Loans and Allowance for Loan Losses | Note 4 - Loans and Allowance for Loan Losses The composition of the loan portfolio is as follows as of the periods indicated: December 31, December 31, 2019 2018 (dollars in thousands) Commercial and industrial loans $ 111,401 $ 90,390 Real estate loans: Construction, land, and land development 97,034 64,045 Residential real estate 115,011 94,745 Commercial real estate 613,398 515,959 Consumer and other loans 4,214 3,584 Gross loans receivable 941,058 768,723 Net deferred origination fees and premiums (1,955 ) (824 ) Loans receivable $ 939,103 $ 767,899 Included in consumer and other loans are overdrafts of $26,000 and $36,000 at December 31, 2019 and December 31, 2018, respectively. The Company has pledged loans totaling $163,522,000 and $155,029,000 at December 31, 2019 and December 31, 2018, respectively, for borrowing lines at the FHLB and FRB. The balance of SBA and USDA loans and participations serviced for others totaled $21,498,000 and $24,878,000 at December 31, 2019 and December 31, 2018, respectively. The Company, at times, purchases individual whole loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $32,937,000 and $45,368,000 as of December 31, 2019 and December 31, 2018, respectively. Unamortized premiums totaled $527,000 and $701,000 as of December 31, 2019 and December 31, 2018, respectively, and are amortized into interest income over the life of the loans. The Company has purchased participation loans with remaining balances totaling $31,352,000 and $36,561,000 as of December 31, 2019 and December 31, 2018, respectively. The following is a summary of the Company’s loan portfolio segments: Commercial and industrial loans - Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment of businesses located generally in the Company’s primary market area. Loan types include revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. The Company also issues letters of credit on behalf of its customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers. Construction, land and land development loans – The Company originates loans for the construction of 1-4 family, multifamily, and CRE properties in the Company’s market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. The Company occasionally originates land loans for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s ability to pay and the inability of the Company to recover its investment due to a material decline in the fair value of the underlying collateral. Residential real estate - Residential real estate includes various types of loans for which the Company holds real property as collateral. Included in this segment are multi-family loans, first lien single family loans, which the Company occasionally purchases to diversify its loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential real estate loans include the borrower’s inability to pay, material decreases in the value of the collateral, and significant increases in interest rates which may make the loan unprofitable. Commercial real estate (includes owner occupied and nonowner occupied) - Commercial real estate includes various types of loans for which the Company holds real property as collateral. The primary risks of commercial real estate loans include the borrower’s inability to pay, material decreases in the value of the collateralized real estate and significant increases in interest rates, which may make the real estate loan unprofitable. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Consumer and other loans – The Company originates a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit, saving account secured loans, and auto loans. This loan category also includes overdrafts. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral. The following table illustrates an age analysis of past due loans as of the dates indicated: 30-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Recorded Investment 90 Days or More Past Due and Still Accruing (dollars in thousands) December 31, 2019 Commercial and industrial loans $ 143 $ 965 $ 1,108 $ 110,293 $ 111,401 $ - Real estate loans: Construction, land and land development - - - 97,034 97,034 - Residential real estate - 65 65 114,946 115,011 - Commercial real estate 417 - 417 612,981 613,398 - Consumer and other loans 4 - 4 4,210 4,214 - $ 564 $ 1,030 $ 1,594 $ 939,464 $ 941,058 $ - Less net deferred origination fees and premiums (1,955 ) Loans receivable $ 939,103 30-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Recorded Investment 90 Days or More Past Due and Still Accruing (dollars in thousands) December 31, 2018 Commercial and industrial loans $ 171 $ 494 $ 665 $ 89,725 $ 90,390 $ - Real estate loans: Construction, land and land development 823 - 823 63,222 64,045 - Residential real estate - 72 72 94,673 94,745 - Commercial real estate - - - 515,959 515,959 - Consumer and other loans 2 - 2 3,582 3,584 - $ 996 $ 566 $ 1,562 $ 767,161 $ 768,723 $ - Less net deferred origination fees and premiums (824 ) Loans receivable $ 767,899 A summary of information pertaining to impaired loans as of the period indicated: Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Total Recorded Investment Related Allowance (dollars in thousands) December 31, 2019 Commercial and industrial loans $ 1,431 $ 965 $ - $ 965 $ - Real estate loans: Residential real estate 73 65 - 65 - Commercial real estate - - - - - Consumer loans 2 - 2 2 2 Total $ 1,506 $ 1,030 $ 2 $ 1,032 $ 2 December 31, 2018 Commercial and industrial loans $ 766 $ 493 $ - $ 493 $ - Real estate loans: Residential real estate 74 72 - 72 - Commercial real estate 1,491 1,261 - 1,261 - Total $ 2,331 $ 1,826 $ - $ 1,826 $ - The following tables summarize the average recorded investment and interest income recognized on impaired loans by loan class for the year ended December 31, 2019 and 2018: December 31, 2019 December 31, 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (dollars in thousands) Commercial and industrial loans $ 1,026 $ - $ 1,103 $ 28 Real estate loans: Construction, land and land development - - - - Residential real estate 69 - 306 5 Commercial real estate 252 - 1,288 - Consumer loans 1 - - - Total $ 1,348 $ - $ 2,697 $ 33 The Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration. The following table presents troubled debt restructurings by accrual versus nonaccrual status and by loan class as of December 31, 2018. There were no troubled debt restructurings at December 31, 2019. Accrual Status Nonaccrual Status Total Restructured Loans (dollars in thousands) December 31, 2018 Commercial real estate $ - $ 1,261 $ 1,261 No loans were restructured in the year ended December 31, 2019 and December 31, 2018 that qualified as troubled debt restructurings. When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual. An analysis of nonaccrual loans by category consisted of the following at the periods indicated: December 31, December 31, 2019 2018 (dollars in thousands) Commercial and industrial loans $ 965 $ 493 Real estate loans: Residential real estate 65 72 Commercial real estate - 1,261 Total nonaccrual loans $ 1,030 $ 1,826 Credit Quality and Credit Risk Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Company’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. The Company also classifies some loans as Watch or Other Loans Especially Mentioned (OLEM). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans and are reported in the OLEM column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring. Loans by credit quality risk rating are as follows as of the periods indicated: Pass Other Loans Especially Mentioned Sub- Standard Doubtful Total (dollars in thousands) December 31, 2019 Commercial and industrial loans $ 104,911 $ 4,740 $ 1,750 $ - $ 111,401 Real estate loans: Construction, land, and land development 97,034 - - - 97,034 Residential real estate 114,823 123 65 - 115,011 Commercial real estate 608,773 4,625 - - 613,398 Consumer and other loans 4,212 - 2 - 4,214 $ 929,753 $ 9,488 $ 1,817 $ - 941,058 Less net deferred origination fees and premiums (1,955 ) Loans receivable $ 939,103 December 31, 2018 Commercial and industrial loans $ 84,859 $ 3,908 $ 1,623 $ - $ 90,390 Real estate loans: Construction, land, and land development 55,666 8,379 - - 64,045 Residential real estate 94,548 125 72 - 94,745 Commercial real estate 512,151 2,547 1,261 - 515,959 Consumer and other loans 3,584 - - - 3,584 $ 750,808 $ 14,959 $ 2,956 $ - 768,723 Less net deferred origination fees and premiums (824 ) Loans receivable $ 767,899 Allowance for Loan Losses The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit review process and our historical loss data, together with data from peer institutions and economic information gathered from published sources. The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances. The following tables summarize the allocation of the allowance for loan loss, as well as the activity in the allowance for loan loss attributed to various segments in the loan portfolio, as of and for the year ended December 31, 2019: Commercial and Industrial Construction, Land, and Land Development Residential Real Estate Commercial Real Estate Consumer and Other Unallocated Total (dollars in thousands) ALLL balance, December 31, 2018 $ 2,039 $ 1,806 $ 1,647 $ 2,648 $ 77 $ 1,190 $ 9,407 Provision for loan losses or (recapture) 677 1,014 422 507 54 (130 ) 2,544 2,716 2,820 2,069 3,155 131 1,060 11,951 Loans charged-off (355 ) (75 ) - (29 ) (35 ) - (494 ) Recoveries of loans previously charged-off 5 - - - 8 - 13 Net (charge-offs) recoveries (350 ) (75 ) - (29 ) (27 ) - (481 ) ALLL balance, December 31, 2019 $ 2,366 $ 2,745 $ 2,069 $ 3,126 $ 104 $ 1,060 $ 11,470 ALLL amounts allocated to Individually evaluated for impairment $ - $ - $ - $ - $ 2 $ - $ 2 Collectively evaluated for impairment 2,366 2,745 2,069 3,126 102 1,060 11,468 ALLL balance, December 31, 2019 $ 2,366 $ 2,745 $ 2,069 $ 3,126 $ 104 $ 1,060 $ 11,470 Loans individually evaluated for impairment $ 965 $ - $ 65 $ - $ 2 $ 1,032 Loans collectively evaluated for impairment 110,436 97,034 114,946 613,398 4,212 940,026 Loan balance, December 31, 2019 $ 111,401 $ 97,034 $ 115,011 $ 613,398 $ 4,214 $ 941,058 The following tables summarize the allocation of the allowance for loan loss, as well as the activity in the allowance for loan loss attributed to various segments in the loan portfolio, as of and for the year ended December 31, 2018: Commercial and Industrial Construction, Land, and Land Development Residential Real Estate Commercial Real Estate Consumer and Other Unallocated Total (dollars in thousands) ALLL balance, December 31, 2017 $ 1,864 $ 1,063 $ 1,343 $ 2,014 $ 43 $ 1,690 $ 8,017 Provision for loan losses or (recapture) 579 743 239 718 47 (500 ) 1,826 2,443 1,806 1,582 2,732 90 1,190 9,843 Loans charged-off (408 ) - - (84 ) (27 ) - (519 ) Recoveries of loans previously charged-off 4 - 65 - 14 - 83 Net (charge-offs) recoveries (404 ) - 65 (84 ) (13 ) - (436 ) ALLL balance, December 31, 2018 $ 2,039 $ 1,806 $ 1,647 $ 2,648 $ 77 $ 1,190 $ 9,407 ALLL amounts allocated to Individually evaluated for impairment - - - - - - - Collectively evaluated for impairment 2,039 1,806 1,647 2,648 77 1,190 9,407 ALLL balance, December 31, 2018 $ 2,039 $ 1,806 $ 1,647 $ 2,648 $ 77 $ 1,190 $ 9,407 Loans individually evaluated for impairment $ 493 - $ 72 $ 1,261 - $ 1,826 Loans collectively evaluated for impairment 89,897 64,045 94,673 514,698 3,584 766,897 Loan balance, December 31, 2018 $ 90,390 $ 64,045 $ 94,745 $ 515,959 $ 3,584 $ 768,723 |