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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2020

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

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, all loan classes are placed on nonaccrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected, for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the non-collectability of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected on the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that State Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

When State Bank moves a loan to nonaccrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on impaired loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive timely principal and interest payments. It is at the discretion of management to determine when a loan is placed back on accrual status upon receipt of six consecutive timely payments.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, State Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Categories of loans at March 31, 2020 and December 31, 2019 include:

	Total Loans						Nonaccrual Loans
($ in thousands)	March 2020			December 2019			March 2020		December 2019

Commercial & industrial	$	150,790		$	151,047		$	1,309	$	1,772
Commercial real estate - owner occupied		101,289			98,488			1,358		1,362
Commercial real estate - nonowner occupied		274,442			268,294			458		464
Agricultural		47,660			50,994			-		-
Residential real estate		193,501			193,159			2,369		1,635
Home equity line of credit (HELOC)		48,213			48,070			263		249
Consumer		14,121			14,738			25		18
Total Loans	$	830,016		$	824,790		$	5,782	$	5,500

Net deferred costs	$	748		$	720

Total Loans, net deferred costs	$	830,764		$	825,510

Allowance for loan losses	$	(8,958	)	$	(8,755	)

The risk characteristics of each loan portfolio segment are as follows:

Commercial & Industrial and Agricultural

Commercial & industrial and agricultural loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate (Owner and Nonowner Occupied)

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential Real Estate, HELOC and Consumer

Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. HELOCs are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers.

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2020, December 31, 2019 and March 31, 2019.

Allowance for loan losses
($ in thousands)
For the Three Months Ended March 31, 2020	Commercial & industrial			Commercial real estate		Agricultural		Residential real estate		Consumer			Total

Beginning balance	$	1,883		$	3,602	$	434	$	2,203	$	633		$	8,755
Charge offs		(388	)		-		-		-		(12	)		(400	)
Recoveries		1			-		-		1		1			3
Provision		153			66		41		238		102			600
Ending balance	$	1,649		$	3,668	$	475	$	2,442	$	724		$	8,958

For the Three Months Ended March 31, 2019	Commercial & industrial			Commercial real estate		Agricultural			Residential real estate			Consumer			Total

Beginning balance	$	1,435		$	2,923	$	482		$	2,567		$	760		$	8,167
Charge offs		(48	)		-		-			-			(12	)		(60	)
Recoveries		-			-		-			-			14			14
Provision		(53	)		346		(16	)		(251	)		(26	)		-
Ending balance	$	1,334		$	3,269	$	466		$	2,316		$	736		$	8,121

Loans Receivable at March 31, 2020	Commercial & industrial		Commercial real estate		Agricultural		Residential real estate		Consumer		Total
Allowance:
Ending balance: individually evaluated for impairment	$	1	$	-	$	-	$	66	$	-	$	67
Ending balance: collectively evaluated for impairment	$	1,648	$	3,668	$	475	$	2,376	$	724	$	8,891

Totals	$	1,649	$	3,668	$	475	$	2,442	$	724	$	8,958

Loans:
Ending balance: individually evaluated
for impairment	$	1,261	$	1,766	$	-	$	2,950	$	27	$	6,004
Ending balance: collectively evaluated for impairment	$	149,529	$	373,965	$	47,660	$	190,551	$	62,307	$	824,012

Totals	$	150,790	$	375,731	$	47,660	$	193,501	$	62,334	$	830,016

Loans Receivable at December 31, 2019	Commercial & industrial		Commercial real estate		Agricultural		Residential real estate		Consumer		Total
Allowance:
Ending balance: individually evaluated for impairment	$	511	$	147	$	-	$	68	$	-	$	726
Ending balance: collectively evaluated for impairment	$	1,372	$	3,455	$	434	$	2,135	$	633	$	8,029

Totals	$	1,883	$	3,602	$	434	$	2,203	$	633	$	8,755

Loans:
Ending balance: individually evaluated for impairment	$	1,722	$	1,558	$	-	$	2,274	$	31	$	5,585
Ending balance: collectively evaluated for impairment	$	149,325	$	365,224	$	50,994	$	190,885	$	62,777	$	819,205

Totals	$	151,047	$	366,782	$	50,994	$	193,159	$	62,808	$	824,790

Credit Risk Profile

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100 thousand and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination.

Special Mention (5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.

Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.

Loss (8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not warranted. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of March 31, 2020 and December 31, 2019.

($ in thousands) March 31, 2020	Commercial & industrial		Commercial real estate - owner occupied		Commercial real estate - nonowner occupied		Agricultural		Residential real estate		HELOC		Consumer		Total
Pass (1 - 4)	$	147,732	$	99,649	$	272,021	$	47,649	$	190,334	$	47,891	$	14,014	$	819,290
Special Mention (5)		575		-		539		-		-		-		-		1,114
Substandard (6)		1,581		282		1,424		11		3,136		322		107		6,863
Doubtful (7)		902		1,358		458		-		31		-		-		2,749
Loss (8)		-		-		-		-		-		-		-		-
Total Loans	$	150,790	$	101,289	$	274,442	$	47,660	$	193,501	$	48,213	$	14,121	$	830,016

December 31, 2019	Commercial & industrial		Commercial real estate - owner occupied		Commercial real estate - nonowner		Agricultural		Residential real estate		HELOC		Consumer		Total
Pass (1 - 4)	$	147,667	$	96,836	$	265,839	$	50,994	$	190,438	$	47,787	$	14,706	$	814,267
Special Mention (5)		597		-		543		-		-		-		-		1,140
Substandard (6)		1,444		290		1,663		-		2,689		283		32		6,401
Doubtful (7)		1,339		1,362		249		-		32		-		-		2,982
Loss (8)		-		-		-		-		-		-		-		-
Total Loans	$	151,047	$	98,488	$	268,294	$	50,994	$	193,159	$	48,070	$	14,738	$	824,790

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis.

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2020 and December 31, 2019.

($ in thousands)	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
March 31, 2020	Past Due		Past Due		90 Days Past Due		Due		Current		Receivable

Commercial & industrial	$	158	$	-	$	875	$	1,033	$	149,757	$	150,790
Commercial real estate - owner occupied		-		88		1,358		1,446		99,843		101,289
Commercial real estate - nonowner occupied		42		-		215		257		274,185		274,442
Agricultural		-		-		-		-		47,660		47,660
Residential real estate		40		613		1,481		2,134		191,367		193,501
HELOC		122		115		63		300		47,913		48,213
Consumer		29		224		17		270		13,851		14,121
Total Loans	$	391	$	1,040	$	4,009	$	5,440	$	824,576	$	830,016

	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
December 31, 2019	Past Due		Past Due		90 Days Past Due		Due		Current		Receivable

Commercial & industrial	$	64	$	-	$	312	$	376	$	150,671	$	151,047
Commercial real estate - owner occupied		-		-		-		-		98,488		98,488
Commercial real estate - nonowner occupied		-		-		215		215		268,079		268,294
Agricultural		13		-		-		13		50,981		50,994
Residential real estate		309		415		644		1,368		191,791		193,159
HELOC		166		91		56		313		47,757		48,070
Consumer		65		93		14		172		14,566		14,738
Total Loans	$	617	$	599	$	1,241	$	2,457	$	822,333	$	824,790

All loans past due 90 days are systematically placed on nonaccrual status.

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable State Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following tables present impaired loan information as of and for the three months ended March 31, 2020 and 2019, and for the twelve months ended December 31, 2019:

($ in thousands)
Three Months Ended	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
March 31, 2020	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	1,069	$	1,769	$	-	$	1,922	$	15
Commercial real estate - owner occupied		1,358		1,358		-		1,362		-
Commercial real estate - nonowner occupied		408		408		-		473		3
Agricultural		-		-		-		-		-
Residential real estate		2,303		2,370		-		2,663		2
HELOC		14		14				15		-
Consumer		13		13		-		15		-
With a specific allowance recorded:
Commercial & industrial		192		249		1		249		-
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		-		-		-		-		-
Agricultural		-		-		-		-		-
Residential real estate		647		647		66		652		5
HELOC		-		-		-		-		-
Consumer		-		-		-		-		-
Totals:
Commercial & industrial	$	1,261	$	2,018	$	1	$	2,171	$	15
Commercial real estate - owner occupied	$	1,358	$	1,358	$	-	$	1,362	$	-
Commercial real estate - nonowner occupied	$	408	$	408	$	-	$	473	$	3
Agricultural	$	-	$	-	$	-	$	-	$	-
Residential real estate	$	2,950	$	3,017	$	66	$	3,315	$	7
HELOC	$	14	$	14	$	-	$	15	$	-
Consumer	$	13	$	13	$	-	$	15	$	-

($ in thousands)
Twelve Months Ended	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
December 31, 2019	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	722	$	1,092	$	-	$	1,377	$	114
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		196		197		-		259		21
Agricultural		-		-		-		-		-
Residential real estate		1,621		1,687		-		2,001		106
HELOC		16		16				18		1
Consumer		15		15		-		19		1
With a specific allowance recorded:
Commercial & industrial		1,000		1,000		511		823		49
Commercial real estate - owner occupied		1,362		1,362		147		1,362		38
Commercial real estate - nonowner occupied		-		-		-		-		-
Agricultural		-		-		-		-		-
Residential real estate		653		653		68		666		31
HELOC		-		-		-		-		-
Consumer		-		-		-		-		-
Totals:
Commercial & industrial	$	1,722	$	2,092	$	511	$	2,200	$	163
Commercial real estate - owner occupied	$	1,362	$	1,362	$	147	$	1,362	$	38
Commercial real estate - nonowner occupied	$	196	$	197	$	-	$	259	$	21
Agricultural	$	-	$	-	$	-	$	-	$	-
Residential real estate	$	2,274	$	2,340	$	68	$	2,667	$	137
HELOC	$	16	$	16	$	-	$	18	$	1
Consumer	$	15	$	15	$	-	$	19	$	1


Three Months Ended March 31, 2019	Average Recorded		Interest Income
($ in thousands)	Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	949	$	25
Commercial real estate - owner occupied		-		-
Commercial real estate - nonowner occupied		259		7
Agricultural		-		-
Residential real estate		1,608		24
HELOC		20		-
Consumer		-		-
With a specific allowance recorded:
Commercial & industrial		-		-
Commercial real estate - owner occupied		-		-
Commercial real estate - nonowner occupied		-		-
Agricultural		-		-
Residential real estate		1,003		12
HELOC		-		-
Consumer		21		-
Totals:
Commercial & industrial	$	949	$	25
Commercial real estate - owner occupied	$	-	$	-
Commercial real estate - nonowner occupied	$	259	$	7
Agricultural	$	-	$	-
Residential real estate	$	2,611	$	36
HELOC	$	20	$	-
Consumer	$	21	$	-

Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status.

Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.

Troubled Debt Restructured (TDR) Loans

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

TDR Concession Types

The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved by management. The types of concessions provided to borrowers include:

●

Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the loan. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis.

●

Amortization or maturity date change: A change in the amortization or maturity date beyond what the collateral supports, including a concession that does any of the following:

(1)

Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

(2)

Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

(3)

Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs.

●

Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type.

During the three months ended March 31, 2020, the Company had no new TDR activity.

The following table represents new TDR activity for the three months ended March 31, 2019:

($ in thousands)	Number of Loans		Pre-Modification Recorded Balance		Post Modification Recorded Balance

Commercial & industrial		3	$	763	$	763

Total modifications		3	$	763	$	763

	Interest						Total
	Only		Term		Combination		Modification

Commercial & industrial	$	150	$	613	$	-	$	763

Total modifications	$	150	$	613	$	-	$	763

There were no TDR’s modified during the three months ended March 31, 2020 that have subsequently defaulted.

The following table represents TDR’s modified during the three months ended March 31, 2019:

($ in thousands)	Number of Contracts		Recorded Balance

Residential real estate		2	$	102

Total Modifications		2	$	102