| Loans and Allowance for Loan Losses | NOTE 3: Loans and Allowance for Loan Losses Classes of loans are summarized as follows: (dollars in thousands) June 30, 2020 June 30, 2019 Real Estate Loans: Residential $ 627,357 $ 491,992 Construction 185,924 123,287 Commercial 887,419 840,777 Consumer loans 80,767 97,534 Commercial loans 468,448 355,874 2,249,915 1,909,464 Loans in process (78,452) (43,153) Deferred loan fees, net (4,395) (3) Allowance for loan losses (25,139) (19,903) Total loans $ 2,141,929 $ 1,846,405 The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. At June 30, 2020, the Bank had purchased participations in 23 loans totaling $58.2 million. Residential Mortgage Lending. The Company also originates loans secured by multi-family residential properties that are often located outside the Company’s primary lending area but made to borrowers who operate within our primary market area. The majority of the multi-family residential loans that are originated by the Bank are amortized over periods generally up to 25 years, with balloon maturities typically up to ten years. Both fixed and adjustable interest rates are offered and it is typical for the Company to include an interest rate “floor” and “ceiling” in the loan agreement. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property. Commercial Real Estate Lending. Most commercial real estate loans originated by the Company generally are based on amortization schedules of up to 25 years with monthly principal and interest payments. Generally, the interest rate received on these loans is fixed for a maturity for up to ten years, with a balloon payment due at maturity. Alternatively, for some loans, the interest rate adjusts at least annually after an initial period up to seven years. The Company typically includes an interest rate “floor” in the loan agreement. Generally, improved commercial real estate loan amounts do not exceed 80% of the lower of the appraised value or the purchase price of the secured property. Agricultural real estate terms offered differ slightly, with amortization schedules of up to 25 years with an 80% loan-to-value ratio, or 30 years with a 75% loan-to-value ratio. Construction Lending. While the Company typically utilizes relatively short maturity periods to closely monitor the inherent risks associated with construction loans for these loans, weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately eight months. During construction, loans typically require monthly interest only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically performs interim inspections which further allow the Company opportunity to assess risk. At June 30, 2020, construction loans outstanding included 77 loans, totaling $48.8 million, for which a modification had been agreed to. At June 30, 2019, construction loans outstanding included 59 loans, totaling $27.2 million, for which a modification had been agreed to. In general, these modifications were solely for the purpose of extending the maturity date due to conditions described above. As these modifications were not executed due to financial difficulty on the part of the borrower, they were not accounted for as TDRs. Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans with such modifications in effect at June 30, 2020, included drawn balances of $4.7 million in construction loans which were modified at the borrower’s request due to the current situation of heightened economic uncertainty triggered by the pandemic. Consumer Lending approximately five years, with the exception of home equity lines of credit, which are variable, tied to the prime rate of interest and are for a period of ten years. Home equity lines of credit (HELOCs) are secured with a deed of trust and are issued up to 100% of the appraised or assessed value of the property securing the line of credit, less the outstanding balance on the first mortgage and are typically issued for a term of ten years. Interest rates on the HELOCs are generally adjustable. Interest rates are based upon the loan-to-value ratio of the property with better rates given to borrowers with more equity. Automobile loans originated by the Company include both direct loans and a smaller amount of loans originated by auto dealers. The Company generally pays a negotiated fee back to the dealer for indirect loans. Typically, automobile loans are made for terms of up to 66 months for new and used vehicles. Loans secured by automobiles have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle. Commercial Business Lending The following tables present the balance in the allowance for loan losses and the recorded investment in loans (excluding loans in process and deferred loan fees) based on portfolio segment and impairment methods as of June 30, 2020 and 2019, and activity in the allowance for loan losses for the fiscal years ended June 30, 2020, 2019, and 2018. (dollars in thousands) Residential Construction Commercial June 30, 2020 Real Estate Real Estate Real Estate Consumer Commercial Total Allowance for loan losses: Balance, beginning of period $ 3,706 $ 1,365 $ 9,399 $ 1,046 $ 4,387 $ 19,903 Provision charged to expense 1,529 645 2,730 300 798 6,002 Losses charged off (379) — (12) (189) (273) (853) Recoveries 19 — 15 25 28 87 Balance, end of period $ 4,875 $ 2,010 $ 12,132 $ 1,182 $ 4,940 $ 25,139 Ending Balance: individually evaluated for impairment $ — $ — $ — $ — $ — $ — Ending Balance: collectively evaluated for impairment $ 4,875 $ 2,010 $ 12,132 $ 1,182 $ 4,940 $ 25,139 Ending Balance: loans acquired with deteriorated credit quality $ — $ — $ — $ — $ — $ — Loans: Ending Balance: individually evaluated for impairment $ — $ — $ — $ — $ — $ — Ending Balance: collectively evaluated for impairment $ 626,085 $ 106,194 $ 872,716 $ 80,767 $ 463,902 $ 2,149,664 Ending Balance: loans acquired with deteriorated credit quality $ 1,272 $ 1,278 $ 14,703 $ — $ 4,546 $ 21,799 (dollars in thousands) Residential Construction Commercial June 30, 2019 Real Estate Real Estate Real Estate Consumer Commercial Total Allowance for loan losses: Balance, beginning of period $ 3,226 $ 1,097 $ 8,793 $ 902 $ 4,196 $ 18,214 Provision charged to expense 487 268 765 231 281 2,032 Losses charged off (30) — (164) (103) (92) (389) Recoveries 23 — 5 16 2 46 Balance, end of period $ 3,706 $ 1,365 $ 9,399 $ 1,046 $ 4,387 $ 19,903 Ending Balance: individually evaluated for impairment $ — $ — $ — $ — $ — $ — Ending Balance: collectively evaluated for impairment $ 3,706 $ 1,365 $ 9,399 $ 1,046 $ 4,387 $ 19,903 Ending Balance: loans acquired with deteriorated credit quality $ — $ — $ — $ — $ — $ — Loans: Ending Balance: individually evaluated for impairment $ — $ — $ — $ — $ — $ — Ending Balance: collectively evaluated for impairment $ 490,307 $ 78,826 $ 821,415 $ 97,534 $ 349,681 $ 1,837,763 Ending Balance: loans acquired with deteriorated credit quality $ 1,685 $ 1,308 $ 19,362 $ — $ 6,193 $ 28,548 (dollars in thousands) Residential Construction Commercial June 30, 2018 Real Estate Real Estate Real Estate Consumer Commercial Total Allowance for loan losses: Balance, beginning of period $ 3,230 $ 964 $ 7,068 $ 757 $ 3,519 $ 15,538 Provision charged to expense 184 142 1,779 251 691 3,047 Losses charged off (190) (9) (56) (129) (22) (406) Recoveries 2 — 2 23 8 35 Balance, end of period $ 3,226 $ 1,097 $ 8,793 $ 902 $ 4,196 $ 18,214 Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers. The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when an amount is determined to be uncollectible, based on management’s analysis of expected cash flow (for non-collateral dependent loans) or collateral value (for collateral-dependent loans). 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 more 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. Under the Company’s allowance methodology, loans are first segmented into 1) those comprising large groups of homogeneous loans which are collectively evaluated for impairment, and 2) all other loans which are individually evaluated. Those loans in the second category are further segmented utilizing a defined grading system which involves categorizing loans by severity of risk based on conditions that may affect the ability of the borrowers to repay their debt, such as current financial information, collateral valuations, historical payment experience, credit documentation, public information, and current trends. The loans subject to credit classification represent the portion of the portfolio subject to the greatest credit risk and where adjustments to the allowance for losses on loans as a result of provisions and charge offs are most likely to have a significant impact on operations. A periodic review of selected credits (based on loan size and type) is conducted to identify loans with heightened risk or probable losses and to assign risk grades. The primary responsibility for this review rests with risk management personnel. This review is supplemented with periodic examinations of both selected credits and the credit review process by the Company’s internal audit function and applicable regulatory agencies. The information from these reviews assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit represents a probable loss or risk that should be recognized. The Company considers, as the primary quantitative factor in its allowance methodology, average net charge offs over the most recent twelve-month period. The Company also reviews average net charge offs over the most recent five-year period. A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest will not be able to be collected 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 all 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 and agricultural 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. Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, individual consumer and residential loans are not separately identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given the internal risk rating process. The loan portfolio is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for other qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio. Included in the Company’s loan portfolio are certain loans accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and nonperforming assets, and nonaccrual loans and nonperforming loans as a percentage of total loans. The following tables present the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and payment activity as of June 30, 2020 and 2019. These tables include purchased credit impaired loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification: (dollars in thousands) Residential Construction Commercial June 30, 2020 Real Estate Real Estate Real Estate Consumer Commercial Pass $ 620,004 $ 103,105 $ 829,276 $ 80,517 $ 457,385 Watch 1,900 4,367 45,262 45 4,708 Special Mention — — 403 25 — Substandard 5,453 — 11,590 180 6,355 Doubtful — — 888 — — Total $ 627,357 $ 107,472 $ 887,419 $ 80,767 $ 468,448 (dollars in thousands) Residential Construction Commercial June 30, 2019 Real Estate Real Estate Real Estate Consumer Commercial Pass $ 482,869 $ 80,134 $ 802,479 $ 97,012 $ 341,069 Watch 1,236 — 21,693 170 7,802 Special Mention 103 — 3,463 26 — Substandard 7,784 — 13,142 291 7,003 Doubtful — — — 35 — Total $ 491,992 $ 80,134 $ 840,777 $ 97,534 $ 355,874 The above amounts include purchased credit impaired loans. At June 30, 2020, purchased credit impaired loans comprised $5.9 million of credits rated “Pass”; $10.3 million of credits rated “Watch”, none rated “Special Mention”, $5.6 million of credits rated “Substandard” and none rated “Doubtful”. At June 30, 2019, purchased credit impaired loans comprised $6.9 million of credits rated “Pass”; $10.4 million of credits rated “Watch”, none rated “Special Mention”; $11.2 million of credits rated “Substandard”; and none rated “Doubtful”. Credit Quality Indicators Watch – Special Mention Substandard Doubtful Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of June 30, 2020 and 2019. These tables include purchased credit impaired loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification: Greater Than Greater Than 90 (dollars in thousands) 30-59 Days 60-89 Days 90 Days Total Total Loans Days Past Due June 30, 2020 Past Due Past Due Past Due Past Due Current Receivable and Accruing Real Estate Loans: Residential $ 772 $ 378 $ 654 $ 1,804 $ 625,553 $ 627,357 $ — Construction — — — — 107,472 107,472 — Commercial 641 327 1,073 2,041 885,378 887,419 — Consumer loans 180 53 193 426 80,341 80,767 — Commercial loans 93 1,219 810 2,122 466,326 468,448 — Total loans $ 1,686 $ 1,977 $ 2,730 $ 6,393 $ 2,165,070 $ 2,171,463 $ — Greater Than Greater Than 90 (dollars in thousands) 30-59 Days 60-89 Days 90 Days Total Total Loans Days Past Due June 30, 2019 Past Due Past Due Past Due Past Due Current Receivable and Accruing Real Estate Loans: Residential $ 227 $ 1,054 $ 1,714 $ 2,995 $ 488,997 $ 491,992 $ — Construction — — — — 80,134 80,134 — Commercial 296 1 5,617 5,914 834,863 840,777 — Consumer loans 128 46 176 350 97,184 97,534 — Commercial loans 424 25 1,902 2,351 353,523 355,874 — Total loans $ 1,075 $ 1,126 $ 9,409 $ 11,610 $ 1,854,701 $ 1,866,311 $ — Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans with such modifications in effect at June 30, 2020, included $380.1 million in loans reported as current in the above table. An additional $29,000 of consumer loans and $1,000 in residential real estate loans with such modifications were reported as 30-59 days past due, and $66,000 of commercial loans with such modifications were reported as 60-89 days past due as of June 30, 2020. At June 30, 2020 there were no purchased credit impaired loans that were greater than 90 days past due. At June 30, 2019 there was one purchased credit impaired loan with net fair value of $3.1 million that was greater than 90 days past due. 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 Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans but also include loans modified in troubled debt restructurings (TDRs) 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 loans (excluding loans in process and deferred loan fees) as of June 30, 2020 and 2019. These tables include purchased credit impaired loans. Purchased credit impaired loans are those for which it was deemed probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. In an instance where, subsequent to the acquisition, the Company determines it is probable, for a specific loan, that cash flows received will exceed the amount previously expected, the Company will recalculate the amount of accretable yield in order to recognize the improved cash flow expectation as additional interest income over the remaining life of the loan. These loans, however, will continue to be reported as impaired loans. In an instance where, subsequent to the acquisition, the Company determines it is probable that, for a specific loan, that cash flows received will be less than the amount previously expected, the Company will allocate a specific allowance under the terms of ASC 310-10-35. (dollars in thousands) Recorded Unpaid Principal Specific June 30, 2020 Balance Balance Allowance Loans without a specific valuation allowance: Residential real estate $ 3,811 $ 4,047 $ — Construction real estate 1,278 1,312 — Commercial real estate 19,271 23,676 — Consumer loans — — — Commercial loans 5,040 6,065 — Loans with a specific valuation allowance: Residential real estate $ — $ — $ — Construction real estate — — — Commercial real estate — — — Consumer loans — — — Commercial loans — — — Total: Residential real estate $ 3,811 $ 4,047 $ — Construction real estate $ 1,278 $ 1,312 $ — Commercial real estate $ 19,271 $ 23,676 $ — Consumer loans $ — $ — $ — Commercial loans $ 5,040 $ 6,065 $ — (dollars in thousands) Recorded Unpaid Principal Specific June 30, 2019 Balance Balance Allowance Loans without a specific valuation allowance: Residential real estate $ 5,104 $ 5,341 $ — Construction real estate 1,330 1,419 — Commercial real estate 26,410 31,717 — Consumer loans 8 8 — Commercial loans 6,999 9,187 — Loans with a specific valuation allowance: Residential real estate $ — $ — $ — Construction real estate — — — Commercial real estate — — — Consumer loans — — — Commercial loans — — — Total: Residential real estate $ 5,104 $ 5,341 $ — Construction real estate $ 1,330 $ 1,419 $ — Commercial real estate $ 26,410 $ 31,717 $ — Consumer loans $ 8 $ 8 $ — Commercial loans $ 6,999 $ 9,187 $ — The above amounts include purchased credit impaired loans. At June 30, 2020, purchased credit impaired loans comprised $21.8 million of impaired loans without a specific valuation allowance. At June 30, 2019, purchased credit impaired loans comprised $28.5 million of impaired loans without a specific valuation allowance. The following tables present information regarding interest income recognized on impaired loans: Fiscal 2020 Average Investment in Interest Income (dollars in thousands) Impaired Loans Recognized Residential Real Estate $ 1,440 $ 89 Construction Real Estate 1,295 134 Commercial Real Estate 16,175 1,276 Consumer Loans — — Commercial Loans 5,597 419 Total Loans $ 24,507 $ 1,918 Fiscal 2019 Average Investment in Interest Income (dollars in thousands) Impaired Loans Recognized Residential Real Estate $ 2,081 $ 112 Construction Real Estate 1,297 246 Commercial Real Estate 14,547 1,570 Consumer Loans — — Commercial Loans 4,212 926 Total Loans $ 22,137 $ 2,854 Fiscal 2018 Average Investment in Interest Income (dollars in thousands) Impaired Loans Recognized Residential Real Estate $ 3,358 $ 219 Construction Real Estate 1,317 165 Commercial Real Estate 9,446 1,163 Consumer Loans — — Commercial Loans 3,152 199 Total Loans $ 17,273 $ 1,746 Interest income on impaired loans recognized on a cash basis in the fiscal years ended June 30, 2020, 2019, and 2018 was immaterial. For the fiscal years ended June 30, 2020, 2019, and 2018, the amount of interest income recorded for impaired loans that represents a change in the present value of future cash flows attributable to the passage of time was approximately $236,000, $1.3 million, and $683,000, respectively. The following table presents the Company’s nonaccrual loans at June 30, 2020 and 2019. Purchased credit impaired loans are placed on nonaccrual status in the event the Company cannot reasonably estimate cash flows expected to be collected. The table excludes performing TDRs. June 30, (dollars in thousands) 2020 2019 Residential real estate $ 4,010 $ 6,404 Construction real estate — — Commercial real estate 3,106 10,876 Consumer loans 196 309 Commercial loans 1,345 3,424 Total loans $ 8,657 $ 21,013 The above amounts include purchased credit impaired loans. At June 30, 2020 there were no purchased impaired loans on nonaccrual. At June 30, 2019, purchased credit impaired loans comprised $4.1 million of nonaccrual loans. Included in certain loan categories in the impaired loans are TDRs, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our 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 restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months. When loans and leases are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, and uses the current fair value of the collateral, less selling costs, for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance. At June 30, 2020, and June 30, 2019, the Company had $4.5 million and $6.5 million, respectively, of commercial real estate loans, $791,000 and $1.1 million, respectively, of residential real estate loans, and $3.2 million and $5.6 million, respectively, of commercial loans, respectively, that were modified in TDRs and impaired. All loans classified as TDRs at June 30, 2020 and June 30, 2019, were so classified due to interest rate concessions. During fiscal 2020, there were no loans modified as TDRs. When loans modified as TDRs have subsequent payment defaults, the defaults are factored into the determination of the allowance for loan losses to ensure specific valuation allowances reflect amounts considered uncollectible. Performing loans classified as TDRs at June 30, 2020 and June 30, 2019 segregated by class, are shown in the table below. Nonperforming TDRs are shown in nonaccrual loans. June 30, 2020 June 30, 2019 Number of Recorded Number of Recorded (dollars in thousands) modifications Investment modifications Investment Residential real estate 3 $ 791 10 $ 1,130 Construction real estate — — — — Commercial real estate 10 4,544 20 6,529 Consumer loans — — — — Commercial loans 7 3,245 10 5,630 Total 20 $ 8,580 40 $ 13,289 The Company may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance repossession. As of June 30, 2020 and June 30, 2019, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $563,000 and $752,000, respectively. In addition, as of June 30, 2020 and June 30, 2019, the Company had residential mortgage loans and home equity loans with a carrying value of $435,000 and $493,000, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process. Following is a summary of loans to executive officers, directors, significant shareholders and their affiliates held by the Company at June 30, 2020 and 2019, respectively: June 30, (dollars in thousands) 2020 2019 Beginning Balance $ 9,132 $ 8,995 Additions 5,179 7,238 Repayments (5,708) (7,134) Change in related party — 33 Ending Balance $ 8,603 $ 9,132 |
