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Note 4 - Loans Receivable

12 Months Ended

Dec. 31, 2020

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

NOTE 4 – Loans Receivable

Year end loans are summarized below:

Loans receivable are summarized below:

(Dollars in thousands)
	December 31, 2020			December 31, 2019
Loans secured by real estate:
Residential real estate	$	286,048		$	299,569
Home equity		39,233			49,118
Commercial real estate		298,257			283,108
Construction and land development		93,562			87,710
Multifamily		50,571			51,286
Farmland		215			227
Total loans secured by real estate		767,886			771,018
Commercial business		158,140			103,222
Consumer		1,025			627
Manufactured homes		24,232			13,285
Government		10,142			15,804
Subtotal		961,425			903,956
Plus:
Net deferred loan origination fees		5,303			2,934
Undisbursed loan funds		(150	)		(21	)
Loans receivable	$	966,578		$	906,869

During 2020, the Bancorp funded loans under the Paycheck Protection Program which was created and designed to provide liquidity to small businesses during the COVID-19 pandemic. The loans are guaranteed by the SBA and loan proceeds to borrowers are forgivable by the SBA if certain criteria are met. The Company originated PPP loans totaling $91.5 million during the year. As of December 31, 2020, there were approximately $67.2 million of PPP loans included in the commercial business loan segment.

PPP processing fees received from the SBA totaling $3.5 million were deferred along with loan origination costs and recognized as interest income using the effective yield method. Upon forgiveness of a loan and resulting repayment by the SBA, any unrecognized net fee for a given loan is recognized as interest income. $1.2 million of the fees were recognized in 2020.

(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 twelve months ended December 31, 2020:

Allowance for loan losses:
Residential real estate	$	1,812	$	(2	)	$	27	$	374		$	2,211
Home equity		223		-			-		53			276
Commercial real estate		3,773		(80	)		-		1,713			5,406
Construction and land development		1,098		(17	)		-		324			1,405
Multifamily		529		-			-		97			626
Farmland		-		-			-		-			-
Commercial business		1,504		(158	)		17		1,145			2,508
Consumer		43		(29	)		14		(2	)		26
Manufactured homes		-		-			-		-			-
Government		17		-			-		(17	)		-
Total	$	8,999	$	(286	)	$	58	$	3,687		$	12,458

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the twelve months ended December 31, 2019:

Allowance for loan losses:
Residential real estate	$	1,715	$	(160	)	$	29	$	228		$	1,812
Home equity		202		-			-		21			223
Commercial real estate		3,335		(229	)		-		667			3,773
Construction and land development		756		-			-		342			1,098
Multifamily		472		-			-		57			529
Farmland		-		-			-		-			-
Commercial business		1,362		(1,178	)		25		1,295			1,504
Consumer		82		(54	)		20		(5	)		43
Manufactured homes		-		-			-		-			-
Government		38		-			-		(21	)		17
Total	$	7,962	$	(1,621	)	$	74	$	2,584		$	8,999

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 $3.8 million and $1.9 million as of December 31, 2020 and December 31, 2019, respectively, and is included in net deferred loan origination fees and 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		Loans individually evaluated for impairment		Purchased credit impaired loans individually evaluated for impairment		Loans collectively evaluated for impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2020:

Residential real estate	$	173	$	2,038	$	285,651	$	868	$	1,297	$	283,486
Home equity		1		275		39,286		216		137		38,933
Commercial real estate		1,089		4,317		298,257		6,190		151		291,916
Construction and land development		-		1,405		93,562		-		-		93,562
Multifamily		-		626		50,571		95		621		49,855
Farmland		-		-		215		-		-		215
Commercial business		512		1,996		156,965		1,086		1,160		154,719
Consumer		-		26		1,025		-		-		1,025
Manufactured homes		-		-		30,904		-		-		30,904
Government		-		-		10,142		-		-		10,142
Total	$	1,775	$	10,683	$	966,578	$	8,455	$	3,366	$	954,757


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 December 31, 2020 and December 31, 2019:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	December 31, 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	$	1,202	$	116,631	$	100,334	$	15,753	$	41,805	$	3,539	$	6,387	$	285,651
Home equity		66		4,949		31,974		108		933		761		495		39,286
Commercial real estate		-		1,847		70,062		150,983		55,202		11,983		8,180		298,257
Construction and land development		-		4,282		31,612		41,961		12,055		3,652		-		93,562
Multifamily		-		709		7,264		35,621		5,065		1,408		504		50,571
Farmland		-		-		-		-		215		-		-		215
Commercial business		7,929		75,783		16,842		33,942		20,067		1,341		1,061		156,965
Consumer		510		1		514		-		-		-		-		1,025
Manufactured homes		6,673		1,864		21,460		176		731		-		-		30,904
Government		-		-		9,202		940		-		-		-		10,142
Total	$	16,380	$	206,066	$	289,264	$	279,484	$	136,073	$	22,684	$	16,627	$	966,578

	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 theses 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.

9 – Doubtful

This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain important and reasonably specific pending factors which may strengthen the credit can be exactly determined. These factors may include proposed acquisitions, liquidation procedures, capital injection and receipt of additional collateral, mergers or refinancing plans.

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

During the twelve months ending December 31, 2020, one residential real estate loan totaling $108 thousand was a new troubled debt restructuring loan. In addition, during 2020, one commercial real estate loan totaling $142 thousand, one residential loan totaling $50 thousand and one home equity loan totaling $22 thousand were renewed as a troubled debt restructuring. One residential real estate loan totaling $108 thousand and one commercial business trouble debt restructuring loan totaling $275 thousand, had 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.

In March of 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed into law. Among other things, the CARES Act suspends the requirements related to accounting for TDRs for certain loan modifications related to the COVID-19 pandemic. As a result of the pandemic, the Company provided a modification program to borrowers that included certain concessions such as interest only or payment deferrals. As of December 31, 2020, there were $14.9 million of loans that remained under a modification agreement but are not disclosed as TDRs. Regardless of whether a modification is classified as a TDR, the Company continues to apply policies for risk rating, accruing interest, and classifying loans as impaired. As of December 31, 2020, there were $6.5 million and $5.2 million of loans outstanding under provisions of the CARES act and rated substandard and special mention, respectively.

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

							For the twelve months ended
	As of December 31, 2020						December 31, 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	$	1,895	$	3,228	$	-	$	2,028	$	115
Home equity		352		363		-		373		16
Commercial real estate		1,177		1,761		-		1,305		80
Construction and land development		-		-		-		-		-
Multifamily		716		798		-		763		42
Farmland		-		-		-				-
Commercial business		1,497		1,514		-		1,591		80
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	270	$	314	$	173	$	174	$	6
Home equity		1		9		1		5		-
Commercial real estate		5,164		5,164		1,089		2,109		16
Construction and land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Farmland		-		-		-				-
Commercial business		749		749		512		739		30
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	2,165	$	3,542	$	173	$	2,202	$	121
Home equity	$	353	$	372	$	1	$	378	$	16
Commercial real estate	$	6,341	$	6,925	$	1,089	$	3,414	$	96
Construction & land development	$	-	$	-	$	-	$	-	$	-
Multifamily	$	716	$	798	$	-	$	763	$	42
Farmland	$	-	$	-	$	-	$	-	$	-
Commercial business	$	2,246	$	2,263	$	512	$	2,330	$	110
Consumer	$	-	$	-	$	-	$	-	$	-
Manufactured homes	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	-	$	-

							For the twelve months ended
	As of December 31, 2019						December 31, 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	$	-	$	1,960	$	85
Home equity		429		451		-		380		10
Commercial real estate		1,547		2,141		-		1,578		52
Construction & land development		-		-		-		-		-
Multifamily		802		884		-		581		20
Farmland		-		-		-		-		-
Commercial business		1,814		1,906		-		1,909		81
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	83	$	83	$	10	$	143	$	3
Home equity		8		8		4		50		-
Commercial real estate		18		18		-		382		-
Construction & land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Farmland		-		-		-		-		-
Commercial business		377		377		152		513		4
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	2,223	$	3,638	$	10	$	2,103	$	88
Home equity	$	437	$	459	$	4	$	430	$	10
Commercial real estate	$	1,565	$	2,159	$	-	$	1,960	$	52
Construction & land development	$	-	$	-	$	-	$	-	$	-
Multifamily	$	802	$	884	$	-	$	581	$	20
Farmland	$	-	$	-	$	-	$	-	$	-
Commercial business	$	2,191	$	2,283	$	152	$	2,422	$	85
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
December 31, 2020
Residential real estate	$	2,797	$	1,119	$	4,875	$	8,791	$	276,860	$	285,651	$	80
Home equity		616		323		416		1,355		37,931		39,286		29
Commercial real estate		1,172		237		680		2,089		296,168		298,257		437
Construction and land development		471		-		20		491		93,071		93,562		20
Multifamily		94		266		150		510		50,061		50,571		-
Farmland		-		-		-		-		215		215		-
Commercial business		845		96		269		1,210		155,755		156,965		-
Consumer		2		-		-		2		1,023		1,025		-
Manufactured homes		303		173		-		476		30,428		30,904		-
Government		380		-		-		380		9,762		10,142		-
Total	$	6,680	$	2,214	$	6,410	$	15,304	$	951,274	$	966,578	$	566

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)
	December 31,		December 31,
	2020		2019
Residential real estate	$	6,390	$	4,374
Home equity		476		473
Commercial real estate		5,390		658
Construction and land development.		-		-
Multifamily		504		420
Farmland		-		-
Commercial business		1,039		582
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	13,799	$	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 December 31, 2020, total purchased credit impaired loans with unpaid principal balances totaled $5.4 million with a recorded investment of $3.4 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.

As the result of the acquisition of First Personal Financial Corp. (“First Personal”), which closed in July 2018, an accretable discount totaling $424 thousand was created for the interest component of expected cash flows related to the purchase credit impaired portfolio. The following tables summarize the accretable periods:

Accretable interest taken from the purchase credit impaired portfolio, or income recorded for the twelve months ended December 31, is as follows:

(dollars in thousands)	First Personal
2019	$	147
2020		99

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
2021		21
Total	$	21

For the acquisitions of First Federal Savings & Loan of Hammond (“First Federal”), Liberty Savings Bank (“Liberty Savings”), First Personal, and AJSB as part of the fair value of loans receivable, a net fair value discount was established for loans. This discount, or accretable yield, is recognized in interest income over the remaining estimated life of the loan pools. The net fair value discount at the acquisition date and accretable periods are 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 twelve months ended December 31, is as follows:

(dollars in thousands)	First Federal		Libery Savings		First Personal		AJSB		Total
2019	$	22	$	42	$	586	$	1,174	$	1,824
2020		-		-		534		1,286		1,820

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

(dollars in thousands)	First Personal		AJ Smith		Total
2021	$	243	$	536	$	779
2022		243		536		779
2023		106		355		461
Total	$	592	$	1,426	$	2,018