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Note 4 - Loans and Allowance for Loan Losses
 12 Months Ended
Dec. 31, 2020
Notes to Financial Statements  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 4:         LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

  

December 31,

 
  

2020

  

2019

 

Real estate - residential mortgage:

        

One to four family units

 $115,799,200  $118,823,731 

Multi-family

  90,028,775   87,448,418 

Real estate - construction

  70,847,330   77,308,551 

Real estate - commercial

  305,673,212   300,619,387 

Commercial loans

  144,326,350   114,047,753 

Consumer and other loans

  26,733,546   30,666,185 

Total loans

  753,408,413   728,914,025 

Less:

        

Allowance for loan losses

  (9,617,024)  (7,607,587)

Deferred loan fees/costs, net

  (1,642,118)  (574,036)

Net loans

 $742,149,271  $720,732,402 

 

Classes of loans by aging at December 31, 2020 and 2019 were as follows:

 

As of December 31, 2020

                            
  

30-59 Days
Past Due

  

60-89 Days
Past Due

  

Greater Than
90 Days

  

Total Past
Due

  

Current

  

Total Loans
Receivable

  

Total Loans >
90 Days and
Accruing

 
  

(In Thousands)

 
Real estate - residential mortgage:                            

One to four family units

 $623  $1,058  $1,071  $2,752  $113,047  $115,799  $- 

Multi-family

  -   -   -   -   90,029   90,029   - 

Real estate - construction

  1,239   -   4,189   5,428   65,419   70,847   - 

Real estate - commercial

  264   76   161   501   305,172   305,673   - 

Commercial loans

  6   1   4,784   4,791   139,535   144,326   - 

Consumer and other loans

  10   1   21   32   26,702   26,734   - 

Total

 $2,142  $1,136  $10,226  $13,504  $739,904  $753,408  $- 

 

As of December 31, 2019

                            
  

30-59 Days
Past Due

  

60-89 Days
Past Due

  

Greater Than
90 Days

  

Total Past
Due

  

Current

  

Total Loans
Receivable

  

Total Loans >
90 Days and
Accruing

 
  

(In Thousands)

 
Real estate - residential mortgage:                            

One to four family units

 $83  $437  $125  $645  $118,179  $118,824  $- 

Multi-family

  -   -   -   -   87,448   87,448   - 

Real estate - construction

  338   -   -   338   76,971   77,309   - 

Real estate - commercial

  -   -   43   43   300,576   300,619   - 

Commercial loans

  134   105   17   256   113,792   114,048   - 

Consumer and other loans

  48   26   -   74   30,592   30,666   - 

Total

 $603  $568  $185  $1,356  $727,558  $728,914  $- 

 

Nonaccruing loans are summarized as follows:

 

  

December 31,

 
  

2020

  

2019

 

Real estate - residential mortgage:

     

One to four family units

 $3,086,159  $2,398,379 

Multi-family

  -   - 

Real estate - construction

  6,239,326   3,738,410 

Real estate - commercial

  3,932,241   2,941,143 

Commercial loans

  5,249,782   855,761 

Consumer and other loans

  121,090   69,784 

Total

 $18,628,598  $10,003,477 

 

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 and for the years ended December 31, 2020, 2019 and 2018:

 

As of December 31, 2020

                                
  

Construction

  

Commercial
Real Estate

  

One to four family

  

Multi-family

  

Commercial

  

Consumer
and Other

  

Unallocated

  

Total

 

 

 

(In Thousands)

 
Allowance for loan losses:                                 

Balance, beginning of year

 $1,749  $2,267  $1,001  $746  $1,129  $443  $273  $7,608 

Provision charged to expense

  121   1,350   440   312   669   323   385  $3,600 

Losses charged off

  (738)  -   (2)  -   (709)  (261)  -  $(1,710)

Recoveries

  -   7   6   -   40   66   -  $119 

Balance, end of year

 $1,132  $3,624  $1,445  $1,058  $1,129  $571  $658  $9,617 

Ending balance: individually evaluated for impairment

 $114  $117  $112  $-  $62  $15  $-  $420 

Ending balance: collectively evaluated for impairment

 $1,018  $3,507  $1,333  $1,058  $1,066  $556  $658  $9,196 

Ending balance: loans acquired with deteriorated credit quality

 $-  $-  $-  $-  $1  $-  $-  $1 

Loans:

                                

Ending balance: individually evaluated for impairment

 $6,239  $1,810  $3,110  $-  $5,111  $202  $-  $16,472 

Ending balance: collectively evaluated for impairment

 $64,608  $301,453  $112,689  $90,029  $139,083  $26,532  $-  $734,394 

Ending balance: loans acquired with deteriorated credit quality

 $-  $2,410  $-  $-  $132  $-  $-  $2,542 

 

As of December 31, 2019

                                
  

Construction

  

Commercial
Real Estate

  

One to four family

  

Multi-family

  

Commercial

  

Consumer
and Other

  

Unallocated

  

Total

 
  

(In Thousands)

 
Allowance for loan losses:                                 

Balance, beginning of year

 $2,306  $2,093  $1,297  $641  $1,160  $373  $126  $7,996 

Provision charged to expense

  (809)  265   (32)  105   225   299   147  $200 

Losses charged off

  -   (122)  (272)  -   (381)  (280)  -  $(1,055)

Recoveries

  252   31   8   -   125   51   -  $467 

Balance, end of year

 $1,749  $2,267  $1,001  $746  $1,129  $443  $273  $7,608 

Ending balance: individually evaluated for impairment

 $553  $24  $197  $-  $299  $21  $-  $1,094 

Ending balance: collectively evaluated for impairment

 $1,196  $2,243  $804  $746  $830  $422  $273  $6,514 

Ending balance: loans acquired with deteriorated credit quality

 $-  $-  $-  $-  $-  $-  $-  $- 

Loans:

                                

Ending balance: individually evaluated for impairment

 $4,742  $650  $2,613  $-  $908  $220  $-  $9,133 

Ending balance: collectively evaluated for impairment

 $72,567  $297,318  $116,211  $87,448  $112,956  $30,446  $-  $716,946 

Ending balance: loans acquired with deteriorated credit quality

 $-  $2,651  $-  $-  $184  $-  $-  $2,835 

 

As of December 31, 2018                        
  

Construction

  

Commercial
Real Estate

  

One to four family

  

Multi-family

  

Commercial

  

Consumer
and Other

  

Unallocated

  

Total

 

 

 

(In Thousands)

 
Allowance for loan losses:                                 

Balance, beginning of year

 $2,244  $1,789  $946  $464  $1,031  $454  $179  $7,107 

Provision charged to expense

  (35)  339   327   177   222   248   (53) $1,225 

Losses charged off

  -   (37)  (8)  -   (110)  (382)  -  $(537)

Recoveries

  97   2   32   -   17   53   -  $201 

Balance, end of year

 $2,306  $2,093  $1,297  $641  $1,160  $373  $126  $7,996 

Ending balance: individually evaluated for impairment

 $552  $106  $573  $-  $363  $18  $-  $1,612 

Ending balance: collectively evaluated for impairment

 $1,754  $1,987  $724  $641  $797  $355  $126  $6,384 

Ending balance: loans acquired with deteriorated credit quality

 $-  $-  $-  $-  $-  $-  $-  $- 

Loans:

                                

Ending balance: individually evaluated for impairment

 $4,088  $1,588  $4,520  $5,952  $1,062  $169  $-  $17,379 

Ending balance: collectively evaluated for impairment

 $84,507  $317,488  $128,258  $84,663  $118,459  $32,968  $-  $766,343 

Ending balance: loans acquired with deteriorated credit quality

 $-  $2,782  $-  $-  $216  $175  $-  $3,173 

 

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 the 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 summarizes impaired loans as of and for the years ended December 31, 2020 and 2019:

 

As of December 31, 2020

                    
  

Recorded
Balance

  

Unpaid
Principal
Balance

  

Specific
Allowance

  

Average
Investment
in Impaired
Loans

  

Interest
Income
Recognized

 
  

(In Thousands)

 
Loans without a specific valuation allowance                    
Real estate - residential mortgage:                    

One to four family units

 $2,780  $2,780  $-  $1,199  $- 

Multi-family

  -   -   -   -   - 

Real estate - construction

  5,081   5,081   -   423   - 

Real estate - commercial

  3,419   3,419   -   3,152   4 

Commercial loans

  4,902   4,902   -   455   - 

Consumer and other loans

  100   100   -   110   13 
Loans with a specific valuation allowance                    
Real estate - residential mortgage:                    

One to four family units

 $330  $330  $112  $1,183  $- 

Multi-family

  -   -   -   -   - 

Real estate - construction

  1,158   3,129   114   4,093   - 

Real estate - commercial

  801   801   117   365   - 

Commercial loans

  341   341   63   792   - 

Consumer and other loans

  102   102   15   136   - 
Total                    
Real estate - residential mortgage:                    

One to four family units

 $3,110  $3,110  $112  $2,382  $- 

Multi-family

  -   -   -   -   - 

Real estate - construction

  6,239   8,210   114   4,516   - 

Real estate - commercial

  4,220   4,220   117   3,517   4 

Commercial loans

  5,243   5,243   63   1,247   - 

Consumer and other loans

  202   202   15   246   13 

Total

 $19,014  $20,985  $421  $11,908  $17 

 

As of December 31, 2019

                    
  

Recorded
Balance

  

Unpaid
Principal
Balance

  

Specific
Allowance

  

Average
Investment
in Impaired
Loans

  

Interest
Income
Recognized

 
  

(In Thousands)

 
Loans without a specific valuation allowance                     
Real estate - residential mortgage:                    

One to four family units

 $1,392  $1,392  $-  $1,075  $1 

Multi-family

  -   -   -   5,438   - 

Real estate - construction

  -   -   -   -   - 

Real estate - commercial

  3,199   3,199   -   3,274   4 

Commercial loans

  33   33   -   127   - 

Consumer and other loans

  70   70   -   230   2 
Loans with a specific valuation allowance                     
Real estate - residential mortgage:                    

One to four family units

 $1,221  $1,221  $197  $1,781  $- 

Multi-family

  -   -   -   -   - 

Real estate - construction

  4,742   5,975   553   3,924   - 

Real estate - commercial

  162   162   24   533   - 

Commercial loans

  999   999   301   756   - 

Consumer and other loans

  150   150   21   153   - 
Total                    
Real estate - residential mortgage:                    

One to four family units

 $2,613  $2,613  $197  $2,856  $1 

Multi-family

  -   -   -   5,438   - 

Real estate - construction

  4,742   5,975   553   3,924   - 

Real estate - commercial

  3,361   3,361   24   3,807   4 

Commercial loans

  1,032   1,032   301   883   - 

Consumer and other loans

  220   220   21   383   2 

Total

 $11,968  $13,201  $1,096  $17,291  $7 

 

At December 31, 2020, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (TDR). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

 

In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

 

The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction of the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

 

In March 2020, our regulators issued a statement titled “Interagency Statement on Loan Modifications and Reporting for Financial institutions with Customers Affected by the Coronavirus” that encouraged financial institutions to work prudently with borrowers who were expected to have difficulty in meeting payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further clarifies that qualified loan modifications are exempt by law from being classified as a TDR as defined by GAAP from March 1, 2020 until December 31, 2020. In December 2020, the Economic Aid to Hard Hit Small Businesses, Non-Profits and Ventures Act was enacted, which extended the CARES Act provisions until January 1, 2022. The Bank continues to work with impacted entities in the form of modifications, payment deferrals, extensions of repayment terms and/or other delays in payments, as necessary.

 

Due to the before mentioned regulatory changes, there were no troubled debt restructuring charge offs or increases to the allowance for loan losses related to TDRs during 2020. In 2019, there were no debt restructuring charge offs and $37,379 in increased allowances for loan losses.

 

Impacts from COVID-19 have increased loan payment deferrals and other loan modifications in our loan portfolio. During 2020, guidance by federal banking regulators, the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) and provisions within the CARES Act noted that short-term loan modifications made in response to COVID-19 to borrowers with a current payment status are not considered troubled debt restructurings (TDRs) for reporting purposes. As of December 31, 2020, 20 loans with an aggregate balance of $28.6 million remained modified for periods from one to twelve months. 84% of loan modifications made during 2020 have resumed scheduled payments with the remaining 16% projected to return to their contractual payment terms with the next six months. Additional details on the modified loans are in the following table.

 

COVID-19 MODIFICATIONS - Types of Modifications

 

Collateral Type

 

# Loans

Modified

  

Amount of Loans Modified ($)

  

Interest Only 3 Months or Less

  

Interest Only 4-6 Months

  

Full Payment Deferral 3 Months

  

Full Payment Deferral 3 Months + Interest Only 3 Months or Less

  

Full Payment Deferral 3 Months + Interest Only > 3 Months

  

Full Payment Deferral > 6 Months

 

Hotel/Motel

 9  $16,018,273  $-  $-  $-  $1,849,520  $7,962,876  $6,205,877 

Theatre

 5   10,586,792   -   -   -   -   3,826,974   6,759,818 

Restaurant (C&I & RE)

 2   411,029   123,236   287,793   -   -   -   - 

Land & Land Development

 1   1,279,878   -   -   -   -   1,279,878   - 

1-4 Family Consumer

 2   168,852   -   -   168,852   -   -   - 

Other

 1   93,100   -   93,100   -   -   -   - 

Total Modified Loans

 20  $28,557,924  $123,236  $380,893  $168,852  $1,849,520  $13,069,728  $12,965,695 

 

The following summarizes information regarding troubled debt restructurings by class as of and for the years ended December 31, 2020 and 2019:

 

  

December 31,

 
  

2020

  

2019

 

Real estate - residential mortgage:

        

One to four family units

 $1,178,876  $1,163,782 

Multi-family

  -   - 

Real estate - construction

  3,700,084   3,738,409 

Real estate - commercial

  893,992   161,491 

Commercial loans

  368,310   572,683 

Total

 $6,141,262  $5,636,365 

 

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

 

Pass- This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

 

Special mention- This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

 

Substandard- This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

 

Doubtful- This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

 

Real estate-Residential 1-4 family: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income.

 

Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

 

Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

 

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. Included in this category as of December 31, 2020 are $37.3 million in Small Business Administration PPP loans originated during the year with the majority of the loans having an original duration of two years or less.

 

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

 

The following table provides information about the credit quality of the loan portfolio using the Bank’s internal rating system as of December 31, 2020 and 2019:

 

As of December 31, 2020

                         
  

Construction

  

Commercial
Real Estate

  

One to four family

  

Multi-family

  

Commercial

  

Consumer
and Other

  

Total

 
  

(In Thousands)

 

Rating:

                            

Pass

 $64,531  $262,771  $110,615  $90,029  $130,874  $26,532  $685,352 

Special Mention

  -   4,442   -   -   123   -   4,565 

Substandard

  6,316   38,460   5,184   -   13,329   202   63,491 

Doubtful

  -   -   -   -   -   -   - 

Total

 $70,847  $305,673  $115,799  $90,029  $144,326  $26,734  $753,408 

 

As of December 31, 2019

                         
  

Construction

  

Commercial
Real Estate

  

One to four family

  

Multi-family

  

Commercial

  

Consumer
and Other

  

Total

 
  

(In Thousands)

 

Rating:

                            

Pass

 $73,489  $292,674  $115,622  $87,448  $100,658  $29,666  $699,557 

Special Mention

  -   1,476   535   -   8,793   -   10,804 

Substandard

  3,820   6,469   2,667   -   4,597   1,000   18,553 

Doubtful

  -   -   -   -   -   -   - 

Total

 $77,309  $300,619  $118,824  $87,448  $114,048  $30,666  $728,914 

 

The tables include purchased credit impaired loan amounts. At December 31, 2020 and 2019, purchased credit impaired loans rated as “Substandard” were $2.5 and $3.2 million, respectively.

 

The weighted average interest rate on loans as of December 31, 2020 and 2019 was 4.45% and 5.65%, respectively.

 

The Bank serviced mortgage loans for others amounting to $24,868 and $29,222 as of December 31, 2020 and 2019, respectively. The Bank serviced commercial loans for others amounting to $62,261,930 and $51,381,794 as of December 31, 2020 and 2019, respectively.