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Note 3 - Allowance for Loan Losses, Nonperforming Assets and Impaired Loans
 9 Months Ended
Sep. 30, 2021
Notes to Financial Statements  
Allowance for Credit Losses [Text Block]

Note 3: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans

 

The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans. The Company performs ongoing analysis of the loan portfolio to determine credit quality and to identify impaired loans. Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral.

 

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts will not be collected when due according to the contractual terms of the loan agreement. Impaired loans are those loans that have been modified in a troubled debt restructuring (“TDR”) as well as larger, usually non-homogeneous loans that exhibit payment history or financial status that indicate that collection probably will not occur when due according to the loan’s terms.

 

Measurement

Impaired loans are individually evaluated to determine appropriate reserves and are measured at the lower of the invested amount or fair value. Fair value is estimated using the collateral method or the cash flow method. The collateral method is applied to collateral-dependent loans, loans for which foreclosure is imminent and to loans for which the fair value of collateral is a more reliable estimate of fair value. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The cash flow method is applied to loans that are not collateral dependent and for which cash flows may be estimated.

 

TDRs

TDRs are impaired loans. If the restructuring included forgiveness of a portion of principal or accrued interest, the charge-off is included in the historical charge-off rates applied to the collective evaluation methodology. Restructured loans are individually evaluated for impairment, and the amount of a restructured loan’s book value in excess of its fair value is accrued as a specific allocation in the allowance for loan losses. If a TDR loan payment exceeds 90 days past due, it is examined to determine whether the late payment indicates collateral dependency or cash flows below those that were used in the fair value measurement. TDRs, as well as all impaired loans, that are determined to be collateral dependent are charged down to fair value. Deficiencies indicated by impairment measurements for TDRs that are not collateral dependent may be accrued in the allowance for loan losses or charged off if deemed uncollectible.

 

Please refer to the Company’s 2020 Form 10-K, Note 1: Summary of Significant Accounting Policies for additional information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs.

 

Collectively-Evaluated Loans

The Company evaluated characteristics in the loan portfolio and determined major segments and smaller classes within each segment. These characteristics include collateral type, repayment sources, and (if applicable) the borrower’s business model. Loans within each class are further stratified by risk rating: pass-rated loans, loans rated special mention, and loans rated classified.

 

Portfolio Segments and Classes

The segments and classes used in determining the allowance for loan losses are as follows.

Real Estate Construction

Construction, residential

Construction, other

 

Consumer Real Estate

Equity lines

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

 

Commercial Real Estate

Multifamily real estate

Commercial real estate, owner-occupied

Commercial real estate, other

Commercial Non Real Estate

Commercial and industrial

 

Public Sector and IDA

Public sector and IDA

 

Consumer Non Real Estate

Credit cards

Automobile

Other consumer loans

 

Please refer to the Company’s 2020 Form 10-K, Note 1: Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class.

Credit risk is estimated at the class level, by risk rating, by applying historical net charge-off rates and percentages for qualitative factors that influence credit risk.

 

Historical Loss Rates

The Company’s allowance methodology for collectively evaluated loans applies historical loss rates by class to current class balances as part of the process of determining required reserves. The Company averages loss rates for the most recent eight quarters to determine the historical loss rate for each class.

Within each class, loans are risk rated pass, special mention or classified. Loss rates are applied based upon risk rating. Total net charge-offs for the class as a percentage of average class loan balance is applied to pass rated loans and loans rated special mention. Total net charge-offs for the class as a percentage of average classified loans in the class is applied to classified loans. Net charge-offs in both calculations include charge-offs and recoveries of classified and non-classified loans as well as those associated with impaired loans.

 

Qualitative Factors

In addition to historical loss rates, risk factors pertinent to credit risk for each class are analyzed to estimate reserves for collectively evaluated loans. Factors include changes in national and local economic and business conditions, the nature and volume of classes within the portfolio, loan quality, loan officers’ experience, lending policies and the Company’s loan review system.

 

A detailed analysis showing the allowance roll-forward by portfolio segment and related loan balance by segment follows.

 

  

Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 2021

 
  

Real Estate

Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non Real

Estate

 

Public

Sector and

IDA

 

Consumer Non

Real Estate

 

Unallocated

 

Total

Balance, December 31, 2020

 $503  $2,165  $3,853  $670  $339  $555  $396  $8,481 

Charge-offs

  -   (13

)

  -   (526

)

  -   (151

)

  -   (690

)

Recoveries

  -   19   86   31   -   109   -   245 

Provision for (recovery of) loan losses

  (5

)

  (203

)

  (776

)

  743   (27

)

  (39

)

  (31

)

  (338

)

Balance, September 30, 2021

 $498  $1,968  $3,163  $918  $312  $474  $365  $7,698 

 

  

Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 2020

 
  

Real Estate

Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non Real

Estate

 

Public

Sector and

IDA

 

Consumer Non

Real Estate

 

Unallocated

 

Total

Balance, December 31, 2019

 $400  $1,895  $2,559  $555  $478  $650  $326  $6,863 

Charge-offs

  -   (62

)

  (15

)

  (372

)

  -   (190

)

  -   (639

)

Recoveries

  -   18   53   6   -   142   -   219 

Provision for (recovery of) loan losses

  24   311   1,047   510   53   (5

)

  45   1,985 

Balance, September 30, 2020

 $424  $2,162  $3,644  $699  $531  $597  $371  $8,428 

 

  

Activity in the Allowance for Loan Losses for the Year Ended December 31, 2020

 
  

Real Estate

Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non Real

Estate

 

Public

Sector and

IDA

 

Consumer Non

Real Estate

 

Unallocated

 

Total

Balance, December 31, 2019

 $400  $1,895  $2,559  $555  $478  $650  $326  $6,863 

Charge-offs

  -   (85

)

  (15

)

  (372

)

  -   (248

)

  -   (720

)

Recoveries

  -   18   145   9   -   175   -   347 

Provision for (recovery of) loan losses

  103   337   1,164   478   (139

)

  (22

)

  70   1,991 

Balance, December 31, 2020

 $503  $2,165  $3,853  $670  $339  $555  $396  $8,481 

 

  

Allowance for Loan Losses as of September 30, 2021

 
  

Real Estate

Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non Real

Estate

 

Public

Sector and

IDA

 

Consumer Non

Real Estate

 

Unallocated

 

Total

Individually evaluated for impairment

 $-  $-  $-  $-  $-  $-  $-  $- 

Collectively evaluated for impairment

  498   1,968   3,163   918   312   474   365   7,698 

Total

 $498  $1,968  $3,163  $918  $312  $474  $365  $7,698 

 

  

Allowance for Loan Losses as of December 31, 2020

 
  

Real Estate

Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non Real

Estate

 

Public

Sector and

IDA

 

Consumer Non

Real Estate

 

Unallocated

 

Total

Individually evaluated for impairment

 $-  $2  $-  $73  $-  $-  $-  $75 

Collectively evaluated for impairment

  503   2,163   3,853   597   339   555   396   8,406 

Total

 $503  $2,165  $3,853  $670  $339  $555  $396  $8,481 

 

  

Loans as of September 30, 2021

 
  

Real Estate

Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non Real

Estate

 

Public

Sector and

IDA

 

Consumer Non

Real Estate

 

Total

Individually evaluated for impairment

 $-  $192  $5,583  $308  $-  $1  $6,084 

Collectively evaluated for impairment

  50,883   204,688   398,257   58,774   48,345   31,575   792,522 

Total

 $50,883  $204,880  $403,840  $59,082  $48,345  $31,576  $798,606 

 

  

Loans as of December 31, 2020

 
  

Real Estate

Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non Real

Estate

 

Public

Sector and

IDA

 

Consumer

Non Real Estate

 

Total

Individually evaluated for impairment

 $-  $194  $3,856  $851  $-  $2  $4,903 

Collectively evaluated for impairment

  42,266   181,588   389,259   77,920   40,983   33,108   765,124 

Total

 $42,266  $181,782  $393,115  $78,771  $40,983  $33,110  $770,027 

 

A summary of ratios for the allowance for loan losses follows.

 

  

As of and for the

  

Nine Months Ended

September 30,

 

Year Ended

December 31,

  

2021

 

2020

 

2020

Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs(1)

  0.97

%

  1.05

%

  1.10

%

Ratio of net charge-offs to average loans, net of unearned income and deferred fees and costs(2)

  0.08

%

  0.07

%

  0.05

%

 

(1)

The ratio of the allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs at September 30, 2021, December 31, 2020 and September 30, 2020 includes government-guaranteed SBA PPP loans, which do not require an allowance for loan losses. Excluding the PPP loans, the ratio would be 0.98% at September 30, 2021, 1.16% at December 31, 2020 and 1.13% at September 30, 2020.

(2)

Net charge-offs are on an annualized basis.

 

A summary of nonperforming assets follows.

 

  

September 30,

 

December 31,

  

2021

 

2020

 

2020

Nonperforming assets:

            

Nonaccrual loans

 $39  $736  $846 

Restructured loans in nonaccrual

  3,075   2,866   2,839 

Total nonperforming loans

  3,114   3,602   3,685 

Other real estate owned, net

  957   1,553   1,553 

Total nonperforming assets

 $4,071  $5,155  $5,238 

Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned

  0.51

%

  0.64

%

  0.68

%

Ratio of allowance for loan losses to nonperforming loans(1)

  247.21

%

  233.98

%

  230.15

%

 

(1)

The Company defines nonperforming loans as nonaccrual loans and restructured loans that are nonaccrual. Loans 90 days past due and still accruing and accruing restructured loans are excluded.

 

A summary of loans past due 90 days or more and impaired loans follows.

 

  

September 30,

 

December 31,

  

2021

 

2020

 

2020

Loans past due 90 days or more and still accruing

 $62  $236  $17 

Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs

  0.01

%

  0.03

%

  0.00

%

Accruing restructured loans

 $3,009  $1,426  $1,410 

Impaired loans:

            

Impaired loans with no valuation allowance

 $6,084  $3,939  $3,858 

Impaired loans with a valuation allowance

  -   1,056   1,045 

Total impaired loans

 $6,084  $4,995  $4,903 

Valuation allowance

  -   (104

)

  (75

)

Impaired loans, net of allowance

 $6,084  $4,891  $4,828 

Average recorded investment in impaired loans(1)

 $6,108  $5,227  $5,093 

Interest income recognized on impaired loans, after designation as impaired

 $175  $49  $54 

Amount of income recognized on a cash basis

 $-  $-  $- 

 

(1)

Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

 

No interest income was recognized on nonaccrual loans for the nine months ended September 30, 2021 or September 30, 2020 or for the year ended December 31, 2020.

 

A detailed analysis of investment in impaired loans and associated reserves, segregated by loan class follows.         

 

  

Impaired Loans as of September 30, 2021

  

Principal

Balance

 

Total Recorded

Investment(1)

 

Recorded

Investment(1) for

Which There is No

Related Allowance

 

Recorded

Investment(1) for

Which There is a

Related Allowance

 

Related

Allowance

Consumer Real Estate(2)

                    

Investor-owned residential real estate

 $192  $192  $192  $-  $- 

Commercial Real Estate(2)

                    

Commercial real estate, owner-occupied

  3,481   2,861   2,861   -   - 

Commercial real estate, other

  2,722   2,722   2,722   -   - 

Commercial Non Real Estate(2)

                    

Commercial and industrial

  313   308   308   -   - 

Consumer Non Real Estate(2)

                    

Automobile

  1   1   1   -   - 

Total

 $6,709  $6,084  $6,084  $-  $- 

 

(1)

Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

(2)

Only classes with impaired loans are shown.

 

  

Impaired Loans as of December 31, 2020

  

Principal

Balance

 

Total Recorded

Investment(1)

 

Recorded

Investment(1) for

Which There is No

Related Allowance

 

Recorded

Investment(1) for

Which There is a

Related Allowance

 

Related

Allowance

Consumer Real Estate(2)

                    

Investor-owned residential real estate

 $194  $194  $-  $194  $2 

Commercial Real Estate(2)

                    

Commercial real estate, owner occupied

  3,752   3,202   3,202   -   - 

Commercial real estate, other

  654   654   654   -   - 

Commercial Non-Real Estate(2)

                    

Commercial and industrial

  851   851   -   851   73 

Consumer Non-Real Estate(2)

                    

Automobile

  2   2   2   -   - 

Total

 $5,453  $4,903  $3,858  $1,045  $75 

 

(1)

Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

(2)

Only classes with impaired loans are shown.

 

The following tables show the average recorded investment and interest income recognized for impaired loans.

 

  

For the Nine Months Ended September 30, 2021

  

Average Recorded Investment(1)

 

Interest Income Recognized

Consumer Real Estate(2)

        

Investor-owned residential real estate

 $193  $9 

Commercial Real Estate(2)

        

Commercial real estate, owner occupied

  2,866   72 

Commercial real estate, other

  2,724   83 

Commercial Non Real Estate(2)

        

Commercial and industrial

  324   11 

Consumer Non Real Estate(2)

        

Automobile

  1   - 

Total

 $6,108  $175 

 

 

 

  

For the Year Ended December 31, 2020

  

Average Recorded Investment(1)

 

Interest Income Recognized

Consumer Real Estate(2)

        

Investor-owned residential real estate

 $196  $13 

Commercial Real Estate(2)

        

Commercial real estate, owner occupied

  3,217   19 

Commercial real estate, other

  790   - 

Commercial Non-Real Estate(2)

        

Commercial and industrial

  887   22 

Consumer Non-Real Estate(2)

        

Automobile

  3   - 

Total

 $5,093  $54 

 

(1)

Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

(2)

Only classes with impaired loans are shown.

 

An analysis of past due and nonaccrual loans follows.

 

September 30, 2021

                
  

30 – 89 Days

Past Due and

Accruing

 

90 or More

Days Past Due

 

90 or More

Days Past Due

and Accruing

 

Nonaccruals(2)

Real Estate Construction(1)

                

Construction, other

 $115  $-  $-  $- 

Consumer Real Estate(1)

                

Equity lines

  29   -   -   - 

Residential closed-end first liens

  489   39   39   - 

Investor-owned residential real estate

  102   -   -   - 

Commercial Real Estate(1)

      -   -   - 

Commercial real estate, owner-occupied

  147   445   -   2,767 

Commercial real estate, other

  -   -   -   - 

Commercial Non Real Estate(1)

                

Commercial and industrial

  29   318   10   347 

Consumer Non Real Estate(1)

                

Credit cards

  3   1   1   - 

Automobile

  91   -   -   - 

Other consumer loans

  218   12   12   - 

Total

 $1,223  $815  $62  $3,114 

 

(1)

Only classes with past-due or nonaccrual loans are shown.

(2)

Includes current and past due loans in nonaccrual status. Includes impaired loans in nonaccrual status.

 

December 31, 2020

                
  

30 – 89 Days

Past Due and

Accruing

 

90 or More

Days Past Due

 

90 or More

Days Past Due

and Accruing

 

Nonaccruals(2)

Consumer Real Estate(1)

                

Residential closed-end first liens

 $365  $62  $-  $62 

Investor-owned residential real estate

  106   -   -   - 

Commercial Real Estate(1)

                

Commercial real estate, owner occupied

  15   571   -   2,941 

Commercial real estate, other

  -   654   -   654 

Commercial Non-Real Estate(1)

                

Commercial and industrial

  730   27   -   28 

Consumer Non-Real Estate(1)

                

Credit cards

  7   3   3   - 

Automobile

  144   1   1   - 

Other consumer loans

  130   13   13   - 

Total

 $1,497  $1,331  $17  $3,685 

 

(1)

Only classes with past-due or nonaccrual loans are shown.

(2)

Includes current and past due loans in nonaccrual status. Includes impaired loans in nonaccrual status.

 

The following displays collectively-evaluated loans by credit quality indicator.

 

September 30, 2021

            
  

Pass(1)

 

Special

Mention(1)

 

Classified(1)

Real Estate Construction

            

Construction, 1-4 family residential

 $10,498  $-  $- 

Construction, other

  40,385   -   - 

Consumer Real Estate

            

Equity lines

  13,962   -   - 

Closed-end first liens

  106,806   -   284 

Closed-end junior liens

  2,773   -   - 

Investor-owned residential real estate

  80,244   619   - 

Commercial Real Estate

            

Multifamily residential real estate

  106,368   -   - 

Commercial real estate owner-occupied

  137,965   -   36 

Commercial real estate, other

  150,131   3,757   - 

Commercial Non Real Estate

            

Commercial and industrial

  58,726   -   48 

Public Sector and IDA

            

States and political subdivisions

  48,345   -   - 

Consumer Non Real Estate

            

Credit cards

  4,270   -   - 

Automobile

  11,653   -   - 

Other consumer

  15,528   -   124 

Total

 $787,654  $4,376  $492 

 

(1)

Excludes impaired, if any.

 

The following displays collectively-evaluated loans by credit quality indicator.

 

December 31, 2020

            
  

Pass(1)

 

Special

Mention(1)

 

Classified(1)

Real Estate Construction

            

Construction, 1-4 family residential

 $8,195  $-  $- 

Construction, other

  34,071   -   - 

Consumer Real Estate

            

Equity lines

  13,903   -   - 

Residential closed-end first liens

  92,241   66   284 

Residential closed-end junior liens

  3,003   -   - 

Investor-owned residential real estate

  71,450   641   - 

Commercial Real Estate

            

Multifamily residential real estate

  87,455   265   - 

Commercial real estate owner-occupied

  146,900   543   140 

Commercial real estate, other

  147,436   6,520   - 

Commercial Non-Real Estate

            

Commercial and industrial

  77,892   -   28 

Public Sector and IDA

            

States and political subdivisions

  40,983   -   - 

Consumer Non-Real Estate

            

Credit cards

  4,665   -   - 

Automobile

  12,024   -   6 

Other consumer

  16,398   -   15 

Total

 $756,616  $8,035  $473 

 

(1)

Excludes impaired, if any.

 

Determination of risk ratings was completed for the portfolio as of September 30, 2021 and December 31, 2020. For detail on determination of risk ratings, please refer to the Company’s 2020 Form 10-K, Note 1: Summary of Significant Accounting Policies and Note 5: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans.

 

TDRs

 

Total TDRs amounted to $6,084 at September 30, 2021, $4,249 at December 31, 2020, and $4,292 at September 30, 2020. All of the Company’s TDR loans are fully funded and no further increase in credit is available.

 

TDRs Designated During the Reporting Period

The Company did not designate any loans as TDR during the three months ended September 30, 2021.          

During the nine months ended September 30, 2021 the Company designated three loans as a TDR. The restructuring of the commercial real estate owner-occupied loan provided cash flow relief to the borrower by shifting the payment structure from interest-only to amortizing and reducing the interest rate. The restructurings of the two other commercial real estate loans provided cash flow relief by re-amortizing the loans over a longer period and reducing the interest rate. No principal or interest was forgiven. The impairment measurement for all three loans at September 30, 2021 was based upon the collateral method and did not result in a specific allocation.

 

The following table presents restructurings by class that occurred during the nine month period ended September 30, 2021.

 

  

Restructurings That Occurred During the Nine Months Ended September 30, 2021

  

Number of

Contracts

 

Pre-Modification

Outstanding

Principal Balance

 

Post-Modification

Outstanding

Principal Balance

Commercial Real Estate

            

Commercial real estate owner-occupied

  1  $102  $102 

Commercial real estate, other

  2   2,724   2,724 

Total

  3  $2,826  $2,826 

 

The Company did not modify any loans in TDRs during the three or nine month periods ended September 30, 2020.

 

Defaulted TDRs

The Company analyzed its TDR portfolio for loans that defaulted during the three and nine month periods ended September 30, 2021 and September 30, 2020, and that were modified within 12 months prior to default. The Company designates three circumstances that indicate default: one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure after the date of restructuring.

Of the Company’s TDRs at September 30, 2021 and September 30, 2020, none of the defaulted TDRs were modified within 12 months prior to default. All of the defaulted TDRs were in nonaccrual status as of September 30, 2021 and September 30, 2020.