Note 3. Loans and Related Allowance for Loan Losses

The Company’s loans, net of deferred fees and costs, as of December 31, 2019 and 2018 were comprised of the following (dollars in thousands):


	2019				2018
	Amount		% of Loans		Amount		% of Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	223,538	21.12	%	$	216,268	21.77	%
Commercial		396,858	37.50			379,904	38.23
Construction and land development		146,566	13.85			120,413	12.12
Second mortgages		6,639	0.63			6,778	0.68
Multifamily		72,978	6.90			59,557	5.99
Agriculture		8,346	0.79			8,370	0.84
Total real estate loans		854,925	80.79			791,290	79.63
Commercial loans		191,183	18.06			188,722	18.99
Consumer installment loans		11,163	1.05			12,048	1.21
All other loans		1,052	0.10			1,645	0.17
Total loans	$	1,058,323	100.00	%	$	993,705	100.00	%

The Company held $12.7 million and $17.4 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 December 31, 2019 and 2018, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $1.0 million and $1.2 million at December 31, 2019 and 2018, 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.

At December 31, 2019 and 2018, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB ASC 310, Receivables, (ii) a general valuation component calculated in accordance with FASB ASC 450, Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with ASC 310.

The following table summarizes information related to impaired loans as of December 31, 2019 and 2018 (dollars in thousands):



	2019						2018
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment (1)		Balance (2)		Allowance		Investment (1)		Balance (2)		Allowance
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,483	$	1,850	$	—	$	1,563	$	1,890	$	—
Commercial		3,226		3,966		—		3,502		4,176		—
Construction and land development		328		328		—		—		—		—
Multifamily		2,463		2,463		—		2,559		2,559		—
Total real estate loans		7,500		8,607		—		7,624		8,625		—
Subtotal impaired loans with no valuation allowance		7,500		8,607		—		7,624		8,625		—
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		1,498		1,808		380		2,131		2,538		349
Commercial		378		876		87		1,550		2,034		482
Construction and land development		48		147		11		4,571		5,840		515
Total real estate loans		1,924		2,831		478		8,252		10,412		1,346
Commercial loans		454		460		105		1,983		1,991		900
Consumer installment loans		7		7		1		—		—		—
Subtotal impaired loans with a valuation allowance		2,385		3,298		584		10,235		12,403		2,246
Total:
Mortgage loans on real estate:
Residential 1‑4 family		2,981		3,658		380		3,694		4,428		349
Commercial		3,604		4,842		87		5,052		6,210		482
Construction and land development		376		475		11		4,571		5,840		515
Multifamily		2,463		2,463		—		2,559		2,559		—
Total real estate loans		9,424		11,438		478		15,876		19,037		1,346
Commercial loans		454		460		105		1,983		1,991		900
Consumer installment loans		7		7		1		—		—		—
Total impaired loans	$	9,885	$	11,905	$	584	$	17,859	$	21,028	$	2,246

(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 allowance

The following table summarizes the average recorded investment of impaired loans for the years ended December 31, 2019 and 2018 (dollars in thousands):


	2019				2018
	Average Investment		Interest Recognized		Average Investment		Interest Recognized
Mortgage loans on real estate:
Residential 1‑4 family	$	3,395	$	87	$	3,993	$	124
Commercial		4,096		145		4,822		164
Construction and land development		2,709		—		4,839		—
Multifamily		2,519		—		1,535		123
Agriculture		—		—		27		—
Total real estate loans		12,719		232		15,216		411
Commercial loans		1,386		16		1,175		19
Consumer installment loans		5		—		3		—
Total impaired loans	$	14,110	$	248	$	16,394	$	430

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 as of December 31, 2019 and December 31, 2018 is set forth in the table below (dollars in thousands):


	2019		2018
Nonaccrual loans	$	5,292	$	9,500
Trouble debt restructure and still accruing		4,593		8,359
Total impaired	$	9,885	$	17,859

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the years ended December 31, 2019 and 2018. For the years ended December 31, 2019 and 2018, estimated interest income of $345,000 and $634,000, 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 December 31, 2019 and 2018 (dollars in thousands):


	December 31, 2019
	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	$	1,308	$	—	$	1,378	$	2,686	$	220,852	$	223,538
Commercial		552		—		1,006		1,558		395,300		396,858
Construction and land development		166		—		376		542		146,024		146,566
Second mortgages		229		—		—		229		6,410		6,639
Multifamily		—		—		2,463		2,463		70,515		72,978
Agriculture		—		—		—		—		8,346		8,346
Total real estate loans		2,255		—		5,223		7,478		847,447		854,925
Commercial loans		1,085		946		62		2,093		189,090		191,183
Consumer installment loans		41		—		7		48		11,115		11,163
All other loans		—		—		—		—		1,052		1,052
Total loans	$	3,381	$	946	$	5,292	$	9,619	$	1,048,704	$	1,058,323


	December 31, 2018
	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	$	495	$	—	$	1,257	$	1,752	$	214,516	$	216,268
Commercial		551		—		2,123		2,674		377,230		379,904
Construction and land development		59		—		4,571		4,630		115,783		120,413
Second mortgages		—		—		—		—		6,778		6,778
Multifamily		2,559		—		—		2,559		56,998		59,557
Agriculture		—		—		—		—		8,370		8,370
Total real estate loans		3,664		—		7,951		11,615		779,675		791,290
Commercial loans		80		—		1,549		1,629		187,093		188,722
Consumer installment loans		10		—		—		10		12,038		12,048
All other loans		—		—		—		—		1,645		1,645
Total loans	$	3,754	$	—	$	9,500	$	13,254	$	980,451	$	993,705

Activity in the allowance for loan losses on loans by segment for the years ended December 31, 2019 and 2018 is presented in the following tables (dollars in thousands):


	Year Ended December 31, 2019
			Provision
	December 31, 2018		Allocation		Charge-offs		Recoveries		December 31, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	2,281	$	315	$	(178)	$	267	$	2,685
Commercial		1,810		583		(277)		80		2,196
Construction and land development		1,161		24		(212)		71		1,044
Second mortgages		20		53		—		6		79
Multifamily		371		(164)		—		41		248
Agriculture		17		21		—		—		38
Total real estate loans		5,660		832		(667)		465		6,290
Commercial loans		1,894		626		(724)		184		1,980
Consumer installment loans		152		99		(253)		116		114
All other loans		12		(5)		—		—		7
Unallocated		1,265		(1,227)		—		—		38
Total loans	$	8,983	$	325	$	(1,644)	$	765	$	8,429


	Year Ended December 31, 2018
			Provision
	December 31, 2017		Allocation		Charge-offs		Recoveries		December 31, 2018
Mortgage loans on real estate:
Residential 1‑4 family	$	3,466	$	(1,252)	$	(89)	$	156	$	2,281
Commercial		2,423		(647)		—		34		1,810
Construction and land development		1,247		3		(127)		38		1,161
Second mortgages		24		(10)		—		6		20
Multifamily		496		(125)		—		—		371
Agriculture		14		3		—		—		17
Total real estate loans		7,670		(2,028)		(216)		234		5,660
Commercial loans		1,139		751		(45)		49		1,894
Consumer installment loans		110		53		(220)		209		152
All other loans		3		6		—		3		12
Unallocated		47		1,218		—		—		1,265
Total loans	$	8,969	$	—	$	(481)	$	495	$	8,983

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of December 31, 2019 and 2018 (dollars in thousands):


	December 31, 2019
	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	$	380	$	2,305	$	2,685	$	2,981	$	220,557	$	223,538
Commercial		87		2,109		2,196		3,604		393,254		396,858
Construction and land development		11		1,033		1,044		376		146,190		146,566
Second mortgages		—		79		79		—		6,639		6,639
Multifamily		—		248		248		2,463		70,515		72,978
Agriculture		—		38		38		—		8,346		8,346
Total real estate loans		478		5,812		6,290		9,424		845,501		854,925
Commercial loans		105		1,875		1,980		454		190,729		191,183
Consumer installment loans		1		113		114		7		11,156		11,163
All other loans		—		7		7		—		1,052		1,052
Unallocated		—		38		38		—		—		—
Total loans	$	584	$	7,845	$	8,429	$	9,885	$	1,048,438	$	1,058,323


	December 31, 2018
	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	$	349	$	1,932	$	2,281	$	3,694	$	212,574	$	216,268
Commercial		482		1,328		1,810		5,052		374,852		379,904
Construction and land development		515		646		1,161		4,571		115,842		120,413
Second mortgages		—		20		20		—		6,778		6,778
Multifamily		—		371		371		2,559		56,998		59,557
Agriculture		—		17		17		—		8,370		8,370
Total real estate loans		1,346		4,314		5,660		15,876		775,414		791,290
Commercial loans		900		994		1,894		1,983		186,739		188,722
Consumer installment loans		—		152		152		—		12,048		12,048
All other loans		—		12		12		—		1,645		1,645
Unallocated		—		1,265		1,265		—		—		—
Total loans	$	2,246	$	6,737	$	8,983	$	17,859	$	975,846	$	993,705

Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows:

Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $12.7 million and $17.4 million at December 31, 2019 and 2018, respectively.

Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. The possibility of loss is extremely high.

The following tables present the composition of loans by credit quality indicator as of December 31, 2019 and 2018 (dollars in thousands):


	December 31, 2019
			Special
	Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	219,210	$	2,964	$	1,364	$	—	$	223,538
Commercial		391,251		3,188		2,419		—		396,858
Construction and land development		145,782		408		376		—		146,566
Second mortgages		6,096		543		—		—		6,639
Multifamily		70,515		—		2,463		—		72,978
Agriculture		8,098		248		—		—		8,346
Total real estate loans		840,952		7,351		6,622		—		854,925
Commercial loans		185,123		2,770		3,290		—		191,183
Consumer installment loans		11,140		16		7		—		11,163
All other loans		1,052		—		—		—		1,052
Total loans	$	1,038,267	$	10,137	$	9,919	$	—	$	1,058,323


	December 31, 2018
			Special
	Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	211,832	$	3,179	$	1,257	$	—	$	216,268
Commercial		372,745		3,551		3,608		—		379,904
Construction and land development		115,650		192		4,571		—		120,413
Second mortgages		6,686		92		—		—		6,778
Multifamily		56,802		196		2,559		—		59,557
Agriculture		8,312		58		—		—		8,370
Total real estate loans		772,027		7,268		11,995		—		791,290
Commercial loans		184,004		1,798		2,920		—		188,722
Consumer installment loans		12,042		6		—		—		12,048
All other loans		1,645		—		—		—		1,645
Total loans	$	969,718	$	9,072	$	14,915	$	—	$	993,705

In accordance with FASB ASU 2011‑02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 24 and 25 loans that met the definition of a TDR at December 31, 2019 and 2018, respectively.

The Company had no loan modifications considered to be TDRs during the year ended December 31, 2019. During the year ended December 31, 2018, the Company modified one multifamily loan, one commercial real estate loan, and one commercial loan that were considered to be TDRs, which had total pre- and post-modification balances of $2.6 million, $126,000, and $233,000 respectively. The Company restructured the terms for the multifamily and commercial loans to interest only payments for six months and extended the maturity for the commercial real estate loan.

A loan is considered to be in default if it is 90 days or more past due. During the year ended December 31, 2019, one loan defaulted that had been restructured during the previous 12 months prior to the default. This multifamily real estate loan had a recorded investment of $2.5 million. During the year ended December 31, 2018, the Company had no loans that went into default that had been restructured in the 12 month period prior to the time of default.

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 December 31, 2019 the Company had 1‑4 family mortgages in the amount of $107.0 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $90.4 million.