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Note 4 - Allowance for Loan Losses and Impaired Loans

9 Months Ended

Sep. 30, 2021

Allowance for Credit Losses [Text Block]

Note 4. Allowance for Loan Losses and Impaired Loans

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed to be sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’s comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency levels, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific and general components. The specific component is calculated on an individual basis for larger-balance, non-homogeneous loans, which are considered impaired. A specific allowance is established when the discounted cash flows, collateral value (less disposal costs), or observable market price of the impaired loan is lower than its carrying value. The specific component of the allowance for smaller-balance loans whose terms have been modified in a TDR is calculated on a pooled basis considering historical experience adjusted for qualitative factors. These smaller-balance TDRs were collectively evaluated for impairment. The general component covers the remaining loan portfolio, and is based on historical loss experience adjusted for qualitative factors. The appropriateness of the allowance for loan losses on loans is estimated based upon these factors and trends identified by management at the time financial statements are prepared.

A provision for loan losses is charged against operations and is added to the allowance for loan losses based on quarterly comprehensive analyses of the loan portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. While management has allocated the allowance for loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety.

As noted in Note 1, the Company determined that SBA-PPP loans have zero expected credit losses and as such are excluded from the disclosures included in the following table. The following table presents activity in the allowance by loan category and information on the loans evaluated individually for impairment and collectively evaluated for impairment as of September 30, 2021 and December 31, 2020:

	Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)	Construction & Development			Farmland			Residential			Commercial Mortgage			Commercial & Agricultural			Consumer & Other			Total

*For the Three Months Ended September 30, 2021*
Allowance for loan losses:
Balance, June 30, 2021	$	428		$	344		$	2,320		$	1,843		$	273		$	134		$	5,342
Charge-offs		-			-			-			-			(8	)		(22	)		(30	)
Recoveries		1			-			-			-			8			10			19
Provision		59			(32	)		117			86			(3	)		(8	)		219
Balance, September 30, 2021	$	488		$	312		$	2,437		$	1,929		$	270		$	114		$	5,550

*For the Three Months Ended September 30, 2020*
Allowance for loan losses:
Balance, June 30, 2020	$	415		$	472		$	2,126		$	1,051		$	450		$	140		$	4,654
Charge-offs		(8	)		-			(48	)		(61	)		(14	)		(28	)		(159	)
Recoveries		-			-			-			-			-			8			8
Provision		-			(8	)		89			246			(38	)		2			291
Balance, September 30, 2020	$	407		$	464		$	2,167		$	1,236		$	398		$	122		$	4,794

*For the Nine Months Ended September 30, 2021*
Allowance for loan losses:
Balance, December 31, 2020	$	499		$	406		$	2,167		$	1,421		$	293		$	114		$	4,900
Charge-offs		-			-			-			-			(8	)		(73	)		(81	)
Recoveries		3			-			2			61			53			36			155
Provision		(14	)		(94	)		268			447			(68	)		37			576
Balance, September 30, 2021	$	488		$	312		$	2,437		$	1,929		$	270		$	114		$	5,550

*For the Nine Months Ended September 30, 2020*
Allowance for loan losses:
Balance, December 31, 2019	$	305		$	487		$	1,822		$	924		$	211		$	144		$	3,893
Charge-offs		(8	)		-			(48	)		(61	)		(14	)		(106	)		(237	)
Recoveries		4			-			11			65			2			29			111
Provision		106			(23	)		382			308			199			55			1,027
Balance, September 30, 2020	$	407		$	464		$	2,167		$	1,236		$	398		$	122		$	4,794

September 30, 2021
Allowance for loan losses:
Ending Balance	$	488		$	312		$	2,437		$	1,929		$	270		$	114		$	5,550
Ending balance: individually evaluated for impairment	$	5		$	-		$	-		$	-		$	-		$	-		$	5
Ending balance: collectively evaluated for impairment	$	483		$	312		$	2,437		$	1,929		$	270		$	114		$	5,545
Ending balance: purchased credit impaired loans	$	-		$	-		$	-		$	-		$	-		$	-		$	-

Loans outstanding:
Ending Balance	$	44,435		$	28,082		$	292,670		$	229,118		$	32,726		$	21,324		$	648,355
Ending balance: individually evaluated for impairment	$	732		$	2,349		$	-		$	-		$	-		$	-		$	3,081
Ending balance: collectively evaluated for impairment	$	43,703		$	25,733		$	292,533		$	229,014		$	32,630		$	21,324		$	644,937
Ending balance: purchased credit impaired loans	$	-		$	-		$	137		$	104		$	96		$	-		$	337

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

Construction

&

Development

Farmland

Residential

Commercial

Mortgage

Commercial

&

Agricultural

Consumer

& Other

Total

December 31, 2020

Allowance for loan losses:

Ending Balance
$ 499 $ 406 $ 2,167 $ 1,421 $ 293 $ 114 $ 4,900

Ending balance: individually evaluated for impairment
$ - $ - $ - $ - $ - $ - $ -

Ending balance: collectively evaluated for impairment
$ 499 $ 406 $ 2,167 $ 1,421 $ 293 $ 114 $ 4,900

Ending balance: purchased credit impaired loans
$ - $ - $ - $ - $ - $ - $ -

Loans outstanding:

Ending Balance
$ 46,053 $ 32,449 $ 279,893 $ 203,886 $ 33,663 $ 17,033 $ 612,977

Ending balance: individually evaluated for impairment
$ - $ 2,580 $ - $ - $ - $ - $ 2,580

Ending balance: collectively evaluated for impairment
$ 46,053 $ 29,869 $ 279,751 $ 203,773 $ 33,567 $ 17,033 $ 610,046

Ending balance: purchased credit impaired loans
$ - $ - $ 142 $ 113 $ 96 $ - $ 351

As of September 30, 2021 and December 31, 2020, the Bank had no unallocated reserves included in the allowance for loan losses.

Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Bank’s loan portfolio. The Bank’s loan ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in assets classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible, and of such little value that its continuance on the books is not warranted. Assets that do not currently expose the insured financial institutions to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.” Management also maintains a listing of loans designated “Watch”. These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk. As of September 30, 2021 and December 31, 2020, respectively, the Bank had no loans graded “Doubtful” or “Loss” included in the balance of total loans outstanding.

The following table lists the loan grades utilized by the Bank and the corresponding total of outstanding loans in each category as of September 30, 2021 and December 31, 2020:

Credit Risk Profile by Internally Assigned Grades

Loan Grades

(dollars in thousands)

Pass

Watch

Special

Mention

Substandard

Total

September 30, 2021

Real Estate Secured:

Construction & development
$ 43,583 $ - $ - $ 852 $ 44,435

Farmland
22,275 840 484 4,483 28,082

Residential
290,317 358 604 1,391 292,670

Commercial mortgage
215,413 5,067 5,474 3,164 229,118

Non-Real Estate Secured:

Commercial & agricultural
32,341 - 45 340 32,726

SBA-PPP
37,762 - - - 37,762

Consumer & other
21,324 - - - 21,324

Total
$ 663,015 $ 6,265 $ 6,607 $ 10,230 $ 686,117

December 31, 2020

Real Estate Secured:

Construction & development
$ 44,909 $ 427 $ 122 $ 595 $ 46,053

Farmland
25,607 419 496 5,927 32,449

Residential
277,811 659 - 1,423 279,893

Commercial mortgage
188,156 8,692 3,647 3,391 203,886

Non-Real Estate Secured:

Commercial & agricultural
32,467 468 161 567 33,663

SBA-PPP
51,118 - - - 51,118

Consumer & other
17,028 - - 5 17,033

Total
$ 637,096 $ 10,665 $ 4,426 $ 11,908 $ 664,095

Loans may be placed in nonaccrual status when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received are first applied to principal, and any remaining funds are then applied to interest. Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof.

The following table presents an age analysis of nonaccrual and past due loans by category as of September 30, 2021 and December 31, 2020:

Analysis of Past Due and Nonaccrual Loans

(dollars in thousands)

30-59 Days

Past Due

60-89 Days

Past Due

90 Days

or More

Past Due

Total

Past Due

Current

Total

Loans

90+ Days

Past Due

and Still

Accruing

Nonaccrual

Loans

September 30, 2021

Real Estate Secured:

Construction & development
$ - $ - $ 426 $ 426 $ 44,009 $ 44,435 $ - $ 426

Farmland
- - 127 127 27,955 28,082 - 736

Residential
495 40 279 814 291,856 292,670 - 663

Commercial mortgage
10 - 46 56 229,062 229,118 - 124

Non-Real Estate Secured:

Commercial & agricultural
- 1 96 97 32,629 32,726 - 110

SBA-PPP
- - - - 37,762 37,762 - -

Consumer & other
1 9 - 10 21,314 21,324 - -

Total
$ 506 $ 50 $ 974 $ 1,530 $ 684,587 $ 686,117 $ - $ 2,059

December 31, 2020

Real Estate Secured:

Construction & development
$ 71 $ - $ - $ 71 $ 45,982 $ 46,053 $ - $ 11

Farmland
100 - 914 1,014 31,435 32,449 - 3,937

Residential
386 29 240 655 279,238 279,893 - 557

Commercial mortgage
- - 24 24 203,862 203,886 - 109

Non-Real Estate Secured:

Commercial & agricultural
14 15 155 184 33,479 33,663 - 189

SBA-PPP
- - - - 51,118 51,118 - -

Consumer & other
7 - - 7 17,026 17,033 - -

Total
$ 578 $ 44 $ 1,333 $ 1,955 $ 662,140 $ 664,095 $ - $ 4,803

Impaired Loans

A loan is considered impaired when it is probable that the Bank will be unable to collect all contractual principal and interest payments due in accordance with the original or modified terms of the loan agreement. Smaller balance homogenous loans may be collectively evaluated for impairment. Non-homogenous impaired loans are either measured based on the estimated fair value of the collateral less estimated cost to sell if the loan is considered collateral dependent, or measured based on the present value of expected future cash flows if not collateral dependent. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

As of September 30, 2021 and December 31, 2020, respectively, the recorded investment in impaired loans totaled $5.9 million and $6.2 million. The total amount of collateral-dependent impaired loans at was $3.1 million and $3.2 million at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, respectively, $2.8 million and $2.6 million of the recorded investment in impaired loans did not have a related allowance. The Bank had $3.4 million and $3.9 million in troubled debt restructured loans included in impaired loans at September 30, 2021 and December 31, 2020, respectively.

The categories of non-accrual loans and impaired loans overlap, although they are not coextensive. The Bank considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on non-accrual status, such as the financial strength of the borrower, the estimated collateral value, reasons for the delay, payment record, the amount past due and the number of days past due.

Management collectively evaluates performing TDRs with a loan balance of $250,000 or less for impairment. As of September 30, 2021 and December 31, 2020, respectively, $2.8 million and $3.6 million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have $152 thousand and $192 thousand of related allowance.

The following table is a summary of information related to impaired loans as of September 30, 2021 and December 31, 2020:

Impaired Loans

Nine months ended

Three months ended

Unpaid
Average

Interest

Average

Interest

Recorded

Principal

Related

Recorded

Income

Recorded

Income

(dollars in thousands)

Investment¹

Balance

Allowance

Investment

Recognized

Investment

Recognized

September 30, 2021

With no related allowance recorded:

Construction & development
$ 426 $ 425 $ - $ 218 $ (5 ) $ 426 $ -

Farmland
2,349 3,008 - 2,464 191 2,384 129

Residential
- - - 198 25 - -

Commercial mortgage
- - - - - - -

Commercial & agricultural
- - - - - - -

Consumer & other
- - - 1 - - -

Subtotal
2,775 3,433 - 2,881 211 2,810 129

With an allowance recorded:

Construction & development
449 449 13 469 20 456 7

Farmland
126 142 2 126 6 126 2

Residential
2,425 2,602 136 2,469 108 2,448 39

Commercial mortgage
71 71 4 40 4 71 1

Commercial & agricultural
37 37 2 41 2 39 1

Consumer & other
- - - - - - -

Subtotal
3,108 3,301 157 3,145 140 3,140 50

Totals:

Construction & development
875 874 13 687 15 882 7

Farmland
2,475 3,150 2 2,590 197 2,510 131

Residential
2,425 2,602 136 2,667 133 2,448 39

Commercial mortgage
71 71 4 40 4 71 1

Commercial & agricultural
37 37 2 41 2 39 1

Consumer & other
- - - 1 - - -

Total
$ 5,883 $ 6,734 $ 157 $ 6,026 $ 351 $ 5,950 $ 179

¹

Recorded investment is the loan balance, net of any charge-offs

(dollars in thousands)

Recorded

Investment¹

Unpaid

Principal

Balance

Related

Allowance

Average

Recorded

Investment

Interest

Income

Recognized

December 31, 2020

With no related allowance recorded:

Construction & development
$ - $ - $ - $ - $ -

Farmland
2,580 3,151 - 2,731 18

Residential
- - - - -

Commercial mortgage
- - - - -

Commercial & agricultural
- - - - -

Consumer & other
- - - - -

Subtotal
2,580 3,151 - 2,731 18

With an allowance recorded:

Construction & development
501 501 27 522 31

Farmland
127 144 2 375 11

Residential
2,906 3,082 159 4,057 222

Commercial mortgage
8 53 1 10 3

Commercial & agricultural
46 46 3 49 3

Consumer & other
1 1 - 2 -

Subtotal
3,589 3,827 192 5,015 270

Totals:

Construction & development
501 501 27 522 31

Farmland
2,707 3,295 2 3,106 29

Residential
2,906 3,082 159 4,057 222

Commercial mortgage
8 53 1 10 3

Commercial & agricultural
46 46 3 49 3

Consumer & other
1 1 - 2 -

Total
$ 6,169 $ 6,978 $ 192 $ 7,746 $ 288

¹

Recorded investment is the loan balance, net of any charge-offs

Troubled Debt Restructuring

A troubled debt restructured loan is a loan for which the Bank, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider.

The loan terms which have been modified or restructured due to a borrower’s financial difficulty, include but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals.

The following table sets forth information with respect to the Bank’s troubled debt restructurings as of September 30, 2021 and September 30, 2020:

For the Nine Months Ended September 30, 2021

(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve

months that subsequently defaulted⁽¹⁾

Number

of

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Number

of

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Construction & development
- $ - $ - - $ - $ -

Farmland
- - - - - -

Residential
- - - - - -

Commercial mortgage
1 73 71 - - -

Commercial & agricultural
- - - - - -

Consumer & other
- - - - - -

Total
1 $ 73 $ 71 - $ - $ -

⁽¹⁾

Loans past due 30 days or more are considered to be in default.

During the nine months ended September 30, 2021, one loan was modified that was considered to be a TDR. Term concessions were granted on the loan and the loan had additional funds advanced for insurance. No TDRs identified in the last twelve months subsequently defaulted in the nine months ended September 30, 2021.

For the Three Months Ended September 30, 2021

(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve

months that subsequently defaulted⁽¹⁾

Number

of

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Number

of

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Construction & development
- $ - $ - - $ - $ -

Farmland
- - - - - -

Residential
- - - - - -

Commercial mortgage
- - - - - -

Commercial & agricultural
- - - - - -

Consumer & other
- - - - - -

Total
- $ - $ - - $ - $ -

⁽¹⁾

Loans past due 30 days or more are considered to be in default.

During the three months ended September 30, 2021, no loans were modified that were considered to be a TDR. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended September 30, 2021.

For the Nine Months Ended September 30, 2020

(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve

months that subsequently defaulted⁽¹⁾

Number

of

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Number

of

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Construction & development
3 $ 471 $ 470 - $ - $ -

Farmland
- - - - - -

Residential
1 46 50 - - -

Commercial mortgage
- - - - - -

Commercial & agricultural
1 20 20 - - -

Consumer & other
- - - - - -

Total
5 $ 537 $ 540 - $ - $ -

⁽¹⁾

Loans past due 30 days or more are considered to be in default.

During the nine months ended September 30, 2020, five loans were modified that were considered to be a TDRs. Term concessions were granted on all the loans and one loan had additional funds advanced for property taxes. No TDRs identified in the last twelve months subsequently defaulted in the nine months ended September 30, 2020.

For the Three Months Ended September 30, 2020

(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve

months that subsequently defaulted⁽¹⁾

Number

of

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Number

of

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Construction & development
1 $ 12 $ 12 - $ - $ -

Farmland
- - - - - -

Residential
- - - - - -

Commercial mortgage
- - - - - -

Commercial & agricultural
- - - - - -

Consumer & other
- - - - - -

Total
1 $ 12 $ 12 - $ - $ -

⁽¹⁾

Loans past due 30 days or more are considered to be in default.

During the three months ended September 30, 2020, one loan was modified that was considered to be a TDR. Term concessions were granted on the loan. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended September 30, 2020.

Modifications in response to COVID-19

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. These modifications generally involve principal and/or interest payment deferrals for up to six months. As the COVID-19 pandemic persists in negatively impacting the economy, the Company continues to offer additional loan modifications to borrowers struggling as a result of COVID-19. Similar to the initial modifications granted, the additional round of loan modifications generally involve principal and/or interest payment deferrals for up to an additional six months for commercial and consumer loans, and principal-only deferrals for up to an additional 12 months for selected commercial loans. The Company generally continues to accrue and recognize interest income during the forbearance period. The Company offers several repayment options such as immediate repayment, repayment over a designated time period or as a balloon payment at maturity, or by extending the loan term. These modifications generally do not involve forgiveness or interest rate reductions. The CARES Act, along with a joint agency statement issued by banking agencies, provide that modifications made in response to COVID-19 to borrowers who qualify are not required to be accounted for as a TDR. Accordingly, the Company does not account for such qualifying as TDRs. See Note 1 Organization and Summary of Significant Accounting Policies for more information.

The Bank began receiving requests for loan deferments on March 23, 2020 and through September 30, 2021, the Bank approved approximately 250 requests for loan payment deferment of approximately $66.5 million in loans, most of which have resumed payment. A breakdown of the loans with deferments by industry remaining as of September 30, 2021 and December 31, 2020 are as follows:

(dollars in thousands)

2021

2020

Classification

# of Loans

Balance

# of Loans

Balance

Commercial Loans w/ First Deferment

Accommodation & Retail Services
- $ - - $ -

Construction
- - 1 47

General & Other
- - - -

Commercial Loans w/ Second Deferment

Accommodation & Retail Services
- - 1 752

Construction
- - 1 36

Agriculture
- - 2 603

Real Estate Rental
- - 2 2,146

General & Other
1 404 - -

Commercial Loans w/ Third Deferment

Accommodation & Retail Services
- - 2 4,438

Construction
- - - -

Manufacturing
- - 1 153

Consumer Loans w/ First Deferment
- - 7 782

Consumer Loans w/ Second Deferment
- - 1 52

Total
1 $ 404 18 $ 9,009

Purchased Credit Impaired Loans

During 2018, the Company acquired loans as a result of the Great State merger, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans at September 30, 2021 and December 31, 2020 are as follows:

(dollars in thousands)

2021

2020

Residential
$ 137 $ 142

Commercial mortgage
104 113

Commercial & agricultural
96 96

Outstanding balance
$ 337 $ 351

Carrying amount
$ 337 $ 351

There was no accretable yield on purchased credit impaired loans for the period presented.

There were no purchased credit impaired loans acquired during the nine months ended September 30, 2021 and during the year ended December 31, 2020. Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected.