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Note 3 - Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2020

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 June 30, 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 June 30, 2020 and December 31, 2019, the balance of foreclosed real estate includes $58,000 and $170,000, respectively, of residential real estate properties where physical possession had been obtained. At June 30, 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 $240,000 and $319,000, respectively.

Loans at June 30, 2020 and December 31, 2019 consisted of the following:

	*June 30,*			*December 31,*
(In thousands)	*2020*			*2019*

Real estate mortgage loans:
Residential	$	128,754		$	131,959
Land		18,228			19,185
Residential construction		39,757			35,554
Commercial real estate		129,321			121,563
Commercial real estate construction		7,436			20,086
Commercial business loans		77,515			45,307
Consumer loans:
Home equity and second mortgage loans		53,243			54,677
Automobile loans		45,138			46,443
Loans secured by savings accounts		1,302			1,372
Unsecured loans		2,995			3,653
Other consumer loans		18,732			13,700
Gross loans		522,421			493,499
Less undisbursed portion of loans in process		(17,240	)		(23,081	)

Principal loan balance		505,181			470,418

Deferred loan origination fees and costs, net		(325	)		1,137
Allowance for loan losses		(6,064	)		(5,061	)

Loans, net	$	498,792		$	466,494

Included in commercial business loans at June 30, 2020, were $45.1 million of PPP loans guaranteed by the SBA.

The following table provides the components of the Company’s recorded investment in loans at June 30, 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
$ 128,754 $ 18,228 $ 29,953 $ 129,321 $ 77,515 $ 53,243 $ 68,167 $ 505,181

Accrued interest receivable
510 93 77 550 219 167 257 1,873

Net deferred loan origination fees and costs
119 16 (6 ) (63 ) (1,452 ) 1,061 - (325 )

Recorded investment in loans
$ 129,383 $ 18,337 $ 30,024 $ 129,808 $ 76,282 $ 54,471 $ 68,424 $ 506,729

Recorded Investment in Loans as Evaluated for Impairment:

Individually evaluated for impairment
$ 1,691 $ 82 $ - $ 1,318 $ 481 $ 352 $ 7 $ 3,931

Collectively evaluated for impairment
127,412 18,255 30,024 128,456 75,801 54,119 68,417 502,484

Acquired with deteriorated credit quality
280 - - 34 - - - 314

Ending balance
$ 129,383 $ 18,337 $ 30,024 $ 129,808 $ 76,282 $ 54,471 $ 68,424 $ 506,729

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 June 30, 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
$ - $ - $ - $ - $ 168 $ - $ - $ 168

Collectively evaluated for impairment
1,032 196 369 1,902 700 604 1,070 5,873

Acquired with deteriorated credit quality
23 - - - - - - 23

Ending balance
$ 1,055 $ 196 $ 369 $ 1,902 $ 868 $ 604 $ 1,070 $ 6,064

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 and six months ended June 30, 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:

Changes in Allowance for Loan Losses for the three-months ended June 30, 2020

Beginning balance
$ 929 $ 163 $ 353 $ 1,735 $ 620 $ 550 $ 957 $ 5,307

Provisions for loan losses
150 33 16 167 248 45 166 825

Charge-offs
(71 ) - - - - - (106 ) (177 )

Recoveries
47 - - - - 9 53 109

Ending balance
$ 1,055 $ 196 $ 369 $ 1,902 $ 868 $ 604 $ 1,070 $ 6,064

Changes in Allowance for Loan Losses for the six-months ended June 30, 2020

Beginning balance
$ 867 $ 163 $ 350 $ 1,623 $ 595 $ 515 $ 948 $ 5,061

Provisions for loan losses
213 33 19 279 273 79 280 1,176

Charge-offs
(72 ) - - - - - (264 ) (336 )

Recoveries
47 - - - - 10 106 163

Ending balance
$ 1,055 $ 196 $ 369 $ 1,902 $ 868 $ 604 $ 1,070 $ 6,064

An analysis of the changes in the allowance for loan losses for the three and six months ended June 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 June 30, 2019

Beginning balance
$ 727 $ 164 $ 291 $ 1,391 $ 541 $ 450 $ 775 $ 4,339

Provisions for loan losses
4 6 25 61 55 20 129 300

Charge-offs
(92 ) - - - - (2 ) (119 ) (213 )

Recoveries
115 - - - - 4 64 183

Ending balance
$ 754 $ 170 $ 316 $ 1,452 $ 596 $ 472 $ 849 $ 4,609

Changes in Allowance for Loan Losses for the six-months ended June 30, 2019

Beginning balance
$ 693 $ 162 $ 224 $ 1,401 $ 459 $ 443 $ 683 $ 4,065

Provisions for loan losses
75 8 92 51 137 25 362 750

Charge-offs
(130 ) - - - - (2 ) (300 ) (432 )

Recoveries
116 - - - - 6 104 226

Ending balance
$ 754 $ 170 $ 316 $ 1,452 $ 596 $ 472 $ 849 $ 4,609

At June 30, 2020 and December 31, 2019, the estimated allowance for loan losses related to qualitative factor adjustments to various portfolio segments totaled approximately $5.1 million and $3.8 million, respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at June 30, 2020 and December 31, 2019. The increases to qualitative factors at June 30, 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 $426,000 and $386,000 at June 30, 2020 and December 31, 2019, respectively. These factors were not adjusted during the period from December 31, 2019 to June 30, 2020.

The following table summarizes the Company’s impaired loans as of June 30, 2020 and for the three months and six months ended June 30, 2020. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three or six month periods ended June 30, 2020:

At June 30, 2020

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

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
$ 1,582 $ 1,715 $ - $ 1,622 $ 5 $ 1,660 $ 11

Land
82 84 - 99 - 104 -

Construction
- - - - - - -

Commercial real estate
1,318 1,331 - 883 9 706 18

Commercial business
283 288 - 265 3 260 4

Home equity/2nd mortgage
352 348 - 204 4 155 5

Other consumer
7 7 - 25 - 32 -

3,624 3,773 - 3,098 21 2,917 38

Loans with an allowance recorded:

Residential
109 129 - 144 - 159 -

Land
- - - - - - -

Construction
- - - - - - -

Commercial real estate
- - - - - - -

Commercial business
198 203 168 99 - 66 -

Home equity/2nd mortgage
- - - - - - -

Other consumer
- - - - - - -

307 332 168 243 - 225 -

Total:

Residential
1,691 1,844 - 1,766 5 1,819 11

Land
82 84 - 99 - 104 -

Construction
- - - - - - -

Commercial real estate
1,318 1,331 - 883 9 706 18

Commercial business
481 491 168 364 3 326 4

Home equity/2nd mortgage
352 348 - 204 4 155 5

Other consumer
7 7 - 25 - 32 -

$ 3,931 $ 4,105 $ 168 $ 3,341 $ 21 $ 3,142 $ 38

The following table summarizes the Company’s impaired loans for the three months and six months ended June 30, 2019. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three or six month periods ended June 30, 2019:

Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

(In thousands)

Loans with no related allowance recorded:

Residential
$ 2,025 $ 3 $ 2,073 $ 6

Land
191 - 178 -

Construction
263 - 349 -

Commercial real estate
467 8 396 11

Commercial business
385 3 390 6

Home equity/2nd mortgage
27 - 29 -

Other consumer
2 - 1 -

3,360 14 3,416 23

Loans with an allowance recorded:

Residential
75 - 55 -

Land
- - - -

Construction
- - - -

Commercial real estate
203 - 135 -

Commercial business
26 - 88 -

Home equity/2nd mortgage
- - 9 -

Other consumer
- - - -

304 - 287 -

Total:

Residential
2,100 3 2,128 6

Land
191 - 178 -

Construction
263 - 349 -

Commercial real estate
670 8 531 11

Commercial business
411 3 478 6

Home equity/2nd mortgage
27 - 38 -

Other consumer
2 - 1 -

$ 3,664 $ 14 $ 3,703 $ 23

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 June 30, 2020 and December 31, 2019:

June 30, 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
$ 1,289 $ - $ 1,289 $ 1,544 $ 13 $ 1,557

Land
82 - 82 115 - 115

Construction
- - - - - -

Commercial real estate
677 - 677 - - -

Commercial business
288 - 288 58 - 58

Home equity/2nd mortgage
- - - - - -

Other consumer
- 16 16 48 - 48

Total
$ 2,336 $ 16 $ 2,352 $ 1,765 $ 13 $ 1,778

The following table presents the aging of the recorded investment in loans at June 30, 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
$ 1,231 $ 155 $ 926 $ 2,312 $ 126,791 $ 280 $ 129,383

Land
- 64 53 117 18,220 - 18,337

Construction
332 - - 332 29,692 - 30,024

Commercial real estate
- 175 - 175 129,599 34 129,808

Commercial business
41 - 21 62 76,220 - 76,282

Home equity/2nd mortgage
134 - - 134 54,337 - 54,471

Other consumer
123 52 16 191 68,233 - 68,424

Total
$ 1,861 $ 446 $ 1,016 $ 3,323 $ 503,092 $ 314 $ 506,729

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)

June 30, 2020

Pass
$ 126,841 $ 17,857 $ 30,024 $ 126,027 $ 75,395 $ 53,995 $ 68,355 $ 498,494

Special Mention
391 319 - 1,787 525 - 69 3,091

Substandard
897 79 - 1,317 74 476 - 2,843

Doubtful
1,254 82 - 677 288 - - 2,301

Loss
- - - - - - - -

Total
$ 129,383 $ 18,337 $ 30,024 $ 129,808 $ 76,282 $ 54,471 $ 68,424 $ 506,729

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 June 30, 2020 and December 31, 2019:

June 30, 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
$ 385 $ 15 $ 400 $ - $ 367 $ 66 $ 433 $ -

Commercial real estate
638 - 638 - 553 - 553 -

Commercial business
191 - 191 - 191 - 191 -

Home equity and second mortgage
347 - 347 - 55 - 55 -

Total
$ 1,561 $ 15 $ 1,576 $ - $ 1,166 $ 66 $ 1,232 $ -

At June 30, 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 business loan, one residential mortgage and one second mortgage during the three months ended June 30, 2020, with an aggregate pre-modification and post-modification outstanding balance of $321,000. The Company restructured two residential mortgages, one commercial business loan, one commercial real estate loan and one second mortgage during the six months ended June 30, 2020, with an aggregate pre-modification and post-modification outstanding balance of $586,000. The Company restructured two commercial real estate loans during the three and six months ended June 30, 2019, with pre-modification and post-modification aggregate balances of $436,000. The terms of the modifications for the TDRs restructured in 2020 and 2019 included the deferral of contractual principal payments and maturity extensions to lower the 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 six months ended June 30, 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 and six months ended June 30, 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. The Company did not recognize any provisions for loan losses or net charge-offs as a result of defaulted TDRs for the three and six months ended June 30, 2020 and 2019.

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 June 30, 2020, the Bank had approved payment extensions of primarily one to three months on $68.1 million of balances in the loan portfolio, primarily related to commercial real estate lending relationships. Of that total, $33.2 million had resumed normal payments at June 30, 2020.

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 June 30, 2020 and December 31, 2019:

June 30,

December 31,

(In thousands)

2020

2019

Residential real estate
$ 280 $ 285

Commercial real estate
34 39

Carrying amount
314 324

Allowance for loan losses
23 12

Carrying amount, net of allowance
$ 291 $ 312

The outstanding balance of PCI loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties was $439,000 and $466,000 at June 30, 2020 and December 31, 2019, respectively.

There was a $23,000 allowance for loan losses related to PCI loans at June 30, 2020 and a $12,000 allowance for loan losses related to PCI loans at December 31, 2019. There was an $11,000 provision for loan losses related to PCI loans for the six-month period ended June 30, 2020. There were no net provisions for loan losses related to PCI loans for the three-month period ended June 30, 2020 or for the three-month or six-month periods ended June 30, 2019.

Accretable yield, or income expected to be collected, is as follows for the three and six month periods ended June 30, 2020 and 2019:

Three Months Ended

Six Months Ended

6/30/2020

6/30/2019

6/30/2020

6/30/2019

Balance at beginning of period
$ 375 $ 409 $ 403 $ 423

New loans purchased
- - - -

Accretion to income
(11 ) (12 ) (22 ) (24 )

Disposals and other adjustments
- - - -

Reclassification (to) from nonaccretable difference
(6 ) (7 ) (23 ) (9 )

Balance at end of period
$ 358 $ 390 $ 358 $ 390