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Note 4 - Loans Receivable and Related Allowance for Loan Losses
 6 Months Ended
Jun. 30, 2022
Notes to Financial Statements  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

4.

Loans Receivable and Related Allowance for Loan Losses

 

The Corporation’s loans receivable as of the respective dates are summarized as follows:

 

(Dollar amounts in thousands)

 June 30, 2022 December 31, 2021

Mortgage loans on real estate:

        

Residential first mortgages

 $291,779  $273,823 

Home equity loans and lines of credit

  73,625   75,810 

Commercial real estate

  342,041   326,341 

Total real estate loans

  707,445   675,974 

Other loans:

        

Commercial business

  57,819   65,877 

Consumer

  45,412   48,552 

Total other loans

  103,231   114,429 

Total loans, gross

  810,676   790,403 

Less allowance for loan losses

  10,525   10,393 

Total loans, net

 $800,151  $780,010 

 

Included in total loans above are net deferred costs of $3.3 million and $3.3 million at June 30, 2022 and December 31, 2021, respectively. In addition, included in commercial loans at  June 30, 2022 and  December 31, 2021 were $171,000 and $1.2 million, respectively, of PPP loans that are guaranteed by the SBA.  The Corporation received $3.7 million of fees related to the origination of these loans, of which $1.3 million was recognized in 2020, $2.4 million was recognized during 2021, $37,000 was recognized in the six months ended June 30, 2022 and $4,000 is expected be recognized in future periods upon forgiveness by the SBA.

 

An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans.  While the Corporation has historically experienced strong trends in asset quality, as a result of the situation regarding the COVID-19 pandemic, management has recognized the need to incorporate factors into the allowance evaluation to help compensate for the effects of any credit deterioration due to the current economic situation.

 

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

 

The allowance for loan losses is based on estimates and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

 

At June 30, 2022, there was no allowance for loan losses allocated to loans acquired from United American Savings Bank (2016), Northern Hancock Bank and Trust Co. (2017) or Community First Bancorp, Inc. (2018) because the unaccreted purchase discount still exceeded the calculated allowance.

 

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:

 

(Dollar amounts in thousands)

 Residential Mortgages Home Equity & Lines of Credit 

Commercial Real Estate

 Commercial Business 

Consumer

 

Total

Three months ended June 30, 2022:

                        

Allowance for loan losses:

                        

Beginning Balance

 $2,310  $485  $6,444  $651  $378  $10,268 

Charge-offs

  (17)  —   —   —   (160)  (177)

Recoveries

  —   40   11   —   8   59 

Provision

  212   (32)  87   (29)  137   375 

Ending Balance

 $2,505  $493  $6,542  $622  $363  $10,525 
                         

Six months ended June 30, 2022:

                        

Allowance for loan losses:

                        

Beginning Balance

 $2,335  $525  $6,253  $904  $376  $10,393 

Charge-offs

  (17)  (15)  —   —   (243)  (275)

Recoveries

  —   40   58   —   14   112 

Provision

  187   (57)  231   (282)  216   295 

Ending Balance

 $2,505  $493  $6,542  $622  $363  $10,525 
                         

At June 30, 2022:

                        

Ending ALL balance attributable to loans:

                        

Individually evaluated for impairment

 $15  $—  $177  $2  $—  $194 

Acquired loans collectively evaluated for impairment

  —   —   —   —   —   — 

Originated loans collectively evaluated for impairment

  2,490   493   6,365   620   363   10,331 

Total

 $2,505  $493  $6,542  $622  $363  $10,525 

Total loans:

                        

Individually evaluated for impairment

 $279  $4  $2,277  $84  $—  $2,644 

Acquired loans collectively evaluated for impairment

  24,865   5,666   18,501   1,748   395   51,175 

Originated loans collectively evaluated for impairment

  266,635   67,955   321,263   55,987   45,017   756,857 

Total

 $291,779  $73,625  $342,041  $57,819  $45,412  $810,676 
                         

At December 31, 2021:

                        

Ending ALL balance attributable to loans:

                        

Individually evaluated for impairment

 $1  $—  $88  $196  $—  $285 

Acquired loans collectively evaluated for impairment

  —   —   —   —   —   — 

Originated loans collectively evaluated for impairment

  2,334   525   6,165   708   376   10,108 

Total

 $2,335  $525  $6,253  $904  $376  $10,393 

Total loans:

                        

Individually evaluated for impairment

 $294  $4  $1,225  $363  $—  $1,886 

Acquired loans collectively evaluated for impairment

  29,573   6,370   21,471   2,055   538   60,007 

Originated loans collectively evaluated for impairment

  243,956   69,436   303,645   63,459   48,014   728,510 

Total

 $273,823  $75,810  $326,341  $65,877  $48,552  $790,403 
                         

Three months ended June 30, 2021:

                        

Allowance for loan losses:

                        

Beginning Balance

 $2,660  $585  $5,472  $612  $356  $9,685 

Charge-offs

  —   —   (56)  —   (38)  (94)

Recoveries

  —   1   1   —   5   7 

Provision

  (211)  (49)  409   63   38   250 

Ending Balance

 $2,449  $537  $5,826  $675  $361  $9,848 
                         

Six months ended June 30, 2021:

                        

Allowance for loan losses:

                        

Beginning Balance

 $2,774  $620  $5,180  $677  $329  $9,580 

Charge-offs

  —   —   (151)  —   (128)  (279)

Recoveries

  —   8   1   1   12   22 

Provision

  (325)  (91)  796   (3)  148   525 

Ending Balance

 $2,449  $537  $5,826  $675  $361  $9,848 

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2022:

 

(Dollar amounts in thousands)

                        
  

Impaired Loans with Specific Allowance

  

As of June 30, 2022

 

For the three months ended June 30, 2022

  Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period

Residential first mortgages

 $68  $68  $15  $68  $1  $1 

Home equity and lines of credit

  —   —   —   —   —   — 

Commercial real estate

  2,060   2,060   177   501   24   24 

Commercial business

  2   2   2   126   —   — 

Consumer

  —   —   —   —   —   — 

Total

 $2,130  $2,130  $194  $695  $25  $25 

 

  

For the six months ended June 30, 2022

  

Average Recorded Investment

 

Interest Income Recognized in Period

 

Cash Basis Interest Recognized in Period

Residential first mortgages

 $68  $1  $1 

Home equity and lines of credit

  —   —   — 

Commercial real estate

  1,020   52   29 

Commercial business

  85   —   — 

Consumer

  —   —   — 

Total

 $1,173  $53  $30 

 

  

Impaired Loans with No Specific Allowance

  

As of June 30, 2022

 

For the three months ended June 30, 2022

  Unpaid Principal Balance Recorded Investment Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period

Residential first mortgages

 $323  $211  $215  $1  $1 

Home equity and lines of credit

  4   4   4   —   — 

Commercial real estate

  217   217   1,188   11   11 

Commercial business

  82   82   84   1   1 

Consumer

  —   —   —   —   — 

Total

 $626  $514  $1,491  $13  $13 

 

  

For the six months ended June 30, 2022

  

Average Recorded Investment

 

Interest Income Recognized in Period

 

Cash Basis Interest Recognized in Period

Residential first mortgages

 $219  $2  $2 

Home equity and lines of credit

  4   —   — 

Commercial real estate

  1,014   20   20 

Commercial business

  94   5   5 

Consumer

  —   —   — 

Total

 $1,331  $27  $27 

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2021:
 

(Dollar amounts in thousands)

                        
  

Impaired Loans with Specific Allowance

  

As of December 31, 2021

 

For the year ended December 31, 2021

  Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period

Residential first mortgages

 $68  $68  $1  $28  $3  $3 

Home equity and lines of credit

  —   —   —   —   —   — 

Commercial real estate

  559   559   88   387   30   30 

Commercial business

  250   250   196   79   8   8 

Consumer

  —   —   —   —   —   — 

Total

 $877  $877  $285  $494  $41  $41 

 

  

Impaired Loans with No Specific Allowance

  

As of December 31, 2021

 

For the year ended December 31, 2021

  Unpaid Principal Balance Recorded Investment Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period

Residential first mortgages

 $338  $226  $284  $3  $3 

Home equity and lines of credit

  4   4   4   —   — 

Commercial real estate

  666   666   990   71   71 

Commercial business

  113   113   96   5   5 

Consumer

  —   —   —   —   — 

Total

 $1,121  $1,009  $1,374  $79  $79 

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2021:

 

(Dollar amounts in thousands)

                        
  

Impaired Loans with Specific Allowance

  

As of June 30, 2021

 

For the three months ended June 30, 2021

  Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period

Residential first mortgages

 $—  $—  $—  $35  $—  $— 

Home equity and lines of credit

  —   —   —   —   —   — 

Commercial real estate

  315   315   27   344   5   5 

Commercial business

  4   4   4   33   —   — 

Consumer

  —   —   —   —   —   — 

Total

 $319  $319  $31  $412  $5  $5 

 

  

For the six months ended June 30, 2021

  

Average Recorded Investment

 

Interest Income Recognized in Period

 

Cash Basis Interest Recognized in Period

Residential first mortgages

 $23  $—  $— 

Home equity and lines of credit

  —   —   — 

Commercial real estate

  356   8   8 

Commercial business

  48   —   — 

Consumer

  —   —   — 

Total

 $427  $8  $8 

 

 

  

Impaired Loans with No Specific Allowance

  

As of June 30, 2021

 

For the three months ended June 30, 2021

  Unpaid Principal Balance Recorded Investment Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period

Residential first mortgages

 $424  $312  $282  $1  $1 

Home equity and lines of credit

  4   4   4   —   — 

Commercial real estate

  1,013   1,013   1,053   10   10 

Commercial business

  120   120   93   2   2 

Consumer

  —   —   —   —   — 

Total

 $1,561  $1,449  $1,432  $13  $13 

 

  

For the six months ended June 30, 2021

  

Average Recorded Investment

 

Interest Income Recognized in Period

 

Cash Basis Interest Recognized in Period

Residential first mortgages

 $297  $2  $2 

Home equity and lines of credit

  4   —   — 

Commercial real estate

  1,122   24   24 

Commercial business

  84   3   3 

Consumer

  —   —   — 

Total

 $1,507  $29  $29 

 

Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans presented above or in the tables that follow based on the amounts not being material.

 

Troubled debt restructurings (TDR). The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would not have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do not include forgiveness of principal balances. The Corporation generally does not extend additional credit to borrowers with loans classified as TDRs.

At June 30, 2022 and December 31, 2021, the Corporation had $2.1 million and $346,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $128,000 and $6,000 of specific allowance for these loans at June 30, 2022 and December 31, 2021, respectively.

During the three and six months ended June 30, 2022  the Corporation modified one commercial mortgage loan with a recorded investment of $1.8 million.  Modifications to this loan included an interest rate reduction and re-amortization of the principal balance.  At June 30, 2022, there was $114,000 of allowance for loan losses allocated to this loan.  During the three and six months ended June 30, 2021, the Corporation did not modify any loans as TDRs.   

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three and six months ended June 30, 2022 and 2021, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

COVID-19 related deferrals.  Under the provisions of the CARES Act, at the peak, the Corporation had granted modifications on 410 loans with an aggregate balance of $110.4 million, representing 13.6% of gross outstanding loan balances.  As of June 30, 2022, one loan with a balance of $3.9 million remained on deferral while the remaining loans have resumed normal repayment or have been repaid in full.  The characteristics of these modifications are considered short-term and do not result in a reclassification of these loans to TDR status.

Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.

Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.

 

Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit.

 

The reserve allocation for risk rated loan pools is developed by applying the following factors:

 

Historic: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A twelve-quarter rolling weighted-average is utilized to estimate probable incurred losses in the portfolios.

 

Qualitative: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans to allow for: quality of lending policies and procedures; national and local economic and business conditions; changes in the nature and volume of the portfolio; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.

 

Management uses the following definitions for risk ratings:

 

Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have a sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.

 

Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.

 

Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower.

 

Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of June 30, 2022 and December 31, 2021:

 

(Dollar amounts in thousands)

                        
  

Not Rated

 

Pass

 Special Mention 

Substandard

 

Doubtful

 

Total

June 30, 2022:

                        

Residential first mortgages

 $290,833  $—  $—  $946  $—  $291,779 

Home equity and lines of credit

  73,341   —   —   284   —   73,625 

Commercial real estate

  —   307,780   10,264   23,997   —   342,041 

Commercial business

  —   52,353   1,260   4,206   —   57,819 

Consumer

  45,403   —   —   9   —   45,412 

Total loans

 $409,577  $360,133  $11,524  $29,442  $—  $810,676 
                         

December 31, 2021:

                        

Residential first mortgages

 $272,722  $—  $—  $1,101  $—  $273,823 

Home equity and lines of credit

  75,408   —   —   402   —   75,810 

Commercial real estate

  —   295,891   7,494   22,956   —   326,341 

Commercial business

  —   59,628   1,356   4,893   —   65,877 

Consumer

  48,538   —   —   14   —   48,552 

Total loans

 $396,668  $355,519  $8,850  $29,366  $—  $790,403 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio 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 aging categories of performing loans and nonperforming loans as of June 30, 2022 and December 31, 2021:

 

(Dollar amounts in thousands)

                        
  

Performing

 

Nonperforming

    
  Accruing Loans Not Past Due Accruing 30-59 Days Past Due Accruing 60-89 Days Past Due 

Accruing 90+ Days Past Due

 

Nonaccrual

 

Total

June 30, 2022:

                        

Residential first mortgages

 $288,478  $1,964  $391  $249  $697  $291,779 

Home equity and lines of credit

  72,543   661   137   43   241   73,625 

Commercial real estate

  337,842   1,815   107   —   2,277   342,041 

Commercial business

  57,472   56   —   206   85   57,819 

Consumer

  45,029   174   199   —   10   45,412 

Total loans

 $801,364  $4,670  $834  $498  $3,310  $810,676 
                         

December 31, 2021:

                        

Residential first mortgages

 $270,221  $1,913  $588  $291  $810  $273,823 

Home equity and lines of credit

  74,853   230   325   160   242   75,810 

Commercial real estate

  325,018   73   —   —   1,250   326,341 

Commercial business

  65,305   —   —   234   338   65,877 

Consumer

  48,344   117   77   —   14   48,552 

Total loans

 $783,741  $2,333  $990  $685  $2,654  $790,403 

 

The following table presents the Corporation’s nonaccrual loans by aging category as of June 30, 2022 and December 31, 2021:

 

(Dollar amounts in thousands)

                    
  Not Past Due 30-59 Days Past Due 60-89 Days Past Due 90 Days + Past Due 

Total

June 30, 2022:

                    

Residential first mortgages

 $184  $—  $68  $445  $697 

Home equity and lines of credit

  4   —   —   237   241 

Commercial real estate

  2,209   8   —   60   2,277 

Commercial business

  85   —   —   —   85 

Consumer

  —   —   —   10   10 

Total loans

 $2,482  $8  $68  $752  $3,310 
                     

December 31, 2021:

                    

Residential first mortgages

 $196  $—  $69  $545  $810 

Home equity and lines of credit

  4   —   —   238   242 

Commercial real estate

  1,052   10   —   188   1,250 

Commercial business

  338   —   —   —   338 

Consumer

  —   —   —   14   14 

Total loans

 $1,590  $10  $69  $985  $2,654