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Note 4: Loans and Allowance for Loan Losses | 3 Months Ended
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Sep. 30, 2020
Notes |
Note 4: Loans and Allowance for Loan Losses | Note 4: Loans and Allowance for Credit Losses Classes of loans are summarized as follows:
(dollars in thousands) | September 30, 2020 | June 30, 2020
Real Estate Loans: |  |
Residential | $ 635,718 | $ 627,357
Construction | 207,737 | 185,924
Commercial | 884,835 | 887,419
Consumer loans | 80,906 | 80,767
Commercial loans | 481,582 | 468,448
| 2,290,778 | 2,249,915
Loans in process | (101,392) | (78,452)
Deferred loan fees, net | (3,839) | (4,395)
Allowance for credit losses | (35,084) | (25,139)
Total loans | $ 2,150,463 | $ 2,141,929
The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. At September 30, 2020, the Bank had purchased participations in 22 loans totaling $55.7 million, as compared to 23 loans totaling $58.2 million at June 30, 2020. Residential Mortgage Lending. The Company actively originates loans for the acquisition or refinance of one- to four-family residences. This category includes both fixed-rate and adjustable-rate mortgage (“ARM”) loans amortizing over periods of up to 30 years, and the properties securing such loans may be owner-occupied or non-owner-occupied. Single-family residential loans do not generally exceed 90% of the lower of the appraised value or purchase price of the secured property. Substantially all of the one- to four-family residential mortgage originations in the Company’s portfolio are located within the Company’s primary lending area. General risks related to one- to four-family residential lending include stability of borrower income and collateral values. The Company also originates loans secured by multi-family residential properties that are often located outside the Company’s primary lending area but made to borrowers who operate within our primary market area. The majority of the multi-family residential loans that are originated by the Bank are amortized over periods generally up to 25 years, with balloon maturities typically up to ten years. Both fixed and adjustable interest rates are offered and it is typical for the Company to include an interest rate “floor” and “ceiling” in the loan agreement. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property. General risks related to multi-family residential lending include rental demand, rental rates, and vacancies, as well as collateral values and borrower leverage. Commercial Real Estate Lending. The Company actively originates loans secured by owner- and non-owner-occupied commercial real estate including farmland, single- and multi-tenant retail properties, restaurants, hotels, land (improved and unimproved), nursing homes and other healthcare facilities, warehouses and distribution centers, convenience stores, automobile dealerships and other automotive-related services, and other businesses. These properties are typically owned and operated by borrowers headquartered within the Company’s primary lending area, however, the property may be located outside our primary lending area. Risks to owner-occupied commercial real estate lending generally include the continued profitable operation of the borrower’s enterprise, as well as general collateral values, and may be heightened by unique, specific uses of the property serving as collateral. Non-owner-occupied commercial real estate lending risks include tenant demand and performance, lease rates, and vacancies, as well as collateral values and borrower leverage. These factors may be influenced by general economic conditions in the region, or in the United States generally. Risks to lending on farmland include unique factors such as commodity prices, yields, input costs, and weather, as well as farmland values. Most commercial real estate loans originated by the Company generally are based on amortization schedules of up to 25 years with monthly principal and interest payments. Generally, the interest rate received on these loans is fixed for a maturity for up to ten years, with a balloon payment due at maturity. Alternatively, for some loans, the interest rate adjusts at least annually after an initial period up to seven years. The Company typically includes an interest rate “floor” in the loan agreement. Generally, improved commercial real estate loan amounts do not exceed 80% of the lower of the appraised value or the purchase price of the secured property. Agricultural real estate terms offered differ slightly, with amortization schedules of up to 25 years with an 80% loan-to-value ratio, or 30 years with a 75% loan-to-value ratio. Construction Lending. The Company originates real estate loans secured by property or land that is under construction or development. Construction loans originated by the Company are generally to finance the construction of owner occupied residential real estate, or to finance speculative construction of residential real estate, land development, or owner-operated or non-owner occupied commercial real estate. During construction, these loans typically require monthly interest-only payments, with single-family residential construction loans having maturities ranging from six to twelve months, while multifamily or commercial construction loans typically mature in 12 to 24 months. Once construction is completed, permanent construction loans may be converted to monthly payments using amortization schedules of up to 30 years on residential and generally up to 25 years on commercial real estate. Construction and development lending risks generally include successful timely and on-budget completion of the project, followed by the sale of the property in the case of land development or non-owner-occupied real estate, or the long-term occupancy of the property by the builder in the case of owner-occupied construction. Changes in real estate values or other economic conditions may impact the ability of a borrower to sell property developed for that purpose. While the Company typically utilizes relatively short maturity periods to closely monitor the inherent risks associated with construction loans for these loans, weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately eight months. During construction, loans typically require monthly interest only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically performs interim inspections which further allow the Company opportunity to assess risk. At September 30, 2020, construction loans outstanding included 78 loans, totaling $36.1 million, for which a modification had been agreed to. At June 30, 2020, construction loans outstanding included 77 loans, totaling $48.8 million, for which a modification had been agreed to. In general, these modifications were solely for the purpose of extending the maturity date due to conditions described above. As these modifications were not executed due to financial difficulty on the part of the borrower, they were not accounted for as troubled debt restructurings (TDRs). Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans with such modifications in effect at September 30, 2020, included drawn balances of $4.4 million in construction loans which were modified at the borrower’s request due to the current situation of heightened economic uncertainty triggered by the pandemic. Consumer Lending. The Company offers a variety of secured consumer loans, including home equity, direct and indirect automobile loans, second mortgages, mobile home loans and loans secured by deposits. The Company originates substantially all of its consumer loans in its primary lending area. Usually, consumer loans are originated with fixed rates for terms of up to five years, with the exception of home equity lines of credit, which are variable, tied to the prime rate of interest and are for a period of ten years. Home equity lines of credit (HELOCs) are secured with a deed of trust and are issued up to 100% of the appraised or assessed value of the property securing the line of credit, less the outstanding balance on the first mortgage and are typically issued for a term of ten years. Interest rates on the HELOCs are generally adjustable. Interest rates are based upon the loan-to-value ratio of the property with better rates given to borrowers with more equity. Risks related to HELOC lending generally include the stability of borrower income and collateral values. Automobile loans originated by the Company include both direct loans and a smaller amount of loans originated by auto dealers. The Company generally pays a negotiated fee back to the dealer for indirect loans. Typically, automobile loans are made for terms of up to 60 months for new and used vehicles. Loans secured by automobiles have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle. Risks to automobile and other consumer lending generally include the stability of borrower income and borrower willingness to repay. Commercial Business Lending. The Company’s commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory, equipment and operating lines of credit, including agricultural production and equipment loans. The Company offers both fixed and adjustable rate commercial business loans. Generally, commercial loans secured by fixed assets are amortized over periods up to five years, while commercial operating lines of credit or agricultural production lines are generally for a one year period. Commercial lending risk is primarily driven by the borrower’s successful generation of cash flow from their business enterprise sufficient to service debt, and may be influenced by factors specific to the borrower and industry, or by general economic conditions in the region or in the United States generally. Agricultural production or equipment lending includes unique risk factors such as commodity prices, yields, input costs, and weather, as well as farm equipment values. Allowance for Credit Losses. The provision for credit losses for the three-month period ended September 30, 2020, was $774,000, relatively low as compared to earlier quarters in calendar year 2020, or as compared to the same period of the prior fiscal year. The charge was based on the estimated required ACL, reflecting management’s estimate of the current expected credit losses in the Company’s loan portfolio at September 30, 2020, and as of that date the Company’s ACL was $35.1 million. The relatively low provision was attributable primarily to the current quarter’s relatively low loan growth and stable credit quality indicators quarter-over-quarter. While uncertainty remains regarding the economic environment resulting from the COVID-19 pandemic and the potential impact on the Company’s borrowers, the Company assesses that the economic outlook is little changed as compared to June 30, 2020. However, there remains significant uncertainty regarding the possible length of the COVID-19 pandemic and the aggregate impact that it will have on global and regional economies, including uncertainty regarding the effectiveness of recent efforts by the U.S. government and the Federal Reserve to respond to the pandemic and its economic impact. Management considered the impact of the pandemic on its consumer and business borrowers, particularly those business borrowers most affected by efforts to contain the pandemic, including our borrowers in the retail and multi-tenant retail industry, restaurants, and hotels. To date, various relief efforts, notably including the availability of forgivable Paycheck Protection Program (PPP) loans to borrowers and deferrals or modifications available as encouraged by banking regulatory authorities and the CARES Act, have resulted in limited impact on the Company’s credit quality indicators, as is true of the industry generally. It is possible that the ongoing adverse effects of the pandemic may not be somewhat offset by future relief efforts, which could cause the outlook for economic conditions and levels and trends of past-due loans to significantly worsen, and require additions to the ACL. The following tables present the balance in the ACL and the recorded investment in loans (excluding loans in process and deferred loan fees) based on portfolio segment as of September 30 and June 30, 2020, and activity in the ACL and ALLL for the three-month periods ended September 30, 2020 and 2019:
| At period end and for the three months ended September 30, 2020
| Residential | Construction | Commercial |  |  |
(dollars in thousands) | Real Estate | Real Estate | Real Estate | Consumer | Commercial | Total
Allowance for credit losses: |  |  |  |  |  |
Balance, beginning of period prior to adoption of CECL | $ 4,875 | $ 2,010 | $ 12,132 | $ 1,182 | $ 4,940 | $ 25,139
Impact of CECL adoption | 3,521 | (121) | 3,856 | 1,065 | 1,012 | 9,333
Provision charged to expense | 252 | 3 | 61 | 61 | 397 | 774
Losses charged off | (19) | - | - | (6) | (145) | (170)
Recoveries | - | - | 1 | 3 | 4 | 8
Balance, end of period | $ 8,629 | $ 1,892 | $ 16,050 | $ 2,305 | $ 6,208 | $ 35,084
| At period end and for the three months ended September 30, 2019
| Residential | Construction | Commercial |  |  |
(dollars in thousands) | Real Estate | Real Estate | Real Estate | Consumer | Commercial | Total
Allowance for loan losses: |  |  |  |  |  |
Balance, beginning of period | $ 3,706 | $ 1,365 | $ 9,399 | $ 1,046 | $ 4,387 | $ 19,903
Provision charged to expense | (134) | 174 | 376 | 96 | 384 | 896
Losses charged off | - | - | - | (72) | (35) | (107)
Recoveries | - | - | 14 | 4 | - | 18
Balance, end of period | $ 3,572 | $ 1,539 | $ 9,789 | $ 1,074 | $ 4,736 | $ 20,710
Ending Balance: individually evaluated for impairment | $ - | $ - | $ - | $ - | $ - | $ -
Ending Balance: collectively evaluated for impairment | $ 3,572 | $ 1,539 | $ 9,789 | $ 1,074 | $ 4,736 | $ 20,710
Ending Balance: loans acquired with deteriorated credit quality | $ - | $ - | $ - | $ - | $ - | $ -
| At June 30, 2020
| Residential | Construction | Commercial |  |  |
(dollars in thousands) | Real Estate | Real Estate | Real Estate | Consumer | Commercial | Total
Allowance for loan losses: |  |  |  |  |  |
Balance, end of period | $ 4,875 | $ 2,010 | $ 12,132 | $ 1,182 | $ 4,940 | $ 25,139
Ending Balance: individually evaluated for impairment | $ - | $ - | $ - | $ - | $ - | $ -
Ending Balance: collectively evaluated for impairment | $ 4,875 | $ 2,010 | $ 12,132 | $ 1,182 | $ 4,940 | $ 25,139
Ending Balance: loans acquired with deteriorated credit quality | $ - | $ - | $ - | $ - | $ - | $ -
Loans: |  |  |  |  |  |
Ending Balance: individually evaluated for impairment | $ - | $ - | $ - | $ - | $ - | $ -
Ending Balance: collectively evaluated for impairment | $ 626,085 | $ 106,194 | $ 872,716 | $ 80,767 | $ 463,902 | $ 2,149,664
Ending Balance: loans acquired with deteriorated credit quality | $ 1,272 | $ 1,278 | $ 14,703 | $ - | $ 4,546 | $ 21,799
Included in the Company’s loan portfolio are certain loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination, which are considered purchased credit deteriorated (PCD) loans. Prior to the July 1, 2020 adoption of ASU 2016-13, these loans were accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were described as purchased credit impaired (PCI) loans. Under ASC 310-30, these loans were written down at acquisition to an amount estimated to be collectible, and, unless there was further deterioration following the acquisition, an ALLL was not recognized for these loans. As a result, certain historical ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s credit quality over time. The ratios particularly affected by accounting under ASC 310-30 include the allowance as a percentage of loans, nonaccrual loans, and nonperforming assets, and nonaccrual loans and nonperforming loans as a percentage of total loans. For more information about the transition from PCI to PCD status of the Company’s acquired loans, see Note 2: Organization and Summary of Significant Accounting Policies, Loans. Credit Quality Indicators. The Company 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. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination, and is updated on a quarterly basis for loans risk rated Watch, Special Mention, Substandard, or Doubtful. In addition, lending relationships of $3 million or more, exclusive of any consumer or owner-occupied residential loan, are subject to an annual credit analysis which is prepared by the loan administration department and presented to a loan committee with appropriate lending authority. A sample of lending relationships in excess of $1 million (exclusive of single-family residential real estate loans) are subject to an independent loan review annually, in order to verify risk ratings. The Company uses the following definitions for risk ratings: Watch – Loans classified as watch exhibit weaknesses that require more than usual monitoring. Issues may include deteriorating financial condition, payments made after due date but within 30 days, adverse industry conditions or management problems. Special Mention – Loans classified as special mention exhibit signs of further deterioration but still generally make payments within 30 days. This is a transitional rating and loans should typically not be rated Special Mention for more than 12 months. Substandard – Loans classified as substandard possess weaknesses that jeopardize the ultimate collection of the principal and interest outstanding. These loans exhibit continued financial losses, ongoing delinquency, overall poor financial condition, and insufficient collateral. 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 of substandard loans, and have deteriorated to the level that there is a high probability of substantial loss. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. A periodic review of selected credits (based on loan size and type) is conducted to identify loans with heightened risk or probable losses and to assign risk grades. The primary responsibility for this review rests with loan administration personnel. This review is supplemented with periodic examinations of both selected credits and the credit review process by the Company’s internal audit function and applicable regulatory agencies. The information from these reviews assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit continues to share similar risk characteristics with collectively evaluated loan pools, or whether credit losses for the loan should be evaluated on an individual loan basis. The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and year of origination as of September 30, 2020. This table includes PCD loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification:
|  |  |  |  |  |  | Revolving |
| 2021 | 2020 | 2019 | 2018 | 2017 | Prior | loans | Total
Residential Real Estate |  |  |  |  |  |  |  |
Pass | $ 123,469 | $ 225,522 | $ 65,243 | $ 53,150 | $ 38,183 | $ 117,755 | $ 5,416 | $ 628,738
Watch | 125 | 122 | 419 | - | 98 | 876 | - | 1,640
Special Mention | - | - | - | 14 | - | 24 | - | 38
Substandard | 145 | 1,007 | 227 | 73 | - | 3,818 | - | 5,270
Doubtful | - | - | - | - | - | 32 | - | 32
Total Residential Real Estate | $ 123,739 | $ 226,651 | $ 65,889 | $ 53,237 | $ 38,281 | $ 122,505 | $ 5,416 | $ 635,718
Construction Real Estate |  |  |  |  |  |  |  |
Pass | $ 42,502 | $ 52,358 | $ 6,914 | $ - | $ - | $ - | $ 205 | $ 101,979
Watch | - | - | 417 | 3,949 | - | - | - | 4,366
Special Mention | - | - | - | - | - | - | - | -
Substandard | - | - | - | - | - | - | - | -
Doubtful | - | - | - | - | - | - | - | -
Total Construction Real Estate | $ 42,502 | $ 52,358 | $ 7,331 | $ 3,949 | $ - | $ - | $ 205 | $ 106,345
Commercial Real Estate |  |  |  |  |  |  |  |
Pass | $ 64,829 | $ 222,926 | $ 151,121 | $ 158,268 | $ 87,699 | $ 117,612 | $ 27,117 | $ 829,572
Watch | 508 | 9,348 | 10,611 | 4,956 | 14,252 | 1,493 | 904 | 42,072
Special Mention | - | - | - | - | - | - | - | -
Substandard | 1,222 | 6,149 | 560 | 285 | 2,718 | 1,369 | - | 12,303
Doubtful | - | - | 888 | - | - | - | - | 888
Total Commercial Real Estate | $ 66,559 | $ 238,423 | $ 163,180 | $ 163,509 | $ 104,669 | $ 120,474 | $ 28,021 | $ 884,835
Consumer |  |  |  |  |  |  |  |
Pass | $ 7,540 | $ 17,077 | $ 7,148 | $ 2,512 | $ 1,289 | $ 788 | $ 44,316 | $ 80,670
Watch | - | - | - | - | - | - | - | -
Special Mention | - | - | - | - | - | - | - | -
Substandard | - | 42 | 15 | 41 | 25 | 42 | 71 | 236
Doubtful | - | - | - | - | - | - | - | -
Total Consumer | $ 7,540 | $ 17,119 | $ 7,163 | $ 2,553 | $ 1,314 | $ 830 | $ 44,387 | $ 80,906
Commercial |  |  |  |  |  |  |  |
Pass | $ 27,116 | $ 232,331 | $ 37,049 | $ 21,354 | $ 10,050 | $ 13,662 | $ 130,547 | $ 472,109
Watch | 1,009 | 162 | 64 | 8 | 12 | - | 1,725 | 2,980
Special Mention | - | - | - | - | - | - | - | -
Substandard | 35 | 1,584 | 1,640 | 462 | 180 | 8 | 2,584 | 6,493
Doubtful | - | - | - | - | - | - | - | -
Total Commercial | $ 28,160 | $ 234,077 | $ 38,753 | $ 21,824 | $ 10,242 | $ 13,670 | $ 134,856 | $ 481,582
Total Loans |  |  |  |  |  |  |  |
Pass | $ 265,456 | $ 750,214 | $ 267,475 | $ 235,284 | $ 137,221 | $ 249,817 | $ 207,601 | $ 2,113,068
Watch | 1,642 | 9,632 | 11,511 | 8,913 | 14,362 | 2,369 | 2,629 | 51,058
Special Mention | - | - | - | 14 | - | 24 | - | 38
Substandard | 1,402 | 8,782 | 2,442 | 861 | 2,923 | 5,237 | 2,655 | 24,302
Doubtful | - | - | 888 | - | - | 32 | - | 920
Total | $ 268,500 | $ 768,628 | $ 282,316 | $ 245,072 | $ 154,506 | $ 257,479 | $ 212,885 | $ 2,189,386
At September 30, 2020, PCD loans comprised $5.6 million of credits rated “Pass”; $10.1 million of credits rated “Watch”; none rated “Special Mention”; $5.7 million of credits rated “Substandard”; and none rated “Doubtful”. The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and payment activity as of June 30, 2020. This table includes PCI loans, which were reported according to risk categorization after acquisition based on the Company’s standards for such classification:
| June 30, 2020
| Residential | Construction | Commercial |  |
(dollars in thousands) | Real Estate | Real Estate | Real Estate | Consumer | Commercial
Pass | $ 620,004 | $ 103,105 | $ 829,276 | $ 80,517 | $ 457,385
Watch | 1,900 | 4,367 | 45,262 | 45 | 4,708
Special Mention | - | - | 403 | 25 | -
Substandard | 5,453 | - | 11,590 | 180 | 6,355
Doubtful | - | - | 888 | - | -
Total | $ 627,357 | $ 107,472 | $ 887,419 | $ 80,767 | $ 468,448
At June 30, 2020, PCI loans comprised $5.9 million of credits rated “Pass”; $10.3 million of credits rated “Watch”, none rated “Special Mention”, $5.6 million of credits rated “Substandard” and none rated “Doubtful”. Past-due Loans. The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of September 30 and June 30, 2020. These tables include PCD and PCI loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification:
| September 30, 2020
|  |  | Greater Than |  |  |  | Greater Than 90
| 30-59 Days | 60-89 Days | 90 Days | Total |  | Total Loans | Days Past Due
(dollars in thousands) | Past Due | Past Due | Past Due | Past Due | Current | Receivable | and Accruing
Real Estate Loans: |  |  |  |  |  |  |
Residential | $ 974 | $ 37 | $ 1,343 | $ 2,354 | $ 633,364 | $ 635,718 | $ -
Construction | 200 | - | - | 200 | 106,145 | 106,345 | -
Commercial | 1,008 | 9 | 760 | 1,777 | 883,058 | 884,835 | -
Consumer loans | 761 | 78 | 248 | 1,087 | 79,819 | 80,906 | -
Commercial loans | 756 | 243 | 490 | 1,489 | 480,093 | 481,582 | -
Total loans | $ 3,699 | $ 367 | $ 2,841 | $ 6,907 | $ 2,182,479 | $ 2,189,386 | $ -
| June 30, 2020
|  |  | Greater Than |  |  |  | Greater Than 90
| 30-59 Days | 60-89 Days | 90 Days | Total |  | Total Loans | Days Past Due
(dollars in thousands) | Past Due | Past Due | Past Due | Past Due | Current | Receivable | and Accruing
Real Estate Loans: |  |  |  |  |  |  |
Residential | $ 772 | $ 378 | $ 654 | $ 1,804 | $ 625,553 | $ 627,357 | $ -
Construction | - | - | - | - | 107,472 | 107,472 | -
Commercial | 641 | 327 | 1,073 | 2,041 | 885,378 | 887,419 | -
Consumer loans | 180 | 53 | 193 | 426 | 80,341 | 80,767 | -
Commercial loans | 93 | 1,219 | 810 | 2,122 | 466,326 | 468,448 | -
Total loans | $ 1,686 | $ 1,977 | $ 2,730 | $ 6,393 | $ 2,165,070 | $ 2,171,463 | $ -
Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans with such modifications in effect at September 30, 2020, included $93.6 million in loans reported as current in the above table, none of which were past due. Loans with such modifications in effect at June 30, 2020, included $380.1 million in loans reported as current in the above table, while an additional $29,000 of consumer loans and $1,000 in residential real estate loans with such modifications were reported as 30-59 days past due, and $66,000 of commercial loans with such modifications were reported as 60-89 days past due. At September 30, and June 30, 2020 there were no PCD or PCI loans that were greater than 90 days past due. Loans that experience insignificant payment delays and payment shortfalls generally are not adversely classified or determined to not share similar risk characteristics with collectively evaluated pools of loans for determination of the ACL estimate. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Significant payment delays or shortfalls may lead to a determination that a loan should be individually evaluated for estimated credit losses. Collateral-dependent Loans. At September 30, 2020, there were no collateral-dependent loans that were individually evaluated to determine expected credit losses. Impairment. Prior to the July 1, 2020, adoption of ASU 2016-13, a loan was considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it was probable the Company would be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans included nonperforming loans, as well as performing loans modified in troubled debt restructurings where concessions were granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The table below presents impaired loans (excluding loans in process and deferred loan fees) as of June 30, 2020. The table includes PCI loans at June 30, 2020 for which it was deemed probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. In an instance where, subsequent to the acquisition, the Company determined it was probable, for a specific loan, that cash flows received would exceed the amount previously expected, the Company will recalculate the amount of accretable yield in order to recognize the improved cash flow expectation as additional interest income over the remaining life of the loan. These loans, however, continued to be reported as impaired loans. In an instance where, subsequent to the acquisition, the Company determined it was probable, for a specific loan, that cash flows received would be less than the amount previously expected, the Company would allocate a specific allowance under the terms of ASC 310-10-35.
| June 30, 2020
| Recorded | Unpaid Principal | Specific
(dollars in thousands) | Balance | Balance | Allowance
Loans without a specific valuation allowance: |
Residential real estate | $ 3,811 | $ 4,047 | $ -
Construction real estate | 1,277 | 1,312 | -
Commercial real estate | 19,271 | 23,676 | -
Consumer loans | - | - | -
Commercial loans | 5,040 | 6,065 | -
Loans with a specific valuation allowance: |  |  |
Residential real estate | $ - | $ - | $ -
Construction real estate | - | - | -
Commercial real estate | - | - | -
Consumer loans | - | - | -
Commercial loans | - | - | -
Total: |  |  |
Residential real estate | $ 3,811 | $ 4,047 | $ -
Construction real estate | $ 1,277 | $ 1,312 | $ -
Commercial real estate | $ 19,271 | $ 23,676 | $ -
Consumer loans | $ - | $ - | $ -
Commercial loans | $ 5,040 | $ 6,065 | $ -
At June 30, 2020, PCI loans comprised $21.8 million of impaired loans without a specific valuation allowance. The following table presents information regarding interest income recognized on impaired loans:
| For the three-month period ended
| September 30, 2019
| Average |
(dollars in thousands) | Investment in | Interest Income
| Impaired Loans | Recognized
Residential Real Estate | $ 1,677 | $ 23
Construction Real Estate | 1,306 | 48
Commercial Real Estate | 17,721 | 335
Consumer Loans | - | -
Commercial Loans | 5,812 | 93
Total Loans | $ 26,516 | $ 499
Interest income on impaired loans recognized on a cash basis in the three-month period ended September 30, 2019, was immaterial. For the three-month period ended September 30, 2019, the amount of interest income recorded for impaired loans that represented a change in the present value of cash flows attributable to the passage of time was approximately $83,000. Nonaccrual Loans. The following table presents the Company’s amortized cost basis of nonaccrual loans segmented by class of loans at September 30 and June 30, 2020. The table excludes performing TDRs.
(dollars in thousands) | September 30, 2020 | June 30, 2020
Residential real estate | $ 4,339 | $ 4,010
Construction real estate | - | -
Commercial real estate | 3,052 | 3,106
Consumer loans | 255 | 196
Commercial loans | 1,129 | 1,345
Total loans | $ 8,775 | $ 8,657
At September 30, 2020, there were no nonaccrual loans individually evaluated for which no ACL was recorded. Interest income recognized on nonaccrual loans in the three-month periods ended September 30, 2019 and 2020, was immaterial. Troubled Debt Restructurings. Prior to the July 1, 2020, adoption of ASU 2016-13, loans restructured as TDRs were included in certain loan categories classified as impaired loans, where economic concessions have been granted to borrowers who have experienced financial difficulties. Subsequent to the adoption of ASU 2016-13, TDRs are evaluated to determine whether they share similar risk characteristics with collectively evaluated loan pools, or must be individually evaluated. These concessions typically result from our loss mitigation activities, and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. In general, the Company’s loans that have been subject to classification as TDRs are the result of guidance under ASU No. 2011-02, which indicates that the Company may not consider the borrower’s effective borrowing rate on the old debt immediately before the restructuring in determining whether a concession has been granted. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months. During the three-month periods ended September 30, 2020 and 2019, certain loans modified were classified as TDRs. They are shown, segregated by class, in the table below:
|  | For the three-month periods ended
|  | September 30, 2020 | September 30, 2019
|  | Number of | Recorded | Number of | Recorded
(dollars in thousands) |  | modifications | Investment | modifications | Investment
Residential real estate |  | 1 | $ 98 | - | $ -
Construction real estate |  | - | - | - | -
Commercial real estate |  | 2 | 1,840 | - | -
Consumer loans |  | - | - | - | -
Commercial loans |  | 1 | 36 | - | -
Total |  | 4 | $ 1,974 | - | $ -
Performing loans classified as TDRs and outstanding at September 30 and June 30, 2020, segregated by class, are shown in the table below. Nonperforming TDRs are shown as nonaccrual loans.
|  | September 30, 2020 | June 30, 2020
|  | Number of | Recorded | Number of | Recorded
(dollars in thousands) |  | modifications | Investment | modifications | Investment
Residential real estate |  | 3 | $ 1,015 | 3 | $ 791
Construction real estate |  | - | - | - | -
Commercial real estate |  | 7 | 3,904 | 10 | 4,544
Consumer loans |  | - | - | - | -
Commercial loans |  | 8 | 3,229 | 7 | 3,245
Total |  | 18 | $ 8,148 | 20 | $ 8,580
Residential Real Estate Foreclosures. The Company may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance repossession. As of September 30, and June 30, 2020, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $565,000 and $563,000, respectively. In addition, as of September 30 and June 30, 2020, the Company had residential mortgage loans and home equity loans with a carrying value of $329,000 and $435,000, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process. Purchased Credit Deteriorated Loans. Prior to the July 1, 2020, adoption of ASU 2016-13, loans acquired in an acquisition that had evidence of credit quality since origination and for which it was probable that the Company would be unable to collect all contractually required payments receivable were considered PCI. Subsequent to the July 1, 2020, adoption of ASU 2016-13, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. All loans considered to be PCI prior to July 1, 2020, were converted to PCD on that date. The carrying amount of $21.8 million in PCI loans was included in the balance sheet amount of loans receivable at June 30, 2020, with no associated ACL. In accordance with ASU 2016-13, the Company did not reassess whether the PCI loans met the criteria of PCD loans as of the adoption date. The amortized cost of the PCD loans were adjusted to reflect the addition of $434,000 to the ACL. PCD loans receivable, net of ACL, totaling $20.9 million were included in the balance sheet amount of loans receivable at September 30, 2020. During the three-month periods ended September 30, 2019 and 2020, the Company did not increase or reverse ALLL or ACL related to PCI or PCD loans.

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- Definition The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses. + References Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -URI http://asc.fasb.org/subtopic&trid=2196772 + Details
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