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Note 3 - Loans and Allowance for Loan Losses
 9 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]
3.
Loans and Allowance for Loan Losses
 
The Company’s loan and allowance for loan loss policies are as follows:
 
Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company originates real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans to customers in the Louisville, Kentucky metropolitan statistical area (MSA). The ability of the Company’s customers to honor their loan agreements is largely dependent upon the real estate and general economic conditions in this area.
 
Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status.
 
The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become
90
days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote.
 
A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least
six
consecutive months.
 
For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will
not
be repaid. A specific reserve is recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment. Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed below. Specific reserves are
not
considered charge-offs in management’s analysis of the allowance for loan losses because they are estimates and the outcome of the loan relationship is undetermined.
 
Consumer loans
not
secured by real estate are typically charged off at
90
days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after
45
days past due. Charge-offs are typically recorded on loans secured by real estate when the property is foreclosed upon.
 
The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the loan portfolio at the balance sheet date. Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
 
The Company uses a disciplined process and methodology to evaluate the allowance for loan losses on at least a quarterly basis that is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that
may
affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
 
The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated for impairment or loans otherwise classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the underlying discounted collateral value (or present value of estimated future cash flows) of the impaired loan is lower than the carrying value of that loan.
 
The general component covers loans
not
considered to be impaired. Such loans are pooled by segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior
five
years. The Company’s historical loss experience is then adjusted for qualitative factors that are reviewed on a quarterly basis based on the risks present for each portfolio segment. Management considers changes and trends in the following qualitative loss factors: underwriting standards, economic conditions, changes and trends in past due and classified loans, collateral valuations, loan concentrations and other internal and external factors.
 
Management also applies additional loss factor multiples to loans classified as watch, special mention and substandard that are
not
individually evaluated for impairment. The loss factor multiples for classified loans are based on management’s assessment of historical trends regarding losses experienced on classified loans in prior periods. See below for additional discussion of the qualitative factors utilized in management’s allowance for loan loss methodology at
September 30, 2019
and
December 31, 2018.
 
Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors. Management also monitors the differences between estimated and actual incurred loan losses for loans considered impaired in order to evaluate the effectiveness of the estimation process and make any changes in the methodology as necessary.
 
Management utilizes the following portfolio segments in its analysis of the allowance for loan losses: residential real estate, land, construction, commercial real estate, commercial business, home equity and
second
mortgage, and other consumer loans. Additional discussion of the portfolio segments and the risks associated with each segment can be found in the Company’s Annual Report on Form
10
-K for the year ended
December 31, 2018.
 
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are
not
classified as impaired. 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. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
 
Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other factors. New appraisals are generally obtained for all significant properties when a loan is identified as impaired, and a property is considered significant if the value of the property is estimated to exceed
$200,000.
Subsequent appraisals are obtained as needed or if management believes there has been a significant change in the market value of the property. In instances where it is
not
deemed necessary to obtain a new appraisal, management bases its impairment and allowance for loan loss analysis on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the property.
 
At
September 30, 2019,
the Company held
no
foreclosed real estate. At
December 31, 2018,
the balance of foreclosed real estate includes
$33,000
of residential real estate properties where physical possession has been obtained. At
September 30, 2019
and
December 31, 2018,
the recorded investment in loans secured by residential real estate properties for which formal foreclosure proceedings are in process was
$441,000
and
$365,000,
respectively.
 
Loans at
September 30, 2019
and
December 31, 2018
consisted of the following:
 
   
September 30,
  
December 31,
(In thousands)  
2019
  
2018
         
Real estate mortgage loans:                
Residential   $
142,801
     $
136,445
  
Land    
21,929
      
22,607
  
Residential construction    
32,250
      
31,459
  
Commercial real estate    
116,584
      
107,445
  
Commercial real estate construction    
23,469
      
20,591
  
Commercial business loans    
38,620
      
36,297
  
Consumer loans:                
Home equity and second mortgage loans    
52,387
      
51,731
  
Automobile loans    
47,440
      
42,124
  
Loans secured by savings accounts    
1,303
      
1,399
  
Unsecured loans    
3,634
      
3,638
  
Other consumer loans    
10,973
      
10,169
  
Gross loans    
491,390
      
463,905
  
Less undisbursed portion of loans in process    
(20,076
 )    
(26,675
 )
                 
Principal loan balance    
471,314
      
437,230
  
                 
Deferred loan origination fees, net    
1,119
      
1,095
  
Allowance for loan losses    
(4,739
 )    
(4,065
 )
                 
Loans, net   $
467,694
     $
434,260
  
 
The following table provides the components of the Company’s recorded investment in loans at
September 30, 2019:
 
    Residential           Commercial   Commercial   Home Equity  &   Other    
    Real Estate   Land   Construction   Real Estate   Business   2nd Mtg   Consumer   Total
    (In thousands)
Recorded Investment in Loans:
Principal loan balance   $
142,801
     $
21,929
     $
35,643
     $
116,584
     $
38,620
     $
52,387
     $
63,350
     $
471,314
  
                                                                 
Accrued interest receivable    
468
      
112
      
104
      
264
      
104
      
244
      
255
      
1,551
  
                                                                 
Net deferred loan origination fees and costs    
116
      
16
      
(7
 )    
(58
 )    
-
      
1,052
      
-
      
1,119
  
                                                                 
Recorded investment in loans   $
143,385
     $
22,057
     $
35,740
     $
116,790
     $
38,724
     $
53,683
     $
63,605
     $
473,984
  
                                                                 
                                                                 
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment   $
1,988
     $
89
     $
-
     $
689
     $
255
     $
37
     $
49
     $
3,107
  
Collectively evaluated for impairment    
141,114
      
21,968
      
35,740
      
116,059
      
38,469
      
53,646
      
63,556
      
470,552
  
Acquired with deteriorated credit quality    
283
      
-
      
-
      
42
      
-
      
-
      
-
      
325
  
                                                                 
Ending balance   $
143,385
     $
22,057
     $
35,740
     $
116,790
     $
38,724
     $
53,683
     $
63,605
     $
473,984
  
 
 
The following table provides the components of the Company’s recorded investment in loans at
December 31, 2018:
 
    Residential           Commercial   Commercial   Home Equity  &   Other    
    Real Estate   Land   Construction   Real Estate   Business   2nd Mtg   Consumer   Total
    (In thousands)
Recorded Investment in Loans:
Principal loan balance   $
136,445
     $
22,607
     $
25,375
     $
107,445
     $
36,297
     $
51,731
     $
57,330
     $
437,230
  
                                                                 
Accrued interest receivable    
475
      
119
      
76
      
265
      
120
      
247
      
228
      
1,530
  
                                                                 
Net deferred loan origination fees and costs    
99
      
18
      
(9
 )    
(38
 )    
-
      
1,025
      
-
      
1,095
  
                                                                 
Recorded investment in loans   $
137,019
     $
22,744
     $
25,442
     $
107,672
     $
36,417
     $
53,003
     $
57,558
     $
439,855
  
                                                                 
                                                                 
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment   $
2,184
     $
152
     $
521
     $
466
     $
427
     $
35
     $
-
     $
3,785
  
Collectively evaluated for impairment    
134,553
      
22,592
      
24,921
      
107,158
      
35,990
      
52,968
      
57,558
      
435,740
  
Acquired with deteriorated credit quality    
282
      
-
      
-
      
48
      
-
      
-
      
-
      
330
  
                                                                 
Ending balance   $
137,019
     $
22,744
     $
25,442
     $
107,672
     $
36,417
     $
53,003
     $
57,558
     $
439,855
  
 
 
An analysis of the allowance for loan losses as of
September 30, 2019
is as follows:
 
    Residential           Commercial   Commercial   Home Equity &   Other    
    Real Estate   Land   Construction   Real Estate   Business   2nd Mtg   Consumer   Total
    (In thousands)
Ending allowance balance attributable to loans:
  
 
  
 
  
 
  
 
  
 
  
 
                                 
Individually evaluated for impairment   $
16
     $
-
     $
-
     $
-
     $
-
     $
14
     $
-
     $
30
  
Collectively evaluated for impairment    
770
      
172
      
351
      
1,482
      
552
      
473
      
889
      
4,689
  
Acquired with deteriorated credit quality    
20
      
-
      
-
      
-
      
-
      
-
      
-
      
20
  
                                                                 
Ending balance   $
806
     $
172
     $
351
     $
1,482
     $
552
     $
487
     $
889
     $
4,739
  
 
 
 
An analysis of the allowance for loan losses as of
December 31, 2018
is as follows:
 
    Residential           Commercial   Commercial   Home Equity &   Other    
    Real Estate   Land   Construction   Real Estate   Business   2nd Mtg   Consumer   Total
    (In thousands)
Ending allowance balance attributable to loans:
  
 
  
 
  
 
  
 
  
 
  
 
                                 
Individually evaluated for impairment   $
3
     $
-
     $
-
     $
44
     $
1
     $
-
     $
-
     $
48
  
Collectively evaluated for impairment    
690
      
162
      
224
      
1,357
      
458
      
443
      
683
      
4,017
  
Acquired with deteriorated credit quality    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                 
Ending balance   $
693
     $
162
     $
224
     $
1,401
     $
459
     $
443
     $
683
     $
4,065
  
 
 
 
An analysis of the changes in the allowance for loan losses for the
three
months and
nine
months ended
September 30, 2019
is as follows:
 
    Residential           Commercial   Commercial   Home Equity &   Other    
    Real Estate   Land   Construction   Real Estate   Business   2nd Mtg   Consumer   Total
    (In thousands)
Allowance for loan losses:                                
Changes in Allowance for Loan Losses for the three-months ended September 30, 2019
Beginning balance   $
754
     $
170
     $
316
     $
1,452
     $
596
     $
472
     $
849
     $
4,609
  
Provisions for loan losses    
56
      
1
      
35
      
30
      
(48
 )    
14
      
137
      
225
  
Charge-offs    
(4
 )    
-
      
-
      
-
      
-
      
-
      
(156
 )    
(160
 )
Recoveries    
-
      
1
      
-
      
-
      
4
      
1
      
59
      
65
  
                                                                 
Ending balance   $
806
     $
172
     $
351
     $
1,482
     $
552
     $
487
     $
889
     $
4,739
  
                                                                 
                                                                 
Changes in Allowance for Loan Losses for the nine-months ended September 30, 2019
Beginning balance   $
693
     $
162
     $
224
     $
1,401
     $
459
     $
443
     $
683
     $
4,065
  
Provisions for loan losses    
131
      
9
      
127
      
81
      
89
      
39
      
499
      
975
  
Charge-offs    
(135
 )    
-
      
-
      
-
      
-
      
(2
 )    
(456
 )    
(593
 )
Recoveries    
117
      
1
      
-
      
-
      
4
      
7
      
163
      
292
  
                                                                 
Ending balance   $
806
     $
172
     $
351
     $
1,482
     $
552
     $
487
     $
889
     $
4,739
  
 
 
An analysis of the changes in the allowance for loan losses for the
three
months and
nine
months ended
September 30, 2018
is as follows:
 
    Residential           Commercial   Commercial   Home Equity &   Other    
    Real Estate   Land   Construction   Real Estate   Business   2nd Mtg   Consumer   Total
    (In thousands)
Allowance for loan losses:                                
Changes in Allowance for Loan Losses for the three-months ended September 30, 2018
Beginning balance   $
688
     $
148
     $
216
     $
1,306
     $
417
     $
607
     $
485
     $
3,867
  
Provisions for loan losses    
71
      
13
      
1
      
8
      
55
      
89
      
218
      
455
  
Charge-offs    
(5
 )    
0
      
0
      
0
      
(2
 )    
(8
 )    
(180
 )    
(195
 )
Recoveries    
1
      
0
      
0
      
3
      
0
      
3
      
45
      
52
  
                                                                 
Ending balance   $
755
     $
161
     $
217
     $
1,317
     $
470
     $
691
     $
568
     $
4,179
  
                                                                 
                                                                 
Changes in Allowance for Loan Losses for the nine-months ended September 30, 2018
Beginning balance   $
219
     $
133
     $
245
     $
1,622
     $
291
     $
710
     $
414
     $
3,634
  
Provisions for loan losses    
608
      
28
      
(28
 )    
(340
 )    
181
      
(19
 )    
538
      
968
  
Charge-offs    
(79
 )    
0
      
0
      
0
      
(3
 )    
(21
 )    
(514
 )    
(617
 )
Recoveries    
7
      
0
      
0
      
35
      
1
      
21
      
130
      
194
  
                                                                 
Ending balance   $
755
     $
161
     $
217
     $
1,317
     $
470
     $
691
     $
568
     $
4,179
  
 
At
September 30, 2019
and
December 31, 2018,
management applied qualitative factor adjustments to various portfolio segments which increased the estimated allowance for loan losses related to those portfolio segments by approximately
$3.3
million and
$3.1
million, respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at
September 30, 2019
and
December 31, 2018.
 
Management also adjusts the historical loss factors for loans classified as watch, special mention and substandard that are
not
individually evaluated for impairment. The adjustments consider the increased likelihood of loss on classified loans based on the Company’s separate historical experience for classified loans. The effect of the adjustments for classified loans was to increase the estimated allowance for loan losses by
$321,000
and
$333,000
at
September 30, 2019
and
December 31, 2018,
respectively. These factors were
not
adjusted during the period from
December 31, 2018
to
September 30, 2019.
 
Additional discussion of the Bank’s allowance for loan loss methodology can be found in the Company’s Annual Report on Form
10
-K for the year ended
December 31, 2018.
 
The following table summarizes the Company’s impaired loans as of
September 30, 2019
and for the
three
months and
nine
months ended
September 30, 2019.
The Company did
not
recognize any interest income on impaired loans using the cash receipts method of accounting for the
three
or
nine
month periods ended
September 30, 2019:
 
                Three Months Ended   Nine Months Ended
    At September 30, 2019   September 30, 2019   September 30, 2019
   
 
  
Unpaid
  
 
  
Average
  
Interest
  
Average
  
Interest
   
Recorded
  
Principal
  
Related
  
Recorded
  
Income
  
Recorded
  
Income
   
Investment
  
Balance
  
Allowance
  
Investment
  
Recognized
  
Investment
  
Recognized
    (In thousands)
Loans with no related allowance recorded:
Residential   $
1,907
 
   $
2,019
 
   $
-
 
   $
1,882
 
   $
6
 
   $
2,032
 
   $
12
 
Land    
89
 
    
89
 
    
-
 
    
141
 
    
-
 
    
156
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
262
 
    
-
 
Commercial real estate    
689
 
    
687
 
    
-
 
    
686
 
    
14
 
    
470
 
    
25
 
Commercial business    
229
 
    
229
 
    
-
 
    
302
 
    
3
 
    
350
 
    
9
 
Home equity/2nd mortgage    
-
 
    
-
 
    
-
 
    
14
 
    
-
 
    
22
 
    
-
 
Other consumer    
49
 
    
48
 
    
-
 
    
27
 
    
-
 
    
13
 
    
-
 
                                                         
     
2,963
 
    
3,072
 
    
-
 
    
3,052
 
    
23
 
    
3,305
 
    
46
 
                                                         
Loans with an allowance recorded:
Residential    
81
 
    
80
 
    
16
 
    
47
 
    
-
 
    
61
 
    
-
 
Land    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
Commercial real estate    
-
 
    
-
 
    
-
 
    
100
 
    
-
 
    
101
 
    
-
 
Commercial business    
26
 
    
26
 
    
-
 
    
26
 
    
-
 
    
72
 
    
-
 
Home equity/2nd mortgage    
37
 
    
37
 
    
14
 
    
19
 
    
-
 
    
16
 
    
-
 
Other consumer    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
                                                         
     
144
 
    
143
 
    
30
 
    
192
 
    
-
 
    
250
 
    
-
 
                                                         
Total:                                                        
Residential    
1,988
 
    
2,099
 
    
16
 
    
1,929
 
    
6
 
    
2,093
 
    
12
 
Land    
89
 
    
89
 
    
-
 
    
141
 
    
-
 
    
156
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
262
 
    
-
 
Commercial real estate    
689
 
    
687
 
    
-
 
    
786
 
    
14
 
    
571
 
    
25
 
Commercial business    
255
 
    
255
 
    
-
 
    
328
 
    
3
 
    
422
 
    
9
 
Home equity/2nd mortgage    
37
 
    
37
 
    
14
 
    
33
 
    
-
 
    
38
 
    
-
 
Other consumer    
49
 
    
48
 
    
-
 
    
27
 
    
-
 
    
13
 
    
-
 
                                                         
    $
3,107
 
   $
3,215
 
   $
30
 
   $
3,244
 
   $
23
 
   $
3,555
 
   $
46
 
 
The following table summarizes the Company’s impaired loans for the
three
months and
nine
months ended
September 30, 2018.
The Company did
not
recognize any interest income on impaired loans using the cash receipts method of accounting for the
three
or
nine
month periods ended
September 30, 2018:
 
    Three Months Ended   Nine Months Ended
    September 30, 2018   September 30, 2018
    Average   Interest   Average   Interest
    Recorded   Income   Recorded   Income
    Investment   Recognized   Investment   Recognized
     
Loans with no related allowance recorded:                                
Residential   $
2,144
     $
7
     $
2,377
     $
19
  
Land    
215
      
-
      
131
      
-
  
Construction    
-
      
-
      
-
      
-
  
Commercial real estate    
303
      
4
      
343
      
14
  
Commercial business    
241
      
3
      
196
      
11
  
Home equity/2nd mortgage    
56
      
-
      
62
      
1
  
Other consumer    
8
      
-
      
6
      
1
  
                                 
     
2,967
      
14
      
3,115
      
46
  
                                 
Loans with an allowance recorded:                                
Residential    
255
      
-
      
250
      
-
  
Land    
-
      
-
      
-
      
-
  
Construction    
-
      
-
      
-
      
-
  
Commercial real estate    
-
      
-
      
-
      
-
  
Commercial business    
54
      
-
      
41
      
-
  
Home equity/2nd mortgage    
-
      
-
      
7
      
-
  
Other consumer    
-
      
-
      
-
      
-
  
                                 
     
309
      
0
      
298
      
0
  
                                 
Total:                                
Residential    
2,399
      
7
      
2,627
      
19
  
Land    
215
      
-
      
131
      
-
  
Construction    
-
      
-
      
-
      
-
  
Commercial real estate    
303
      
4
      
343
      
14
  
Commercial business    
295
      
3
      
237
      
11
  
Home equity/2nd mortgage    
56
      
-
      
69
      
1
  
Other consumer    
8
      
-
      
6
      
1
  
                                 
    $
3,276
     $
14
     $
3,413
     $
46
  
 
The following table summarizes the Company’s impaired loans as of
December 31, 2018:
 
        Unpaid    
   
Recorded
  
Principal
  
Related
   
Investment
  
Balance
  
Allowance
    (In thousands)
Loans with no related allowance recorded:
Residential   $
2,170
 
   $
2,409
 
   $
-
 
Land    
152
 
    
153
 
    
-
 
Construction    
521
 
    
521
 
    
-
 
Commercial real estate    
255
 
    
260
 
    
-
 
Commercial business    
400
 
    
451
 
    
-
 
Home equity/2nd mortgage    
35
 
    
44
 
    
-
 
Other consumer    
-
 
    
-
 
    
-
 
                         
     
3,533
 
    
3,838
 
    
-
 
                         
Loans with an allowance recorded:
Residential    
14
 
    
15
 
    
3
 
Land    
-
 
    
-
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
Commercial real estate    
211
 
    
213
 
    
44
 
Commercial business    
27
 
    
30
 
    
1
 
Home equity/2nd mortgage    
-
 
    
-
 
    
-
 
Other consumer    
-
 
    
-
 
    
-
 
                         
     
252
 
    
258
 
    
48
 
                         
Total:
Residential    
2,184
 
    
2,424
 
    
3
 
Land    
152
 
    
153
 
    
-
 
Construction    
521
 
    
521
 
    
-
 
Commercial real estate    
466
 
    
473
 
    
44
 
Commercial business    
427
 
    
481
 
    
1
 
Home equity/2nd mortgage    
35
 
    
44
 
    
-
 
Other consumer    
-
 
    
-
 
    
-
 
                         
    $
3,785
 
   $
4,096
 
   $
48
 
 
Nonperforming loans consists of nonaccrual loans and loans over
90
days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at
September 30, 2019
and
December 31, 2018:
 
    September 30, 2019   December 31, 2018
        Loans 90+ Days   Total       Loans 90+ Days   Total
   
Nonaccrual
  
Past Due
  
Nonperforming
  
Nonaccrual
  
Past Due
  
Nonperforming
   
Loans
  
Still Accruing
  
Loans
  
Loans
  
Still Accruing
  
Loans
    (In thousands)
                         
Residential   $
1,593
 
   $
14
 
   $
1,607
 
   $
1,769
 
   $
-
 
   $
1,769
 
Land    
89
 
    
-
 
    
89
 
    
152
 
    
-
 
    
152
 
Construction    
-
 
    
-
 
    
-
 
    
521
 
    
-
 
    
521
 
Commercial real estate    
-
 
    
-
 
    
-
 
    
371
 
    
-
 
    
371
 
Commercial business    
58
 
    
-
 
    
58
 
    
207
 
    
-
 
    
207
 
Home equity/2nd mortgage    
37
 
    
-
 
    
37
 
    
35
 
    
-
 
    
35
 
Other consumer    
48
 
    
1
 
    
49
 
    
-
 
    
2
 
    
2
 
                                                 
Total   $
1,825
 
   $
15
 
   $
1,840
 
   $
3,055
 
   $
2
 
   $
3,057
 
 
 
The following table presents the aging of the recorded investment in loans at
September 30, 2019:
 
                        Purchased
Credit 		   
   
30-59 Days
  
60-89 Days
  
90 Days or More
  
Total
  
 
  
Impaired
 
Total
   
Past Due
  
Past Due
  
Past Due
  
Past Due
  
Current
  
Loans
  
Loans
    (In thousands)
                             
Residential   $
1,984
 
   $
721
 
   $
1,161
 
   $
3,866
 
   $
139,236
 
   $
283
 
   $
143,385
 
Land    
150
 
    
36
 
    
53
 
    
239
 
    
21,818
 
    
-
 
    
22,057
 
Construction    
156
 
    
-
 
    
-
 
    
156
 
    
35,584
 
    
-
 
    
35,740
 
Commercial real estate    
-
 
    
-
 
    
-
 
    
-
 
    
116,748
 
    
42
 
    
116,790
 
Commercial business    
16
 
    
37
 
    
58
 
    
111
 
    
38,613
 
    
-
 
    
38,724
 
Home equity/2nd mortgage    
448
 
    
83
 
    
37
 
    
568
 
    
53,115
 
    
-
 
    
53,683
 
Other consumer    
351
 
    
29
 
    
1
 
    
381
 
    
63,224
 
    
-
 
    
63,605
 
                                                         
Total   $
3,105
 
   $
906
 
   $
1,310
 
   $
5,321
 
   $
468,338
 
   $
325
 
   $
473,984
 
 
The following table presents the aging of the recorded investment in loans at
December 31, 2018:
 
                        Purchased    
   
30-59 Days
  
60-89 Days
  
90 Days or More
  
Total
  
 
  
Credit
  
Total
   
Past Due
  
Past Due
  
Past Due
  
Past Due
  
Current
  
Impaired Loans
  
Loans
    (In thousands)
                             
Residential   $
2,617
 
   $
926
 
   $
1,189
 
   $
4,732
 
   $
132,005
 
   $
282
 
   $
137,019
 
Land    
247
 
    
39
 
    
152
 
    
438
 
    
22,306
 
    
-
 
    
22,744
 
Construction    
-
 
    
-
 
    
-
 
    
-
 
    
25,442
 
    
-
 
    
25,442
 
Commercial real estate    
450
 
    
-
 
    
-
 
    
450
 
    
107,174
 
    
48
 
    
107,672
 
Commercial business    
377
 
    
-
 
    
145
 
    
522
 
    
35,895
 
    
-
 
    
36,417
 
Home equity/2nd mortgage    
191
 
    
-
 
    
35
 
    
226
 
    
52,777
 
    
-
 
    
53,003
 
Other consumer    
491
 
    
50
 
    
2
 
    
543
 
    
57,015
 
    
-
 
    
57,558
 
                                                         
Total   $
4,373
 
   $
1,015
 
   $
1,523
 
   $
6,911
 
   $
432,614
 
   $
330
 
   $
439,855
 
 
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, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:
 
Special Mention:
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.
 
Loss:
Loans classified as loss are considered uncollectible and of such little value that their continuance on the institution’s books as an asset is
not
warranted.
 
Loans
not
meeting the criteria above that are analyzed individually as part of the described process are considered to be pass rated loans.
 
The following table presents the recorded investment in loans by risk category as of the date indicated:
 
 
    Residential           Commercial   Commercial   Home Equity &   Other    
    Real Estate   Land   Construction   Real Estate   Business   2nd Mtg   Consumer   Total
    (In thousands)
September 30, 2019
                                
Pass   $
140,354
     $
21,524
     $
35,390
     $
114,510
     $
37,853
     $
53,512
     $
63,492
     $
466,635
  
Special Mention    
47
      
330
      
350
      
1,050
      
523
      
-
      
65
      
2,365
  
Substandard    
1,317
      
114
      
-
      
1,230
      
290
      
134
      
-
      
3,085
  
Doubtful    
1,667
      
89
      
-
      
-
      
58
      
37
      
48
      
1,899
  
Loss    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                 
Total   $
143,385
     $
22,057
     $
35,740
     $
116,790
     $
38,724
     $
53,683
     $
63,605
     $
473,984
  
                                                                 
December 31, 2018                                                                
Pass   $
133,878
     $
22,458
     $
24,921
     $
104,843
     $
35,162
     $
52,859
     $
57,529
     $
431,650
  
Special Mention    
133
      
65
      
-
      
1,520
      
763
      
-
      
29
      
2,510
  
Substandard    
1,168
      
69
      
-
      
938
      
285
      
109
      
-
      
2,569
  
Doubtful    
1,840
      
152
      
521
      
371
      
207
      
35
      
-
      
3,126
  
Loss    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                 
Total   $
137,019
     $
22,744
     $
25,442
     $
107,672
     $
36,417
     $
53,003
     $
57,558
     $
439,855
  
 
 
The following table summarizes the Company’s troubled debt restructurings (TDRs) by accrual status as of
September 30, 2019
and
December 31, 2018:
 
                                 
                                 
    September 30, 2019   December 31, 2018
                Related Allowance               Related Allowance
   
Accruing
  
Nonaccrual
  
Total
  
for Loan Losses
  
Accruing
  
Nonaccrual
  
Total
  
for Loan Losses
    (In thousands)
Troubled debt restructurings:                                                                
Residential real estate   $
380
 
   $
67
 
   $
447
 
   $
-
 
   $
295
 
   $
302
 
   $
597
 
   $
-
 
Commercial real estate    
890
 
    
-
 
    
890
 
    
-
 
    
190
 
    
371
 
    
561
 
    
44
 
Commercial business    
196
 
    
-
 
    
196
 
    
-
 
    
218
 
    
-
 
    
218
 
    
-
 
                                                                 
Total   $
1,466
 
   $
67
 
   $
1,533
 
   $
-
 
   $
703
 
   $
673
 
   $
1,376
 
   $
44
 
 
At
September 30, 2019
and
December 31, 2018,
there were
no
commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.
 
The Company restructured
two
commercial real estate loans during the
nine
months ended
September 30, 2019,
with pre-modification and post-modification aggregate balances of
$436,000.
There were
no
TDRs that were restructured during the
three
months ended
September 30, 2019.
The Company restructured
two
commercial business loans,
one
commercial real estate loan and
one
residential real estate loan during the
nine
months ended
September 30, 2018,
with pre-modification and post-modification aggregate balances of
$569,000.
The Company restructured
one
commercial business loan,
one
commercial real estate loan and
one
residential real estate loan during the
three
months ended
September 30, 2018,
with pre-modification and post-modification aggregate balances of
$390,000.
For the TDRs restructured in
2019
and
2018,
the terms of modification included an extension and the deferral of contractual principal payments.
 
There were
no
principal charge-offs recorded as a result of TDRs and there was
no
specific allowance for loan losses related to TDRs modified during the
three
and
nine
months ended
September 30, 2019
or
2018.
 
There were
no
TDRs modified within the previous
12
months for which there was a subsequent payment default (defined as the loan becoming more than
90
days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the
three
and
nine
months ended
September 30, 2019
and
2018.
In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses
may
be increased or charge-offs
may
be taken to reduce the carrying amount of the loan. The Company did
not
recognize any provisions for loan losses or net charge-offs as a result of defaulted TDRs for the
three
and
nine
months ended
September 30, 2019
and
2018.
 
Purchased Credit Impaired (PCI) Loans
 
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with
no
carryover of the related allowance for loan and lease losses. Such loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. In determining the estimated fair value of purchased loans or pools, management considers a number of factors including the remaining life, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received, among others. Purchased loans that have evidence of credit deterioration since origination for which it is deemed probable at the date of acquisition that the acquirer will
not
collect all contractually required principal and interest payments are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
310
-
30.
The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The difference between the expected cash flows and the fair value at acquisition is recorded as interest income over the remaining life of the loan or pool of loans and is referred to as the accretable yield. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which is recognized as future interest income.
 
The following table presents the carrying amount of PCI loans accounted for under ASC
310
-
30
at
September 30, 2019
and
December 31, 2018:
 
   
September 30,
  
December 31,
(In thousands)  
2019
  
2018
         
Residential real estate   $
283
     $
282
  
Commercial real estate    
42
      
48
  
Carrying amount    
325
      
330
  
Allowance for loan losses    
(20
 )    
-
  
Carrying amount, net of allowance   $
305
     $
330
  
 
The outstanding balance of PCI loans accounted for under ASC
310
-
30,
including contractual principal, interest, fees and penalties was
$494,000
and
$519,000
at
September 30, 2019
and
December 31, 2018,
respectively.
 
There was a
$20,000
allowance for loan losses related to PCI loans at
September 30, 2019.
There was
no
allowance related to PCI loans at
December 31, 2018.
There was a
$20,000
provision of the allowance for loan losses related to PCI loans for the
nine
-month and
three
-month periods ended
September 30, 2019.
There was a
$2,000
reduction of the allowance for loan losses related to PCI loans for the
nine
-month period ended
September 30, 2018.
There were
no
net provisions for loans losses related to PCI loans for the
three
-month period ended
September 30, 2018.
 
Accretable yield, or income expected to be collected, is as follows for the
three
and
nine
month periods ended
September 30, 2019
and
2018:
 
    Three Months Ended   Nine Months Ended
   
9/30/2019
  
9/30/2018
  
9/30/2019
  
9/30/2018
                 
Balance at beginning of period   $
390
     $
443
     $
423
     $
470
  
New loans purchased    
-
      
-
      
-
      
-
  
Accretion to income    
(11
 )    
(13
 )    
(35
 )    
(42
 )
Disposals and other adjustments    
-
      
-
      
-
      
-
  
Reclassification (to) from nonaccretable difference    
(4
 )    
2
      
(13
 )    
4
  
                                 
Balance at end of period   $
375
     $
432
     $
375
     $
432