Note 2 - Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

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

Note 2. Loans and Allowance for Loan Losses

For financial reporting purposes, the Company classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with that utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).

The following schedule details the loans of the Company at March 31, 2020 and December 31, 2019:

	(In Thousands)
	March 31, 2020			December 31, 2019
Mortgage loans on real estate:
Residential 1-4 family	$	519,775		$	511,250
Multifamily		151,929			97,104
Commercial		841,521			793,379
Construction and land development		388,769			425,185
Farmland		18,610			19,268
Second mortgages		11,254			10,760
Equity lines of credit		74,908			72,379
Total mortgage loans on real estate		2,006,766			1,929,325
Commercial loans		95,547			98,265
Agricultural loans		1,487			1,569
Consumer installment loans
Personal		51,961			50,532
Credit cards		3,999			4,302
Total consumer installment loans		55,960			54,834
Other loans		9,927			9,049
Total loans before net deferred loan fees		2,169,687			2,093,042
Net deferred loan fees		(7,675	)		(7,141	)
Total loans		2,162,012			2,085,901
Less: Allowance for loan losses		(30,281	)		(28,726	)
Net loans	$	2,131,731		$	2,057,175

Risk characteristics relevant to each portfolio segment are as follows:

Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayments 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.

1-4 family residential real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value ("LTV") , minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment.

1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV ratios, minimum credit scores, and maximum debt to income ratios. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans, as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans.

Multi-family and commercial real estate: Multi-family and commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These 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 largely 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 properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property.

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower, if any. The cash flows of borrowers, however, may not be as expected and any collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some 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.

Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV ratios on secured consumer loans, minimum credit scores, and maximum debt to income ratios. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle or other large personal items, or for consolidating debt. These loans may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, current and anticipated economic conditions, historical loss experience, industry and peer bank loan quality indicators and other pertinent factors, including regulatory recommendations.

Transactions in the allowance for loan losses for the three months ended March 31, 2020 and 2019 and year ended  December 31, 2019 are summarized as follows:

	(In Thousands)
	Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction			Farmland			Second Mortgages		Equity Lines of Credit			Commercial			Agricultural, Installment and Other			Total
March 31, 2020
Allowance for loan losses:
Beginning balance	$	7,144		1,117		11,114		5,997			187			123		889			1,044			1,111			28,726
Provision		198		524		1,330		(816	)		(10	)		4		(44	)		(46	)		329			1,469
Charge-offs		—		—		—		—			—			—		—			—			(355	)		(355	)
Recoveries		9		—		300		19			—			—		—			—			113			441
Ending balance	$	7,351		1,641		12,744		5,200			177			127		845			998			1,198			30,281
Ending balance individually evaluated for impairment	$	715		—		220		—			—			—		—			—			—			935
Ending balance collectively evaluated for impairment	$	6,636		1,641		12,524		5,200			177			127		845			998			1,198			29,346
Loans:
Ending balance	$	519,775		151,929		841,521		388,769			18,610			11,254		74,908			95,547			67,374			2,169,687
Ending balance individually evaluated for impairment	$	1,429		—		999		—			—			—		—			—			—			2,428
Ending balance collectively evaluated for impairment	$	518,346		151,929		840,522		388,769			18,610			11,254		74,908			95,547			67,374			2,167,259

	Residential 1-4 Family			Multifamily			Commercial Real Estate			Construction			Farmland			Second Mortgages		Equity Lines of Credit		Commercial			Agricultural, Installment and Other			Total
December 31, 2019
Allowance for loan losses:
Beginning balance	$	6,297			1,481			9,753			7,084			221			118		731		622			867			27,174
Provision		838			(364	)		1,484			(1,510	)		(34	)		5		158		422			1,041			2,040
Charge-offs		(15	)		—			(173	)		—			—			—		—		(15	)		(1,160	)		(1,363	)
Recoveries		24			—			50			423			—			—		—		15			363			875
Ending balance	$	7,144			1,117			11,114			5,997			187			123		889		1,044			1,111			28,726
Ending balance individually evaluated for impairment	$	795			—			341			—			—			—		—		—			—			1,136
Ending balance collectively evaluated for impairment	$	6,349			1,117			10,773			5,997			187			123		889		1,044			1,111			27,590
Loans:
Ending balance	$	511,250			97,104			793,379			425,185			19,268			10,760		72,379		98,265			65,452			2,093,042
Ending balance individually evaluated for impairment	$	2,569			—			2,471			—			—			—		—		—			—			5,040
Ending balance collectively evaluated for impairment	$	508,681			97,104			790,908			425,185			19,268			10,760		72,379		98,265			65,452			2,088,002

	Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction			Farmland			Second Mortgages		Equity Lines of Credit			Commercial		Agricultural, Installment and Other			Total
March 31, 2019
Allowance for loan losses:
Beginning balance	$	6,297		1,481		9,753		7,084			221			118		731			622		867			27,174
Provision		261		19		510		(259	)		(5	)		3		(4	)		163		345			1,033
Charge-offs		—		—		—		—			—			—		—			—		(296	)		(296	)
Recoveries		7		—		—		267			—			—		—			—		95			369
Ending balance	$	6,565		1,500		10,263		7,092			216			121		727			785		1,011			28,280
Ending balance individually evaluated for impairment	$	845		—		142		—			—			—		—			—		—			987
Ending balance collectively evaluated for impairment	$	5,720		1,500		10,121		7,092			216			121		727			785		1,011			27,293
Loans:
Ending balance	$	458,304		136,385		727,394		495,061			23,438			11,465		61,656			77,921		66,377			2,058,001
Ending balance individually evaluated for impairment	$	2,802		—		1,826		—			—			—		—			—		—			4,628
Ending balance collectively evaluated for impairment	$	455,502		136,385		725,568		495,061			23,438			11,465		61,656			77,921		66,377			2,053,373

Impaired Loans

At March 31, 2020, the Company had certain impaired loans of $311,000 which were on non-accruing interest status. At  December 31, 2019, the Company had certain impaired loans of $2.6 million which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The rest of the Company's impaired loans as of such dates remained on accruing status. The following table presents the Company’s impaired loans at  March 31, 2020 and  December 31, 2019. 

	In Thousands
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2020
With no related allowance recorded:
Residential 1-4 family	$	140		139		—		615		2
Multifamily		—		—		—		—		—
Commercial real estate		311		311		—		631		—
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	451	$	450		—	$	1,246	$	2
With related allowance recorded:
Residential 1-4 family	$	1,292		1,290		715		1,391		17
Multifamily		—		—		—		—		—
Commercial real estate		690		688		220		1,106		8
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	1,982	$	1,978	$	935	$	2,497	$	25
Total
Residential 1-4 family	$	1,432		1,429		715		2,006		19
Multifamily		—		—		—		—		—
Commercial real estate		1,001		999		220		1,737		8
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	2,433	$	2,428	$	935	$	3,743	$	27

	In Thousands
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2019
With no related allowance recorded:
Residential 1-4 family	$	1,090		1,464		—		1,090		99
Multifamily		—		—		—		—		—
Commercial real estate		951		1,124		—		910		17
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	2,041		2,588		—		2,000		116
With related allowance recorded:
Residential 1-4 family	$	1,489		1,480		795		1,590		83
Multifamily		—		—		—		—		—
Commercial real estate		1,522		1,520		341		2,015		17
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	3,011		3,000		1,136		3,605		100
Total:
Residential 1-4 family	$	2,579		2,944		795		2,680		182
Multifamily		—		—		—		—		—
Commercial real estate		2,473		2,644		341		2,925		34
Construction		—		—		—		—		—
Farmland		—		—		—		—		—
Second mortgages		—		—		—		—		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—
	$	5,052		5,588		1,136		5,605		216

Impaired loans also include loans that the Bank may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Bank may otherwise incur. These loans are classified as impaired loans and, if on non-accruing status as of the date of restructuring, the loans are included in the nonperforming loan balances. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date.

Troubled Debt Restructuring

The Bank’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring ("TDR"), where economic or other concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

The following table summarizes the carrying balances of TDRs at March 31, 2020 and December 31, 2019. 

	March 31, 2020		December 31, 2019
	(In thousands)
Performing TDRs	$	2,061	$	3,080
Nonperforming TDRs		811		1,467
Total TDRS	$	2,872	$	4,547

The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the three months ended March 31, 2020 and the three months ended March 31, 2019 (in thousands, except for number of contracts): 

	March 31, 2020						March 31, 2019
	Number of Contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, Net of Related Allowance		Number of Contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, Net of Related Allowance
Residential 1-4 family		—	$	—	$	—		—	$	—	$	—
Multifamily		—		—		—		—		—		—
Commercial real estate		1		111		132		—		—		—
Construction		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Second mortgages		—		—		—		—		—		—
Equity lines of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Agricultural, installment and other		—		—		—		—		—		—
Total		1	$	111	$	132		—	$	—	$	—

As of March 31, 2020 the Company had one loan relationship totaling $311,000 that had been previously classified as a TDR subsequently default within twelve months of restructuring. As of December 31, 2019, the Company had no loan relationships subsequently default within twelve months of restructuring.

In response to the COVID-19 pandemic and its economic impact to the Bank’s customers, the Bank proactively began providing relief to its customers in the middle of March 2020 through a 90 day interest only payment option or a full 90 day payment deferral option.  Following the passage of the CARES Act the Bank expanded this program to provide a six-month interest only payment option in an effort to provide flexibility to its customers as they navigate these uncertain times. Pursuant to interagency regulatory guidance and the CARES Act, the Bank may elect to not classify loans for which these deferrals are granted between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency as troubled debt restructurings.

As of April 30, 2020, the Bank had granted deferrals of principal or both principal and interest on approximately 855 loans, totaling $572.4 million in aggregate principal amount. Under the applicable guidance, none of these loans were considered troubled debt restructurings as of April 30, 2020.

As of March 31, 2020, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to approximately $1.0 million. As of December 31, 2019, the Company did not have any consumer mortgage loans in the process of foreclosure.

Potential problem loans, which include nonperforming loans, amounted to approximately $9.6 million at March 31, 2020 and $10.7 million at December 31, 2019. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.

The following summary presents the Bank's loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:

• Special mention loans 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 Bank’s credit position at some future date.

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

• Doubtful loans have all the characteristics of substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Bank considers all doubtful loans to be impaired and places such loans on nonaccrual status.

The following table is a summary of the Bank’s loan portfolio by risk rating at March 31, 2020 and December 31, 2019: 

	(In Thousands)
	Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction		Farmland		Second Mortgages		Equity Lines of  Credit		Commercial		Agricultural, installment and other		Total
March 31, 2020
Credit Risk Profile by Internally Assigned Rating
Pass	$	511,772		151,929		840,914		388,674		18,453		10,857		74,754		95,525		67,185		2,160,063
Special Mention		5,096		—		—		63		102		273		10		—		78		5,622
Substandard		2,907		—		607		32		55		124		144		22		111		4,002
Doubtful		—		—		—		—		—		—		—		—		—		—
Total	$	519,775		151,929		841,521		388,769		18,610		11,254		74,908		95,547		67,374		2,169,687
December 31, 2019
Credit Risk Profile by Internally Assigned Rating
Pass	$	503,861		97,104		791,610		424,517		19,106		10,458		72,237		98,243		65,255		2,082,391
Special Mention		2,923		—		—		635		103		174		—		—		101		3,936
Substandard		4,466		—		1,769		33		59		128		142		22		96		6,715
Doubtful		—		—		—		—		—		—		—		—		—		—
Total	$	511,250		97,104		793,379		425,185		19,268		10,760		72,379		98,265		65,452		2,093,042