Credit Quality of Loans and the Allowance for Loan Losses

3 Months Ended

Mar. 31, 2021

Credit Quality of Loans and the Allowance for Loan Losses

Note 4. Credit Quality of Loans and the Allowance for Loan Losses

The allowance for loan losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. The general component covers

non-impaired

loans and is based on historical loss experience adjusted for qualitative factors. Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. A loan in considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest 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 all loans secured by real estate by the fair value of the collateral if the loan is collateral dependent. If the loan repayment is not deemed collateral dependent, impairment is measured on the net present value of the expected discounted future cash flows.

Loans are automatically placed on

non-accrual

status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on

non-accrual

status if collection of principal or interest in full is in doubt or if the loan has been restructured. When loans are placed on

non-accrual

status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent. The Bank’s

charge-off

policy states after all collection efforts have been exhausted, the loan is deemed to be a loss and the amount has been determined, the loss amount will be charged to the allowance for loan losses.

The following tables summarize the activity in the allowance for losses for the three months ended March 31, 2021 and 2020 the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of March 31, 2021 and 2020.


	As of March 31, 2021
	One –to Four-Family			Home Equity Loans and Lines of Credit			Construction and Land Development		Nonresidential		Commercial		Consumer			Total
Allowance for loans losses:
Beginning Balance – January 1, 2021	$	339,817		$	64,350		$	206,362	$	1,043,596	$	68,380	$	4,711		$	1,727,216
Charge-offs		—			—			—		—		—		—			—
Recoveries		—			—			—		—		—		—			—
Provision		(21,866	)		(19,877	)		11,343		22,103		8,803		(506	)		—

Ending Balance – March 31, 2021	$	317,951		$	44,473		$	217,705	$	1,065,699	$	77,183	$	4,205		$	1,727,216

Ending balance: individually evaluated for impairment	$	7,336		$	844		$	—	$	—	$	—	$	—		$	8,180

Ending balance: collectively evaluated for impairment	$	310,615		$	43,629		$	217,705	$	1,065,699	$	77,183	$	4,205		$	1,719,036

Loans:
Ending balance	$	59,653,409		$	4,746,179		$	11,280,061	$	59,815,640	$	13,284,697	$	294,075		$	149,074,061

Ending balance: individually evaluated for impairment	$	322,566		$	54,894		$	—	$	—	$	—	$	—		$	377,460

Ending balance: collectively evaluated for impairment	$	59,330,843		$	4,691,285		$	11,280,061	$	59,815,640	$	13,284,697	$	294,075		$	148,696,601


	As of March 31, 2020
	One –to Four-Family			Home Equity Loans and Lines of Credit		Construction and Land Development		Nonresidential		Commercial		Consumer			Unallocated			Total
Allowance for loans losses:
Beginning Balance – January 1, 2020	$	331,605		$	62,603	$	179,541	$	683,453	$	55,571	$	6,950		$	59,427		$	1,379,150
Charge-offs		(263	)		—		—		—		—		(3,633	)		—			(3,896	)
Recoveries		—			597		—		—		—		—			—			597
Provision		48,887			1,643		27,241		125,565		11,928		2,210			(42,474	)		175,000

Ending Balance – March 31, 2020	$	380,229		$	64,843	$	206,782	$	809,018	$	67,499	$	5,527		$	16,953		$	1,550,851

Ending balance: individually evaluated for impairment	$	—		$	385	$	—	$	—	$	—	$	—		$	—		$	385

Ending balance: collectively evaluated for impairment	$	380,229		$	64,458	$	206,782	$	809,018	$	67,499	$	5,527		$	16,953		$	1,550,466

Loans:
Ending balance	$	77,108,832		$	7,281,582	$	10,176,933	$	61,935,252	$	7,105,201	$	456,814					$	164,064,614

Ending balance: individually evaluated for impairment	$	265,377		$	39,103	$	—	$	1,560,753	$	—	$	—					$	1,865,233

Ending balance: collectively evaluated for impairment	$	76,843,455		$	7,242,479	$	10,176,933	$	60,374,499	$	7,105,201	$	456,814					$	162,199,381

As part of the ongoing monitoring of the credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grade of classified loans, net chargeoffs, nonperforming loans, credit scores, and the general economic conditions in the Bank’s market area.

The Bank utilizes an internal rating system to monitor the credit quality of the overall loan portfolio. A description of the general characteristics is as follows:

•

Pass

– A pass loan is considered of sufficient quality to preclude a special mention or an adverse rating. Pass assets are generally well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. The pass classification also includes watch credits which have all of the characteristics of a pass loan but warrant more than the normal level of supervision.

•

Special mention

– A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

•

Substandard

– A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the collection or liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This will be the measurement for determining if a loan is impaired.

•

Doubtful

– A doubtful loan has all of the weaknesses inherent in a substandard credit with the added factor that the weaknesses make the collection or liquidation in full, on the basis of current information, conditions and values, highly questionable and improbable. Loans in this category must be placed on

non-accrual

status and all payments applied to principal recapture. Doubtful classification should be used only when a distinct possibility of loss exists. When identified, adequate loss should be recorded for the specific assets. It is not necessary to classify an entire credit doubtful when collection of a specific portion appears highly probable.

•

Loss

– A loan classified as loss is considered uncollectable and of such little value that continuance as a loan in unjustified. A loss classification does not mean that the credit has absolutely no value; partial recoveries may be received in the future. Amounts classified as loss must be

charged-off

in the period in which they are deemed uncollectible.

When assets are classified as impaired, the Bank allocates a portion of the related general loss allowances to such assets as the Bank deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following table is a summary of the loan portfolio quality indicators by loan class recorded investment as of March 31, 2021 and December 31, 2020:


	March 31, 2021
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Real estate loans:
One-to four-family	$	59,191,191	$	139,652	$	322,566	$	—	$	59,653,409
Home equity loans and lines of credit		4,725,558		—		20,621		—		4,746,179
Construction and land development		11,280,061		—		—		—		11,280,061
Nonresidential		58,526,225		1,289,415		—		—		59,815,640
Other loans:
Commercial		13,284,697		—		—		—		13,284,697
Consumer		294,075		—		—		—		294,075

Total loans	$	147,301,807	$	1,429,067	$	343,187	$	—	$	149,074,061


	December 31, 2020
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Real estate loans:
One-to four-family	$	61,657,131	$	272,583	$	187,845	$	—	$	62,117,559
Home equity loans and lines of credit		6,874,011		20,621		—		—		6,894,632
Construction and land development		10,804,315		—		—		—		10,804,315
Nonresidential		58,831,855		1,378,041		—		—		60,209,896
Other loans:
Commercial		10,197,884		—		—		—		10,197,884
Consumer		336,507		—		—		—		336,507

Total loans	$	148,701,703	$	1,671,245	$	187,845	$	—	$	150,560,793

The following table sets forth certain information with respect to our loan portfolio delinquencies by loan class and amount as of March 31, 2021 and December 31, 2020:


	March 31, 2021
	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Recorded Investment > 90 Days and Accruing		Nonaccrual Loans
Real estate loans:
One-to four-family	$	—	$	—	$	232,477	$	232,477	$	59,420,932	$	59,653,409	$	—	$	322,566
Home equity loans and lines of credit		—		—		20,621		20,621		4,725,558		4,746,179		—		20,621
Construction and land development		—		—		—		—		11,280,061		11,280,061		—		—
Nonresidential		—		—		—		—		59,815,640		59,815,640		—		—
Other loans:
Commercial		—		—		—		—		13,284,697		13,284,697		—		—
Consumer		—		—		—		—		294,075		294,075		—		—

Total loans	$	—	$	—	$	253,098	$	253,098	$	148,820,963	$	149,074,061	$	—	$	343,187


	December 31, 2020
	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Recorded Investment > 90 Days and Accruing		Nonaccrual Loans
Real estate loans:
One-to four-family	$	9,199	$	—	$	187,845	$	197,044	$	61,920,515	$	62,117,559	$	—	$	187,845
Home equity loans and lines of credit		—		—		—		—		6,894,632		6,894,632		—		—
Construction and land development		—		—		—		—		10,804,315		10,804,315		—		—
Nonresidential		—		—		—		—		60,209,896		60,209,896		—		—
Other loans:
Commercial		—		—		—		—		10,197,884		10,197,884		—		—
Consumer		—		—		—		—		336,507		336,507		—		—

Total loans	$	9,199	$	—	$	187,845	$	197,044	$	150,363,749	$	150,560,793	$	—	$	187,845

At March 31, 2021 and December 31, 2020 there were no loans 90 days past due and still accruing interest. At March 31, 2021, the Bank had five loans on

non-accrual

status with foregone interest in the amount of $8,280. At December 31, 2020, the Bank had three loans on

non-accrual

status with foregone interest in the amount of $8,895.

The Bank accounts for impaired loans under generally accepted accounting principles. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Loans are individually evaluated for impairment. When the Bank classifies a problem asset as impaired, it provides a specific reserve for that portion of the asset that is deemed uncollectible based on the present value of expected future cash flows discounted at the loan’s original effective interest rate, or based on the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.

The following table is a summary of impaired loans for the three months ended March 31, 2021 and 2020 and the year ended and December 31, 2020:


							Three Months Ended
	Impaired Loans at March 31, 2021						March 31, 2021
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
One-to four-family	$	232,477	$	236,257	$	—	$	232,477	$	—
Home equity loans and lines of credit		20,621		20,621		—		20,621		—
With an allowance recorded:
One-to four-family	$	90,089	$	90,089	$	7,336	$	90,451	$	1,019
Home equity loans and lines of credit		34,273		34,273		844		34,921		486
Total
One-to four-family	$	322,566	$	326,346	$	7,336	$	322,928	$	1,019
Home equity loans and lines of credit		54,894		54,894		844		55,541		486


							Three Months Ended
	Impaired Loans at March 31, 2020						March 31, 2020
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
One-to four-family	$	265,377	$	267,279	$	—	$	266,868	$	4,896
Nonresidential		1,560,753		1,560,753		—		1,571,286		23,466
With an allowance recorded:
Home equity loans and lines of credit	$	39,103	$	39,103	$	385	$	39,773	$	2,964
Total
One-to four-family	$	265,377	$	267,279	$	—	$	266,868	$	4,896
Home equity loans and lines of credit		39,103		39,103		385		39,773		2,964
Nonresidential		1,560,753		1,560,753		—		1,571,286		23,466


	December 31, 2020
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
One-to four-family	$	97,032	$	98,970	$	—	$	97,804	$	1,927
With an allowance recorded:
One-to four-family	$	90,813	$	90,813	$	7,501	$	88,012	$	4,019
Home equity loans and lines of credit		35,568		35,568		97		38,005		2,238
Total
One-to four-family	$	187,845	$	189,783	$	7,501	$	185,816	$	5,946
Home equity loans and lines of credit		35,568		35,568		97		38,005		2,238

Impaired loans also include certain loans that have been modified in a TDR to make concessions to help a borrower remain current on the loan and/or to avoid foreclosure. 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. Generally, nonaccrual loans that are modified and are considered TDRs are classified as nonperforming at the time of the restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. A summary of TDRs at March 31, 2021 and December 31, 2020 are as follows:


March 31, 2021	Number of Contracts		Performing		Nonperforming		Total
One-to four-family		1	$	—	$	90,089	$	90,089
Home equity loans and lines of credit		1		34,273		—		34,273

		2	$	34,273	$	90,089	$	124,362


December 31, 2020	Number of Contracts		Performing		Nonperforming		Total
One-to four-family		1	$	—	$	90,813	$	90,813
Home equity loans and lines of credit		1		35,568		—		35,568

		2	$	35,568	$	90,813	$	126,381

The Bank had two TDRs at March 31, 2021 totaling $124,362 and two TDRs at December 31, 2020 totaling $126,381. The Bank has no commitments to loan additional funds to borrowers whose loans have been modified. There were no nonperforming TDRs reclassified to nonperforming loans during the three months ended March 31, 2021 and 2020. A default is considered to have occurred once the TDR is past due 90 days or more, or it has been placed on nonaccrual. If loans modified in a TDR subsequently default, the Bank evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

In response to the

COVID-19

pandemic and its economic impact to our customers, we implemented a short-term modification program that complies with the CARES Act and ASC

310-40

to provide temporary payment relief to those borrowers directly impacted by

COVID-19

who were not more than 30 days past due as of December 31, 2019. This program allowed for a deferral of payments for 90 days, which we extended for an additional 90 days for certain loans, for a maximum of 180 days on a cumulative and successive basis.

Additionally, none of the deferrals are reflected in the Company’s asset quality measures (i.e.

non-performing

loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.

During the year ended December 31, 2020, the Bank received and approved requests to modify 61 loans with total balances of approximately $26,100,000 due to the effects of

COVID-19.

The Bank’s modifications primarily consisted of interest only payments with the deferral of principal for up to six months, dependent on the borrower and the borrower’s financial situation. All the borrowers whose loans were modified during the year ended December 31, 2020 due to the effects of

COVID-19,

complied with their loan modification agreements. As of March 31, 2021, three of the loans continued to receive

COVID-19

modification relief. During the three months ended March 31, 2021, the Bank received and approved eight additional modification requests with total balances of approximately $2,500,000. In general, the Bank does not classify such modified loans as nonperforming and continues to accrue and recognize interest income during the forbearance period.

The breakdown of the loan modifications due to the effects of

COVID-19

outstanding as of March 31, 2021 is as follows:


	Number of loans		Balance
One-to four-family		3	$	1,069,699
Home equity loans and lines of credit		2		220,170
Nonresidential		5		2,499,825
Commercial		1		38,045

Total loans		11	$	3,827,739

CBM BANCORP, INC. 10-Q