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Note 5 - Credit Quality

12 Months Ended

Dec. 31, 2021

Note 5. Credit Quality

The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The general characteristics of each risk grade are as follows:

●

Pass -- This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity, leverage, and industry conditions.

●

Special Mention -- This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.

●

Substandard -- This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms.

●

Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.

●

Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.

The following tables present the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated. Included in total loans December 31, 2020, were covered loans of $9.68 million generally reimbursable by the FDIC at the applicable loss share percentage of 80%.

	*December 31, 2021*
			*Special*
(Amounts in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*
Commercial loans
Construction, development, and other land	$	64,498	$	451	$	857	$	—	$	—	$	65,806
Commercial and industrial		128,770		1,005		3,855		—		—		133,630
Multi-family residential		98,457		1,090		855		—		—		100,402
Single family non-owner occupied		186,184		3,607		8,977		10		—		198,778
Non-farm, non-residential		665,559		25,624		16,323		—		—		707,506
Agricultural		8,758		70		513		—		—		9,341
Farmland		11,939		633		2,441		—		—		15,013
Consumer real estate loans
Home equity lines		76,259		426		3,172		—		—		79,857
Single family owner occupied		671,459		2,420		29,985		—		—		703,864
Owner occupied construction		16,629		—		281		—		—		16,910
Consumer and other loans
Consumer loans		127,514		16		2,264		—		—		129,794
Other		4,668		—		—		—		—		4,668
Total loans	$	2,060,694	$	35,342	$	69,523	$	10	$	—	$	2,165,569

December 31, 2020

Special

(Amounts in thousands)

Pass

Mention

Substandard

Doubtful

Loss

Total

Commercial loans

Construction, development, and other land
$ 36,934 $ 4,975 $ 2,765 $ — $ — $ 44,674

Commercial and industrial
160,625 7,065 5,519 — — 173,209

Multi-family residential
103,291 8,586 3,284 — — 115,161

Single family non-owner occupied
165,146 9,602 12,838 12 — 187,598

Non-farm, non-residential
568,438 125,907 40,448 — — 734,793

Agricultural
7,724 1,686 339 — — 9,749

Farmland
13,527 2,597 3,637 — — 19,761

Consumer real estate loans
—

Home equity lines
91,712 1,488 3,326 — — 96,526

Single family owner occupied
623,860 3,859 33,335 — — 661,054

Owner occupied construction
17,232 201 287 — — 17,720

Consumer and other loans
—

Consumer loans
118,134 28 2,211 — — 120,373

Other
6,014 — — — — 6,014

Total loans
$ 1,912,637 $ 165,994 $ 107,989 $ 12 $ - $ 2,186,632

The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated:

(Amounts in thousands)

Term Loans Amortized Cost Basis by Origination Year

Balance at December 31, 2021

2021

2020

2019

2018

2017

Prior

Revolving

Total

Construction, development

and other land

Pass
$ 40,207 $ 10,127 $ 3,081 $ 3,704 $ 1,308 $ 5,717 $ 354 $ 64,498

Special Mention
- 266 - 128 - 21 36 451

Substandard
- - 128 11 291 427 - 857

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total construction, development, and other land
$ 40,207 $ 10,393 $ 3,209 $ 3,843 $ 1,599 $ 6,165 $ 390 $ 65,806

Commercial and industrial

Pass
$ 34,539 $ 18,887 $ 13,679 $ 13,772 $ 4,817 $ 5,890 $ 16,544 $ 108,128

Special Mention
32 60 597 192 28 - 96 1,005

Substandard
184 355 706 384 842 866 518 3,855

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total commercial and industrial
$ 34,755 $ 19,302 $ 14,982 $ 14,348 $ 5,687 $ 6,756 $ 17,158 $ 112,988

Paycheck Protection Loans

Pass
$ 16,482 $ 4,160 $ - $ - $ - $ - $ - $ 20,642

Special Mention
- - - - - - - -

Substandard
- - - - - - - -

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total Paycheck Protection Loans
$ 16,482 $ 4,160 $ - $ - $ - $ - $ - $ 20,642

Multi-family residential

Pass
$ 11,307 $ 24,299 $ 4,644 $ 1,897 $ 8,413 $ 46,962 $ 935 $ 98,457

Special Mention
- - - - - 1,090 - 1,090

Substandard
- - - - - 855 - 855

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total multi-family residential
$ 11,307 $ 24,299 $ 4,644 $ 1,897 $ 8,413 $ 48,907 $ 935 $ 100,402

Non-farm, non-residential

Pass
$ 147,978 $ 146,381 $ 62,651 $ 50,943 $ 43,776 $ 199,812 $ 14,018 $ 665,559

Special Mention
397 3,334 823 2,595 9,190 9,135 150 25,624

Substandard
1,161 711 2,508 2,531 3,232 5,953 227 16,323

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total non-farm, non-residential
$ 149,536 $ 150,426 $ 65,982 $ 56,069 $ 56,198 $ 214,900 $ 14,395 $ 707,506

Agricultural

Pass
$ 4,564 $ 1,548 $ 998 $ 534 $ 346 $ 335 $ 433 $ 8,758

Special Mention
43 27 - - - - - 70

Substandard
44 11 282 39 17 120 - 513

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total agricultural
$ 4,651 $ 1,586 $ 1,280 $ 573 $ 363 $ 455 $ 433 $ 9,341

Farmland

Pass
$ 428 $ 1,047 $ 82 $ 1,125 $ 887 $ 6,835 $ 1,535 $ 11,939

Special Mention
189 - - 240 5 199 - 633

Substandard
- 14 519 249 264 1,395 - 2,441

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total farmland
$ 617 $ 1,061 $ 601 $ 1,614 $ 1,156 $ 8,429 $ 1,535 $ 15,013

(Amounts in thousands)

Term Loans Amortized Cost Basis by Origination Year

Balance at December 31, 2021

2021

2020

2019

2018

2017

Prior

Revolving

Total

Home equity lines

Pass
$ 115 $ 59 $ - $ 25 $ 2 $ 2,168 $ 73,890 $ 76,259

Special Mention
- - - - - - 426 426

Substandard
- - 28 249 128 1,316 1,451 3,172

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total home equity lines
$ 115 $ 59 $ 28 $ 274 $ 130 $ 3,484 $ 75,767 $ 79,857

Single family Mortgage

Pass
$ 239,917 $ 225,294 $ 61,925 $ 46,716 $ 41,757 $ 240,845 $ 1,189 $ 857,643

Special Mention
399 510 937 269 137 3,775 - 6,027

Substandard
1,213 799 1,475 1,668 1,878 31,929 - 38,962

Doubtful
- - - - - 10 - 10

Loss
- - - - - - - -

Total single family owner and non-owner occupied
$ 241,529 $ 226,603 $ 64,337 $ 48,653 $ 43,772 $ 276,559 $ 1,189 $ 902,642

Owner occupied construction

Pass
$ 9,689 $ 4,729 $ 178 $ 22 $ 428 $ 1,583 $ - $ 16,629

Special Mention
- - - - - - - -

Substandard
- - - - - 281 - 281

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total owner occupied construction
$ 9,689 $ 4,729 $ 178 $ 22 $ 428 $ 1,864 $ - $ 16,910

Consumer loans

Pass
$ 65,018 $ 31,065 $ 16,548 $ 4,980 $ 2,306 $ 10,040 $ 2,225 $ 132,182

Special Mention
- - 16 - - - - 16

Substandard
328 663 824 107 78 186 78 2,264

Doubtful
- - - - - - - -

Loss
- - - - - - - -

Total consumer loans
$ 65,346 $ 31,728 $ 17,388 $ 5,087 $ 2,384 $ 10,226 $ 2,303 $ 134,462

(Amounts in thousands)

Term Loans Amortized Cost Basis by Origination Year

Balance at December 31, 2021

2021

2020

2019

2018

2017

Prior

Revolving

Total

Total Loans

Pass
$ 570,244 $ 467,596 $ 163,786 $ 123,718 $ 104,040 $ 520,187 $ 111,123 $ 2,060,694

Special Mention
1,060 4,197 2,373 3,424 9,360 14,220 708 35,342

Substandard
2,930 2,553 6,470 5,238 6,730 43,328 2,274 69,523

Doubtful
- - - - - 10 - 10

Loss
- - - - - - - -

Total loans
$ 574,234 $ 474,346 $ 172,629 $ 132,380 $ 120,130 $ 577,745 $ 114,105 $ 2,165,569

Prior to the adoption of ASU 2016-13, the Company identified loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. When the Company determined that it was probable all principal and interest amounts contractually due would not be collected, the loan was generally deemed impaired.

The following table presents the recorded investment, unpaid principal balance, and related allowance for loan losses for impaired loans, excluding PCI loans, as of the date indicated prior to the adoption of ASU 2016-13:

December 31, 2020

Unpaid

Recorded

Principal

Related

(Amounts in thousands)

Investment

Balance

Allowance

Impaired loans with no related allowance

Commercial loans

Construction, development, and other land
$ 616 $ 891 $ —

Commercial and industrial
2,341 2,392 —

Multi-family residential
946 1,593 —

Single family non-owner occupied
4,816 5,785 —

Non-farm, non-residential
8,238 9,467 —

Agricultural
218 226 —

Farmland
1,228 1,311 —

Consumer real estate loans

Home equity lines
1,604 1,772 —

Single family owner occupied
16,778 19,361 —

Owner occupied construction
216 216 —

Consumer and other loans

Consumer loans
818 833 —

Total impaired loans with no allowance
37,819 43,847 —

Impaired loans with a related allowance

Commercial loans

Non-farm, non-residential
1,068 1,121 319

Consumer real estate loans

Single family owner occupied
338 338 108

Total impaired loans with an allowance
1,406 1,459 427

Total impaired loans(1)
$ 39,225 $ 45,306 $ 427

(1)

Total recorded investment of impaired loans include loans totaling $31.18 million as of December 31, 2020, that do not meet the Company's evaluation threshold of $500 thousand for individual impairment and are therefore collectively evaluated for impairment.

Prior to the adoption of ASU 2016-13, the Company presented the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the periods indicated:

Year Ended December 31,

2020

2019

(Amounts in thousands)

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Impaired loans with no related allowance:

Commercial loans

Construction, development, and other land
$ 25 $ 935 $ 22 $ 704

Commercial and industrial
155 2,749 34 363

Multi-family residential
19 808 24 1,356

Single family non-owner occupied
189 4,890 123 2,979

Non-farm, non-residential
295 7,450 123 4,683

Agricultural
9 241 9 121

Farmland
63 1,569 55 1,469

Consumer real estate loans

Home equity lines
51 1,594 46 1,439

Single family owner occupied
578 17,044 599 16,058

Owner occupied construction
10 407 29 308

Consumer and other loans

Consumer loans
42 543 13 213

Total impaired loans with no related allowance
1,436 38,230 1,077 29,693

Impaired loans with a related allowance:

Commercial loans

Multi-family residential
— 707 — —

Single family non-owner occupied
— — — —

Non-farm, non-residential
17 1,524 48 766

Farmland
— — — —

Consumer real estate loans

Home equity lines
— — — —

Single family owner occupied
29 1,196 46 1,947

Total impaired loans with a related allowance
46 3,427 94 2,713

Total impaired loans
$ 1,482 $ 41,657 $ 1,171 $ 32,406

The Company generally places a loan on nonaccrual status when it is 90 days or more past due. The following table presents nonaccrual loans, by loan class, as of the date indicated:

December 31, 2021

(Amounts in thousands)

No Allowance

With an Allowance

Total

Commercial loans

Construction, development, and other land
$ 409 $ — $ 409

Commercial and industrial
1,734 — 1,734

Multi-family residential
208 — 208

Single family non-owner occupied
2,304 — 2,304

Non-farm, non-residential
3,439 1,100 4,539

Agricultural
136 — 136

Farmland
222 — 222

Consumer real estate loans
—

Home equity lines
767 — 767

Single family owner occupied
8,957 — 8,957

Owner occupied construction
— — —

Consumer and other loans
—

Consumer loans
1,492 — 1,492

Total nonaccrual loans
$ 19,668 $ 1,100 $ 20,768

During 2021, $72 thousand in nonaccrual loan interest was recognized.

The following table presents nonaccrual loans prior to the adoption of ASU 2016-13. PCI loans were generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. Covered nonaccrual loans totaled $297 thousand at December 31, 2020; the total was comprised of consumer real estate loans. The following table presents nonaccrual loans, by loan class, as of the date indicated:

(Amounts in thousands)

December 31, 2020

Commercial loans

Construction, development, and other land
$ 244

Commercial and industrial
895

Multi-family residential
946

Single family non-owner occupied
2,990

Non-farm, non-residential
6,343

Agricultural
217

Farmland
489

Consumer real estate loans

Home equity lines
1,122

Single family owner occupied
7,976

Owner occupied construction
—

Consumer and other loans

Consumer loans
781

Total nonaccrual loans
$ 22,003

The following table presents the aging of past due loans, by loan class, as of the date indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category.

December 31, 2021

Amortized Cost of

30 - 59 Days

60 - 89 Days

90+ Days

Total

Current

Total

>90 Days Accruing

(Amounts in thousands)

Past Due

Past Due

Past Due

Past Due

Loans

Loans

No Allowance

Commercial loans

Construction, development, and other land
$ 52 $ — $ 120 $ 172 $ 65,634 $ 65,806 $ —

Commercial and industrial
325 35 1,394 1,754 131,876 133,630 —

Multi-family residential
97 — — 97 100,305 100,402 —

Single family non-owner occupied
1,210 583 795 2,588 196,190 198,778 —

Non-farm, non-residential
1,002 441 2,333 3,776 703,730 707,506 —

Agricultural
73 7 101 181 9,160 9,341 —

Farmland
52 — 222 274 14,739 15,013 —

Consumer real estate loans

Home equity lines
275 388 333 996 78,861 79,857 —

Single family owner occupied
4,740 2,584 3,880 11,204 692,660 703,864 —

Owner occupied construction
139 — — 139 16,771 16,910 —

Consumer and other loans

Consumer loans
3,469 1,182 1,049 5,700 124,094 129,794 —

Other
— — — — 4,668 4,668 —

Total loans
$ 11,434 $ 5,220 $ 10,227 $ 26,881 $ 2,138,688 $ 2,165,569 $ —

The following table presents the aging of past due loans, by loan class, as of the date indicated prior to the adoption of ASU 2016-13. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continue to accrue interest based on expected cash flows; therefore, PCI loans are not generally considered nonaccrual. Accruing loans contractually past due 90 days or more totaled $295 thousand as of December 31, 2020.

December 31, 2020

30 - 59 Days

60 - 89 Days

90+ Days

Total

Current

Total

(Amounts in thousands)

Past Due

Past Due

Past Due

Past Due

Loans

Loans

Commercial loans

Construction, development, and other land
$ 1,039 $ — $ 235 $ 1,274 $ 43,400 $ 44,674

Commercial and industrial
669 230 700 1,599 171,425 173,024

Multi-family residential
103 — 946 1,049 114,112 115,161

Single family non-owner occupied
925 488 2,144 3,557 184,226 187,783

Non-farm, non-residential
601 296 3,368 4,265 730,528 734,793

Agricultural
70 189 88 347 9,402 9,749

Farmland
43 — 457 500 19,261 19,761

Consumer real estate loans

Home equity lines
649 380 425 1,454 95,072 96,526

Single family owner occupied
5,317 2,265 3,891 11,473 649,581 661,054

Owner occupied construction
82 — — 82 17,638 17,720

Consumer and other loans

Consumer loans
2,637 746 651 4,034 116,339 120,373

Other
— — — — 6,014 6,014

Total loans
$ 12,135 $ 4,594 $ 12,905 $ 29,634 $ 2,156,998 $ 2,186,632

ASC 326 prescribes that when an entity determines foreclosure is probable, the expected credit loss is required to be measured based on the fair value of the collateral. As a practical expedient, an entity may use the fiar value as of the reporting date when recording the net carrying amount of the asset. For the collateral dependent asset ("CDA") a credit loss expense is recorded for loan amounts in excess of fair value of the collateral. The table below summarizes collateral dependent loans, where foreclosure is possible, by type of collateral, and the extent to which they are collateralized during the period.

December 31, 2021

(Amounts in thousands)
Balance Collateral Coverage Coverage Ratio

Commercial Real Estate

Hotel
$ - $ - -

Office
- - -

Other
2,216 2,312 104.33 %

Retail
- - -

Multi-Family

Industrial
- - -

Office
- - -

Other
- - -

Commercial and industrial

Industrial
- - -

Other
- - -

Home equity loans
- - -

Consumer owner occupied
- - -

Consumer
- - -

Total collateral dependent loans
$ 2,216 $ 2,312 104.33 %

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs.

The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

From March, 2020, through December 31, 2021, the Company modified a total of 4,066 loans with principal balances totaling $475.82 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. The Company’s policy is to downgrade commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company upgrades these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of December 31, 2021, total COVID-19 loan deferrals stood at $2.92 million.

The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:

December 31,

2021

2020

(Amounts in thousands)

Nonaccrual(1)

Accruing

Total

Nonaccrual(1)

Accruing

Total

Commercial loans

Commercial and industrial
$ 396 $ 470 $ 866 $ — $ 1,326 $ 1,326

Single family non-owner occupied
857 1,100 1,957 1,585 1,265 2,850

Non-farm, non-residential
— 2,021 2,021 — 2,407 2,407

Consumer real estate loans

Home equity lines
— 67 67 — 77 77

Single family owner occupied
1,266 4,755 6,021 229 4,927 5,156

Owner occupied construction
— 212 212 — 216 216

Consumer and other loans
—

Consumer loans
— 27 27 — 30 30

Total TDRs
$ 2,519 $ 8,652 $ 11,171 $ 1,814 $ 10,248 $ 12,062

Allowance for credit/loan losses related to TDRs
$ — $ —

(1)

Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above.

The following table presents interest income recognized on TDRs for the periods indicated:

Year Ended December 31,

2021

2020

2019

(Amounts in thousands)

Interest income recognized
$ 422 $ 473 $ 277

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.

Year Ended December 31,

2021

2020

(Amounts in thousands)

Total Contracts

Pre-modification Recorded Investment

Post modification Recorded Investment(1)

Total Contracts

Pre-modification Recorded Investment

Post modification Recorded Investment(1)

Below market interest rate

Single family owner occupied
— $ — $ — 1 $ 50 $ 50

Below market interest rate and extended payment term

Single family non-owner occupied
1 165 165 — — —

Single family owner occupied
4 402 402 — — —

Total below market interest rate and extended payment term
5 567 567 — — —

Principal deferral

Construction, development, and other land development
— — — 3 1,708 1,708

Non-farm, non-residential
— — — 3 2,115 2,115

Home equity
— — — — — —

Single family non-owner occupied
1 753 753

Single family owner occupied
1 41 41 5 4,908 4,877

Total principal deferral
2 794 794 11 4,908 4,877

Total
7 $ 1,361 $ 1,361 12 $ 4,958 $ 4,927

(1)

Represents the loan balance immediately following modification

The following table presents loans modified as TDRs, by loan class, that were restructured within the previous 12 months for which there was a payment default during the periods indicated

Year Ended December 31,

2021

2020

Total

Recorded

Total

Recorded

Contracts

Investment

Contracts

Investment

(Amounts in thousands)

Single family owner occupied
— $ — 1 $ 53

Total
— $ — 1 $ 53

The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:

December 31, 2021

December 31, 2020

(Amounts in thousands)

Total OREO
$ 1,015 $ 2,083

OREO secured by residential real estate
$ 337 $ 769

Residential real estate loans in the foreclosure process(1)
$ 2,210 $ 4,141

(1)

The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction