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Note 3 - Loans and Allowance for Loan Losses
 3 Months Ended
Mar. 31, 2020
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
March 31, 2020
and
December 31, 2019.
 
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, 2019.
 
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
March 31, 2020,
the Company held
no
foreclosed real estate. At
December 31, 2019,
the balance of foreclosed real estate includes
$170,000
of residential real estate properties where physical possession had been obtained. At
March 31, 2020
and
December 31, 2019,
the recorded investment in loans secured by residential real estate properties for which formal foreclosure proceedings are in process was
$289,000
and
$319,000,
respectively.
 
Loans at
March 31, 2020
and
December 31, 2019
consisted of the following:
 
    March 31,   December 31,
(In thousands)   2020   2019
         
Real estate mortgage loans:                
Residential   $
128,039
     $
131,959
  
Land    
18,861
      
19,185
  
Residential construction    
42,760
      
35,554
  
Commercial real estate    
129,180
      
121,563
  
Commercial real estate construction    
12,620
      
20,086
  
Commercial business loans    
44,811
      
45,307
  
Consumer loans:                
Home equity and second mortgage loans    
54,655
      
54,677
  
Automobile loans    
45,304
      
46,443
  
Loans secured by savings accounts    
1,318
      
1,372
  
Unsecured loans    
3,434
      
3,653
  
Other consumer loans    
13,134
      
13,700
  
Gross loans    
494,116
      
493,499
  
Less undisbursed portion of loans in process    
(24,638
 )    
(23,081
 )
                 
Principal loan balance    
469,478
      
470,418
  
                 
Deferred loan origination fees, net    
1,121
      
1,137
  
Allowance for loan losses    
(5,307
 )    
(5,061
 )
                 
Loans, net   $
465,292
     $
466,494
  
 
The following table provides the components of the Company’s recorded investment in loans at
March 31, 2020:
 
    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   $
128,039
     $
18,861
     $
30,742
     $
129,180
     $
44,811
     $
54,655
     $
63,190
     $
469,478
  
                                                                 
Accrued interest receivable    
453
      
98
      
70
      
344
      
117
      
218
      
226
      
1,526
  
                                                                 
Net deferred loan origination fees and costs    
116
      
14
      
(6
 )    
(68
 )    
-
      
1,065
      
-
      
1,121
  
                                                                 
Recorded investment in loans   $
128,608
     $
18,973
     $
30,806
     $
129,456
     $
44,928
     $
55,938
     $
63,416
     $
472,125
  
                                                                 
                                                                 
Recorded Investment in Loans as Evaluated for Impairment:                                                                
Individually evaluated for impairment   $
1,840
     $
115
     $
-
     $
447
     $
247
     $
56
     $
42
     $
2,747
  
Collectively evaluated for impairment    
126,487
      
18,858
      
30,806
      
128,972
      
44,681
      
55,882
      
63,374
      
469,060
  
Acquired with deteriorated credit quality    
281
      
-
      
-
      
37
      
-
      
-
      
-
      
318
  
                                                                 
Ending balance   $
128,608
     $
18,973
     $
30,806
     $
129,456
     $
44,928
     $
55,938
     $
63,416
     $
472,125
  
 
The following table provides the components of the Company’s recorded investment in loans at
December 31, 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   $
131,959
     $
19,185
     $
32,559
     $
121,563
     $
45,307
     $
54,677
     $
65,168
     $
470,418
  
                                                                 
Accrued interest receivable    
462
      
114
      
86
      
312
      
142
      
244
      
272
      
1,632
  
                                                                 
Net deferred loan origination fees and costs    
118
      
15
      
(1
 )    
(62
 )    
-
      
1,067
      
-
      
1,137
  
                                                                 
Recorded investment in loans   $
132,539
     $
19,314
     $
32,644
     $
121,813
     $
45,449
     $
55,988
     $
65,440
     $
473,187
  
                                                                 
                                                                 
Recorded Investment in Loans as Evaluated for Impairment:
                                                                
Individually evaluated for impairment   $
1,926
     $
115
     $
-
     $
353
     $
249
     $
56
     $
48
     $
2,747
  
Collectively evaluated for impairment    
130,328
      
19,199
      
32,644
      
121,421
      
45,200
      
55,932
      
65,392
      
470,116
  
Acquired with deteriorated credit quality    
285
      
-
      
-
      
39
      
-
      
-
      
-
      
324
  
                                                                 
Ending balance   $
132,539
     $
19,314
     $
32,644
     $
121,813
     $
45,449
     $
55,988
     $
65,440
     $
473,187
  
 
An analysis of the allowance for loan losses as of
March 31, 2020
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   $
15
     $
-
     $
-
     $
-
     $
-
     $
-
     $
-
     $
15
  
Collectively evaluated for impairment    
891
      
163
      
353
      
1,735
      
620
      
550
      
957
      
5,269
  
Acquired with deteriorated credit quality    
23
      
-
      
-
      
-
      
-
      
-
      
-
      
23
  
                                                                 
Ending balance   $
929
     $
163
     $
353
     $
1,735
     $
620
     $
550
     $
957
     $
5,307
  
 
An analysis of the allowance for loan losses as of
December 31, 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
     $
-
     $
-
     $
-
     $
-
     $
-
     $
-
     $
16
  
Collectively evaluated for impairment    
839
      
163
      
350
      
1,623
      
595
      
515
      
948
      
5,033
  
Acquired with deteriorated credit quality    
12
      
-
      
-
      
-
      
-
      
-
      
-
      
12
  
                                                                 
Ending balance   $
867
     $
163
     $
350
     $
1,623
     $
595
     $
515
     $
948
     $
5,061
  
 
An analysis of the changes in the allowance for loan losses for the
three
months ended
March 31, 2020
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:                                                                
                                                                 
Beginning balance   $
867
     $
163
     $
350
     $
1,623
     $
595
     $
515
     $
948
     $
5,061
  
Provisions for loan losses    
62
      
-
      
3
      
112
      
25
      
33
      
116
      
351
  
Charge-offs    
-
      
-
      
-
      
-
      
-
      
-
      
(159
 )    
(159
 )
Recoveries    
-
      
-
      
-
      
-
      
-
      
2
      
52
      
54
  
                                                                 
Ending balance   $
929
     $
163
     $
353
     $
1,735
     $
620
     $
550
     $
957
     $
5,307
  
 
An analysis of the changes in the allowance for loan losses for the
three
months ended
March 31, 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:                                                                
                                                                 
Beginning balance   $
693
     $
162
     $
224
     $
1,401
     $
459
     $
443
     $
683
     $
4,065
  
Provisions for loan losses    
71
      
2
      
67
      
(10
 )    
82
      
5
      
233
      
450
  
Charge-offs    
(39
 )    
-
      
-
      
-
      
-
      
-
      
(181
 )    
(220
 )
Recoveries    
2
      
-
      
-
      
-
      
-
      
2
      
40
      
44
  
                                                                 
Ending balance   $
727
     $
164
     $
291
     $
1,391
     $
541
     $
450
     $
775
     $
4,339
  
 
At
March 31, 2020
and
December 31, 2019,
the estimated allowance for loan losses related to qualitative factor adjustments to various portfolio segments totaled approximately
$4.1
million and
$3.8
million, respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at
March 31, 2020
and
December 31, 2019.
The increases to qualitative factors at
March 31, 2020
were largely related to economic uncertainties surrounding COVID-
19.
 
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
$407,000
and
$386,000
at
March 31, 2020
and
December 31, 2019,
respectively. These factors were
not
adjusted during the period from
December 31, 2019
to
March 31, 2020.
 
The following table summarizes the Company’s impaired loans as of
March 31, 2020
and for the
three
months ended
March 31, 2020
and
2019.
The Company did
not
recognize any interest income on impaired loans using the cash receipts method of accounting for the
three
month periods ended
March 31, 2020
and
2019:
 
    At March 31, 2020   Three Months Ended March 31, 2020   Three Months Ended March 31, 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   $
1,662
 
   $
1,927
 
   $
-
 
   $
1,700
 
   $
6
 
   $
2,181
 
   $
3
 
Land    
115
 
    
119
 
    
-
 
    
115
 
    
-
 
    
171
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
523
 
    
-
 
Commercial real estate    
447
 
    
446
 
    
-
 
    
400
 
    
9
 
    
253
 
    
2
 
Commercial business    
247
 
    
255
 
    
-
 
    
248
 
    
2
 
    
398
 
    
3
 
Home equity/2nd mortgage    
56
 
    
55
 
    
-
 
    
56
 
    
1
 
    
30
 
    
-
 
Other consumer    
42
 
    
44
 
    
-
 
    
45
 
    
-
 
    
-
 
    
-
 
                                                         
     
2,569
 
    
2,846
 
    
-
 
    
2,564
 
    
18
 
    
3,556
 
    
8
 
                                                         
Loans with an allowance recorded:                                                        
Residential    
178
 
    
198
 
    
15
 
    
184
 
    
-
 
    
76
 
    
-
 
Land    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
Commercial real estate    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
103
 
    
-
 
Commercial business    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
119
 
    
-
 
Home equity/2nd mortgage    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
14
 
    
-
 
Other consumer    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
                                                         
     
178
 
    
198
 
    
15
 
    
184
 
    
-
 
    
312
 
    
-
 
                                                         
Total:                                                        
Residential    
1,840
 
    
2,125
 
    
15
 
    
1,884
 
    
6
 
    
2,257
 
    
3
 
Land    
115
 
    
119
 
    
-
 
    
115
 
    
-
 
    
171
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
523
 
    
-
 
Commercial real estate    
447
 
    
446
 
    
-
 
    
400
 
    
9
 
    
356
 
    
2
 
Commercial business    
247
 
    
255
 
    
-
 
    
248
 
    
2
 
    
517
 
    
3
 
Home equity/2nd mortgage    
56
 
    
55
 
    
-
 
    
56
 
    
1
 
    
44
 
    
-
 
Other consumer    
42
 
    
44
 
    
-
 
    
45
 
    
-
 
    
-
 
    
-
 
                                                         
    $
2,747
 
   $
3,044
 
   $
15
 
   $
2,748
 
   $
18
 
   $
3,868
 
   $
8
 
 
The following table summarizes the Company’s impaired loans as of
December 31, 2019:
 
        Unpaid    
   
Recorded
  
Principal
  
Related
   
Investment
  
Balance
  
Allowance
    (In thousands)
Loans with no related allowance recorded:                        
Residential   $
1,737
 
   $
1,986
 
   $
-
 
Land    
115
 
    
117
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
Commercial real estate    
353
 
    
352
 
    
-
 
Commercial business    
249
 
    
257
 
    
-
 
Home equity/2nd mortgage    
56
 
    
56
 
    
-
 
Other consumer    
48
 
    
50
 
    
-
 
                         
     
2,558
 
    
2,818
 
    
-
 
                         
Loans with an allowance recorded:                        
Residential    
189
 
    
211
 
    
16
 
Land    
-
 
    
-
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
Commercial real estate    
-
 
    
-
 
    
-
 
Commercial business    
-
 
    
-
 
    
-
 
Home equity/2nd mortgage    
-
 
    
-
 
    
-
 
Other consumer    
-
 
    
-
 
    
-
 
                         
     
189
 
    
211
 
    
16
 
                         
Total:                        
Residential    
1,926
 
    
2,197
 
    
16
 
Land    
115
 
    
117
 
    
-
 
Construction    
-
 
    
-
 
    
-
 
Commercial real estate    
353
 
    
352
 
    
-
 
Commercial business    
249
 
    
257
 
    
-
 
Home equity/2nd mortgage    
56
 
    
56
 
    
-
 
Other consumer    
48
 
    
50
 
    
-
 
                         
    $
2,747
 
   $
3,029
 
   $
16
 
 
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
March 31, 2020
and
December 31, 2019:
 
    March 31, 2020   December 31, 2019
        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   $
1,460
 
   $
55
 
   $
1,515
 
   $
1,544
 
   $
13
 
   $
1,557
 
Land    
115
 
    
-
 
    
115
 
    
115
 
    
-
 
    
115
 
Construction    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
Commercial real estate    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
Commercial business    
61
 
    
-
 
    
61
 
    
58
 
    
-
 
    
58
 
Home equity/2nd mortgage    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
    
-
 
Other consumer    
41
 
    
1
 
    
42
 
    
48
 
    
-
 
    
48
 
                                                 
Total   $
1,677
 
   $
56
 
   $
1,733
 
   $
1,765
 
   $
13
 
   $
1,778
 
 
The following table presents the aging of the recorded investment in loans at
March 31, 2020:
 
                        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   $
2,050
 
   $
401
 
   $
1,035
 
   $
3,486
 
   $
124,841
 
   $
281
 
   $
128,608
 
Land    
130
 
    
6
 
    
86
 
    
222
 
    
18,751
 
    
-
 
    
18,973
 
Construction    
51
 
    
-
 
    
-
 
    
51
 
    
30,755
 
    
-
 
    
30,806
 
Commercial real estate    
672
 
    
249
 
    
-
 
    
921
 
    
128,498
 
    
37
 
    
129,456
 
Commercial business    
112
 
    
218
 
    
61
 
    
391
 
    
44,537
 
    
-
 
    
44,928
 
Home equity/2nd mortgage    
355
 
    
204
 
    
-
 
    
559
 
    
55,379
 
    
-
 
    
55,938
 
Other consumer    
409
 
    
53
 
    
1
 
    
463
 
    
62,953
 
    
-
 
    
63,416
 
                                                         
Total   $
3,779
 
   $
1,131
 
   $
1,183
 
   $
6,093
 
   $
465,714
 
   $
318
 
   $
472,125
 
 
The following table presents the aging of the recorded investment in loans at
December 31, 2019:
 
                        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   $
2,572
 
   $
824
 
   $
1,010
 
   $
4,406
 
   $
127,848
 
   $
285
 
   $
132,539
 
Land    
185
 
    
101
 
    
80
 
    
366
 
    
18,948
 
    
-
 
    
19,314
 
Construction    
-
 
    
-
 
    
-
 
    
-
 
    
32,644
 
    
-
 
    
32,644
 
Commercial real estate    
-
 
    
146
 
    
-
 
    
146
 
    
121,628
 
    
39
 
    
121,813
 
Commercial business    
61
 
    
-
 
    
58
 
    
119
 
    
45,330
 
    
-
 
    
45,449
 
Home equity/2nd mortgage    
395
 
    
256
 
    
-
 
    
651
 
    
55,337
 
    
-
 
    
55,988
 
Other consumer    
504
 
    
66
 
    
-
 
    
570
 
    
64,870
 
    
-
 
    
65,440
 
                                                         
Total   $
3,717
 
   $
1,393
 
   $
1,148
 
   $
6,258
 
   $
466,605
 
   $
324
 
   $
473,187
 
 
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)
March 31, 2020
                                                                
Pass   $
125,357
     $
18,460
     $
30,806
     $
126,799
     $
44,032
     $
55,511
     $
63,313
     $
464,278
  
Special Mention    
386
      
321
      
-
      
784
      
464
      
-
      
62
      
2,017
  
Substandard    
1,443
      
77
      
-
      
1,873
      
371
      
427
      
-
      
4,191
  
Doubtful    
1,422
      
115
      
-
      
-
      
61
      
-
      
41
      
1,639
  
Loss    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                 
Total   $
128,608
     $
18,973
     $
30,806
     $
129,456
     $
44,928
     $
55,938
     $
63,416
     $
472,125
  
                                                                 
December 31, 2019                                                                
Pass   $
129,613
     $
18,805
     $
32,394
     $
119,469
     $
44,879
     $
55,569
     $
65,320
     $
466,049
  
Special Mention    
46
      
327
      
250
      
1,136
      
378
      
-
      
72
      
2,209
  
Substandard    
1,336
      
67
      
-
      
1,208
      
134
      
419
      
-
      
3,164
  
Doubtful    
1,544
      
115
      
-
      
-
      
58
      
-
      
48
      
1,765
  
Loss    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                 
Total   $
132,539
     $
19,314
     $
32,644
     $
121,813
     $
45,449
     $
55,988
     $
65,440
     $
473,187
  
 
The following table summarizes the Company’s TDRs by accrual status as of
March 31, 2020
and
December 31, 2019:
 
    March 31, 2020   December 31, 2019
                Related Allowance               Related Allowance
   
Accruing
  
Nonaccrual
  
Total
  
for Loan Losses
  
Accruing
  
Nonaccrual
  
Total
  
for Loan Losses
    (In thousands)
Troubled debt restructurings:                                                                
Residential real estate   $
381
 
   $
65
 
   $
446
 
   $
-
 
   $
367
 
   $
66
 
   $
433
 
   $
-
 
Commercial real estate    
643
 
    
-
 
    
643
 
    
-
 
    
553
 
    
-
 
    
553
 
    
-
 
Commercial business    
186
 
    
-
 
    
186
 
    
-
 
    
191
 
    
-
 
    
191
 
    
-
 
Home equity and second mortgage    
55
 
    
-
 
    
55
 
    
-
 
    
55
 
    
-
 
    
55
 
    
-
 
                                                                 
Total   $
1,265
 
   $
65
 
   $
1,330
 
   $
-
 
   $
1,166
 
   $
66
 
   $
1,232
 
   $
-
 
 
At
March 31, 2020
and
December 31, 2019,
there were
no
commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.
 
The Company restructured
one
commercial real estate loan and
one
residential mortgage loan during the
three
months ended
March 31, 2020,
with a pre-modification and post-modification outstanding balance of
$265,000.
The terms of the modifications included the deferral of contractual principal payments and a maturity extension to lower the payment. There were
no
TDRs that were restructured during the
three
months ended
March 31, 2019.
 
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
months ended
March 31, 2020
or
2019.
 
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
months ended
March 31, 2020
and
2019.
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.
 
As discussed in Note
1,
the federal banking agencies issued guidance in
March 2020
that short-term modifications (e.g.,
six
months) made to a borrower affected by the COVID-
19
pandemic does
not
need to be identified as a TDR if the loan was current at the time of the modification. The CARES Act also addressed COVID-
19
related modifications and specified that such modifications made on loans that were current as of
December 31, 2019
are
not
TDRs. As of
May 6, 2020,
the Bank had approved payment extensions using this guidance on approximately
11.7%
of balances in the loan portfolio, primarily related to commercial real estate lending relationships. These payment extensions are generally for periods of
one
to
three
months, but
may
extend for up to
six
months.
 
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 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
March 31, 2020
and
December 31, 2019:
 
    March 31,   December 31,
(In thousands)
   2020   2019
         
Residential real estate   $
281
     $
285
  
Commercial real estate    
37
      
39
  
Carrying amount    
318
      
324
  
Allowance for loan losses    
23
      
12
  
Carrying amount, net of allowance   $
295
     $
312
  
 
The outstanding balance of PCI loans accounted for under ASC
310
-
30,
including contractual principal, interest, fees and penalties was
$452,000
and
$466,000
at
March 31, 2020
and
December 31, 2019,
respectively.
 
There was a
$23,000
allowance for loan losses related to PCI loans at
March 31, 2020
and a
$12,000
allowance for loan losses related to PCI loans at
December 31, 2019.
There was a
$11,000
provision for loan losses related to PCI loans for the
three
-month period ended
March 31, 2020.
There were
no
net provisions for loan losses related to PCI loans for the
three
-month period ended
March 31, 2019.
 
Accretable yield, or income expected to be collected, is as follows for the
three
month periods ended
March 31, 2020
and
2019:
 
    2020   2019
         
Balance at beginning of period   $
403
     $
423
  
New loans purchased    
-
      
-
  
Accretion to income    
(11
 )    
(12
 )
Disposals and other adjustments    
-
      
-
  
Reclassification from nonaccretable difference    
(17
 )    
(2
 )
                 
Balance at end of period   $
375
     $
409