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Note 4 - Loans Receivable

3 Months Ended

Mar. 31, 2021

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

Note 4 - Loans Receivable

The Bancorp’s current lending programs are described below:

Residential Real Estate. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. Loans closed with over 20% of equity do not require private mortgage insurance because of the borrower’s level of equity investment.

Fixed rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one‑to‑four family program. Loan interest rates are determined based on secondary market yield requirements and local market conditions. Fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater may be sold and/or classified as held for sale to control exposure to interest rate risk.

The 15 year mortgage loan program has gained wide acceptance in the Bancorp’s primary market area. As a result of the shortened maturity of these loans, this product has been priced below the comparable 20 and 30 year loan offerings. Mortgage applicants for 15 year loans tend to have a larger than normal down payment; this, coupled with the larger principal and interest payment amount, has caused the 15 year mortgage loan portfolio to consist, to a significant extent, of second time home buyers whose underwriting qualifications tend to be above average.

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.” The “Mini‑Fixed” mortgage reprices annually after a one, three, five, seven or ten year period. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans and terms offered by competitors.

Home Equity Line of Credit. The Bancorp offers a fixed and variable rate revolving line of credit secured by the equity in the borrower’s home. Both products offer an interest only option where the borrower pays interest only on the outstanding balance each month. Equity lines will typically require a second mortgage appraisal and a second mortgage lender’s title insurance policy. Loans are generally made up to a maximum of 89% of the appraised value of the property less any outstanding liens.

Fixed term home improvement and equity loans are made up to a maximum of 85% of the appraised value of the improved property, less any outstanding liens. These loans are offered on both a fixed and variable rate basis with a maximum term of 240 months. All home equity loans are made on a direct basis to borrowers.

Commercial Real Estate and Multifamily Loans. Commercial real estate loans are typically made to a maximum of 80% of the appraised value. Such loans are generally made on an adjustable rate basis. These loans are typically made for terms of 15 to 20 years. Loans with an amortizing term exceeding 15 years normally have a balloon feature calling for a full repayment within seven to ten years from the date of the loan. The balloon feature affords the Bancorp the opportunity to restructure the loan if economic conditions so warrant. Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units and other retail and commercial developments.

While commercial real estate lending is generally considered to involve a higher degree of risk than single‑family residential lending due to the concentration of principal in a limited number of loans and the effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways. In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment. Management evaluates the debt coverage ratio and analyzes the reliability of cash flows, as well as the quality of earnings. All such loans are made in accordance with well-defined underwriting standards and are generally supported by personal guarantees, which represent a secondary source of repayment.

Loans for the construction of commercial properties are generally located within an area permitting physical inspection and regular review of business records. Projects financed outside of the Bancorp’s primary lending area generally involve borrowers and guarantors who are or were previous customers of the Bancorp or projects that are underwritten according to the Bank’s underwriting standards.

Construction and Land Development. Construction loans on residential properties are made primarily to individuals and contractors who are under contract with individual purchasers. These loans are personally guaranteed by the borrower. The maximum loan-to-value ratio is 89% of either the current appraised value or the cost of construction, whichever is less. Residential construction loans are typically made for periods of six months to one year.

Loans are also made for the construction of commercial properties. All such loans are made in accordance with well-defined underwriting standards. Generally if the loans are not owner occupied, these types of loans require proof of intent to lease and a confirmed end-loan takeout. In general, loans made do not exceed 80% of the appraised value of the property. Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less.

Commercial Business and Farmland Loans. Although the Bancorp’s priority in extending various types of commercial business loans changes from time to time, the basic considerations in determining the makeup of the commercial business loan portfolio are economic factors, regulatory requirements and money market conditions. The Bancorp seeks commercial loan relationships from the local business community and from its present customers. Conservative lending policies based upon sound credit analysis governs the extension of commercial credit. The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio: loans collateralized by liquid assets; loans secured by general use machinery and equipment; secured short‑term working capital loans to established businesses secured by business assets; short‑term loans with established sources of repayment and secured by sufficient equity and real estate; and unsecured loans to customers whose character and capacity to repay are firmly established.

Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products.

Manufactured Homes. The Bancorp purchases fixed rate closed loans from a third party that are subject to Bancorp’s underwriting requirements and secured by manufactured homes. The maturity date on these loans can range up to 25 years. In addition, these loans have partial recourse secured by a reserve account held at the Bancorp.

Government Loans. The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes and warrants within the local market area.

(Dollars in thousands)
	March 31, 2021		December 31, 2020
Loans secured by real estate:
Residential real estate	$	276,728	$	286,048
Home equity		36,222		39,233
Commercial real estate		304,851		298,257
Construction and land development		97,400		93,562
Multifamily		51,933		50,571
Farmland		315		215
Total loans secured by real estate		767,449		767,886
Commercial business		163,896		158,140
Consumer		438		1,025
Manufactured homes		26,260		24,232
Government		9,372		10,142
Subtotal		967,415		961,425
Add (less):
Net deferred loan origination fees and purchase premiums		5,673		5,303
Undisbursed loan funds and clearings		966		(150	)
Loans receivable	$	974,054	$	966,578

(Unaudited)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance
(Dollars in thousands)
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2021:

Allowance for loan losses:
Residential real estate	$	2,211	$	(4	)	$	10	$	(41	)	$	2,176
Home equity		276		(1	)		-		34			309
Commercial real estate		5,406		-			-		320			5,726
Construction and land development		1,405		-			-		182			1,587
Multifamily		626		-			-		54			680
Farmland		-		-			-		-			-
Commercial business		2,508		-			8		36			2,552
Consumer		26		(6	)		4		(7	)		17
Manufactured homes		-		-			-		-			-
Government		-		-			-		-			-
Total	$	12,458	$	(11	)	$	22	$	578		$	13,047

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2020:

Allowance for loan losses:
Residential real estate	$	1,812	$	-		$	6	$	10		$	1,828
Home equity		223		-			-		23			246
Commercial real estate		3,773		-			-		(80	)		3,693
Construction and land development		1,098		-			-		125			1,223
Multifamily		529		-			-		33			562
Farmland		-		-			-		-			-
Commercial business		1,504		-			1		396			1,901
Consumer		43		(12	)		3		8			42
Manufactured homes		-		-			-		-			-
Government		17		-			-		(1	)		16
Total	$	8,999	$	(12	)	$	10	$	514		$	9,511

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 a premium to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled $4.1 million and $3.8 million as of March 31, 2021 and December 31, 2020, respectively, and is included in net deferred loan origination costs and purchase premiums.

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 March 31, 2021:

Residential real estate	$	92	$	2,084	$	277,465	$	737	$	1,165	$	275,563
Home equity		5		304		36,273		220		132		35,921
Commercial real estate		1,269		4,457		304,851		6,952		151		297,748
Construction and land development		-		1,587		97,400		-		-		97,400
Multifamily		-		680		51,933		90		609		51,234
Farmland		-		-		315		-		-		315
Commercial business		518		2,034		162,375		999		1,163		160,213
Consumer		-		17		438		-		-		438
Manufactured homes		-		-		33,632		-		-		33,632
Government		-		-		9,372		-		-		9,372
Total	$	1,884	$	11,163	$	974,054	$	8,998	$	3,220	$	961,836


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 credit quality indicators are summarized below at March 31, 2021 and December 31, 2020:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	March 31, 2021
(Dollars in thousands)	1155		6		7		8

Loan Segment	Pass		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	229,246	$	38,206	$	5,344	$	4,669	$	277,465
Home equity		34,123		908		755		487		36,273
Commercial real estate		228,938		52,578		14,456		8,879		304,851
Construction and land development		79,839		13,939		3,622		-		97,400
Multifamily		45,035		5,013		1,390		495		51,933
Farmland		104		211		-		-		315
Commercial business		140,656		19,487		1,260		972		162,375
Consumer		438		-		-		-		438
Manufactured homes		32,821		750		61		-		33,632
Government		9,372		-		-		-		9,372
Total	$	800,572	$	131,092	$	26,888	$	15,502	$	974,054

	December 31, 2020
(Dollars in thousands)	1155		6		7		8

Loan Segment	Pass		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	233,920	$	41,805	$	3,539	$	6,387	$	285,651
Home equity		37,097		933		761		495		39,286
Commercial real estate		222,892		55,202		11,983		8,180		298,257
Construction and land development		77,855		12,055		3,652		-		93,562
Multifamily		43,594		5,065		1,408		504		50,571
Farmland		-		215		-		-		215
Commercial business		134,496		20,067		1,341		1,061		156,965
Consumer		1,025		-		-		-		1,025
Manufactured homes		30,173		731		-		-		30,904
Government		10,142		-		-		-		10,142
Total	$	791,194	$	136,073	$	22,684	$	16,627	$	966,578

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 – Superior Quality

Loans in this category are substantially risk free. Loans fully collateralized by a Bank certificate of deposit or Bank deposits with a hold are substantially risk free.

2 – Excellent Quality

The borrower generates excellent and consistent cash flow for debt coverage, excellent average credit scores, excellent liquidity and net worth and are reputable operators with over 15 years experience. Current and debt to tangible net worth ratios are excellent. Loan to value is substantially below policy and collateral condition is excellent.

3 – Great Quality

The borrower generates more than sufficient cash flow to fund debt service and cash flow is improving. Average credit scores are very strong. Operators are reputable with significant years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are very strong. Loan to value is significantly below policy and collateral condition is significantly above average.

4 – Above Average Quality

The borrower generates more than sufficient cash flow to fund debt service but cash flow trends may be stable or slightly declining. Average credit scores are strong. The borrower is a reputable operator with many years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are strong. Loan to value is below policy and collateral condition is above average.

5 – Average Quality

Borrowers are considered creditworthy and can repay the debt in the normal course of business, however, cash flow trends may be inconsistent or fluctuating. Average credit scores are satisfactory and years of experience is acceptable. Liquidity and net worth are satisfactory. Current and debt to tangible net worth ratios are average. Loan to value is slightly below policy and the collateral condition is slightly above average.

6 – Pass

Borrowers are considered credit worthy but financial condition may show signs of weakness due to internal or external factors. Cash flow trends may be declining annually. Average credit scores may be low but remain acceptable. Borrower has limited years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are below average. Loan to value is nearing policy limits and collateral condition is average.

7 – Special Mention

A special mention asset has identified weaknesses that deserve Management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. There is still adequate protection by the current sound worth and paying capacity of the obligor or of the collateral pledged. The Special Mention rating is viewed as transitional and will be monitored closely.

Loans in this category may exhibit some of the following risk factors. Cash flow trends may be consistently declining or may be questionable. Debt coverage ratios may be at or near 1:1. Average credit scores may be very weak or the borrower may have minimal years of experience. Liquidity, net worth, current and debt to tangible net worth ratios may be very weak. Loan to value may be at policy limits or may exceed policy limits. Collateral condition may be below average.

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 three months ending March 31, 2021, two residential real estate loans to one customer totaling $150 thousand were modified to included deferral of principal resulting troubled debt restructuring classification. One residential real estate trouble debt restructuring loan totaling $39 thousand had subsequently defaulted during the three months ending March 31, 2021. During the three months ending March 31, 2020, one commercial real estate loan totaling $149 thousand and one residential loan totaling $53 thousand was renewed as a troubled debt restructuring. One commercial business trouble debt restructuring loan totaling $312 thousand has subsequently defaulted during the three months ending March 31, 2020. 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 three months ended
	As of March 31, 2021						March 31, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,739	$	3,072	$	-	$	1,817	$	22
Home equity		329		341		-		341		4
Commercial real estate		1,170		1,753		-		1,174		12
Construction and land development		-		-		-		-		-
Multifamily		699		781		-		708		5
Farmland		-		-		-		-		-
Commercial business		1,437		1,436		-		1,467		18
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	163	$	163	$	92	$	217	$	5
Home equity		23		23		5		12		-
Commercial real estate		5,933		5,933		1,269		5,549		50
Construction and land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Farmland		-		-		-		-		-
Commercial business		725		725		518		737		11
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	1,902	$	3,235	$	92	$	2,034	$	27
Home equity	$	352	$	364	$	5	$	353	$	4
Commercial real estate	$	7,103	$	7,686	$	1,269	$	6,723	$	62
Construction & land development	$	-	$	-	$	-	$	-	$	-
Multifamily	$	699	$	781	$	-	$	708	$	5
Farmland	$	-	$	-	$	-	$	-	$	-
Commercial business	$	2,162	$	2,161	$	518	$	2,204	$	29
Consumer	$	-	$	-	$	-	$	-	$	-
Manufactured homes	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	-	$	-

							For the three months ended
	As of December 31, 2020						March 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	$	-	$	2,122	$	24
Home equity		352		363		-		390		5
Commercial real estate		1,177		1,761		-		1,520		13
Construction & land development		-		-		-		-		-
Multifamily		716		798		-		792		7
Farmland		-		-		-		-		-
Commercial business		1,497		1,514		-		1,650		17
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	270	$	314	$	173	$	68	$	1
Home equity		1		9		1		8		-
Commercial real estate		5,164		5,164		1,089		18		-
Construction & land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Farmland		-		-		-		-		-
Commercial business		749		749		512		618		3
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	2,165	$	3,542	$	173	$	2,190	$	25
Home equity	$	353	$	372	$	1	$	398	$	5
Commercial real estate	$	6,341	$	6,925	$	1,089	$	1,538	$	13
Construction & land development	$	-	$	-	$	-	$	-	$	-
Multifamily	$	716	$	798	$	-	$	792	$	7
Farmland	$	-	$	-	$	-	$	-	$	-
Commercial business	$	2,246	$	2,263	$	512	$	2,268	$	20
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
March 31, 2021
Residential real estate	$	1,610	$	926	$	3,161	$	5,697	$	271,768	$	277,465	$	300
Home equity		266		19		384		669		35,604		36,273		-
Commercial real estate		1,585		453		497		2,535		302,316		304,851		257
Construction and land development		-		-		42		42		97,358		97,400		42
Multifamily		259		90		145		494		51,439		51,933		-
Farmland		-		-		-		-		315		315		-
Commercial business		652		-		282		934		161,441		162,375		-
Consumer		2		-		-		2		436		438		-
Manufactured homes		429		65		-		494		33,138		33,632		-
Government		-		-		-		-		9,372		9,372		-
Total	$	4,803	$	1,553	$	4,511	$	10,867	$	963,187	$	974,054	$	599

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

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

(Dollars in thousands)
	March 31, 2021		December 31, 2020
Residential real estate	$	4,658	$	6,390
Home equity		469		476
Commercial real estate		6,173		5,390
Construction and land development		-		-
Multifamily		495		504
Farmland		-		-
Commercial business		462		1,039
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	12,257	$	13,799

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 March 31, 2021, total purchased credit impaired loans with unpaid principal balances totaled $5.2 million with a recorded investment of $3.2 million. At December 31, 2020, purchased credit impaired loans with unpaid principal balances totaled $5.4 million with a recorded investment of $3.4 million.

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

(dollars in thousands)	First Personal
2020	$	29
2021		21

The accetable interest portion of the purchase credit impaired portfolio has fully amortized at March 31, 2021.

For the acquisitions of First Personal Bank (“First Personal”) and A.J. Smith Federal Savings Bank (“AJSB”), 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 Personal				AJSB
	Net fair value discount		Accretable period in months		Net fair value discount		Accretable period in months
Residential real estate	$	948		56	$	3,734		52
Home equity		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	$	2,137			$	3,886

Accretable yield, or income recorded for the three months ended March 31, is as follows:
(dollars in thousands)	First Personal		AJSB		Total
2020	$	115	$	245	$	360
2021		113		192		305

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

(dollars in thousands)	First Personal		AJ Smith		Total
2021	$	186	$	428	$	614
2022		239		571		810
2023		54		235		289
Total	$	479	$	1,234	$	1,713