The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company's loan portfolio is subject to varying degrees of credit risk. These risks entail both general risks, which are inherent in the lending process, and risks specific to individual borrowers. The Company's credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type.

The Company currently manages its credit products and the respective exposure to loan losses by specific portfolio segments and classes, which are levels at which the Company develops and documents its systematic methodology to determine the allowance for credit losses. The Company believes each portfolio segment has unique risk characteristics. The Company's loans held for investment is divided into three portfolio segments: loans secured by real estate, commercial and industrial loans, and consumer loans. Each of these segments is further divided into loan classes for purposes of estimating the allowance for credit losses.

For additional information, including the accounting policies and CECL methodology used to estimate the allowance for credit losses, see Note 2 “Basis of Presentation” and Note 7 “Recent Accounting Pronouncements.”

The following table is a summary of loans receivable by loan portfolio segment and class.

The Bank’s net loans totaled $221.9 million on September 30, 2021, compared to $252.3 million on December 31, 2020, a decrease of $30.4 million, or 12.05%. Construction and land loans increased from $2.6 million on December 31, 2020, to $3.7 million on September 30, 2021, an increase of $1.1 million, or 43.44%. Farmland loans decreased by $0.1 million or 1.58%, from $0.4 million on December 31, 2020, to $0.3 million on September 30, 2021. Single-family residential loans decreased from $82.5 million on December 31, 2020, to $79.0 million on September 30, 2021, a decrease of $3.5 million, or 4.21%. Multi-family residential loans were $5.8 million on September 30, 2021, and $6.1 million on December 31, 2020, a decrease of $0.3 million or 4.24%. Commercial real estate loans decreased $1.9 million, or 3.27%, to $55.2 million at September 30, 2021 compared to $57.0 million on December 31, 2020. Commercial and industrial loans decreased by $0.7 million, or 6.68%, to $10.1 million on September 30, 2021, compared to $10.8 million on December 31, 2020. SBA guaranty loans were $6.9 million on September 30, 2021, a decrease of $0.3 million, or 3.76%, compared to $7.2 million at December 31, 2020. The Commercial Small Business Administration (SBA) Paycheck Protection Program (PPP) loan balance was $2.6 million on September 30, 2021, compared to $9.9 million on December 31, 2020, a decrease of $7.3 million or 74.06%. Consumer loans decreased by $0.7 million, or 21.72% to $2.4 million on September 30, 2021, compared to $3.1 million on December 31, 2020. Automobile loans decreased from $74.2 million on December 31, 2020, to $58.6 million on September 30, 2021, a decrease of $15.6 million or 21.02%.

Credit Risk and Allowance for Loan Losses. Credit risk is the risk of loss arising from the inability of a borrower to meet his or her obligations and entails both general risks, which are inherent in the process of lending, and risks specific to individual borrowers. Credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type. Residential mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans secured by personal property, such as auto loans, generally experience medium credit losses. Unsecured loan products, such as personal revolving credit, have the highest credit loss experience and for that reason, the Bank has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates

that may occur during improved economic times. Inconsistent economic conditions may have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.

On January 1, 2021, the Company early adopted ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”) which replaces the “incurred loss approach” for estimating credit losses with an expected loss methodology. The incurred loss model delayed the recognition of credit losses until it was probable that a loss had occurred, while the CECL model requires the immediate recognition of expected credit losses over the contractual term for financial instruments that fall within the scope of CECL at the date of origination or purchase of the financial instrument. The CECL model, which is applicable to the measurement of credit losses on financial assets measured at amortized cost and certain off-balance sheet credit exposures, affects the Company’s estimates of the allowance for credit losses for our loan portfolio and the reserve for our off-balance sheet credit exposures related to loan commitments. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance, based on all available information from internal and external sources, relevant to assessing the collectability of loans over their contractual terms, adjusted for expected prepayments when appropriate, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations are performed for each class of loans and take into consideration factors such as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, value of collateral securing the loans and current economic conditions and trends that may affect the borrowers’ ability to pay. For example, delinquencies in unsecured loans and indirect automobile installment loans will be reserved for at significantly higher ratios than loans secured by real estate. Finally, the Company considers forecasts about future economic conditions or changes in collateral values that are reasonable and supportable. Based on that analysis, the Bank deems its allowance for loan losses in proportion to the total nonaccrual loans and past due loans to be sufficient.

As a result of the adoption of ASC 326 in the first quarter of 2021, with an effective date of January 1, 2021, there is a lack of comparability in both the allowance and provisions for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2021 are presented using the CECL methodology, while comparative period information continues to be reported in accordance with the incurred loss methodology in effect for prior years.

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

During the nine-month period ended September 30, 2021, loans to 20 borrowers and related entities totaling approximately $193,000 were determined to be uncollectible and were charged off. During the nine-month period ending September 30, 2020, loans to 30 borrowers and related entities totaling approximately $277,000 were determined to be uncollectible and were charged off.

Reserve for Unfunded Commitments. Loan commitments and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Bank generally requires collateral to support financial instruments with credit risk on the same basis as it does for on-balance sheet instruments. The collateral requirement is based on management's credit evaluation of the counter party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

As of September 30, 2021, and 2020, the Bank had outstanding commitments totaling $30.6 million and $33.1 million, respectively. The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws, including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class.

The following table shows the Bank’s reserve for unfunded commitments arising from these transactions:

Contractual Obligations and Commitments. No material changes, outside the normal course of business, have been made during the third quarter of 2021.

Asset Quality. The following tables set forth the amount of the Bank’s current, past due, and non-accrual loans by categories of loans and restructured loans, at the dates indicated.

The balances in the above charts have not been reduced by the allowance for credit losses. For the period ending September 30, 2021, the allowance for credit loss is $2.8 million. For the period ending December 31, 2020, the allowance for loan loss is $1.5 million.

Non-accrual loans with specific reserves at September 30, 2021 are comprised of:

Single–family residential – One loan to one borrower that totaled $36,532 with specific reserves of $10,359 established for the loan. This loan was also a troubled debt restructured loan.

Below is a summary of the recorded investment amount and related allowance for losses of the Bank’s impaired loans at September 30, 2021 and December 31, 2020.

At September 30, 2021, there was one troubled debt restructured loan consisting of a single-family residential loan in the amount of $36,532. This loan is in a nonaccrual status.

The following table shows the activity for non-accrual loans for the nine months ended September 30, 2020 and 2021.

Other Real Estate Owned. The Company had $575,000 in real estate acquired in partial or total satisfaction of debt at December 31, 2020. All such properties are initially recorded at the lower of cost or fair value (net realizable value) at the date acquired and carried on the balance sheet as other real estate owned. Losses arising at the date of acquisition are charged against the allowance for credit losses. Subsequent write-downs that may be required and expense of operation are included in noninterest expense. Gains and losses realized from the sale of other real estate owned were included in noninterest income.

In June of 2021 the property was sold for $589,000 and resulted in a gain on the sale of other real estate owned property in the amount of $14,000. At September 30, 2021 the Company had no real estate acquired in partial or total satisfaction of debt.

In addition to monitoring the performance status of the loan portfolio, the Company utilizes a risk rating scale (1-8) to evaluate loan asset quality for all loans. Loans that are rated 1-4 are classified as pass credits. For the pass rated loans, management believes there is a low risk of loss related to these loans and, as necessary, credit may be strengthened through improved borrower performance and/or additional collateral.

The following tables provides information with respect to the Company's credit quality indicators by loan portfolio segment on September 30, 2021, and December 31, 2020:


	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
September 30, 2021	Construction				Single-family						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Pass	$	3,662	$	345	$	78,917	$	5,846	$	52,708	$	10,078	$	6,859	$	2,571	$	2,398	$	58,509	$	221,893
Special mention		—		—		—		—		—		—		—		—		—		5		5
Substandard		—		—		132		—		2,452		—		71		—		—		42		2,697
Doubtful		—		—		—		—		—		—		—		—		—		79		79
Loss		—		—		—		—		—		—		—		—		—		—		—

	$	3,662	$	345	$	79,049	$	5,846	$	55,160	$	10,078	$	6,930	$	2,571	$	2,398	$	58,635	$	224,674

Nonaccrual	$	—	$	—	$	132	$	—	$	2,452	$	—	$	71	$	—	$	—	$	126	$	2,781
Troubled debt restructures	$	—	$	—	$	37	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	37
Number of TDRs accounts		—		—		1		—		—		—		—		—		—		—		1
Non-performing TDRs	$	—	$	—	$	37	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	37
Number of non-performing TDR accounts		—		—		1		—		—		—		—		—		—		—		1


	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
December 31, 2020	Construction				Single-family						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Pass	$	2,553	$	350	$	82,310	$	6,105	$	52,534	$	10,800	$	7,200	$	9,912	$	3,030	$	74,064	$	248,858
Special mention		—		—		—		—		—		—		—		—		—		—		—
Substandard		—		—		210		—		4,493		—		—		—		33		62		4,798
Doubtful		—		—		—		—		—		—		—		—		—		116		116
Loss		—		—		—		—		—		—		—		—		—		—		—

	$	2,553	$	350	$	82,520	$	6,105	$	57,027	$	10,800	$	7,200	$	9,912	$	3,063	$	74,242	$	253,772

Nonaccrual	$	—	$	—	$	270	$	—	$	4,029	$	—	$	—	$	—	$	34	$	179	$	4,512
Troubled debt restructures	$	—	$	—	$	39	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	39
Number of TDRs accounts		—		—		1		—		—		—		—		—		—		—		1
Non-performing TDRs	$	—	$	—	$	39	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	39
Number of non-performing TDR accounts		—		—		1		—		—		—		—		—		—		—		1