Loans and Allowance for Loan Losses | (2) Loans and Allowance for Loan Losses Loans Major classifications within the Company’s held for investment loan portfolio at June 30, 2021 and December 31, 2020 is as follows: June 30, December 31, (in thousands) 2021 2020 Commercial, financial, and agricultural (a) $ 263,511 $ 272,918 Real estate construction − 35,760 29,692 Real estate construction − 74,788 78,144 Real estate mortgage − 267,264 262,339 Real estate mortgage − 628,075 617,133 Installment and other consumer 24,496 26,741 Total loans held for investment $ 1,293,894 $ 1,286,967 (a) Includes $49.6 million and $63.3 million of SBA PPP loans, net as of June 30, 2021 and December 31, 2020, respectively. The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the Missouri communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, St. Louis, and the greater Kansas City metropolitan area. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of automotive vehicles. At June 30, 2021, loans of $537.1 million were pledged to the Federal Home Loan Bank (FHLB) as collateral for borrowings and letters of credit. Allowance for Loan Losses The following table illustrates the changes in the allowance for loan losses by portfolio segment: Three Months Ended June 30, 2021 Commercial, Real Estate Real Estate Real Estate Real Estate Installment Financial, & Construction - Construction - Mortgage - Mortgage - and Other Un- (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total Balance at beginning of period $ 4,676 $ 309 $ 532 $ 2,594 $ 9,904 $ 245 $ 101 $ 18,361 Additions: Provision for loan losses 655 (58) (37) (130) 14 38 (82) 400 Deductions: Loans charged off 28 — — 4 3 46 — 81 Less recoveries on loans (33) — — (7) — (15) — (55) Net loan charge-offs (recoveries) (5) — — (3) 3 31 — 26 Balance at end of period $ 5,336 $ 251 $ 495 $ 2,467 $ 9,915 $ 252 $ 19 $ 18,735 Three Months Ended June 30, 2020 Commercial, Real Estate Real Estate Real Estate Real Estate Installment Financial, & Construction - Construction - Mortgage - Mortgage - and Other Un- (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total Balance at beginning of period $ 3,623 $ 117 $ 622 $ 2,363 $ 8,614 $ 351 $ 3 $ 15,693 Additions: Provision for loan losses (32) 22 100 354 435 (26) 47 900 Deductions: Loans charged off 43 — — 33 2 39 — 117 Less recoveries on loans (66) (32) — (27) (1) (20) — (146) Net loan charge-offs (recoveries) (23) (32) — 6 1 19 — (29) Balance at end of period $ 3,614 $ 171 $ 722 $ 2,711 $ 9,048 $ 306 $ 50 $ 16,622 Six Months Ended June 30, 2021 Commercial, Real Estate Real Estate Real Estate Real Estate Installment Financial, & Construction - Construction - Mortgage - Mortgage - and Other Un- (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total Balance at beginning of period $ 5,121 $ 213 $ 475 $ 2,679 $ 9,354 $ 264 $ 7 $ 18,113 Additions: Provision for loan losses 87 25 20 (384) 587 53 12 400 Deductions: Loans charged off 55 — — 3 26 104 — 188 Less recoveries on loans (183) (13) — (175) — (39) — (410) Net loan charge-offs (recoveries) (128) (13) — (172) 26 65 — (222) Balance at end of period $ 5,336 $ 251 $ 495 $ 2,467 $ 9,915 $ 252 $ 19 $ 18,735 Six Months Ended June 30, 2020 Commercial, Real Estate Real Estate Real Estate Real Estate Installment Financial, & Construction - Construction - Mortgage - Mortgage - and Other Un- (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total Balance at beginning of period $ 2,918 $ 64 $ 369 $ 2,118 $ 6,547 $ 381 $ 80 $ 12,477 Additions: Provision for loan losses 689 75 353 609 2,522 (18) (30) 4,200 Deductions: Loans charged off 84 — — 52 24 91 — 251 Less recoveries on loans (91) (32) — (36) (3) (34) — (196) Net loan charge-offs (recoveries) (7) (32) — 16 21 57 — 55 Balance at end of period $ 3,614 $ 171 $ 722 $ 2,711 $ 9,048 $ 306 $ 50 $ 16,622 Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss. Management's look-back period began with loss history in the first quarter 2012 as the starting point through the current quarter and it will continue to include this starting point going forward. The look-back period will continue to be evaluated and will be adjusted once a sustained loss producing downturn is recognized and found to be representative of historical losses expected for the current portfolio. The Company’s methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values, assessment of changes in the quality of the Company’s internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices. When the COVID-19 pandemic surfaced in the first quarter of 2020, management reassessed the calculation of the allowance for loan loss by increasing the economic qualitative factor in order to capture the impact on the credit risk present in the loan portfolio given the economic environment that existed at that time. As of the fourth quarter of 2020, management reassessed the qualitative factor and economic indicators. Enough time had passed so that data after the outbreak would be available and a better interpretation of the impact of the virus on the economy. Management determined that the local market and economy had been able to transition to a functional level while adapting to the new requirements aimed at stopping the spread of the virus and returned to calculating the qualitative adjustment according to the Company's methodology detailed above. Additionally, the funding of $88.4 million and $47.5 million in SBA PPP loans during 2020 and 2021, respectively, required management to assess the methodology that would be adopted in regard to the allowance for loan losses applicable to these loans. As the SBA PPP loans are expected to be mostly paid off in the next six All SBA PPP loans have a 1% interest rate and the Company earns a fee that is based upon a tiered schedule corresponding with the amount of the loan to the borrower, which is deferred and recognized over the life of the loan. The PPP loan may be forgiven by SBA if the borrower meets certain criteria as defined by the CARES Act. The Company reports these loans at their principal amount outstanding, net of unearned income, unamortized deferred loan fee income and loan origination costs. Interest is accrued as earned and loan origination fees and direct costs are deferred and accreted or amortized into interest income, as an adjustment to the yield, over the life of the loan using the level yield method. When a PPP loan is paid off or forgiven by the SBA, the remaining unaccreted or unamortized net origination fees or costs are immediately recognized into income. The following table illustrates the allowance for loan losses and recorded investment by portfolio segment: Commercial, Real Estate Real Estate Real Estate Real Estate Installment Financial, and Construction - Construction - Mortgage - Mortgage - and Other Un- (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total June 30, 2021 Allowance for loan losses: Individually evaluated for impairment $ 2,325 $ — $ 16 $ 242 $ 2,764 $ 8 $ — $ 5,355 Collectively evaluated for impairment 3,011 251 479 2,225 7,151 244 19 13,380 Total $ 5,336 $ 251 $ 495 $ 2,467 $ 9,915 $ 252 $ 19 $ 18,735 Loans outstanding: Individually evaluated for impairment $ 7,362 $ — $ 112 $ 2,909 $ 25,647 $ 61 $ — $ 36,091 Collectively evaluated for impairment 256,149 35,760 74,676 264,355 602,428 24,435 — 1,257,803 Total $ 263,511 $ 35,760 $ 74,788 $ 267,264 $ 628,075 $ 24,496 $ — $ 1,293,894 December 31, 2020 Allowance for loan losses: Individually evaluated for impairment $ 2,187 $ 27 $ 28 $ 263 $ 2,594 $ 14 $ — $ 5,113 Collectively evaluated for impairment 2,934 186 447 2,416 6,760 250 7 13,000 Total $ 5,121 $ 213 $ 475 $ 2,679 $ 9,354 $ 264 $ 7 $ 18,113 Loans outstanding: Individually evaluated for impairment $ 7,552 $ 192 $ 200 $ 3,626 $ 25,657 $ 108 $ — $ 37,335 Collectively evaluated for impairment 265,366 29,500 77,944 258,713 591,476 26,633 — 1,249,632 Total $ 272,918 $ 29,692 $ 78,144 $ 262,339 $ 617,133 $ 26,741 $ — $ 1,286,967 Impaired Loans Loans evaluated under Accounting Standards Codification (ASC) 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans individually evaluated for impairment totaled $36.1 million and $37.3 million at June 30, 2021 and December 31, 2020, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructuring (TDRs). The net carrying value of impaired loans is based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At June 30, 2021, $31.8 million of impaired loans were evaluated based on the fair value less estimated selling costs of the loans' collateral compared to $32.2 million at December 31, 2020. Once the impairment amount is calculated, a specific reserve allocation is recorded. At June 30, 2021, $5.4 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $36.1 million compared to $5.1 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $37.3 million at December 31, 2020. Management determined that $12.4 million, or 34%, of total impaired loans required no reserve allocation at June 30, 2021 compared to $11.9 million, or 32%, at December 31, 2020, primarily due to adequate collateral values , The categories of impaired loans at June 30, 2021 and December 31, 2020 are as follows: June 30, December 31, (in thousands) 2021 2020 Non-accrual loans $ 33,783 $ 34,559 Performing TDRs 2,308 2,776 Total impaired loans $ 36,091 $ 37,335 The following tables provide additional information about impaired loans at June 30, 2021 and December 31, 2020, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided. Unpaid Recorded Principal Specific (in thousands) Investment Balance Reserves June 30, 2021 With no related allowance recorded: Commercial, financial and agricultural $ 1,821 $ 1,872 $ — Real estate mortgage − 1,153 1,261 — Real estate mortgage − 9,465 9,483 — Total $ 12,439 $ 12,616 $ — With an allowance recorded: Commercial, financial and agricultural $ 5,541 $ 5,618 $ 2,325 Real estate construction − 112 142 16 Real estate mortgage − 1,756 2,191 242 Real estate mortgage − 16,182 16,252 2,764 Installment and other consumer 61 63 8 Total $ 23,652 $ 24,266 $ 5,355 Total impaired loans $ 36,091 $ 36,882 $ 5,355 Unpaid Recorded Principal Specific (in thousands) Investment Balance Reserves December 31, 2020 With no related allowance recorded: Commercial, financial and agricultural $ 1,703 $ 1,731 $ — Real estate mortgage − 1,300 1,395 — Real estate mortgage − 8,943 8,943 — Total $ 11,946 $ 12,069 $ — With an allowance recorded: Commercial, financial and agricultural $ 5,849 $ 6,180 $ 2,187 Real estate construction − 192 192 27 Real estate construction − 200 251 28 Real estate mortgage − 2,326 2,786 263 Real estate mortgage − 16,714 16,787 2,594 Installment and other consumer 108 112 14 Total $ 25,389 $ 26,308 $ 5,113 Total impaired loans $ 37,335 $ 38,377 $ 5,113 The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans during the periods indicated. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Interest Interest Interest Interest Average Recognized Average Recognized Average Recognized Average Recognized Recorded For the Recorded For the Recorded For the Recorded For the (in thousands) Investment Period Ended Investment Period Ended Investment Period Ended Investment Period Ended With no related allowance recorded: Commercial, financial and agricultural $ 1,826 $ 5 $ 3,059 $ — $ 1,834 $ 13 $ 1,370 $ — Real estate construction − — — 528 — — — 271 — Real estate mortgage − 1,266 12 2,758 — 1,391 21 1,355 — Real estate mortgage − 9,459 — 1,448 7 9,458 — 1,178 13 Installment and other consumer — — 15 — — — 12 — Total $ 12,551 $ 17 $ 7,808 $ 7 $ 12,683 $ 34 $ 4,186 $ 13 With an allowance recorded: Commercial, financial and agricultural $ 5,553 $ 7 $ 1,615 $ 11 $ 5,548 $ 13 $ 1,195 $ 19 Real estate construction − 125 — — — 158 — — — Real estate construction − 165 — 766 — 182 — 142 — Real estate mortgage − 1,692 4 3,724 8 1,779 11 2,990 28 Real estate mortgage − 16,323 8 540 3 16,189 15 438 6 Installment and other consumer 58 — 147 1 71 3 135 7 Total $ 23,916 $ 19 $ 6,792 $ 23 $ 23,927 $ 42 $ 4,900 $ 60 Total impaired loans $ 36,467 $ 36 $ 14,600 $ 30 $ 36,610 $ 76 $ 9,086 $ 73 The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to TDRs, was $36,000 and $76,000 for the three and six months ended June 30, 2021, respectively, compared to $30,000 and $73,000 for the three and six months ended June 30, 2020, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the periods reported. Delinquent and Non-Accrual Loans The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due. The Company’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, the ultimate collectability of interest or principal is no longer probable. In general, loans are placed on non-accrual when they become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual, including the delinquency status of the loan, the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral. Subsequent interest payments received on non-accrual loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial condition of the borrower indicates that the timely collectability of interest and principal is probable and the borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six months. The following table provides aging information for the Company’s past due and non-accrual loans at June 30, 2021 and December 31, 2020. Current or 90 Days Less Than Past Due 30 Days 30 - 89 Days And Still (in thousands) Past Due Past Due Accruing Non-Accrual Total June 30, 2021 Commercial, Financial, and Agricultural $ 256,916 $ 31 $ — $ 6,564 $ 263,511 Real estate construction − 35,760 — — — 35,760 Real estate construction − 74,612 64 — 112 74,788 Real estate mortgage − 265,400 91 — 1,773 267,264 Real estate mortgage − 602,558 204 — 25,313 628,075 Installment and Other Consumer 24,423 47 5 21 24,496 Total $ 1,259,669 $ 437 $ 5 $ 33,783 $ 1,293,894 December 31, 2020 Commercial, Financial, and Agricultural $ 265,821 $ 380 $ — $ 6,717 $ 272,918 Real estate construction − 29,500 — — 192 29,692 Real estate construction − 77,944 — — 200 78,144 Real estate mortgage − 259,688 546 — 2,105 262,339 Real estate mortgage − 591,815 4 — 25,314 617,133 Installment and Other Consumer 26,576 117 17 31 26,741 Total $ 1,251,344 $ 1,047 $ 17 $ 34,559 $ 1,286,967 The Company's past due and non-accrual loans at June 30, 2021 and December 31, 2020 do not include $19.2 million and $57.1 million of loans accepting forbearance under the CARES Act, respectively. Their delinquency status will not change through the forbearance period as they are fulfilling the agreement they have made with the Company. Of the total remaining $42.8 million loan modifications under the CARES Act, $23.5 million, are on non-accrual status at June 30, 2021. Credit Quality The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch substandard non-accrual loans for presentation purposes. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. The following table presents the risk categories by class at June 30, 2021 and December 31, 2020. Commercial, Real Estate Real Estate Real Estate Real Estate Installment Financial, & Construction - Construction - Mortgage - Mortgage - and other (in thousands) Agricultural Residential Commercial Residential Commercial Consumer Total At June 30, 2021 Watch $ 12,544 $ 535 $ 4,750 $ 14,556 $ 63,487 $ — $ 95,872 Substandard 628 — 2,670 782 556 — 4,636 Performing TDRs 798 — — 1,136 334 40 2,308 Non-accrual loans 6,564 — 112 1,773 25,313 21 33,783 Total $ 20,534 $ 535 $ 7,532 $ 18,247 $ 89,690 $ 61 $ 136,599 At December 31, 2020 Watch $ 9,649 $ 545 $ 10,806 $ 15,835 $ 66,936 $ — $ 103,771 Substandard 598 — — 1,002 1,662 — 3,262 Performing TDRs 835 — — 1,521 343 77 2,776 Non-accrual loans 6,717 192 200 2,105 25,314 31 34,559 Total $ 17,799 $ 737 $ 11,006 $ 20,463 $ 94,255 $ 108 $ 144,368 Troubled Debt Restructurings At June 30, 2021, loans classified as TDRs totaled $3.1 million, of which $0.8 million were classified as non-performing TDRs and $2.3 million were classified as performing TDRs. At December 31, 2020, loans classified as TDRs totaled $3.7 million, of which $0.9 million were classified as non-performing TDRs and $2.8 million were classified as performing TDRs. Both performing and non-performing TDRs are considered impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $154,000 and $214,000 related to TDRs were allocated to the allowance for loan losses at June 30, 2021 and December 31, 2020, respectively. Beginning in 2020, the Company began offering short-term loan modification to assist borrowers during the COVID-19 pandemic. These modifications generally meet the criteria of both Section 4013 of the CARES Act and the join interagency statement, and therefore, the Company does not account for such loan modifications as TDRs. At June 30, 2021, $42.8 million, or 3.3% of total loans, remained in some form of a modification. These loan modifications include $11.4 million on interest only, $26.4 million on full deferral and $5.0 million with extended amortization. Of the $26.4 million loan modifications on full deferral, $23.5 million, or 55.0% of the total remaining loan modifications, were determined to be on non-accrual status as of June 30, 2021. The following table summarizes loans that were modified as TDRs during the periods indicated. Three Months Ended June 30, 2021 2020 Recorded Investment (1) Recorded Investment (1) Number of Pre- Post- Number of Pre- Post- (in thousands) Contracts Modification Modification Contracts Modification Modification Troubled Debt Restructurings Real estate mortgage − — $ — $ — 1 $ 111 $ 119 Total — $ — $ — 1 $ 111 $ 119 Six Months Ended June 30, 2021 2020 Recorded Investment (1) Recorded Investment (1) Number of Pre- Post- Number of Pre- Post- (in thousands) Contracts Modification Modification Contracts Modification Modification Troubled Debt Restructurings Real estate mortgage - residential — $ — $ — 1 $ 111 $ 119 Installment and other consumer — — — 1 6 5 Total — $ — $ — 2 $ 117 $ 124 (1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon during the period ended are not reported. The Company’s portfolio of loans classified as TDRs include concessions for the borrower given their financial condition such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. There were no loans meeting the TDR criteria that were modified during the three and six months ended June 30, 2021, respectively, and one and two loans that were modified during the three and six months ended June 30, 2020, respectively. The Company considers a TDR to be in default when it is 90 days or more past due under the modified terms, a charge-off occurs, or in the process of foreclosure. There were no loans modified as a TDR that defaulted during any of the three and six months ended June 30, 2021, respectively, and one loan and no loans modified as a TDR that defaulted during the three and six months ended June 30, 2020, respectively, and within twelve months of their modification date. See Lending and Credit Management Loans Held For Sale The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company carries them at the lower of cost or fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac, and other various secondary market investors. At June 30, 2021, the carrying amount of these loans was $2.5 million compared to $5.1 million and $9.0 million at December 31, 2020 and June 30, 2020, respectively. |