(2) Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at September 30, 2019 and December 31, 2018 is as follows:


	September 30,		December 31,
(in thousands)	2019		2018
Commercial, financial, and agricultural	$	193,267	$	207,720
Real estate construction - residential		23,782		28,610
Real estate construction - commercial		124,389		106,784
Real estate mortgage - residential		248,435		241,517
Real estate mortgage - commercial		530,010		529,536
Installment and other consumer		31,635		32,460
Total loans	$	1,151,518	$	1,146,627

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, 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 September 30, 2019, loans of $501.0 million were pledged to the Federal Home Loan Bank 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 September 30, 2019
	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	$	2,783	$	69	$	704	$	1,772	$	6,109	$	307	$	139	$	11,883
Additions:
Provision for loan losses		155		3		97		252		(15)		62		(104)		450
Deductions:
Loans charged off		61		—		—		86		6		60		—		213
Less recoveries on loans		(12)		(12)		—		(8)		(7)		(19)		—		(58)
Net loan charge-offs (recoveries)		49		(12)		—		78		(1)		41		—		155
Balance at end of period	$	2,889	$	84	$	801	$	1,946	$	6,095	$	328	$	35	$	12,178


	Nine Months Ended September 30, 2019
	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	$	3,237	$	140	$	757	$	2,071	$	4,914	$	334	$	199	$	11,652
Additions:
Provision for loan losses		(232)		(81)		44		30		1,193		60		(164)		850
Deductions:
Loans charged off		255		—		—		266		21		151		—		693
Less recoveries on loans		(139)		(25)		—		(111)		(9)		(85)		—		(369)
Net loan charge-offs (recoveries)		116		(25)		—		155		12		66		—		324
Balance at end of period	$	2,889	$	84	$	801	$	1,946	$	6,095	$	328	$	35	$	12,178


	Three Months Ended September 30, 2018
	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	$	3,943	$	201	$	905	$	2,109	$	3,630	$	413	$	11	$	11,212
Additions:
Provision for loan losses		(420)		26		(159)		255		444		39		65		250
Deductions:
Loans charged off		75		—		—		32		5		74		—		186
Less recoveries on loans		(38)		(13)		—		(9)		(2)		(20)		—		(82)
Net loan charge-offs (recoveries)		37		(13)		—		23		3		54		—		104
Balance at end of period	$	3,486	$	240	$	746	$	2,341	$	4,071	$	398	$	76	$	11,358


	Nine Months Ended September 30, 2018
	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	$	3,325	$	170	$	807	$	1,689	$	4,437		345	$	79	$	10,852
Additions:
Provision for loan losses		478		80		(31)		672		(366)		170		(3)		1,000
Deductions:
Loans charged off		378		48		30		64		34		181		—		735
Less recoveries on loans		(61)		(38)		—		(44)		(34)		(64)		—		(241)
Net loan charge-offs (recoveries)		317		10		30		20		—		117		—		494
Balance at end of period	$	3,486	$	240	$	746	$	2,341	$	4,071	$	398	$	76	$	11,358

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.

Beginning with the first quarter 2019, management adjusted the look-back period to begin with loss history in the first quarter 2012 and continue to include this starting point going forward. Management determined that with the current economic recovery continuing to set records for its length, the look-back period needed to be expanded to account for this extended economic cycle. This ever increasing look-back period will then be adjusted once a loss producing downturn is recognized by allowing the look-back period to shift forward by eliminating the earliest loss period and replenishing it with losses from the most recent period. Prior to 2019, the Company utilized a five-year look-back period, which was considered a representative historical loss period. The look-back period is consistently evaluated for relevance given the current facts and circumstances.

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
September 30, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	361	$	—	$	—	$	296	$	34	$	17	$	—	$	708
Collectively evaluated for impairment		2,528		84		801		1,650		6,061		311		35		11,470
Total	$	2,889	$	84	$	801	$	1,946	$	6,095	$	328	$	35	$	12,178
Loans outstanding:
Individually evaluated for impairment	$	1,578	$	—	$	145	$	3,902	$	1,469	$	161	$	—	$	7,255
Collectively evaluated for impairment		191,689		23,782		124,244		244,533		528,541		31,474		—		1,144,263
Total	$	193,267	$	23,782	$	124,389	$	248,435	$	530,010	$	31,635	$	—	$	1,151,518

December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	551	$	—	$	—	$	579	$	37	$	27	$	—	$	1,194
Collectively evaluated for impairment		2,686		140		757		1,492		4,877		307		199		10,458
Total	$	3,237	$	140	$	757	$	2,071	$	4,914	$	334	$	199	$	11,652
Loans outstanding:
Individually evaluated for impairment	$	2,428	$	—	$	153	$	4,793	$	850	$	254	$	—	$	8,478
Collectively evaluated for impairment		205,292		28,610		106,631		236,724		528,686		32,206		—		1,138,149
Total	$	207,720	$	28,610	$	106,784	$	241,517	$	529,536	$	32,460	$	—	$	1,146,627

Impaired Loans

Loans evaluated under 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 $7.3 million and $8.5 million at September 30, 2019 and December 31, 2018, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings (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 September 30, 2019, $2.9 million of impaired loans were evaluated based on the fair value less estimated selling costs of the loans' collateral compared to $3.8 million at December 31, 2018. Once the impairment amount is calculated, a specific reserve allocation is recorded. At September 30, 2019, $708,000 of the Company’s allowance for loan losses was allocated to impaired loans totaling $7.3 million compared to $1.2 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $8.5 million at December 31, 2018. Management determined that $1.6 million, or 23%, of total impaired loans required no reserve allocation at September 30, 2019 compared to $2.1 million, or 25%, at December 31, 2018, primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The categories of impaired loans at September 30, 2019 and December 31, 2018 are as follows:


	September 30,		December 31,
(in thousands)	2019		2018
Non-accrual and non-performing TDRs	$	4,623	$	5,414
Performing TDRs		2,632		3,064
Total impaired loans	$	7,255	$	8,478

The following tables provide additional information about impaired loans at September 30, 2019 and December 31, 2018, 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
September 30, 2019
With no related allowance recorded:
Commercial, financial and agricultural	$	496	$	837	$	—
Real estate - construction commercial		145		177		—
Real estate - residential		606		684		—
Real estate - commercial		377		394
Installment and other consumer		13		13		—
Total	$	1,637	$	2,105	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	1,082	$	1,163	$	361
Real estate - residential		3,296		3,635		296
Real estate - commercial		1,092		1,219		34
Installment and other consumer		148		176		17
Total	$	5,618	$	6,193	$	708
Total impaired loans	$	7,255	$	8,298	$	708


			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2018
With no related allowance recorded:
Commercial, financial and agricultural	$	1,264	$	1,550	$	—
Real estate - construction commercial		153		180		—
Real estate - residential		561		602		—
Real estate - commercial		115		119		—
Total	$	2,093	$	2,451	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	1,164	$	1,236	$	551
Real estate - residential		4,232		4,458		579
Real estate - commercial		735		1,093		37
Installment and other consumer		254		280		27
Total	$	6,385	$	7,067	$	1,194
Total impaired loans	$	8,478	$	9,518	$	1,194

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 September 30,								Nine Months Ended September 30,
	2019				2018				2019				2018
			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	$	851	$	—	$	1,375	$	—	$	1,036	$	—	$	1,334	$	1
Real estate - construction commercial		146		—		161		—		149		—		82		—
Real estate - residential		1,301		—		1,037		3		651		—		929		9
Real estate - commercial		380		—		120		3		393		—		30		22
Installment and other consumer		4		—		91		—		3		—		34		—
Total	$	2,682	$	—	$	2,784	$	6	$	2,232	$	—	$	2,409	$	32
With an allowance recorded:
Commercial, financial and agricultural	$	1,086	$	9	$	1,423	$	8	$	1,095	$	30	$	1,507	$	23
Real estate - construction residential		—		—		—		—		—		—		15		—
Real estate - construction commercial		—		—		—		—		—		—		24		—
Real estate - residential		2,818		21		4,076		25		3,881		68		4,211		71
Real estate - commercial		1,112		9		1,443		13		788		25		1,649		24
Installment and other consumer		188		1		197		—		221		2		186		1
Total	$	5,204	$	40	$	7,139	$	46	$	5,985	$	125	$	7,592	$	119
Total impaired loans	$	7,886	$	40	$	9,923	$	52	$	8,217	$	125	$	10,001	$	151

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 troubled debt restructurings, was $40,000 and $125,000 for the three and nine months ended September 30, 2019, respectively, compared to $52,000 and $151,000 for the three and nine months ended September 30, 2018, 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 September 30, 2019 and December 31, 2018.


	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
September 30, 2019
Commercial, Financial, and Agricultural	$	192,142	$	98	$	—	$	1,027	$	193,267
Real Estate Construction - Residential		23,782		—		—		—		23,782
Real Estate Construction - Commercial		124,177		67		—		145		124,389
Real Estate Mortgage - Residential		245,379		705		193		2,158		248,435
Real Estate Mortgage - Commercial		528,539		360		—		1,111		530,010
Installment and Other Consumer		31,402		106		4		123		31,635
Total	$	1,145,421	$	1,336	$	197	$	4,564	$	1,151,518
December 31, 2018
Commercial, Financial, and Agricultural	$	205,597	$	266	$	—	$	1,857	$	207,720
Real Estate Construction - Residential		28,404		206		—		—		28,610
Real Estate Construction - Commercial		106,531		100		—		153		106,784
Real Estate Mortgage - Residential		235,734		2,907		156		2,720		241,517
Real Estate Mortgage - Commercial		527,968		1,094		—		474		529,536
Installment and Other Consumer		32,002		242		6		210		32,460
Total	$	1,136,236	$	4,815	$	162	$	5,414	$	1,146,627

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 status when one or more weaknesses are identified that may result in the borrower being unable to meet repayment terms or the Company’s credit position could deteriorate at some future date. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. A loan is classified as a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs that are accruing interest are classified as performing TDRs. Loans classified as TDRs, that are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual 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 September 30, 2019 and December 31, 2018.


	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 September 30, 2019
Watch	$	13,083	$	679	$	7,172	$	14,453	$	36,393	$	—	$	71,780
Substandard		1,257		—		—		1,336		685		3		3,281
Performing TDRs		551		—		—		1,685		358		38		2,632
Non-accrual and non-performing TDRs		1,027		—		145		2,217		1,111		123		4,623
Total	$	15,918	$	679	$	7,317	$	19,691	$	38,547	$	164	$	82,316
At December 31, 2018
Watch	$	8,871	$	588	$	4,063	$	12,790	$	36,408	$	8	$	62,728
Substandard		53		—		—		1,411		702		3		2,169
Performing TDRs		570		—		—		2,073		377		44		3,064
Non-accrual and non-performing TDRs		1,857		—		153		2,720		474		210		5,414
Total	$	11,351	$	588	$	4,216	$	18,994	$	37,961	$	265	$	73,375

Troubled Debt Restructurings

At September 30, 2019, loans classified as TDRs totaled $4.0 million, of which $1.4 million were classified as non-performing TDRs and $2.6 million were classified as performing TDRs. At December 31, 2018, loans classified as TDRs totaled $5.0 million, of which $2.0 million were classified as non-performing TDRs and $3.0 million were classified as performing TDRs. Both performing and nonperforming 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 $471,000 and $543,000 related to TDRs were allocated to the allowance for loan losses at September 30, 2019 and December 31, 2018, respectively.

The following table summarizes loans that were modified as TDRs during the periods indicated.


	Three Months Ended September 30,
	2019					2018
	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
Commercial, financial and agricultural	—	$	—	$	—	2	$	353	$	353
Installment and other consumer	—		—		—	1		112		53
Total	—	$	—	$	—	3	$	465	$	406


	Nine Months Ended September 30,
	2019					2018
	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
Commercial, financial and agricultural	2	$	80	$	76	2	$	353	$	353
Real estate mortgage - residential	—		—		—	1		75		74
Installment and other consumer	—		—		—	5		160		3
Total	2	$	80	$	76	8	$	588	$	430

(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 financial condition such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. There were no loans and two loans meeting the TDR criteria that were modified during the three and nine months ended September 30, 2019, compared to three and eight loans during the three and nine months ended September 30, 2018.

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 it is the process of foreclosure. There was one loan and no loans modified as a TDR that defaulted during any of the three and nine months ended September 30, 2019 and 2018, respectively, and within twelve months of their modification date. See Lending and Credit Management section for further information.