Note 4: Loans and Allowance for Loan Losses

Classes of loans at December 31, 2019 and 2018, include:


	December 31,		December 31,
	2019		2018
	(In thousands)

Mortgage warehouse lines of credit	$	765,151	$	337,332
Residential real estate		413,835		410,871
Multi-family and healthcare financing		1,347,125		914,393
Commercial and commercial real estate		398,601		299,194
Agricultural production and real estate		85,210		79,255
Consumer and margin loans		18,388		17,082
		3,028,310		2,058,127
Less
Allowance for loan losses		15,842		12,704

Loans Receivable	$	3,012,468	$	2,045,423

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Mortgage Warehouse Lines of Credit (MTG WHLOC): Under its warehouse program, the Company provides warehouse financing arrangements to approved mortgage companies for the origination and sale of residential mortgage loans and to a lesser extent multi‑family loans. Agency eligible, governmental and jumbo residential mortgage loans that are secured by mortgages placed on existing one-to-four family dwellings may be originated or purchased and placed on each mortgage warehouse line.

As a secured line of credit, collateral pledged to the Company secures each individual mortgage until the lender sells the loan in the secondary market. A traditional secured warehouse line of credit typically carries a base interest rate of 30‑day LIBOR, plus a margin, or mortgage note rate, less a margin. The interest rate will typically not go below an agreed upon threshold.

Risk is evident if there is a change in the fair value of mortgage loans originated by mortgage bankers in warehouse, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit.

Residential Real Estate Loans (RES RE): Real estate loans are secured by owner occupied 1‑4 family residences. Repayment of residential real estate loans is primarily dependent on the personal income and credit rating of the borrowers. All-in-One mortgages included in this segment typically carry a base rate of 30-day LIBOR, plus a margin.

Multi‑Family and Healthcare Financing (MF RE): The Company engages in multi‑family and healthcare financing, including construction loans, specializing in originating and servicing loans for multi‑family rental and senior living properties. In addition, the Company originates loans secured by an assignment of federal income tax credits by partnerships invested in multi‑family real estate projects. Construction and land loans are generally based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent agency-eligible financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long‑term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economy in the Company’s market area. Repayment of these loans depends on the successful operation of a business or property and the borrower’s cash flows.

Commercial Lending and Commercial Real Estate Loans (CML & CRE): The commercial lending and commercial real estate portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions, as well as loans to commercial customers to finance land and improvements. It also includes loans collateralized by mortgage servicing rights of mortgage warehouse customers. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Agricultural Production and Real Estate Loans (AG & AGRE): Agricultural production loans are generally comprised of seasonal operating lines of credit to grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. The Company also offers long‑term financing to purchase agricultural real estate. Specific underwriting standards have been established for agricultural related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. The Company is approved to sell agricultural loans in the secondary market through the Federal Agricultural Mortgage Corporation and uses this relationship to manage interest rate risk within the portfolio.

Consumer and Margin Loans (CON & MAR): Consumer loans are those loans secured by household assets. Margin loans are those loans secured by marketable securities. The term and maximum amount for these loans are determined by considering the purpose of the loan, the margin (advance percentage against value) in all collateral, the primary source of repayment, and the borrower’s other related cash flow.

The following tables present by loan portfolio segment, the activity in the allowance for loan losses for the years ended December 31, 2019, 2018 and 2017 and the recorded investment in loans and impairment method as of December 31, 2019, 2018 and 2017:


	At or For the Year Ended December 31, 2019
	MTG WHLOC		RES RE		MF RE		CML & CRE		AG & AGRE		CON & MAR		TOTAL
	(In thousands)
Allowance for loan losses
Balance, beginning of period	$	1,068	$	1,986	$	6,030	$	3,051	$	429	$	140	$	12,704
Provision for loan losses		952		56		988		1,817		94		33		3,940
Loans charged to the allowance		(107)		—		—		(857)		—		—		(964)
Recoveries of loans previously charged off		—		—		—		162		—		—		162
Balance, end of period	$	1,913	$	2,042	$	7,018	$	4,173	$	523	$	173	$	15,842
Ending balance: individually evaluated for impairment	$	—	$	23	$	—	$	650	$	—	$	8	$	681
Ending balance: collectively evaluated for impairment	$	1,913	$	2,019	$	7,018	$	3,523	$	523	$	165	$	15,161
Loans
Ending balance	$	765,151	$	413,835	$	1,347,125	$	398,601	$	85,210	$	18,388	$	3,028,310
Ending balance individually evaluated for impairment	$	233	$	3,109	$	—	$	9,152	$	—	$	23	$	12,517
Ending balance collectively evaluated for impairment	$	764,918	$	410,726	$	1,347,125	$	389,449	$	85,210	$	18,365	$	3,015,793


	At or For the Year Ended December 31, 2018
	MTG WHLOC		RES RE		MF RE		CML & CRE		AG & AGRE		CON & MAR		TOTAL
	(In thousands)
Allowance for loan losses
Balance, beginning of period	$	283	$	1,587	$	3,502	$	2,362	$	320	$	257	$	8,311
Provision (credit) for loan losses		785		399		2,528		779		109		29		4,629
Loans charged to the allowance		—		—		—		(90)		—		(146)		(236)
Recoveries of loans previously charged off		—		—		—		—		—		—		—
Balance, end of period	$	1,068	$	1,986	$	6,030	$	3,051	$	429	$	140	$	12,704
Ending balance: individually evaluated for impairment	$	225	$	—	$	—	$	400	$	20	$	—	$	645
Ending balance: collectively evaluated for impairment	$	843	$	1,986	$	6,030	$	2,651	$	409	$	140	$	12,059
Loans
Ending balance	$	337,332	$	410,871	$	914,393	$	299,194	$	79,255	$	17,082	$	2,058,127
Ending balance individually evaluated for impairment	$	575	$	1,606	$	—	$	8,576	$	370	$	58	$	11,185
Ending balance collectively evaluated for impairment	$	336,757	$	409,265	$	914,393	$	290,618	$	78,885	$	17,024	$	2,046,942


	For the Year Ended December 31, 2017
	MTG WHLOC		RES RE		MF RE		CML & CRE		AG & AGRE		CON & MAR		TOTAL
	(In thousands)
Allowance for loan losses
Balance, beginning of year	$	373	$	2,170	$	1,962	$	1,374	$	269	$	102	$	6,250
Provision for loan losses		(90)		(583)		1,540		1,399		51		155		2,472
Loans charged to the allowance		—		—		—		(546)		—		—		(546)
Recoveries of loans previously charged off		—		—		—		135		—		—		135
Balance, end of year	$	283	$	1,587	$	3,502	$	2,362	$	320	$	257	$	8,311

Internal Risk Categories

In adherence with policy, the Company uses the following internal risk grading categories and definitions for loans:

Average or above - Loans to borrowers of satisfactory financial strength or better. Earnings performance is consistent with primary and secondary sources of repayment that are well defined and adequate to retire the debt in a timely and orderly fashion. These businesses would generally exhibit satisfactory asset quality and liquidity with moderate leverage, average performance to their peer group and experienced management in key positions. These loans are disclosed as “Acceptable and Above” in the following table.

Acceptable - Loans to borrowers involving more than average risk and which contain certain characteristics that require some supervision and attention by the lender. Asset quality is acceptable, but debt capacity is modest and little excess liquidity is available. The borrower may be fully leveraged and unable to sustain major setbacks. Covenants are structured to ensure adequate protection. Borrower’s management may have limited experience and depth. This category includes loans which are highly leveraged due to regulatory constraints, as well as loans involving reasonable exceptions to policy. These loans are disclosed as “Acceptable and Above” in the following table.

Special Mention (Watch) - This is a loan that is sound and collectable but contains considerable risk. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well‑defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of December 31, 2019 and 2018:


	December 31, 2019
	MTG WHLOC		RES RE		MF RE		CML & CRE		AG & AGRE		CON & MAR		TOTAL
	(In thousands)

Special Mention (Watch)	$	—	$	2,472	$	41,882	$	13,806	$	2,114	$	31	$	60,305
Substandard		233		3,109		—		9,152		—		23		12,517
Doubtful		—		—		—		—		—		—		—
Acceptable and Above		764,918		408,254		1,305,243		375,643		83,096		18,334		2,955,488
Total	$	765,151	$	413,835	$	1,347,125	$	398,601	$	85,210	$	18,388	$	3,028,310


	December 31, 2018
	MTG WHLOC		RES RE		MF RE		CML & CRE		AG & AGRE		CON & MAR		TOTAL
	(In thousands)

Special Mention (Watch)	$	—	$	443	$	71,734	$	14,650	$	3,096	$	681	$	90,604
Substandard		575		1,606		—		8,576		370		58		11,185
Doubtful		—		—		—		—		—		—		—
Acceptable and Above		336,757		408,822		842,659		275,968		75,789		16,343		1,956,338
Total	$	337,332	$	410,871	$	914,393	$	299,194	$	79,255	$	17,082	$	2,058,127

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the past year.

The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2019 and 2018:


	December 31, 2019
	30-59 Days		60-89 Days		Greater Than		Total				Total
	Past Due		Past Due		90 Days		Past Due		Current		Loans
	(In thousands)
MTG WHLOC	$	—	$	—	$	—	$	—	$	765,151	$	765,151
RES RE		3,089		562		2,324		5,975		407,860		413,835
MF RE		—		—		—		—		1,347,125		1,347,125
CML & CRE		2,293		335		1,663		4,291		394,310		398,601
AG & AGRE		2,047		—		195		2,242		82,968		85,210
CON & MAR		50		31		19		100		18,288		18,388
	$	7,479	$	928	$	4,201	$	12,608	$	3,015,702	$	3,028,310


	December 31, 2018
	30-59 Days		60-89 Days		Greater Than		Total				Total
	Past Due		Past Due		90 Days		Past Due		Current		Loans
	(In thousands)
MTG WHLOC	$	—	$	—	$	324	$	324	$	337,008	$	337,332
RES RE		579		178		825		1,582		409,289		410,871
MF RE		—		—		—		—		914,393		914,393
CML & CRE		245		52		253		550		298,644		299,194
AG & AGRE		91		—		588		679		78,576		79,255
CON & MAR		2		52		28		82		17,000		17,082
	$	917	$	282	$	2,018	$	3,217	$	2,054,910	$	2,058,127

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310‑10‑35‑16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings.

The following tables present impaired loans and specific valuation allowance information based on class level as of December 31, 2019 and 2018:


	December 31, 2019
	MTG WHLOC		RES RE		MF RE		CML & CRE		AG & AGRE		CON & MAR		TOTAL
	(In thousands)
Impaired loans without a specific allowance:
Recorded investment	$	233	$	2,899	$	—	$	6,662	$	—	$	12	$	9,806
Unpaid principal balance		233		2,899		—		6,662		—		12		9,806
Impaired loans with a specific allowance:
Recorded investment		—		210		—		2,490		—		11		2,711
Unpaid principal balance		—		210		—		2,490		—		11		2,711
Specific allowance		—		23		—		650		—		8		681
Total impaired loans:
Recorded investment		233		3,109		—		9,152		—		23		12,517
Unpaid principal balance		233		3,109		—		9,152		—		23		12,517
Specific allowance		—		23		—		650		—		8		681


	December 31, 2018
	MTG WHLOC		RES RE		MF RE		CML & CRE		AG & AGRE		CON & MAR		TOTAL
	(In thousands)
Impaired loans without a specific allowance:
Recorded investment	$	251	$	1,606	$	—	$	5,636	$	88	$	58	$	7,639
Unpaid principal balance		251		1,606		—		5,636		88		58		7,639
Impaired loans with a specific allowance:
Recorded investment		324		—		—		2,940		282		—		3,546
Unpaid principal balance		324		—		—		2,940		282		—		3,546
Specific allowance		225		—		—		400		20		—		645
Total impaired loans:
Recorded investment		575		1,606		—		8,576		370		58		11,185
Unpaid principal balance		575		1,606		—		8,576		370		58		11,185
Specific allowance		225		—		—		400		20		—		645

The following tables present by portfolio class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2019, 2018and 2017:


	December 31, 2019
	MTG						CML &		AG &		CON &
	WHLOC		RES RE		MF RE		CRE		AGRE		MAR		TOTAL
	(In thousands)
Average recorded investment in impaired loans	$	242	$	3,175	$	—	$	8,675	$	—	$	25	$	12,117
Interest income recognized		—		71		—		463		—		—		534


	December 31, 2018
	MTG						CML &		AG &		CON &
	WHLOC		RES RE		MF RE		CRE		AGRE		MAR		TOTAL
	(In thousands)
Average recorded investment in impaired loans	$	932	$	1,485	$	—	$	8,872	$	489	$	52	$	11,830
Interest income recognized		59		50		—		375		43		1		528


	December 31, 2017
	MTG						CML &			AG &	CON &
	WHLOC		RES RE		MF RE		CRE			AGRE	MAR		TOTAL
	(In thousands)
Average recorded investment in impaired loans	$	—	$	156	$	—	$	3,703	$	282	$	197	$	4,338
Interest income recognized		—		1		—		182		—		—		183

The following table presents the Company’s nonaccrual loans and loans past due 90 days or more and still accruing at December 31, 2019 and 2018.


	December 31,				December 31,
	2019				2018
			Total Loans >				Total Loans >
			90 Days &				90 Days &
	Nonaccrual		Accruing		Nonaccrual		Accruing
	(In thousands)
MTG WHLOC	$	233	$	—	$	575	$	—
RES RE		740		1,851		893		74
MF RE		—		—		—		—
CML & CRE		1,118		486		136		117
AG & AGRE		—		231		282		307
CON & MAR		18		1		18		9

	$	2,109	$	2,569	$	1,904	$	507

No troubled loans were restructured during 2019. During 2018, the Company had one newly classified troubled debt restructuring in the CML & CRE loan class. The loan had a pre and post modification balance of $2.0 million. During 2017, the Company had one newly classified troubled debt restructuring to the same borrower in the CML & CRE loan class. This loan also had a pre and post modification balance of $2.0 million. The modifications on both loans included a combination of term and rate concessions which reflect the unlikeliness of the borrower being able to obtain similar financing from another financial institution. For 2019, 2018 and 2017, no troubled debt restructurings modified in the prior 12 months subsequently defaulted.

There was one customer with a residential loan balance of $725,000 in the process of foreclosure at December 31, 2019. No residential loans were in the process of foreclosure at December 31, 2018.