include income generated from operations of a business on the property, rental income or sales of the property. Credit risk in these loans may be impacted by crop and commodity prices, the creditworthiness of a borrower, and changes in economic conditions which might affect underlying property values and the local economies in the Company’s market areas. Consumer The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors, such as unemployment and general economic conditions in the Company’s market area and the creditworthiness of a borrower. Loan grades are numbered 1 through 4. Grade 1 is considered satisfactory. The grades of 2 and 3, or Watch and Special Mention, respectively, represent loans of lower quality and are considered criticized. Grade of 4, or Substandard, refers to loans that are classified. • Grade 1 (Pass) • Grade 2 (Watch) • Grade 3 (Special Mention) • Grade 4 (Substandard) The Company evaluates the definitions of loan grades and the allowance for loan losses methodology on an ongoing basis. No changes were made to either during the period ended December 31, 2020. The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of December 31, 2020 and December 31, 2019 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2020 Grade 1 (Pass) $ 107,855 $ 28,711 $ 248,194 $ 328,656 $ 50,051 $ 9,898 $ 773,365 2 (Watch) - 368 24,155 7,691 - - 32,214 3 (Special Mention) - - 10,086 300 - - 10,386 4 (Substandard) - - 8,054 14,601 468 - 23,123 Total $ 107,855 $ 29,079 $ 290,489 $ 351,248 $ 50,519 $ 9,898 $ 839,088 Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2019 Grade 1 (Pass) $ 70,628 $ 33,622 $ 267,437 $ 241,176 $ 53,290 $ 11,895 $ 678,048 2 (Watch) - 538 - 5,312 - - 5,850 3 (Special Mention) - - - 11,524 2,128 - 13,652 4 (Substandard) - - 5,841 2,750 2,527 - 11,118 Total $ 70,628 $ 34,160 $ 273,278 $ 260,762 $ 57,945 $ 11,895 $ 708,668 The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2020 and December 31, 2019 (dollars in thousands): Past Due Total Loans > 90 Days & Accruing 30–59 Days 60–89 Days Greater than 90 Days Total Current Total Loans December 31, 2020 Construction & development $ 714 $ - $ - $ 714 $ 107,141 $ 107,855 $ - 1 - 4 Family Real Estate - - - - 29,079 29,079 - Commercial Real Estate - other 1,444 - 1,960 3,404 287,085 290,489 1,960 Commercial & industrial - - - - 351,248 351,248 - Agricultural - - - - 50,519 50,519 - Consumer 193 - - 193 9,705 9,898 - Total $ 2,351 $ - $ 1,960 $ 4,311 $ 834,777 $ 839,088 $ 1,960 December 31, 2019 Construction & development $ - $ - $ - $ - $ 70,628 $ 70,628 $ - 1 - 4 Family Real Estate - - - - 34,160 34,160 - Commercial Real Estate - other - - - - 273,278 273,278 - Commercial & industrial - - 14 14 260,748 260,762 14 Agricultural - - 598 598 57,347 57,945 598 Consumer 90 - - 90 11,805 11,895 - Total $ 90 $ - $ 612 $ 702 $ 707,966 $ 708,668 $ 612 The following table presents impaired loans as of December 31, 2020 and December 31, 2019 (dollars in thousands): Unpaid Principal Balance Recorded Investment with No Allowance Recorded Investment with an Allowance Total Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2020 Construction & development $ - $ - $ - $ - $ - $ - $ - 1 - 4 Family Real Estate - - - - - 570 - Commercial Real Estate - other 8,353 8,054 - 8,054 - 5,209 554 Commercial & industrial 18,082 14,424 177 14,601 177 15,668 1,049 Agricultural 768 468 - 468 - 2,318 (13 ) Consumer - - - - - - - Total $ 27,203 $ 22,946 $ 177 $ 23,123 $ 177 $ 23,765 $ 1,590 December 31, 2019 Construction & development $ - $ - $ - $ - $ - $ - $ - 1 - 4 Family Real Estate - - - - - 208 - Commercial Real Estate - other 5,841 4,032 1,809 5,841 26 2,557 440 Commercial & industrial 2,750 2,750 - 2,750 - 5,495 281 Agricultural 2,527 1,744 - 1,744 - 2,238 174 Consumer - - - - - 98 - Total $ 11,118 $ 8,526 $ 1,809 $ 10,335 $ 26 $ 10,596 $ 895 Impaired loans include nonperforming loans and also include loans modified in troubled-debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired. At December 31, 2020, the Company had $1.6 million of commercial real estate, $10.9 million of commercial and industrial, and $469,000 of agricultural loans that were modified in troubled-debt restructurings and impaired and $1.8 million of commercial real estate and $900,000 of agricultural loan modifications as of December 31, 2019. There were $11.4 million in newly modified troubled-debt restructurings during the year ended December 31, 2020, consisting of $10.9 million of commercial and industrial loans and $469,000 in agricultural loans. The modification of the terms of the TDR loan included a reduction of the stated interest rate of the loan to a stated rate of interest lower than the current market rate for new debt with similar risk. Troubled-debt restructurings of $10.9 million in commercial and industrial and $469,000 in agricultural loans modified in the past twelve months subsequently defaulted during the period ended December 31, 2020. The following table represents information regarding nonperforming assets at December 31, 2020 and December 31, 2019 (dollars in thousands): Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2020 Nonaccrual loans $ - $ - $ 3,043 $ 11,063 $ 469 $ - $ 14,575 Troubled-debt restructurings (1) - - - - - - - Accruing loans 90 or more days past due - - 1,960 - - - 1,960 Total nonperforming loans $ - $ - $ 5,003 $ 11,063 $ 469 $ - $ 16,535 Construction & Development 1 - 4 Family Real Estate Commercial Real Estate - Other Commercial & Industrial Agricultural Consumer Total December 31, 2019 Nonaccrual loans $ - $ - $ 1,809 $ - $ - $ - $ 1,809 Troubled-debt restructurings (1) - - - - 912 - 912 Accruing loans 90 or more days past due - - - 14 598 - 612 Total nonperforming loans $ - $ - $ 1,809 $ 14 $ 1,510 $ - $ 3,333 (1) $12.98 million and $1.81 million of TDRs as of December 31, 2020 and 2019, respectively, are included in the nonaccrual loans balance in the line above. The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) January 1, 2022. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of December 31, 2020, eight loans totaling $33.0 million were modified, related to COVID-19, which were not considered troubled debt restructurings. |