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Note 5 - Loans Receivable

3 Months Ended

Mar. 31, 2022

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

Note 5 - 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 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.

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. 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 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.

Loans receivable are summarized below:

(Dollars in thousands)
	March 31, 2022		December 31, 2021
Loans secured by real estate:
Residential real estate	$	444,753	$	260,134
Home equity		34,284		34,612
Commercial real estate		408,375		317,145
Construction and land development		150,810		123,822
Multifamily		234,267		61,194
Total loans secured by real estate		1,272,489		796,907
Commercial business		112,396		115,772
Consumer		924		582
Manufactured homes		38,636		37,887
Government		8,176		8,991
Loans receivable		1,432,621		960,139
Add (less):
Net deferred loan origination costs		6,700		6,810
Undisbursed loan funds		407		(229	)
Loans receivable, net of deferred fees and costs	$	1,439,728	$	966,720

(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 March 31, 2022:

Allowance for loan losses:
Residential real estate	$	2,480	$	-		$	21	$	(8	)	$	2,493
Home equity		357		-			-		(3	)		354
Commercial real estate		5,515		-			-		15			5,530
Construction and land development		2,119		-			-		16			2,135
Multifamily		848		-			-		41			889
Commercial business		2,009		-			31		(99	)		1,941
Consumer		15		(10	)		2		38			45
Manufactured homes		-		-			-		-			-
Government		-		-			-		-			-
Total	$	13,343	$	(10	)	$	54	$	-		$	13,387

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
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

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 $5.5 million and $5.8 million as of March 31, 2022 and December 31, 2021, 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		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, 2022:

Residential real estate	$	17	$	2,476	$	444,753	$	753	$	2,908	$	441,092
Home equity		4		350		34,284		135		134		34,015
Commercial real estate		440		5,090		408,375		1,496		2,965		403,914
Construction and land development		-		2,135		150,810		-		804		150,006
Multifamily		-		889		234,267		-		3,302		230,965
Commercial business		259		1,682		112,396		501		1,061		110,834
Consumer		-		45		924		-		21		903
Manufactured homes		-		-		38,636		-		-		38,636
Government		-		-		8,176		-		-		8,176
Total	$	720	$	12,667	$	1,432,621	$	2,885	$	11,195	$	1,418,541

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2021:

Residential real estate	$	17	$	2,463	$	260,134	$	755	$	1,016	$	258,363
Home equity		4		353		34,612		147		137		34,328
Commercial real estate		386		5,129		317,145		1,600		-		315,545
Construction and land development		-		2,119		123,822		-		-		123,822
Multifamily		-		848		61,194		-		556		60,638
Commercial business		277		1,732		115,772		524		1,073		114,175
Consumer		-		15		582		-		-		582
Manufactured homes		-		-		37,887		-		-		37,887
Government		-		-		8,991		-		-		8,991
Total	$	684	$	12,659	$	960,139	$	3,026	$	2,782	$	954,331

The Bancorp's credit quality indicators are summarized below at March 31, 2022 and December 31, 2021:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	March 31, 2022
(Dollars in thousands)	1-6		7		8

Loan Segment	Pass		Special mention		Substandard		Total
Residential real estate	$	435,814	$	2,308	$	6,631	$	444,753
Home equity		33,234		415		635		34,284
Commercial real estate		390,533		11,391		6,451		408,375
Construction and land development		146,407		4,403		-		150,810
Multifamily		229,705		1,532		3,030		234,267
Commercial business		108,605		3,395		396		112,396
Consumer		924		-		-		924
Manufactured homes		38,577		59		-		38,636
Government		8,176		-		-		8,176
Total	$	1,391,975	$	23,503	$	17,143	$	1,432,621

	December 31, 2021
(Dollars in thousands)	1-6		7		8

Loan Segment	Pass		Special mention		Substandard		Total
Residential real estate	$	253,472	$	2,940	$	3,722	$	260,134
Home equity		33,565		415		632		34,612
Commercial real estate		301,572		12,011		3,562		317,145
Construction and land development		120,192		3,630		-		123,822
Multifamily		60,657		153		384		61,194
Commercial business		113,470		1,915		387		115,772
Consumer		582		-		-		582
Manufactured homes		37,828		59		-		37,887
Government		8,991		-		-		8,991
Total	$	930,329	$	21,123	$	8,687	$	960,139

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.

9 – Doubtful

Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.

10 – Loss

Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

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, 2022, four residential real estate loans totaling $194 thousand and one home equity loan totaling $7 thousand, were modified to include deferral of principal resulting troubled debt restructuring classification. 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. 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:

(Dollars in thousands)							For the three months ended
(unaudited)	As of March 31, 2022						March 31, 2022
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	3,575	$	5,070	$	-	$	2,629	$	30
Home equity		248		263		-		255		7
Commercial real estate		3,610		3,722		-		2,188		10
Construction and land development		804		920		-		460		-
Multifamily		3,302		4,241		-		2,036		-
Commercial business		1,247		1,363		-		1,226		15
Consumer		21		21		-		11		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	86	$	86	$	17	$	87	$	3
Home equity		21		21		4		22		1
Commercial real estate		851		852		440		843		-
Construction and land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Commercial business		315		377		259		354		16
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	3,661	$	5,156	$	17	$	2,716	$	33
Home equity	$	269	$	284	$	4	$	277	$	8
Commercial real estate	$	4,461	$	4,574	$	440	$	3,031	$	10
Construction & land development	$	804	$	920	$	-	$	460	$	-
Multifamily	$	3,302	$	4,241	$	-	$	2,036	$	-
Commercial business	$	1,562	$	1,740	$	259	$	1,580	$	31
Consumer	$	21	$	21	$	-	$	11	$	-
Manufactured homes	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	-	$	-

							For the three months ended
	As of December 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	$	1,683	$	3,017	$	-	$	1,817	$	22
Home equity		262		275		-		341		4
Commercial real estate		765		765		-		1,174		12
Construction & land development		-		-		-		-		-
Multifamily		556		647		-		708		5
Commercial business		1,205		1,324		-		1,467		18
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	88	$	88	$	17	$	217	$	5
Home equity		22		22		4		12		-
Commercial real estate		835		835		386		5,549		50
Construction & land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Commercial business		392		392		277		737		11
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	1,771	$	3,105	$	17	$	2,034	$	27
Home equity	$	284	$	297	$	4	$	353	$	4
Commercial real estate	$	1,600	$	1,600	$	386	$	6,723	$	62
Construction & land development	$	-	$	-	$	-	$	-	$	-
Multifamily	$	556	$	647	$	-	$	708	$	5
Commercial business	$	1,597	$	1,716	$	277	$	2,204	$	29
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, 2022
Residential real estate	$	3,056	$	1,388	$	3,528	$	7,972	$	436,781	$	444,753	$	117
Home equity		37		18		534		589		33,695		34,284		-
Commercial real estate		1,665		805		1,015		3,485		404,890		408,375		163
Construction and land development		2,513		-		-		2,513		148,297		150,810		-
Multifamily		55		18		111		184		234,083		234,267		-
Commercial business		970		-		583		1,553		110,843		112,396		214
Consumer		-		-		-		-		924		924		-
Manufactured homes		316		204		-		520		38,116		38,636		-
Government		-		-		-		-		8,176		8,176		-
Total	$	8,612	$	2,433	$	5,771	$	16,816	$	1,415,805	$	1,432,621	$	494

December 31, 2021
Residential real estate	$	2,507	$	824	$	2,142	$	5,473	$	254,661	$	260,134	$	31
Home equity		169		67		565		801		33,811		34,612		34
Commercial real estate		231		1,960		944		3,135		314,010		317,145		91
Construction and land development		5,148		283		-		5,431		118,391		123,822		-
Multifamily		-		-		109		109		61,085		61,194		-
Commercial business		573		1,594		242		2,409		113,363		115,772		49
Consumer		-		3		-		3		579		582		-
Manufactured homes		633		171		-		804		37,083		37,887		-
Government		-		-		-		-		8,991		8,991		-
Total	$	9,261	$	4,902	$	4,002	$	18,165	$	941,974	$	960,139	$	205

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

(Dollars in thousands)
	March 31, 2022		December 31, 2021
Residential real estate	$	5,710	$	4,651
Home equity		620		623
Commercial real estate		1,263		940
Construction and land development		-		-
Multifamily		447		455
Commercial business		374		387
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	8,414	$	7,056

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, 2022, total purchased credit impaired loans with unpaid principal balances totaled $13.2 million with a recorded investment of $11.2 million. At December 31, 2021, total purchased credit impaired loans with unpaid principal balances totaled $4.2 million with a recorded investment of $2.8 million

As part of the fair value of loans receivable, there was a net fair value discount for loans acquired of $6.4 million at March 31, 2022, compared to $1.1 million at December 31, 2021.

Accretable yield, or income recorded for the three months ended March 31, is as follows:

(dollars in thousands)	Total
2021	$	305
2022		107

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

(dollars in thousands)	Total
Remainder 2022	$	719
2023		804
2024		623
2025		605
2026 and thereafter		3,671
Total	$	6,422