Note 5 - Loans Receivable

 

Loans receivable are summarized below:

 

     (Dollars in thousands)

 

 

The Bancorp's impairment analysis is summarized below:

 

 

The Bancorp's credit quality indicators are summarized below at June 30, 2018 and December 31, 2017:

 

 

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 2018, three commercial business loans totaling $355 thousand, three commercial real estate loans totaling $935 thousand, two residential real estate loans totaling $114 thousand and three home equity loans totaling $124 thousand were modified as a troubled debt restructuring. 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.

  

		As of June 30, 2018												June 30, 2018
(Dollars in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Residential real estate		$	1,110			$	2,841			$	-			$	1,108			$	16
Home equity			65				65				-				45
Commercial real estate			1,180				1,180				-				561				-
Construction and land development			-				-				-				89				-
Commercial business			405				405				-				257				-
With an allowance recorded:
Residential real estate			131				131				30				114				10
Home equity			59				59				10				20				-
Commercial real estate.			109				109				14				160				16
Construction and land development			-				-				-				-				-
Commercial business			8				8				8				186				8
Total:
Residential real estate		$	1,241			$	2,972			$	30			$	1,222			$	26
Home equity		$	124			$	124			$	10			$	65			$	-
Commercial real estate		$	1,289			$	1,289			$	14			$	721			$	16
Construction and land development		$	-			$	-			$	-			$	89			$	-
Commercial business		$	413			$	413			$	8			$	443			$	8

		As of December 31, 2017												June 30, 2017
(Dollars in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Residential real estate		$	1,072			$	3,351			$	-			$	1,333			$	22
Home equity			-				-				-				-				-
Commercial real estate			253				253				-				381				3
Construction and land development			134				134				-				134				-
Commercial business			184				184				-				206				2
With an allowance recorded:
Residential real estate			80				270				21				380				-
Home equity			-				-				-				-				-
Commercial real estate			259				259				144				99				-
Construction and land development			-				-				-				-				-
Commercial business			540				540				539				454				4
Total:
Residential real estate		$	1,152			$	3,621			$	21			$	1,713			$	22
Home equity		$	-			$	-			$	-			$	-			$	-
Commercial real estate		$	512			$	512			$	144			$	480			$	3
Construction and land development		$	134			$	134			$	-			$	134			$	-
Commercial business		$	724			$	724			$	539			$	660			$	6

(Dollars in thousands)		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days Past Due				Total Past Due				Current				Total Loans				Recorded Investments Greater than 90 Days Past Due and Accruing
June 30, 2018
Residential real estate		$	2,848			$	1,612			$	2,750			$	7,210			$	168,282			$	175,492			$	71
Home equity			167				200				298				665				37,638				38,303				-
Commercial real estate			8				935				85				1,028				222,570				223,598				-
Construction and land development			-				-				-				-				51,947				51,947				-
Multifamily			66				-				-				66				44,715				44,781				-
Farmland			-				-				-				-				245				245				-
Commercial business			76				198				8				282				83,417				83,699				-
Consumer			-				-				-				-				487				487				-
Government			-				-				-				-				27,736				27,736				-
Total		$	3,165			$	2,945			$	3,141			$	9,251			$	637,037			$	646,288			$	71
December 31, 2017
Residential real estate		$	4,921			$	1,751			$	3,092			$	9,764				162,377			$	172,141			$	225
Home equity			295				18				234				547				36,222				36,769				2
Commercial real estate			951				96				332				1,379				209,711				211,090				-
Construction and land development			-				-				133				133				50,613				50,746				-
Multifamily			319				-				-				319				43,049				43,368				-
Farmland			-				-				-				-				-				-
Commercial business			285				162				539				986				75,865				76,851				-
Consumer			1				-				-				1				460				461				-
Government			-				-				-				-				28,785				28,785				-
Total		$	6,772			$	2,027			$	4,330			$	13,129			$	607,082			$	620,211			$	227