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Note 5 - Loans Receivable

9 Months Ended

Sep. 30, 2020

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 5 - Loans Receivable

Loans receivable are summarized below:

(Dollars in thousands)
	September 30, 2020		December 31, 2019
Loans secured by real estate:
Residential real estate	$	284,381	$	299,569
Home equity		42,127		49,118
Commercial real estate		285,701		283,108
Construction and land development		89,176		87,710
Multifamily		50,701		51,286
Farmland		218		227
Total loans secured by real estate		752,304		771,018
Commercial business		184,406		103,222
Consumer		467		627
Manufactured homes		21,991		13,285
Government		13,205		15,804
Subtotal		972,373		903,956
Less:
Net deferred loan origination fees		3,441		2,934
Undisbursed loan funds		126		(21	)
Loans receivable	$	975,940	$	906,869

(Dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended September 30, 2020:

Allowance for loan losses:
Residential real estate	$	1,708	$	-		$	5	$	170		$	1,883
Home equity		231		-			-		(19	)		212
Commercial real estate		3,712		-			-		675			4,387
Construction and land development		1,201		-			-		(29	)		1,172
Multifamily		609		-			-		(59	)		550
Farmland		-		-			-		-			-
Commercial business		2,375		-			-		113			2,488
Consumer		30		(9	)		3		(2	)		22
Manufactured homes		-		-			-		-			-
Government		-		-			-		-			-
Total	$	9,866	$	(9	)	$	8	$	849		$	10,714

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended September 30, 2019:

Allowance for loan losses:
Residential real estate	$	1,660	$	(62	)	$	5	$	149		$	1,752
Home equity		202		-			2		23			227
Commercial real estate		3,529		-			-		178			3,707
Construction and land development		806		-			-		188			994
Multifamily		453		-			-		51			504
Farmland		-		-			-		-			-
Commercial business		1,517		(9	)		8		405			1,921
Consumer		51		(13	)		5		7			50
Manufactured homes		505		-			-		(505	)		-
Government		21		-			-		(2	)		19
Total	$	8,744	$	(84	)	$	20	$	494		$	9,174

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2020:

Allowance for loan losses:
Residential real estate	$	1,812	$	(2	)	$	15	$	58		$	1,883
Home equity		223		-			-		(11	)		212
Commercial real estate		3,773		(80	)		-		694			4,387
Construction and land development		1,098		(17	)		-		91			1,172
Multifamily		529		-			-		21			550
Farmland		-		-			-		-			-
Commercial business		1,504		(78	)		17		1,045			2,488
Consumer		43		(22	)		11		(10	)		22
Manufactured homes		-		-			-		-			-
Government		17		-			-		(17	)		-
Total	$	8,999	$	(199	)	$	43	$	1,871		$	10,714

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2019:

Allowance for loan losses:
Residential real estate	$	1,715	$	(128	)	$	23	$	142		$	1,752
Home equity		202		-			4		21			227
Commercial real estate		3,335		-			-		372			3,707
Construction and land development		756		-			-		238			994
Multifamily		472		-			-		32			504
Farmland		-		-			-		-			-
Commercial business		1,362		(9	)		24		544			1,921
Consumer		41		(38	)		14		33			50
Manufactured homes		41		-			-		(41	)		-
Government		38		-			-		(19	)		19
Total	$	7,962	$	(175	)	$	65	$	1,322		$	9,174

A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectation, the deferred cost reserve is paid as an origination cost to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled $3.3 million and $1.9 million as of September 30, 2020 and December 31, 2019, respectively, and is included in net deferred loan origination costs.

The Bancorp's impairment analysis is summarized below:

	Ending Balances

(Dollars in thousands)	Individually evaluated for impairment reserves		Collectively evaluated for impairment reserves		Loan receivables		Individually evaluated for impairment		Purchased credit impaired individually evaluated for impairment		Collectively evaluated for impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at September 30, 2020:

Residential real estate	$	186	$	1,697	$	284,293	$	781		1,422	$	282,090
		1		211		42,183		222		139		41,822
Commercial real estate		683		3,704		285,701		6,242		152		279,307
Construction and land development		-		1,172		89,176		-		-		89,176
Multifamily		-		550		50,701		102		646		49,953
Farmland		-		-		218		-		-		218
Commercial business		460		2,028		182,182		1,451		1,158		179,573
Consumer		-		22		467		-		-		467
Manufactured homes		-		-		27,814		-		-		27,814
Government		-		-		13,205		-		-		13,205
Total	$	1,330	$	9,384	$	975,940	$	8,798	$	3,517	$	963,625

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2019:

Residential real estate	$	10	$	1,802	$	299,333	$	642	$	1,581	$	297,110
Home equity		4		219		49,181		221		216		48,744
Commercial real estate		-		3,773		283,108		1,078		487		281,543
Construction and land development		-		1,098		87,710		-		-		87,710
Multifamily		-		529		51,286		129		673		50,484
Farmland		-		-		227		-		-		227
Commercial business		152		1,352		103,088		1,041		1,150		100,897
Consumer		-		43		627		-		-		627
Manufactured homes		-		-		16,505		-		-		16,505
Government		-		17		15,804		-		-		15,804
Total	$	166	$	8,833	$	906,869	$	3,111	$	4,107	$	899,651

The Bancorp's credit quality indicators are summarized below at September 30, 2020 and December 31, 2019:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	September 30, 2020
(Dollars in thousands)	2		3		4		5		6		7		8

Loan Segment	Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	952	$	115,720	$	100,115	$	13,601	$	44,660	$	2,555	$	6,690	$	284,293
Home equity		76		5,636		34,538		115		713		563		542		42,183
Commercial real estate		-		1,780		70,624		143,743		54,799		6,486		8,269		285,701
Construction and land development		-		2,238		26,639		45,236		15,063		-		-		89,176
Multifamily		-		723		13,364		29,548		4,971		1,567		528		50,701
Farmland		-		-		-		-		218		-		-		218
Commercial business		5,674		101,847		17,848		33,675		19,994		1,718		1,426		182,182
Consumer		63		1		403		-		-		-		-		467
Manufactured homes		5,822		1,998		19,041		178		775		-		-		27,814
Government		-		1,658		9,887		1,660		-		-		-		13,205
Total	$	12,587	$	231,601	$	292,459	$	267,756	$	141,193	$	12,889	$	17,455	$	975,940

	December 31, 2019
(Dollars in thousands)	2		3		4		5		6		7		8

Loan Segment	Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	827	$	119,138	$	104,153	$	13,463	$	53,058	$	4,203	$	4,491	$	299,333
Home equity		100		6,536		40,027		264		934		813		507		49,181
Commercial real estate		-		2,030		82,158		135,058		56,917		5,380		1,565		283,108
Construction and land development		-		719		26,900		45,751		14,340		-		-		87,710
Multifamily		-		903		18,107		26,800		4,674		-		802		51,286
Farmland		-		-		-		-		227		-		-		227
Commercial business		8,312		13,158		19,638		39,016		20,009		2,228		727		103,088
Consumer		90		-		537		-		-		-		-		627
Manufactured homes		3,221		2,413		9,825		184		862		-		-		16,505
Government		-		1,889		11,505		2,410		-		-		-		15,804
Total	$	12,550	$	146,786	$	312,850	$	262,946	$	151,021	$	12,624	$	8,092	$	906,869

The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:

1 – Minimal Risk

Borrower demonstrates exceptional credit fundamentals, including stable and predictable profit margins, strong liquidity and a conservative balance sheet with superior asset quality. Excellent cash flow coverage of existing and projected debt service. Historic and projected performance indicates borrower is able to meet obligations under almost any economic circumstances.

2 – Moderate risk

Borrower consistently internally generates sufficient cash flow to fund debt service, working assets, and some capital expenditures. Risk of default considered low.

3 – Above average acceptable risk

Borrower generates sufficient cash flow to fund debt service and some working assets and/or capital expansion needs. Profitability and key balance sheet ratios are at or slightly above peers. Current trends are positive or stable. Earnings may be level or trending down slightly or be erratic; however, positive strengths are offsetting. Risk of default is reasonable but may warrant collateral protection.

4 – Acceptable risk

Borrower generates sufficient cash flow to fund debt service, but most working asset and all capital expansion needs are provided from external sources. Profitability ratios and key balance sheet ratios are usually close to peers but one or more ratios (e.g. leverage) may be higher than peer. Earnings may be trending down over the last three years. Borrower may be able to obtain similar financing from other banks with comparable or less favorable terms. Risk of default is acceptable but requires collateral protection.

5 – Marginally acceptable risk

Borrower may exhibit excessive growth, declining earnings, strained cash flow, increasing leverage and/or weakening market position that indicate above average risk. Limited additional debt capacity, modest coverage, and average or below average asset quality, margins and market share. Interim losses and/or adverse trends may occur, but not to the level that would affect the Bank’s position. The potential for default is higher than normal but considered marginally acceptable based on prospects for improving financial performance and the strength of the collateral.

6 – Pass/monitor

The borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the company has taken a negative turn and may be temporarily strained. Cash flow may be weak but cash reserves remain adequate to meet debt service. Management weaknesses are evident. Borrowers in this category will warrant more than the normal level of supervision and more frequent reporting.

7 – Special mention (watch)

Special mention credits are considered bankable assets with no apparent loss of principal or interest envisioned but requiring a high level of management attention. Assets in this category are currently protected but are potentially weak. These borrowers are subject to economic, industry, or management factors having an adverse impact upon their prospects for orderly service of debt. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard.

8 – Substandard

This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.

Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.

During the first nine months of 2020, one commercial real estate loan totaling $145 thousand, one residential loan totaling $51 thousand and one home equity loan totaling $23 thousand were renewed as a troubled debt restructuring. One commercial business trouble debt restructuring loan totaling $287 thousand has subsequently defaulted during the periods presented. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

The Bancorp's individually evaluated impaired loans are summarized below:

							For the nine months ended
	As of September 30, 2020						September 30, 2020
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,923	$	3,260	$	-	$	2,061	$	81
Home equity		360		372		-		378		13
Commercial real estate		1,214		1,797		-		1,338		65
Construction and land development		-		-		-		-		-
Multifamily		748		830		-		775		23
Farmland		-		-		-		-		-
Commercial business		1,693		1,728		-		1,614		61
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	280	$	324	$	186	$	151	$	4
Home equity		1		9		1		4		-
Commercial real estate		5,180		5,180		683		1,346		-
Construction and land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Farmland		-		-		-		-		-
Commercial business		916		916		460		736		19
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	2,203	$	3,584	$	186	$	2,212	$	85
Home equity	$	361	$	381	$	1	$	382	$	13
Commercial real estate	$	6,394	$	6,977	$	683	$	2,684	$	65
Construction & land development	$	-	$	-	$	-	$	-	$	-
Multifamily	$	748	$	830	$	-	$	775	$	23
Farmland	$	-	$	-	$	-	$	-	$	-
Commercial business	$	2,609	$	2,644	$	460	$	2,350	$	80
Consumer	$	-	$	-	$	-	$	-	$	-
Manufactured homes	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	-	$	-

							For the nine months ended
	As of December 31, 2019						September 30, 2019
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	2,140	$	3,555	$	-	$	1,915	$	55
Home equity		429		451		-		368		6
Commercial real estate		1,547		2,141		-		1,586		41
Construction & land development		-		-		-		-		-
Multifamily		802		884		-		525		12
Farmland		-		-		-		-		-
Commercial business		1,814		1,906		-		1,933		63
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	83	$	83	$	10	$	158	$	3
Home equity		8		8		4		60		1
Commercial real estate		18		18		-		473		-
Construction & land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Farmland		-		-		-		-		-
Commercial business		377		377		152		547		3
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	2,223	$	3,638	$	10	$	2,073	$	58
Home equity	$	437	$	459	$	4	$	428	$	7
Commercial real estate	$	1,565	$	2,159	$	-	$	2,059	$	41
Construction & land development	$	-	$	-	$	-	$	-	$	-
Multifamily	$	802	$	884	$	-	$	525	$	12
Farmland	$	-	$	-	$	-	$	-	$	-
Commercial business	$	2,191	$	2,283	$	152	$	2,480	$	66
Consumer	$	-	$	-	$	-	$	-	$	-
Manufactured homes	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	-	$	-

The Bancorp's age analysis of past due loans is summarized below:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investments Greater than 90 Days Past Due and Accruing
September 30, 2020
Residential real estate	$	2,697	$	2,028	$	3,284	$	8,009	$	276,284	$	284,293	$	-
Home equity		163		-		408		571		41,612		42,183		-
Commercial real estate		9,837		1,532		248		11,617		274,084		285,701		-
Construction and land development		478		-		345		823		88,353		89,176		345
Multifamily		102		269		166		537		50,164		50,701		-
Farmland		-		-		-		-		218		218		-
Commercial business		1,342		215		759		2,316		179,866		182,182		234
Consumer		-		-		-		-		467		467		-
Manufactured homes		423		168		-		591		27,223		27,814		-
Government		-		-		-		-		13,205		13,205		-
Total	$	15,042	$	4,212	$	5,210	$	24,464	$	951,476	$	975,940	$	579

December 31, 2019
Residential real estate	$	3,486	$	1,332	$	3,724	$	8,542	$	290,791	$	299,333	$	452
Home equity		90		24		388		502		48,679		49,181		19
Commercial real estate		1,461		170		719		2,350		280,758		283,108		61
Construction and land development		143		289		-		432		87,278		87,710		-
Multifamily		140		-		160		300		50,986		51,286		-
Farmland		-		-		-		-		227		227		-
Commercial business		926		583		870		2,379		100,709		103,088		288
Consumer		-		-		-		-		627		627		-
Manufactured homes		63		36		46		145		16,360		16,505		46
Government		-		-		-		-		15,804		15,804		-
Total	$	6,309	$	2,434	$	5,907	$	14,650	$	892,219	$	906,869	$	866

The Bancorp's loans on nonaccrual status are summarized below:

(Dollars in thousands)
	September 30, 2020		December 31, 2019
Residential real estate	$	6,650	$	4,374
Home equity		509		473
Commercial real estate		5,411		658
Construction and land development		-		-
Multifamily		528		420
Farmland		-		-
Commercial business		1,383		582
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	14,481	$	6,507

As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At September 30, 2020, total purchased credit impaired loans with unpaid principal balances totaled $5.6 million with a recorded investment of $3.5 million. At December 31, 2019, purchased credit impaired loans with unpaid principal balances totaled $6.3 million with a recorded investment of $4.1 million.

Accretable interest taken from the purchase credit impaired portfolio, or income recorded for the nine months ended September 30, is as follows:

(dollars in thousands)	First Personal
2019	$	118
2020		78

Accretable interest taken from the purchase credit impaired portfolio, or income expected to be recorded in the future is as follows:

(dollars in thousands)	First Personal
2020		21
2021		21
Total	$	42

For the acquisitions of First Federal Savings & Loan (“First Federal”), Liberty Savings Bank (“Liberty Savings”), First Personal Bank (“First Personal”), and A.J. Smith Federal Savings Bank (“AJ Smith”), as part of the fair value of loans receivable, a net fair value discount was established for loans as summarized below:

(dollars in thousands)	First Federal				Libery Savings				First Personal				AJSB
	Net fair value discount		Accretable period in months		Net fair value discount		Accretable period in months		Net fair value discount		Accretable period in months		Net fair value discount		Accretable period in months
Residential real estate	$	1,062		59	$	1,203		44	$	948		56	$	3,734		52
Home equity		44		29		5		29		51		50		141		32
Commercial real estate		-		-		-		-		208		56		8		9
Construction and land development		-		-		-		-		1		30		-		-
Multifamily		-		-		-		-		11		48		2		48
Consumer		-		-		-		-		146		50		1		5
Commercial business		-		-		-		-		348		24		-		-
Purchased credit impaired loans		-		-		-		-		424		32		-		-
Total	$	1,106			$	1,208			$	2,137			$	3,886

Accretable yield, or income recorded for the nine months ended September 30, is as follows:

(dollars in thousands)	First Federal		Libery Savings		First Personal		AJSB		Total
2019	$	22	$	42	$	402	$	843	$	1,245
2020		-		-		416		936		1,352

Accretable yield, or income expected to be recorded in the future is as follows:

(dollars in thousands)	First Personal		AJ Smith		Total
2020	$	73	$	167	$	240
2021		292		667		959
2022		282		667		949
2023		63		275		338
Total	$	710	$	1,776	$	2,486