Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2021

NOTE 5. Loans and Allowance for Loan Losses

The composition of loans at September 30, 2021 and December 31, 2020 was as follows:

	September 30,			December 31,
	2021			2020
	(in thousands)
Mortgage loans on real estate:
Construction and land development	$	60,829		$	42,544
Secured by farmland		14,160			15,846
Secured by 1-4 family residential properties		254,767			248,246
Multifamily		27,275			21,496
Commercial		367,230			334,661
Commercial and industrial loans		129,150			140,762
Consumer installment loans		53,151			21,321
All other loans		14,274			10,773
Total loans	$	920,836		$	835,649
Net deferred loan costs		2,240			685
Allowance for loan losses		(8,448	)		(7,096	)
	$	914,628		$	829,238

Changes in the allowance for loan losses for the nine months ended September 30, 2021 and 2020 and the year ended December 31, 2020 were as follows:

	Nine Months Ended			Year Ended			Nine Months Ended
	September 30,			December 31,			September 30,
	2021			2020			2020
				(in thousands)
Balance, beginning	$	7,096		$	4,973		$	4,973
Provision for loan losses		1,183			1,457			755
Recoveries added to the allowance		238			1,131			1,097
Loan losses charged to the allowance		(69	)		(465	)		(164	)
Balance, ending	$	8,448		$	7,096		$	6,661

Nonaccrual and past due loans by class at September 30, 2021 and December 31, 2020 were as follows:

	September 30, 2021
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Days Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	2	$	—	$	—	$	2	$	129,148	$	129,150	$	—	$	—
Commercial Real Estate:
Owner Occupied		—		—		—		—		184,412		184,412		—		215
Non-owner occupied		—		—		131		131		182,687		182,818		—		2,200
Construction and Farmland:
Residential		—		—		—		—		10,594		10,594		—		130
Commercial		—		—		107		107		64,288		64,395		—		107
Consumer:
Installment		4		—		—		4		53,147		53,151		—		4
Residential:
Equity Lines		26		—		—		26		33,124		33,150		—		31
Single family		445		364		392		1,201		220,416		221,617		—		845
Multifamily		—		—		—		—		27,275		27,275		—		—
All Other Loans		—		—		—		—		14,274		14,274		—		—
Total	$	477	$	364	$	630	$	1,471	$	919,365	$	920,836	$	—	$	3,532

	December 31, 2020
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	43	$	—	$	—	$	43	$	140,719	$	140,762	$	—	$	—
Commercial Real Estate:
Owner Occupied		—		—		157		157		165,764		165,921		—		1,227
Non-owner occupied		500		—		122		622		168,118		168,740		—		2,405
Construction and Farmland:
Residential		—		—		—		—		10,644		10,644		—		—
Commercial		—		—		69		69		47,677		47,746		—		69
Consumer:
Installment		5		—		—		5		21,316		21,321		—		5
Residential:
Equity Lines		13		—		—		13		31,239		31,252		—		42
Single family		249		123		581		953		216,041		216,994		—		1,006
Multifamily		—		—		—		—		21,496		21,496		—		—
All Other Loans		—		—		—		—		10,773		10,773		—		—
Total	$	810	$	123	$	929	$	1,862	$	833,787	$	835,649	$	—	$	4,754

Allowance for loan losses by segment at September 30, 2021 and December 31, 2020 were as follows:

	As of and For the Nine Months Ended
	September 30, 2021
	(in thousands)
	Construction and Farmland		Residential Real Estate			Commercial Real Estate		Commercial		Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	1,604	$	1,929		$	1,645	$	1,374	$	198		$	346		$	—	$	7,096
Charge-Offs		—		(13	)		—		—		(16	)		(40	)		—		(69	)
Recoveries		10		190			—		6		22			10			—		238
Provision		720		(86	)		193		198		214			(56	)		—		1,183
Ending balance	$	2,334	$	2,020		$	1,838	$	1,578	$	418		$	260		$	—	$	8,448
Ending balance: Individually evaluated for impairment	$	—	$	43		$	—	$	—	$	—		$	—		$	—	$	43
Ending balance: collectively evaluated for impairment	$	2,334	$	1,977		$	1,838	$	1,578	$	418		$	260		$	—	$	8,405
Loans:
Ending balance	$	74,989	$	282,042		$	367,230	$	129,150	$	53,151		$	14,274		$	—	$	920,836
Ending balance individually evaluated for impairment	$	263	$	2,858		$	2,415	$	118	$	18		$	—		$	—	$	5,672
Ending balance collectively evaluated for impairment	$	74,726	$	279,184		$	364,815	$	129,032	$	53,133		$	14,274		$	—	$	915,164

	December 31, 2020
	(in thousands)
	Construction and Farmland			Residential Real Estate			Commercial Real Estate			Commercial			Consumer			All Other Loans			Unallocated			Total
Allowance for credit losses:
Beginning Balance	$	446		$	1,601		$	1,991		$	565		$	54		$	120		$	196		$	4,973
Charge-Offs		(119	)		(20	)		(155	)		(49	)		(83	)		(39	)		—			(465	)
Recoveries		7			275			302			498			41			8			—			1,131
Provision		1,270			73			(493	)		360			186			257			(196	)		1,457
Ending balance	$	1,604		$	1,929		$	1,645		$	1,374		$	198		$	346		$	—		$	7,096
Ending balance: Individually evaluated for impairment	$	—		$	72		$	—		$	—		$	—		$	—		$	—		$	72
Ending balance: collectively evaluated for impairment	$	1,604		$	1,857		$	1,645		$	1,374		$	198		$	346		$	—		$	7,024
Loans:
Ending balance	$	58,390		$	269,742		$	334,661		$	140,762		$	21,321		$	10,773		$	—		$	835,649
Ending balance individually evaluated for impairment	$	105		$	3,869		$	3,632		$	147		$	15		$	—		$	—		$	7,768
Ending balance collectively evaluated for impairment	$	58,285		$	265,873		$	331,029		$	140,615		$	21,306		$	10,773		$	—		$	827,881

Impaired loans by class as of and for the periods ended September 30, 2021 and December 31, 2020 were as follows:

	As of
	September 30, 2021
	(in thousands)
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	167	$	118	$	—	$	166	$	8
Commercial Real Estate:
Owner Occupied		249		215		—		234		—
Non-owner occupied		2,544		2,200		—		2,208		—
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		275		263		—		272		9
Consumer:
Installment		18		18		—		19		1
Residential
Equity lines		36		31		—		33		—
Single family		2,154		2,044		—		2,073		47
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	5,443	$	4,889	$	—	$	5,005	$	65
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Owner Occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Consumer:
Installment		—		—		—		—		—
Residential
Equity lines		—		—		—		—		—
Single family		819		797		43		808		21
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	819	$	797	$	43	$	808	$	21
Total:
Commercial	$	167	$	118	$	—	$	166	$	8
Commercial Real Estate		2,793		2,415		—		2,442		—
Construction and Farmland		275		263		—		272		9
Consumer		18		18		—		19		1
Residential		3,009		2,872		43		2,914		68
Other		—		—		—		—		—
Total	$	6,262	$	5,686	$	43	$	5,813	$	86

(1)	Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, net deferred loan fees or costs, and any partial charge-offs. Accrued interest and net deferred loan fees or costs totaled $14 thousand at September 30, 2021.

	As of
	December 31, 2020
	(in thousands)
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	246	$	147	$	—	$	186	$	16
Commercial Real Estate:
Owner Occupied		1,282		1,227		—		1,258		18
Non-owner occupied		2,682		2,405		—		2,444		34
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		233		105		—		109		3
Consumer:
Installment		16		15		—		22		1
Residential:
Equity lines		272		42		—		44		—
Single family		2,655		2,413		—		2,514		76
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	7,386	$	6,354	$	—	$	6,577	$	148
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Owner Occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Consumer:
Installment		—		—		—		—		—
Residential:
Equity lines		—		—		—		—		—
Single family		1,449		1,431		72		1,448		38
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	1,449	$	1,431	$	72	$	1,448	$	38
Total:
Commercial	$	246	$	147	$	—	$	186	$	16
Commercial Real Estate		3,964		3,632		—		3,702		52
Construction and Farmland		233		105		—		109		3
Consumer		16		15		—		22		1
Residential		4,376		3,886		72		4,006		114
Other		—		—		—		—		—
Total	$	8,835	$	7,785	$	72	$	8,025	$	186

(1)	Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, net deferred loan fees or costs, and any partial charge-offs. Accrued interest and net deferred loan fees or costs totaled $17 thousand at December 31, 2020.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.

The Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Consumer loans are evaluated for collection based on payment performance. Descriptions of these ratings are as follows:


Pass	Pass loans exhibit acceptable history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.

Pass Monitored	Pass monitored loans may be experiencing income and cash volatility, inconsistent operating trends, nominal liquidity and/or a leveraged balance sheet. A higher level of supervision is required for these loans as the potential for a negative event could impact the borrower’s ability to repay the loan.

Special Mention	Special mention loans exhibit negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt.

Substandard	Substandard loans exhibit well defined weaknesses resulting in a higher probability of default. The borrowers exhibit adverse financial trends and a diminishing ability or willingness to service debt.

Doubtful	Doubtful loans exhibit all of the characteristics inherent in substandard loans; however given the severity of weaknesses, the collection of 100% of the principal is unlikely under current conditions.

Loss	Loss loans are considered uncollectible over a reasonable period of time and of such little value that its continuance as a bankable asset is not warranted.

Credit quality information by class at September 30, 2021 and December 31, 2020 was as follows:

	As of
	September 30, 2021
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	119,511	$	9,434	$	200	$	5	$	—	$	—	$	129,150
Commercial Real Estate:
Owner Occupied		122,302		55,693		6,202		215		—		—		184,412
Non-owner occupied		120,192		48,507		11,520		2,599		—		—		182,818
Construction and Farmland:
Residential		7,808		2,786		—		—		—		—		10,594
Commercial		18,148		35,224		10,708		315		—		—		64,395
Residential:
Equity Lines		31,778		1,341		—		31		—		—		33,150
Single family		205,824		10,966		3,061		1,649		117		—		221,617
Multifamily		20,902		6,373		—		—		—		—		27,275
All other loans		12,059		—		2,215		—		—		—		14,274
Total	$	658,524	$	170,324	$	33,906	$	4,814	$	117	$	—	$	867,685

		Performing				Nonperforming
Consumer Credit Exposure by Payment Activity		$	53,147			$	4

	As of
	December 31, 2020
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Pass Monitored		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	137,566	$	2,750	$	439	$	7	$	—	$	—	$	140,762
Commercial Real Estate:
Owner Occupied		126,839		31,927		5,929		1,226		—		—		165,921
Non-owner occupied		101,026		42,338		22,555		2,821		—		—		168,740
Construction and Farm land:
Residential		8,131		2,513		—		—		—		—		10,644
Commercial		19,599		24,982		3,004		161		—		—		47,746
Residential:
Equity Lines		31,087		124		—		36		5		—		31,252
Single family		193,579		16,639		3,594		3,053		129		—		216,994
Multifamily		10,923		8,700		1,873		—		—		—		21,496
All other loans		8,438		—		2,335		—		—		—		10,773
Total	$	637,188	$	129,973	$	39,729	$	7,304	$	134	$	—	$	814,328

		Performing				Nonperforming
Consumer Credit Exposure by Payment Activity		$	21,316			$	5