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Note 6 - Loans Receivable and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2020

Allowance for Credit Losses [Text Block]

Note 6: Loans Receivable and Allowance for Loan Losses

The following table sets forth the Company’s gross loans by major category as of September 30, 2020 and December 31, 2019:

(dollars in thousands)	September 30, 2020			December 31, 2019

Commercial real estate	$	676,460		$	613,631
Construction and land development		164,671			121,395
Commercial and industrial		228,145			223,906
Owner occupied real estate		427,026			424,400
Consumer and other		100,035			101,320
Residential mortgage		365,279			263,444
Paycheck protection program		683,398			-
Total loans receivable		2,645,014			1,748,096
Deferred (fees) costs		(15,616	)		99
Allowance for loan losses		(11,851	)		(9,266	)
Net loans receivable	$	2,617,547		$	1,738,929

The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for loan losses. The Company’s loan groups include commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer, residential mortgages, and PPP loans. PPP loans are fully guaranteed by the U.S. Government and as such have no allowance associated with them. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended September 30, 2020 and 2019:

(dollars in thousands)	Commercial Real Estate		Construction and Land Development			Commercial and Industrial			Owner Occupied Real Estate			Consumer and Other			Residential Mortgage			Paycheck Protection Program		Unallocated		Total

*Three months ended September 30, 2020*
*Allowance for loan losses:*
Beginning balance:	$	3,732	$	952		$	1,431		$	1,995		$	675		$	2,255		$	-	$	-	$	11,040
Charge-offs		-		-			(33	)		-			(2	)		(17	)		-		-		(52	)
Recoveries		-		-			11			-			2			-			-		-		13
Provisions (credits)		235		112			74			(8	)		6			429			-		2		850
Ending balance	$	3,967	$	1,064		$	1,483		$	1,987		$	681		$	2,667		$	-	$	2	$	11,851

Three months ended September 30, 2019
*Allowance for loan losses:*
Beginning balance:	$	2,673	$	631		$	875		$	2,158		$	562		$	1,124		$	-	$	33	$	8,056
Charge-offs		-		-			(72	)		-			(29	)		-			-		-		(101	)
Recoveries		-		-			59			1			2			-			-		-		62
Provisions (credits)		198		(10	)		(79	)		31			36			205			-		69		450
Ending balance	$	2,871	$	621		$	783		$	2,190		$	571		$	1,329		$	-	$	102	$	8,467

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the nine months ended September 30, 2020 and 2019:

(dollars in thousands)	Commercial Real Estate		Construction and Land Development			Commercial and Industrial			Owner Occupied Real Estate			Consumer and Other			Residential Mortgage			Paycheck Protection Program		Unallocated			Total

*Nine months ended September 30, 2020*
*Allowance for loan losses:*

Beginning balance:	$	3,043	$	688		$	931		$	2,292		$	590		$	1,705		$	-	$	17		$	9,266
Charge-offs		-		-			(84	)		(48	)		(67	)		(67	)		-		-			(266	)
Recoveries		-		2			38			1			10			-			-		-			51
Provisions (credits)		924		374			598			(258	)		148			1,029			-		(15	)		2,800
Ending balance	$	3,967	$	1,064		$	1,483		$	1,987		$	681		$	2,667		$	-	$	2		$	11,851

Nine months ended September 30, 2019
*Allowance for loan losses:*

Beginning balance:	$	2,462	$	777		$	1,754		$	2,033		$	577		$	894		$	-	$	118		$	8,615
Charge-offs		-		-			(1,002	)		-			(117	)		-			-		-			(1,119	)
Recoveries		-		-			213			1			7			-			-		-			221
Provisions (credits)		409		(156	)		(182	)		156			104			435			-		(16	)		750
Ending balance	$	2,871	$	621		$	783		$	2,190		$	571		$	1,329		$	-	$	102		$	8,467

The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of September 30, 2020 and December 31, 2019:

(dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate		Consumer and Other		Residential Mortgage		Paycheck Protection Program		Unallocated		Total
September 30, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	426	$	-	$	51	$	122	$	-	$	-	$	-	$	-	$	599
Collectively evaluated for impairment		3,541		1,064		1,432		1,865		681		2,667		-		2		11,252
Total allowance for loan losses	$	3,967	$	1,064	$	1,483	$	1,987	$	681	$	2,667	$	-	$	2	$	11,851

Loans receivable:
Loans evaluated Individually	$	10,737	$	-	$	2,972	$	4,305	$	1,095	$	701	$	-	$	-	$	19,810
Loans evaluated Collectively		665,723		164,671		225,173		422,721		98,940		364,578		683,398		-		2,625,204
Total loans receivable	$	676,460	$	164,671	$	228,145	$	427,026	$	100,035	$	365,279	$	683,398	$	-	$	2,645,014

(dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate		Consumer and Other		Residential Mortgage		Paycheck Protection Program		Unallocated		Total
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	265	$	-	$	23	$	268	$	-	$	-	$	-	$	-	$	556
Collectively evaluated for impairment		2,778		688		908		2,024		590		1,705		-		17		8,710
Total allowance for loan losses	$	3,043	$	688	$	931	$	2,292	$	590	$	1,705	$	-	$	17	$	9,266

Loans receivable:
Loans evaluated Individually	$	10,331	$	-	$	3,087	$	3,634	$	1,062	$	768	$	-	$	-	$	18,882
Loans evaluated Collectively		603,300		121,395		220,819		420,766		100,258		262,676				-		1,729,214
Total loans receivable	$	613,631	$	121,395	$	223,906	$	424,400	$	101,320	$	263,444	$	-	$	-	$	1,748,096

A loan is considered impaired, when based on current information and events, it is probable that 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 loans, but also include internally classified accruing loans. The following table summarizes information with regard to impaired loans by loan portfolio class as of September 30, 2020 and December 31, 2019:

	September 30, 2020						December 31, 2019
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial real estate	$	6,561	$	6,569	$	-	$	6,186	$	6,192	$	-
Construction and land development		-		-		-		-		-		-
Commercial and industrial		2,617		2,803		-		2,719		2,989		-
Owner occupied real estate		3,712		3,920		-		2,127		2,275		-
Consumer and other		1,095		1,297		-		1,062		1,375		-
Residential mortgage		701		768		-		768		768		-
Paycheck protection program		-		-		-		-		-		-
Total	$	14,686	$	15,357	$	-	$	12,862	$	13,599	$	-

With an allowance recorded:
Commercial real estate		4,176	$	4,697	$	426	$	4,145	$	4,667	$	265
Construction and land development		-		-		-		-		-		-
Commercial and industrial		355		371		51		368		383		23
Owner occupied real estate		593		612		122		1,507		1,521		268
Consumer and other		-		-		-		-		-		-
Residential mortgage		-		-		-		-		-		-
Paycheck protection program		-		-		-		-		-		-
Total		5,124	$	5,680	$	599	$	6,020	$	6,571	$	556

Total:
Commercial real estate	$	10,737	$	11,266	$	426	$	10,331	$	10,859	$	265
Construction and land development		-		-		-		-		-		-
Commercial and industrial		2,972		3,174		51		3,087		3,372		23
Owner occupied real estate		4,305		4,532		122		3,634		3,796		268
Consumer and other		1,095		1,297		-		1,062		1,375		-
Residential mortgage		701		768		-		768		768		-
Paycheck protection program		-		-		-		-		-		-
Total	$	19,810	$	21,037	$	599	$	18,882	$	20,170	$	556

The following table presents additional information regarding the Company’s impaired loans for the three months ended September 30, 2020 and September 30, 2019:

	Three Months Ended September 30,
	2020				2019
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	6,534	$	69	$	7,004	$	80
Construction and land development		-		-		-		-
Commercial and industrial		2,615		-		2,821		19
Owner occupied real estate		3,491		13		1,801		12
Consumer and other		1,114		6		931		4
Residential mortgage		724		-		640		1
Paycheck protection program		-		-		-		-
Total	$	14,478	$	88	$	13,197	$	116

With an allowance recorded:
Commercial real estate	$	4,167	$	-	$	4,114	$	-
Construction and land development		-		-		-		-
Commercial and industrial		37		-		572		-
Owner occupied real estate		819		1		1,492		12
Consumer and other		10		-		12		-
Residential mortgage		-		-		-		-
Paycheck protection program		-		-		-		-
Total	$	5,033	$	1	$	6,190	$	12

Total:
Commercial real estate	$	10,701	$	69	$	11,118	$	80
Construction and land development		-		-		-		-
Commercial and industrial		2,652		-		3,393		19
Owner occupied real estate		4,310		14		3,293		24
Consumer and other		1,124		6		943		4
Residential mortgage		724		-		640		1
Paycheck protection program		-		-		-		-
Total	$	19,511	$	89	$	19,387	$	128

The following table presents additional information regarding the Company’s impaired loans for the nine months ended September 30, 2020 and September 30, 2019:

	Nine Months Ended September 30,
	2020				2019
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	6,484	$	207	$	6,532	$	220
Construction and land development		-		-		-		-
Commercial and industrial		2,607		1		2,001		19
Owner occupied real estate		3,051		21		1,853		40
Consumer and other		1,156		13		871		12
Residential mortgage		768		1		384		2
Paycheck protection program		-		-		-		-
Total	$	14,066	$	243	$	11,641	$	293

With an allowance recorded:
Commercial real estate	$	4,153	$	-	$	4,314	$	-
Construction and land development		-		-		-		-
Commercial and industrial		479		-		956		-
Owner occupied real estate		1,273		17		962		24
Consumer and other		-		-		38		-
Residential mortgage		30		1		-		-
Paycheck protection program		-		-		-		-
Total	$	5,935	$	18	$	6,270	$	24

Total:
Commercial real estate	$	10,637	$	207	$	10,846	$	220
Construction and land development		-		-		-		-
Commercial and industrial		3,086		1		2,957		19
Owner occupied real estate		4,324		38		2,815		64
Consumer and other		1,156		13		909		12
Residential mortgage		798		2		384		2
Paycheck protection program		-		-		-		-
Total	$	20,001	$	261	$	17,911	$	317

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2020 and December 31, 2019:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
At September 30, 2020
Commercial real estate	$	-	$	6	$	4,578	$	4,584	$	671,876	$	676,460	$	-
Construction and land development		-		-		-		-		164,671		164,671		-
Commercial and industrial		-		-		2,972		2,972		225,173		228,145		-
Owner occupied real estate		-		611		3,103		3,714		423,312		427,026		-
Consumer and other		468		241		1,095		1,804		98,231		100,035		-
Residential mortgage		557		-		701		1,258		364,021		365,279		-
Paycheck protection program		-		-		-		-		683,398		683,398		-
Total	$	1,025	$	858	$	12,449	$	14,332	$	2,630,682	$	2,645,014	$	-

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
At December 31, 2019
Commercial real estate	$	-	$	313	$	4,159	$	4,472	$	609,159	$	613,631	$	-
Construction and land development		-		-		-		-		121,395		121,395		-
Commercial and industrial		-		50		3,087		3,137		220,769		223,906		-
Owner occupied real estate		-		1,219		3,337		4,556		419,844		424,400		-
Consumer and other		112		241		1,062		1,415		99,905		101,320		-
Residential mortgage		-		-		768		768		262,676		263,444		-
Total	$	112	$	1,823	$	12,413	$	14,348	$	1,733,748	$	1,748,096	$	-

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2020 and December 31, 2019:

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
At September 30, 2020:
Commercial real estate	$	671,702	$	83	$	4,675	$	-	$	676,460
Construction and land development		164,671		-		-		-		164,671
Commercial and industrial		225,173		-		2,972		-		228,145
Owner occupied real estate		422,194		527		4,305		-		427,026
Consumer and other		98,940		-		1,095		-		100,035
Residential mortgage		364,578		-		701		-		365,279
Paycheck protection program		683,398		-		-		-		683,398
Total	$	2,630,656	$	610	$	13,748	$	-	$	2,645,014

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
At December 31, 2019:
Commercial real estate	$	609,382	$	90	$	4,159	$	-	$	613,631
Construction and land development		121,395		-		-		-		121,395
Commercial and industrial		220,819		-		3,087		-		223,906
Owner occupied real estate		418,997		1,770		3,633		-		424,400
Consumer and other		100,258		-		1,062		-		101,320
Residential mortgage		262,555		121		768		-		263,444
Total	$	1,733,406	$	1,981	$	12,709	$	-	$	1,748,096

The following table shows non-accrual loans by class as of September 30, 2020 and December 31, 2019:

(dollars in thousands)	September 30, 2020		December 31, 2019

Commercial real estate	$	4,578	$	4,159
Construction and land development		-		-
Commercial and industrial		2,972		3,087
Owner occupied real estate		3,103		3,337
Consumer and other		1,095		1,062
Residential mortgage		701		768
Paycheck protection program		-		-
Total	$	12,449	$	12,413

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $190,000 and $587,000 for the three and nine months ended September 30, 2020, respectively, and $145,000 and $378,000 for the three and nine months ended September 30, 2019, respectively.

Troubled Debt Restructurings

A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. As of June 30, 2020, we had granted payment deferrals to 491 customers with outstanding balances of $444 million, or 24% of total loans outstanding. As of September 30, 2020, deferrals declined to 95 customers with outstanding balances of $115 million, or 6% of total loans outstanding. Approximately $65 million of the deferral requests, or 3% of total loans, were for deferment of principal balances only. The remaining deferrals include requests to defer both principal and interest payments. Deferrals as of September 30, 2020 were comprised of the following categories: 90 day deferrals amounted to 43 customers with outstanding balances of $45 million and second deferrals amounted to 52 customers with outstanding balances of $70 million.

The following table summarizes information with regard to outstanding troubled debt restructurings at September 30, 2020 and December 31, 2019:

(dollars in thousands)	Number of Loans		Accrual Status		Non- Accrual Status		Total TDRs
September 30, 2020
Commercial real estate		1	$	6,062	$	-	$	6,062
Construction and land development		-		-		-		-
Commercial and industrial		-		-		-		-
Owner occupied real estate		-		-		-		-
Consumer and other		-		-		-		-
Residential mortgage		-		-		-		-
Total		1	$	6,062	$	-	$	6,062

December 31, 2019
Commercial real estate		1	$	6,173	$	-	$	6,173
Construction and land development		-		-		-		-
Commercial and industrial		-		-		-		-
Owner occupied real estate		-		-		-		-
Consumer and other		-		-		-		-
Residential mortgage		-		-		-		-
Total		1	$	6,173	$	-	$	6,173

All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into our estimate of the allowance for loan losses. The level of any subsequent defaults will likely be affected by future economic conditions.

There were no loan modifications made during the three and nine months ended September 30, 2020 and 2019 that met the criteria of a TDR.

After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three and nine months ended September 30, 2020. There were no TDRs that subsequently defaulted during the year ended December 31, 2019.

There was one residential mortgage in the process of foreclosure as of September 30, 2020 and December 31, 2019. There was no other real estate owned relating to residential real estate at September 30, 2020 and December 31, 2019.