Loans Receivable | Note 5 - Loans Receivable Loans receivable are summarized below: (Dollars in thousands) June 30, 2019 December 31, 2018 Loans secured by real estate: Residential real estate $ 301,770 $ 224,082 Home equity 50,093 45,423 Commercial real estate 275,954 253,104 Construction and land development 71,655 64,433 Multifamily 51,149 47,234 Farmland 234 240 Total loans secured by real estate 750,855 634,516 Commercial business 112,238 103,628 Consumer 10,273 5,293 Government 19,284 21,101 Subtotal 892,650 764,538 Less: Net deferred loan origination fees 1,804 530 Undisbursed loan funds (180) (668) Loans receivable $ 894,274 $ 764,400 (Dollars in thousands) Beginning Balance Charge-offs Recoveries Provisions Ending Balance The Bancorp’s activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2019: Allowance for loan losses: Residential real estate $ 1,680 $ (18) $ 4 $ (6) $ 1,660 Home equity 194 — 2 6 202 Commercial real estate 3,485 — — 44 3,529 Construction and land development 777 — — 29 806 Multifamily 434 — — 19 453 Farmland — — — — — Commercial business 1,391 — 10 116 1,517 Consumer 254 (7) 6 303 556 Government 21 — — — 21 Total $ 8,236 $ (25) $ 22 $ 511 $ 8,744 The Bancorp’s activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2018: Allowance for loan losses: Residential real estate $ 1,493 $ (38) $ — $ 68 $ 1,523 Home equity 159 (5) — 29 183 Commercial real estate 2,996 — 2 172 3,170 Construction and land development 661 — — (50) 611 Multifamily 615 — — (8) 607 Farmland 4 — — — 4 Commercial business 1,077 (3) 107 83 1,264 Consumer 35 (14) 5 10 36 Government 57 — — (7) 50 Total $ 7,097 $ (60) $ 114 $ 297 $ 7,448 The Bancorp’s activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2019: Allowance for loan losses: Residential real estate $ 1,715 $ (66) $ 18 $ (7) $ 1,660 Home equity 202 — 2 (2) 202 Commercial real estate 3,335 — — 194 3,529 Construction and land development 756 — — 50 806 Multifamily 472 — — (19) 453 Farmland — — — — — Commercial business 1,362 — 16 139 1,517 Consumer 82 (25) 9 490 556 Government 38 — — (17) 21 Total $ 7,962 $ (91) $ 45 $ 828 $ 8,744 The Bancorp’s activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2018: Allowance for loan losses: Residential real estate $ 1,568 $ (106) $ — $ 61 $ 1,523 Home equity 166 (24) — 41 183 Commercial real estate 3,125 (119) 2 162 3,170 Construction and land development 618 — — (7) 611 Multifamily 622 — — (15) 607 Farmland — 4 4 Commercial business 1,298 (529) 117 378 1,264 Consumer 31 (22) 9 18 36 Government 54 — — (4) 50 Total $ 7,482 $ (800) $ 128 $ 638 $ 7,448 The Bancorp’s impairment analysis is summarized below: Ending Balances Purchased credit Individually Collectively impaired loans Loans (Dollars in thousands) evaluated for evaluated for Loans individually individually collectively impairment impairment evaluated for evaluated for evaluated for reserves reserves Loan receivables impairment impairment impairment The Bancorp’s allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2019: Residential real estate $ 22 $ 1,638 $ 301,488 $ 547 $ 1,894 $ 299,047 Home equity 11 191 50,155 214 225 49,716 Commercial real estate 196 3,333 275,954 1,651 485 273,818 Construction and land development — 806 71,655 — — 71,655 Multifamily — 453 51,149 — 701 50,448 Farmland — — 234 — — 234 Commercial business 334 1,183 112,076 1,753 1,152 109,171 Consumer — 556 12,279 — — 12,279 Government — 21 19,284 — — 19,284 Total $ 563 $ 8,181 $ 894,274 $ 4,165 $ 4,457 $ 885,652 The Bancorp’s allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2018: Residential real estate $ 22 1,693 223,323 $ 570 $ 980 $ 221,773 Home equity 9 193 45,483 141 123 45,219 Commercial real estate 210 3,125 253,104 1,703 402 250,999 Construction and land development — 756 64,433 — — 64,433 Multifamily — 472 47,234 — — 47,234 Farmland — — 240 — — 240 Commercial business 5 1,357 103,439 423 1,440 101,576 Consumer — 82 6,043 — — 6,043 Government — 38 21,101 — — 21,101 Total $ 246 $ 7,716 $ 764,400 $ 2,837 $ 2,945 $ 758,618 The Bancorp’s credit quality indicators are summarized below at June 30, 2019 and December 31, 2018: Credit Exposure - Credit Risk Portfolio By Creditworthiness Category June 30, 2019 (Dollars in thousands) 2 3 4 5 6 7 8 Above average Marginally Loan Segment Moderate acceptable Acceptable acceptable Pass/monitor Special mention Substandard Total Residential real estate $ 881 $ 115,857 $ 105,661 $ 13,342 55,872 3,900 $ 5,975 $ 301,488 Home equity 64 7,639 39,725 258 1,161 744 564 50,155 Commercial real estate — 4,336 85,845 126,413 53,058 4,253 2,049 275,954 Construction and land development — 310 23,891 32,407 15,047 — — 71,655 Multifamily — 934 18,915 27,298 3,161 140 701 51,149 Farmland — — — — 234 — — 234 Commercial business 9,634 21,596 20,230 36,348 20,081 2,423 1,764 112,076 Consumer 2,155 2,666 6,371 190 897 — — 12,279 Government — 1,889 13,485 3,910 — — — 19,284 Total $ 12,734 $ 155,227 $ 314,123 $ 240,166 $ 149,511 $ 11,460 $ 11,053 $ 894,274 December 31, 2018 (Dollars in thousands) 2 3 4 5 6 7 8 Above average Marginally Loan Segment Moderate acceptable Acceptable acceptable Pass/monitor Special mention Substandard Total Residential real estate $ 261 $ 58,276 $ 100,374 $ 10,404 $ 44,734 $ 3,908 $ 5,366 $ 223,323 Home equity 192 3,736 40,165 37 323 657 373 45,483 Commercial real estate — 5,042 78,611 110,984 51,982 4,715 1,770 253,104 Construction and land development — 322 24,271 29,383 10,457 — — 64,433 Multifamily — 569 19,255 23,417 3,844 149 — 47,234 Farmland — — — — 240 — — 240 Commercial business 10,655 19,127 20,941 34,996 14,034 2,958 728 103,439 Consumer 925 2,953 1,040 196 909 20 — 6,043 Government — 2,111 14,795 4,195 — — — 21,101 Total $ 12,033 $ 92,136 $ 299,452 $ 213,612 $ 126,523 $ 12,407 $ 8,237 $ 764,400 The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows: 1 – Minimal Risk Borrower demonstrates exceptional credit fundamentals, including stable and predictable profit margins, strong liquidity and a conservative balance sheet with superior asset quality. Excellent cash flow coverage of existing and projected debt service. Historic and projected performance indicates borrower is able to meet obligations under almost any economic circumstances. 2 – Moderate risk Borrower consistently internally generates sufficient cash flow to fund debt service, working assets, and some capital expenditures. Risk of default considered low. 3 – Above average acceptable risk Borrower generates sufficient cash flow to fund debt service and some working assets and/or capital expansion needs. Profitability and key balance sheet ratios are at or slightly above peers. Current trends are positive or stable. Earnings may be level or trending down slightly or be erratic; however, positive strengths are offsetting. Risk of default is reasonable but may warrant collateral protection. 4 – Acceptable risk Borrower generates sufficient cash flow to fund debt service, but most working asset and all capital expansion needs are provided from external sources. Profitability ratios and key balance sheet ratios are usually close to peers but one or more ratios (e.g. leverage) may be higher than peer. Earnings may be trending down over the last three years. Borrower may be able to obtain similar financing from other banks with comparable or less favorable terms. Risk of default is acceptable but requires collateral protection. 5 – Marginally acceptable risk Borrower may exhibit excessive growth, declining earnings, strained cash flow, increasing leverage and/or weakening market position that indicate above average risk. Limited additional debt capacity, modest coverage, and average or below average asset quality, margins and market share. Interim losses and/or adverse trends may occur, but not to the level that would affect the Bank’s position. The potential for default is higher than normal but considered marginally acceptable based on prospects for improving financial performance and the strength of the collateral. 6 – Pass/monitor The borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the company has taken a negative turn and may be temporarily strained. Cash flow may be weak but cash reserves remain adequate to meet debt service. Management weaknesses are evident. Borrowers in this category will warrant more than the normal level of supervision and more frequent reporting. 7 – Special mention (watch) Special mention credits are considered bankable assets with no apparent loss of principal or interest envisioned but requiring a high level of management attention. Assets in this category are currently protected but are potentially weak. These borrowers are subject to economic, industry, or management factors having an adverse impact upon their prospects for orderly service of debt. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard. 8 – Substandard This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected. Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal. During the first six months of 2019, three home equity loans and one commercial business loan totaling $128 thousand were renewed as troubled debt restructurings. No troubled debt restructurings have subsequently defaulted during the periods presented. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation. The Bancorp’s individually evaluated impaired loans are summarized below: For the six months ended As of June 30, 2019 June 30, 2019 Recorded Unpaid Principal Average Recorded Interest Income (Dollars in thousands) Investment Balance Related Allowance Investment Recognized With no related allowance recorded: Residential real estate $ 2,284 $ 3,762 $ — $ 1,813 $ 31 Home equity 375 398 — 344 3 Commercial real estate 1,665 2,264 — 1,655 33 Construction and land development — — — — — Multifamily 701 783 — 472 3 Farmland — — — — — Commercial business 2,565 2,695 — 1,967 43 Consumer — — — — — Government — — — — — With an allowance recorded: Residential real estate 157 157 22 159 2 Home equity 64 64 11 59 1 Commercial real estate 471 471 196 478 — Construction and land development — — — — — Multifamily — — — — — Farmland — — — — — Commercial business 340 340 334 145 — Consumer — — — — — Government — — — — — Total: Residential real estate $ 2,441 $ 3,919 $ 22 $ 1,972 $ 33 Home equity $ 439 $ 462 $ 11 $ 403 $ 4 Commercial real estate $ 2,136 $ 2,735 $ 196 $ 2,133 $ 33 Construction & land development $ — $ — $ — $ — $ — Multifamily $ 701 $ 783 $ — $ 472 $ 3 Farmland $ — $ — $ — $ — $ — Commercial business $ 2,905 $ 3,035 $ 334 $ 2,112 $ 43 Consumer $ — $ — $ — $ — $ — Government $ — $ — $ — $ — $ — For the six months ended As of December 31, 2018 June 30, 2018 Recorded Unpaid Principal Average Recorded Interest Income (Dollars in thousands) Investment Balance Related Allowance Investment Recognized With no related allowance recorded: Residential real estate $ 1,389 $ 3,628 $ — $ 1,108 $ 16 Home equity 207 214 — 45 — Commercial real estate 1,624 2,222 — 561 — Construction & land development — — — 89 — Multifamily — — — — — Farmland — — — — — Commercial business 1,799 2,038 — 257 — Consumer — — — — — Government — — — — — With an allowance recorded: Residential real estate 161 161 22 114 10 Home equity 57 57 9 20 — Commercial real estate 481 481 210 160 16 Construction & land development — — — — — Multifamily — — — — — Farmland — — — — — Commercial business 64 64 5 186 8 Consumer — — — — — Government — — — — — Total: Residential real estate $ 1,550 $ 3,789 $ 22 $ 1,222 $ 26 Home equity $ 264 $ 271 $ 9 $ 65 $ — Commercial real estate $ 2,105 $ 2,703 $ 210 $ 721 $ 16 Construction & land development $ — $ — $ — $ 89 $ — Multifamily $ — $ — $ — $ — $ — Farmland $ — $ — $ — $ — $ — Commercial business $ 1,863 $ 2,102 $ 5 $ 443 $ 8 Consumer $ — $ — $ — $ — $ — Government $ — $ — $ — $ — $ — As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At June 30, 2019, total purchased credit impaired loans with unpaid principal balances totaled $6.8 million with a recorded investment of $4.5 million. At December 31, 2018, purchased credit impaired loans with unpaid principal balances totaled $6.0 million with a recorded investment of $2.9 million. The Bancorp’s age analysis of past due loans is summarized below: (Dollars in thousands) Recorded Investments Greater than 90 30‑59 Days Past 60‑89 Days Past Greater Than 90 Days Past Due Due Due Days Past Due Total Past Due Current Total Loans and Accruing June 30, 2019 Residential real estate $ 4,342 $ 1,597 $ 4,612 $ 10,551 $ 290,937 $ 301,488 $ 294 Home equity 245 6 426 677 49,478 50,155 — Commercial real estate 753 174 1,146 2,073 273,881 275,954 220 Construction and land development 248 — — 248 71,407 71,655 — Multifamily — — 438 438 50,711 51,149 173 Farmland — — — — 234 234 — Commercial business 372 331 1,320 2,023 110,053 112,076 238 Consumer 181 34 — 215 12,064 12,279 — Government — — — — 19,284 19,284 — Total $ 6,141 $ 2,142 $ 7,942 $ 16,225 $ 878,049 $ 894,274 $ 925 December 31, 2018 Residential real estate $ 3,659 $ 909 $ 4,362 $ 8,930 $ 214,393 $ 223,323 $ 122 Home equity 143 5 304 452 45,031 45,483 50 Commercial real estate 842 18 611 1,471 251,633 253,104 — Construction and land development 491 533 — 1,024 63,409 64,433 — Multifamily — 149 — 149 47,085 47,234 — Farmland — — — — 240 240 — Commercial business 733 260 436 1,429 102,010 103,439 149 Consumer 1 72 — 73 5,970 6,043 — Government — — — — 21,101 21,101 — Total $ 5,869 $ 1,946 $ 5,713 $ 13,528 $ 750,872 $ 764,400 $ 321 The Bancorp’s loans on nonaccrual status are summarized below: (Dollars in thousands) June 30, December 31, 2019 2018 Residential real estate $ 5,720 $ 5,135 Home equity 543 270 Commercial real estate 926 695 Construction and land development — — Multifamily 265 — Farmland — — Commercial business 1,521 495 Consumer — — Government — — Total $ 8,975 $ 6,595 For the acquisitions of First Federal Savings & Loan (“First Federal”), Liberty Savings Bank (“Liberty Savings”), First Personal Bank (“First Personal”), and A.J. Smith Federal Savings Bank (“AJ Smith”), as part of the fair value of loans receivable, a net fair value discount was established for loans as summarized below: First Federal Liberty Savings First Personal AJ Smith Net fair value Accretable period Net fair value Accretable period Net fair value Accretable period Net fair value Accretable period (dollars in thousands) discount in months discount in months discount in months discount in months Residential real estate $ 1,062 59 $ 1,203 44 $ 948 56 $ 3,734 52 Home equity 44 29 5 29 51 50 141 32 Commercial real estate — 0 — 0 208 56 8 9 Construction and land development — 0 — 0 1 30 — 0 Multifamily — 0 — 0 11 48 2 48 Consumer — 0 — 0 146 50 1 5 Commercial business — 0 — 0 348 24 — 0 Purchased credit impaired loans — 0 — 0 424 32 — 0 Total $ 1,106 $ 1,208 $ 2,137 $ 3,886 Accretable yield, or income recorded for the six months ended June 30, is as follows: (dollars in thousands) First Federal Liberty Savings First Personal AJ Smith Total 2018 $ 36 $ 68 $ — $ — $ 104 2019 22 42 357 451 $ 872 Accretable yield, or income expected to be recorded in the future is as follows: (dollars in thousands) First Personal AJ Smith Total 2019 $ 281 $ 455 $ 736 2020 538 879 1,417 2021 345 871 1,216 2022 334 871 1,205 2023 75 359 434 Total $ 1,573 $ 3,435 $ 5,008 |