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Note 3 - Loans and Allowance for Loan Losses
 9 Months Ended
Sep. 30, 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 September 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 September 30, 2020 and December 31, 2019, the balance of foreclosed real estate includes $57,000 and $170,000, respectively, of residential real estate properties where physical possession had been obtained. At September 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 $162,000 and $319,000, respectively.

 

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

 

  

September 30,

  

December 31,

 

(In thousands)

 

2020

  

2019

 
         

Real estate mortgage loans:

        

Residential

 $127,146  $131,959 

Land

  17,181   19,185 

Residential construction

  44,091   35,554 

Commercial real estate

  128,130   121,563 

Commercial real estate construction

  6,539   20,086 

Commercial business loans

  79,856   45,307 

Consumer loans:

        

Home equity and second mortgage loans

  51,885   54,677 

Automobile loans

  44,304   46,443 

Loans secured by savings accounts

  1,204   1,372 

Unsecured loans

  2,912   3,653 

Other consumer loans

  16,354   13,700 

Gross loans

  519,602   493,499 

Less undisbursed portion of loans in process

  (20,937)  (23,081)
         

Principal loan balance

  498,665   470,418 
         

Deferred loan origination fees and costs, net

  (133)  1,137 

Allowance for loan losses

  (6,404)  (5,061)
         

Loans, net

 $492,128  $466,494 

 

Included in commercial business loans at September 30, 2020, were $45.9 million of PPP loans guaranteed by the SBA.

 

The following table provides the components of the Company’s recorded investment in loans at September 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

 $127,146  $17,181  $29,693  $128,130  $79,856  $51,885  $64,774  $498,665 
                                 

Accrued interest receivable

  499   123   66   560   294   166   251   1,959 
                                 

Net deferred loan origination fees and costs

  116   14   (9)  (64)  (1,275)  1,085   -   (133)
                                 

Recorded investment in loans

 $127,761  $17,318  $29,750  $128,626  $78,875  $53,136  $65,025  $500,491 
                                 
                                 

Recorded Investment in Loans as Evaluated for Impairment:

                     

Individually evaluated for impairment

 $1,591  $97  $-  $1,284  $436  $352  $-  $3,760 

Collectively evaluated for impairment

  125,892   17,221   29,750   127,311   78,439   52,784   65,025   496,422 

Acquired with deteriorated credit quality

  278   -   -   31   -   -   -   309 
                                 

Ending balance

 $127,761  $17,318  $29,750  $128,626  $78,875  $53,136  $65,025  $500,491 

 

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 September 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

 $-  $-  $-  $-  $138  $-  $-  $138 

Collectively evaluated for impairment

  1,105   207   373   2,054   715   643   1,145   6,242 

Acquired with deteriorated credit quality

  24   -   -   -   -   -   -   24 
                                 

Ending balance

 $1,129  $207  $373  $2,054  $853  $643  $1,145  $6,404 

 

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 nine months ended September 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 September 30, 2020

             

Beginning balance

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

Provisions for loan losses

  70   11   4   152   17   39   107   400 

Charge-offs

  -   -   -   -   (32)  -   (80)  (112)

Recoveries

  4   -   -   -   -   -   48   52 
                                 

Ending balance

 $1,129  $207  $373  $2,054  $853  $643  $1,145  $6,404 
                                 
                                 

Changes in Allowance for Loan Losses for the nine-months ended September 30, 2020

             

Beginning balance

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

Provisions for loan losses

  284   44   23   431   290   117   387   1,576 

Charge-offs

  (72)  -   -   -   (32)  -   (344)  (448)

Recoveries

  50   -   -   -   -   11   154   215 
                                 

Ending balance

 $1,129  $207  $373  $2,054  $853  $643  $1,145  $6,404 

 

An analysis of the changes in the allowance for loan losses for the three 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 

 

At September 30, 2020 and December 31, 2019, the estimated allowance for loan losses related to qualitative factor adjustments to various portfolio segments totaled approximately $5.4 million and $3.8 million, respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at September 30, 2020 and December 31, 2019. The increases to qualitative factors at September 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 $459,000 and $386,000 at September 30, 2020 and December 31, 2019, respectively. These factors were not adjusted during the period from December 31, 2019 to September 30, 2020.

 

The following table summarizes the Company’s impaired loans as of September 30, 2020 and for the three months and nine months ended September 30, 2020. 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, 2020:

 

              

Three Months Ended

  

Nine Months Ended

 
  

At September 30, 2020

  

September 30, 2020

  

September 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

 $1,482  $1,617  $-  $1,532  $6  $1,616  $16 

Land

  97   97   -   90   -   102   - 

Construction

  -   -   -   -   -   -   - 

Commercial real estate

  1,284   1,308   -   1,301   9   851   27 

Commercial business

  253   256   -   268   2   258   7 

Home equity/2nd mortgage

  352   346   -   352   4   204   9 

Other consumer

  -   -   -   4   -   24   - 
                             
   3,468   3,624   -   3,547   21   3,055   59 
                             

Loans with an allowance recorded:

                         

Residential

  109   129   -   109   -   146   - 

Land

  -   -   -   -   -   -   - 

Construction

  -   -   -   -   -   -   - 

Commercial real estate

  -   -   -   -   -   -   - 

Commercial business

  183   192   138   191   -   95   - 

Home equity/2nd mortgage

  -   -   -   -   -   -   - 

Other consumer

  -   -   -   -   -   -   - 
                             
   292   321   138   300   -   241   - 
                             

Total:

                            

Residential

  1,591   1,746   -   1,641   6   1,762   16 

Land

  97   97   -   90   -   102   - 

Construction

  -   -   -   -   -   -   - 

Commercial real estate

  1,284   1,308   -   1,301   9   851   27 

Commercial business

  436   448   138   459   2   353   7 

Home equity/2nd mortgage

  352   346   -   352   4   204   9 

Other consumer

  -   -   -   4   -   24   - 
                             
  $3,760  $3,945  $138  $3,847  $21  $3,296  $59 

 

The following table summarizes the Company’s impaired loans 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

 
  

September 30, 2019

  

September 30, 2019

 
  

Average

  

Interest

  

Average

  

Interest

 
  

Recorded

  

Income

  

Recorded

  

Income

 
  

Investment

  

Recognized

  

Investment

  

Recognized

 
                 

Loans with no related allowance recorded:

             

Residential

 $1,882  $6  $2,032  $12 

Land

  141   -   156   - 

Construction

  -   -   262   - 

Commercial real estate

  686   14   470   25 

Commercial business

  302   3   350   9 

Home equity/2nd mortgage

  14   -   22   - 

Other consumer

  27   -   13   - 
                 
   3,052   23   3,305   46 
                 

Loans with an allowance recorded:

             

Residential

  47   -   61   - 

Land

  -   -   -   - 

Construction

  -   -   -   - 

Commercial real estate

  100   -   101   - 

Commercial business

  26   -   72   - 

Home equity/2nd mortgage

  19   -   16   - 

Other consumer

  -   -   -   - 
                 
   192   -   250   - 
                 

Total:

                

Residential

  1,929   6   2,093   12 

Land

  141   -   156   - 

Construction

  -   -   262   - 

Commercial real estate

  786   14   571   25 

Commercial business

  328   3   422   9 

Home equity/2nd mortgage

  33   -   38   0 

Other consumer

  27   -   13   0 
                 
  $3,244  $23  $3,555  $46 

 

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 September 30, 2020 and December 31, 2019:

 

  

September 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

 $1,169  $-  $1,169  $1,544  $13  $1,557 

Land

  97   -   97   115   -   115 

Construction

  -   -   -   -   -   - 

Commercial real estate

  657   -   657   -   -   - 

Commercial business

  250   -   250   58   -   58 

Home equity/2nd mortgage

  -   -   -   -   -   - 

Other consumer

  -   -   -   48   -   48 
                         

Total

 $2,173  $-  $2,173  $1,765  $13  $1,778 

 

The following table presents the aging of the recorded investment in loans at September 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

 $1,716  $46  $774  $2,536  $124,947  $278  $127,761 

Land

  65   -   97   162   17,156   -   17,318 

Construction

  -   -   -   -   29,750   -   29,750 

Commercial real estate

  -   166   -   166   128,429   31   128,626 

Commercial business

  136   29   -   165   78,710   -   78,875 

Home equity/2nd mortgage

  188   13   -   201   52,935   -   53,136 

Other consumer

  265   50   -   315   64,710   -   65,025 
                             

Total

 $2,370  $304  $871  $3,545  $496,637  $309  $500,491 

 

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)

 

September 30, 2020

                             

Pass

 $126,006  $16,780  $29,750  $124,446  $78,133  $52,733  $64,909  $492,757 

Special Mention

  -   318   -   2,284   422   -   66   3,090 

Substandard

  620   123   -   1,239   70   403   50   2,505 

Doubtful

  1,135   97   -   657   250   -   -   2,139 

Loss

  -   -   -   -   -   -   -   - 
                                 

Total

 $127,761  $17,318  $29,750  $128,626  $78,875  $53,136  $65,025  $500,491 
                                 

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 September 30, 2020 and December 31, 2019:

 

  

September 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

 $402  $-  $402  $-  $367  $66  $433  $- 

Commercial real estate

  626   -   626   -   553   -   553   - 

Commercial business

  186   -   186   -   191   -   191   - 

Home equity and second mortgage

  347   -   347   -   55   -   55   - 
                                 

Total

 $1,561  $-  $1,561  $-  $1,166  $66  $1,232  $- 

 

 

 

At September 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 two residential mortgages, one commercial business loan, one commercial real estate loan and one second mortgage during the nine months ended September 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 nine months ended September 30, 2019, with pre-modification and post-modification aggregate balances of $436,000. There were no loans restructured during the three months ended September 30, 2020 and 2019. 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 September 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, $58.1 million had resumed normal payments at September 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 September 30, 2020 and December 31, 2019:

 

  

September 30,

  

December 31,

 

(In thousands)

 

2020

  

2019

 
         

Residential real estate

 $278  $285 

Commercial real estate

  31   39 

Carrying amount

  309   324 

Allowance for loan losses

  24   12 

Carrying amount, net of allowance

 $285  $312 

 

The outstanding balance of PCI loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties was $425,000 and $466,000 at September 30, 2020 and December 31, 2019, respectively.

 

There was a $24,000 allowance for loan losses related to PCI loans at September 30, 2020 and a $12,000 allowance for loan losses related to PCI loans at December 31, 2019. There were provisions for loan losses related to PCI loans for the three-month and nine-month periods ended September 30, 2020 of $1,000 and $12,000, respectively. There was a $20,000 provision for loan losses related to PCI loans for the three-month and nine-month periods ended September 30, 2019.

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  

9/30/2020

  

9/30/2019

  

9/30/2020

  

9/30/2019

 
                 

Balance at beginning of period

 $358  $390  $403  $423 

New loans purchased

  -   -   -   - 

Accretion to income

  (11)  (11)  (33)  (35)

Disposals and other adjustments

  -   -   -   - 

Reclassification (to) from nonaccretable difference

  (2)  (4)  (25)  (13)
                 

Balance at end of period

 $345  $375  $345  $375