Note

Loans and Allowance for Loan Losses

The Company’s loan portfolio consists of

four

classifications: real estate loans, commercial and industrial loans, consumer loans, and other loans. The following table presents the classifications of loans as of the dates indicated.

	March 31, 2020						December 31, 2019
	Amount			Percent			Amount			Percent
(Dollars in thousands)

Real Estate:
Residential	$	346,864			35.5	%	$	347,766			36.6	%
Commercial		354,374			36.4			351,360			36.9
Construction		50,017			5.1			35,605			3.7
Commercial and Industrial		80,721			8.3			85,586			9.0
Consumer		121,494			12.5			113,637			11.9
Other		21,180			2.2			18,542			1.9
Total Loans		974,650			100.0	%		952,496			100.0	%
Allowance for Loan Losses		(12,322	)					(9,867	)
Loans, Net	$	962,328					$	942,629

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on

March 27, 2020

and provides over

$2.0

trillion in emergency economic relief to individuals and businesses impacted by the COVID-

pandemic, which includes authorizing the Small Business Administration (“SBA”) to temporarily guarantee loans under a new

(a) loan program called the Paycheck Protection Program (“PPP”). Under the PPP, participating SBA and other qualifying lenders can originate loans to eligible businesses that are fully guaranteed by the SBA as to principal and interest, have more favorable terms than traditional SBA loans and

may

be forgiven if the proceeds are used by the borrower for certain purposes. PPP is designed to help small businesses keep their workforce employed and cover expenses during the COVID-

crisis. These loans have a

two

-year loan term to maturity, an interest rate of

per annum and loan payments are deferred for

six

months. The SBA will guarantee

100%

of the PPP loans made to eligible borrowers. The entire principal amount of a PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and

75%

of the loan proceeds are used for payroll expenses, with the remaining

25%

of the loan proceeds used for other qualifying expenses. The Bank receives a processing fee from the SBA ranging from

depending on the size of the loan, which is offset by a

0.75%

third

-party servicing agent fee. On

April 16, 2020,

the original

$349

billion funding cap was reached. On

April 23, 2020,

the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”) was signed into law and includes an additional

$484

billion in COVID-

relief, including allocating an additional

$310

billion to replenish the PPP. The

second

round of the PPP began on

April 27, 2020.

As part of the

first

round of the PPP, the Bank originated

181

loans totaling

$38.6

million and generated approximately

$1.2

million from processing fees. The total approved loans will impact

3,081

small business employees. The Bank is also participating in the

second

round of the PPP and as of

April 29, 2020,

we expect to submit approximately

315

applications totaling

$27.6

million and generate an additional

$1.0

million in processing fees. All PPP loan originations occurred after the end of the

March 31, 2020

reporting period and will be classified as commercial and industrial loans held for investment.

Total unamortized net deferred loan fees were

$950,000

and

$907,000

March 31, 2020

and

December 31, 2019,

respectively.

Real estate loans serviced for others, which are

not

included in the Consolidated Statement of Financial Condition, totaled

$101.2

million and

$100.0

million at

March 31, 2020

and

December 31, 2019,

respectively.

The following table presents loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the dates indicated. At

March 31, 2020

and

December 31, 2019,

there were

loans in the criticized category of Loss within the internal risk rating system.

	March 31, 2020
			Special
	Pass		Mention		Substandard		Doubtful		Total
(Dollars in Thousands)

Real Estate:
Residential	$	342,785	$	1,028	$	3,051	$	-	$	346,864
Commercial		312,089		36,496		5,789		-		354,374
Construction		45,985		3,179		853		-		50,017
Commercial and Industrial		74,264		4,109		1,667		681		80,721
Consumer		121,337		-		157		-		121,494
Other		21,094		86		-		-		21,180
Total Loans	$	917,554	$	44,898	$	11,517	$	681	$	974,650

	December 31, 2019
			Special
	Pass		Mention		Substandard		Doubtful		Total
(Dollars in Thousands)

Real Estate:
Residential	$	343,851	$	1,997	$	1,918	$	-	$	347,766
Commercial		335,436		12,260		3,664		-		351,360
Construction		33,342		2,263		-		-		35,605
Commercial and Industrial		75,201		7,975		1,691		719		85,586
Consumer		113,527		-		110		-		113,637
Other		18,452		90		-		-		18,542
Total Loans	$	919,809	$	24,585	$	7,383	$	719	$	952,496

The increase of

$20.3

million in the special mention loan category as of

March 31, 2020

compared to

December 31, 2019

was mainly from the downgrade of the hospitality portfolio due to the economic conditions in that industry caused by the COVID-

pandemic. The increase of

$4.1

million in the substandard category is primarily due to a lease dispute on a

$2.3

million industrial building (commercial real estate) and

$956,000

associated with

two

residential real estate loans which have insufficient debt service coverage from the borrower demonstrating an inability to build and sell the speculative homes at a fast enough rate that can service the interest-only debt.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of the dates indicated.

	March 31, 2020
			30-59		60-89		90 Days
	Loans		Days		Days		Or More		Total		Non-		Total
	Current		Past Due		Past Due		Past Due		Past Due		Accrual		Loans
(Dollars in Thousands)

Real Estate:
Residential	$	340,982	$	3,824	$	61	$	-	$	3,885	$	1,997	$	346,864
Commercial		354,168		45		-		-		45		161		354,374
Construction		49,177		407		433		-		840		-		50,017
Commercial and Industrial		80,007		-		-		-		-		714		80,721
Consumer		120,442		845		50		-		895		157		121,494
Other		21,180		-		-		-		-		-		21,180
Total Loans	$	965,956	$	5,121	$	544	$	-	$	5,665	$	3,029	$	974,650

	December 31, 2019
			30-59		60-89		90 Days
	Loans		Days		Days		Or More		Total		Non-		Total
	Current		Past Due		Past Due		Past Due		Past Due		Accrual		Loans
(Dollars in Thousands)

Real Estate:
Residential	$	342,010	$	3,462	$	281	$	196	$	3,939	$	1,817	$	347,766
Commercial		351,104		22		-		-		22		234		351,360
Construction		35,605		-		-		-		-		-		35,605
Commercial and Industrial		84,280		388		178		-		566		740		85,586
Consumer		112,438		923		140		26		1,089		110		113,637
Other		18,542		-		-		-		-		-		18,542
Total Loans	$	943,979	$	4,795	$	599	$	222	$	5,616	$	2,901	$	952,496

The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated. Included in nonperforming loans and assets are troubled debt restructurings (“TDRs”), which are loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties. Nonaccrual TDRs are included in their specific loan category in the nonaccrual loans section.

	March 31,			December 31,
	2020			2019
(Dollars in Thousands)

Nonaccrual Loans:
Real Estate:
Residential	$	1,997		$	1,817
Commercial		161			234
Commercial and Industrial		714			740
Consumer		157			110
Total Nonaccrual Loans		3,029			2,901

Accruing Loans Past Due 90 Days or More:
Real Estate:
Residential		-			196
Consumer		-			26
Total Accruing Loans Past Due 90 Days or More		-			222
Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More		3,029			3,123

Troubled Debt Restructurings, Accruing:
Real Estate
Residential		503			511
Commercial		1,621			1,648
Commercial and Industrial		79			100
Total Troubled Debt Restructurings, Accruing		2,203			2,259

Total Nonperforming Loans		5,232			5,382

Other Real Estate Owned:
Residential		117			41
Commercial		174			192
Total Other Real Estate Owned		291			233

Total Nonperforming Assets	$	5,523		$	5,615

Nonperforming Loans to Total Loans		0.54	%		0.57	%
Nonperforming Assets to Total Assets		0.42			0.42

The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was

$1.7

million and

$1.1

million at

March 31, 2020

and

December 31, 2019,

respectively.

TDRs typically are the result of loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. For a loan modification to be considered a TDR, the borrower must be experiencing financial difficulty and a concession must be granted, except for an insignificant delay in payment. Section

4013

of the CARES Act provides temporary relief from accounting and financial reporting requirements for TDRs regarding certain loan modifications related to COVID-

19.

Specifically, the CARES Act provides that the Bank

may

elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and suspend any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Any modification involving a loan that was

not

more than

days past due as of

December 31, 2019

and that occurs beginning on

March 1, 2020

and ends on the earlier of

December 31, 2020

or the date that is

days after the termination date of the national emergency related to the COVID-

outbreak qualify for this exception, including a forbearance arrangement, interest rate modification, repayment plan or any other similar arrangement that defers or delays the payment of principal or interest.

Banking regulatory agencies released an interagency statement that offers practical expedients for modifications that occur in response to the COVID-

pandemic, but they differ with the CARES Act in certain areas. The expedients require a lender to conclude that a borrower is

not

experiencing financial difficulty if either short-term (e.g.,

six

months or less) modifications are made, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than

days past due on its contractual payments at the time a modification program is implemented or the modification or deferral program is mandated by the federal government or a state government. The banking regulatory agencies have subsequently confirmed that their guidance could be applicable for loans that do

not

qualify for favorable accounting treatment under Section

4013

of the CARES Act. Both Section

4013

of the CARES Act and the interagency statement can be applied to a

second

modification that occurs after the

first

modification provided that the

second

modification does

not

qualify as a TDR under Section

4013

of the CARES Act or the interagency statement. In its evaluation of whether a payment deferral qualifies as short-term under the interagency statement, an entity should assess multiple payment deferrals collectively (i.e., the cumulative deferrals cannot exceed

six

months).

The Bank offered forbearance options for borrowers impacted by COVID-

that provide a short-term delay in payment by primarily allowing: (a) deferral of

three

months of payments; or (b) for consumer loans

not

secured by a real estate mortgage,

three

months of interest-only payments that also extends the maturity date of the loan by

three

months. During the forbearance period, the borrower is

not

considered delinquent for credit bureau reporting purposes. The Company has elected the practical expedients related to TDRs that are available in the CARES Act and interagency guidance as an entity-wide accounting policy and does

not

consider any of the forbearance agreements TDRs. The following table provides details of loans in forbearance as of

April 29, 2020.

	Number
	of
	Loans		Amount
(Dollars in thousands)

Real Estate:
Residential		170	$	21,998
Commercial		98		94,101
Construction		1		7,109
Commercial and Industrial		44		13,119
Consumer		201		4,051
Other		1		2,504
Total Loans in Forbearance		515	$	142,882

Forbearance in the commercial real estate category includes, but is

not

limited to,

$24.2

million of retail space,

$17.9

million of nonowner occupied multi-family apartments,

$15.8

million in hotels,

$11.9

million of warehouse space, and

$4.7

million in various business that are dependent on the oil and gas industry, which includes

$3.1

million of hotels in proximity to oil and gas related activity.

The concessions granted for the TDRs in the portfolio primarily consist of, but are

not

limited to, modification of payment or other terms, temporary rate modification and extension of maturity date. Loans classified as TDRs consisted of

loans totaling

$2.9

million and

$3.0

million at

March 31, 2020

and

December 31, 2019,

respectively.

For the

three

months ended

March 31, 2020,

there were

loans that were modified that were considered a TDR or TDRs that paid off.

For the

three

months ended

March 31, 2019,

one

residential real estate loan was modified in a TDR transaction by extending the term of the loan and

one

residential real estate TDR paid off.

TDRs subsequently defaulted during the

three

months ended

March 31, 2020

and

2019,

respectively. The following table presents information at the time of modification related to loans modified in a TDR during the

three

months ended

March 31, 2019.

Three Months Ended March 31, 2019

Pre-

Post-

Modification

Number

Outstanding

Recorded

Contracts

Investment

Allowance

(Dollars in thousands)

Real Estate:

Residential

The following table presents a summary of the loans considered to be impaired as of the dates indicated.

	March 31, 2020
					Unpaid		Average		Interest
	Recorded		Related		Principal		Recorded		Income
	Investment		Allowance		Balance		Investment		Recognized
(Dollars in thousands)

With No Related Allowance Recorded:
Real Estate:
Residential	$	1,495	$	-	$	1,500	$	1,498	$	17
Commercial		5,187		-		5,203		5,230		54
Construction		853		-		853		853		10
Commercial and Industrial		792		-		957		812		1
Total With No Related Allowance Recorded	$	8,327	$	-	$	8,513	$	8,393	$	82

With A Related Allowance Recorded:
Real Estate:
Commercial	$	1,619	$	392	$	1,619	$	1,630	$	19
Commercial and Industrial		1,636		259		1,636		1,648		24
Total With A Related Allowance Recorded	$	3,255	$	651	$	3,255	$	3,278	$	43

Total Impaired Loans:
Real Estate:
Residential	$	1,495	$	-	$	1,500	$	1,498	$	17
Commercial		6,806		392		6,822		6,860		73
Construction		853		-		853		853		10
Commercial and Industrial		2,428		259		2,593		2,460		25
Total Impaired Loans	$	11,582	$	651	$	11,768	$	11,671	$	125

	December 31, 2019
					Unpaid		Average		Interest
	Recorded		Related		Principal		Recorded		Income
	Investment		Allowance		Balance		Investment		Recognized
(Dollars in thousands)

With No Related Allowance Recorded:
Real Estate:
Residential	$	549	$	-	$	553	$	494	$	20
Commercial		3,058		-		3,077		3,335		177
Commercial and Industrial		133		-		135		156		6
Total With No Related Allowance Recorded	$	3,740	$	-	$	3,765	$	3,985	$	203

With A Related Allowance Recorded:
Real Estate:
Commercial	$	1,646	$	274	$	1,646	$	1,702	$	81
Commercial and Industrial		2,378		610		2,529		2,448		113
Total With A Related Allowance Recorded	$	4,024	$	884	$	4,175	$	4,150	$	194

Total Impaired Loans
Real Estate:
Residential	$	549	$	-	$	553	$	494	$	20
Commercial		4,704		274		4,723		5,037		258
Commercial and Industrial		2,511		610		2,664		2,604		119
Total Impaired Loans	$	7,764	$	884	$	7,940	$	8,135	$	397

The

$3.8

million increase in recorded investment of loans evaluated for impairment is primarily due to a lease dispute on a

$2.3

million industrial building (commercial real estate) and

$956,000

and

$853,000

associated with

two

residential real estate loans and

one

residential construction loan, respectively, which have insufficient debt service coverage from the borrower demonstrating an inability to build and sell the speculative homes at a fast enough rate that can service the interest-only debt. These loans were downgraded to substandard as of

March 31, 2020.

The following table presents the activity in the allowance for loan losses (“ALLL”) summarized by major classifications and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment at the dates and for the periods indicated.

	Real			Real		Real		Commercial
	Estate			Estate		Estate		and
	Residential			Commercial		Construction		Industrial			Consumer			Other		Unallocated		Total
(Dollars in thousands)

December 31, 2019	$	2,023		$	3,210	$	285	$	2,412		$	1,417		$	-	$	520	$	9,867
Charge-offs		(25	)		-		-		-			(99	)		-		-		(124	)
Recoveries		2			14		-		9			54			-		-		79
Provision		685			1,651		379		(829	)		507			-		107		2,500
March 31, 2020	$	2,685		$	4,875	$	664	$	1,592		$	1,879		$	-	$	627	$	12,322

	March 31, 2020
	Real		Real		Real		Commercial
	Estate		Estate		Estate		and
	Residential		Commercial		Construction		Industrial		Consumer		Other		Unallocated		Total
(Dollars in thousands)

Individually Evaluated for Impairment	$	-	$	392	$	-	$	259	$	-	$	-	$	-	$	651
Collectively Evaluated for Potential Impairment	$	2,685	$	4,483	$	664	$	1,333	$	1,879	$	-	$	627	$	11,671

	December 31, 2019
	Real		Real		Real		Commercial
	Estate		Estate		Estate		and
	Residential		Commercial		Construction		Industrial		Consumer		Other		Unallocated		Total
(Dollars in thousands)

Individually Evaluated for Impairment	$	-	$	274	$	-	$	610	$	-	$	-	$	-	$	884
Collectively Evaluated for Potential Impairment	$	2,023	$	2,936	$	285	$	1,802	$	1,417	$	-	$	520	$	8,983

	Real		Real			Real		Commercial
	Estate		Estate			Estate		and
	Residential		Commercial			Construction		Industrial			Consumer			Other		Unallocated		Total
(Dollars in thousands)

December 31, 2018	$	1,050	$	2,693		$	395	$	2,807		$	2,027		$	-	$	586	$	9,558
Charge-offs		-		-			-		-			(213	)		-		-		(213	)
Recoveries		4		13			-		1			24			-		-		42
Provision		100		(156	)		105		(255	)		(105	)		-		336		25
March 31, 2019	$	1,154	$	2,550		$	500	$	2,553		$	1,733		$	-	$	922	$	9,412

	March 31, 2019
	Real		Real		Real		Commercial
	Estate		Estate		Estate		and
	Residential		Commercial		Construction		Industrial		Consumer		Other		Unallocated		Total
(Dollars in thousands)

Individually Evaluated for Impairment	$	-	$	199	$	-	$	784	$	-	$	-	$	-	$	983
Collectively Evaluated for Potential Impairment	$	1,154	$	2,351	$	500	$	1,769	$	1,733	$	-	$	922	$	8,429

The COVID-

pandemic, which led to state-wide shelter in place orders and mandatory closures of all but essential business has resulted in a dramatic increase in unemployment and recessionary economic conditions. Based on evaluation of the current macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis related to economic trends and industry conditions, specifically because of vulnerable industries such as hospitality, oil and gas, retail and restaurants, were adjusted for these circumstances and resulted in a

$2.5

million provision for loan losses for the

three

months ended

March 31, 2020.

This change increased the ALLL in all categories except commercial and industrial due to a decrease in the average loss history factor as further explained below.

Prior to the quarter ended

March 31, 2020,

management determined historical loss experience for each segment of loans using a

two

-year rolling average of the net charge-off data within each loan segment, which was then used in combination with qualitative factors to calculate the general allowance component that covers pools of homogeneous loans that are

not

specifically evaluated for impairment. For the quarter ended

March 31, 2020,

the Company began using a

five

-year rolling average of the net charge-off data within each segment. This change was driven by

net charge-off experience in the commercial real estate and commercial and industrial segments in the prior

two

-year rolling period as of

March 31, 2020,

which the Company believes does

not

represent the inherent risks in those segments. In the

first

quarter of

2018,

the Company incurred

$1.4

million of commercial and industrial charge-offs, however this period would have dropped off the lookback period as of

March 31, 2020

if continuing to use a

two

-year history. In addition, moving to a

five

-year history is expected to improve the calculation moving forward by capturing economic ebbs and flows over a longer period while also

not

heavily weighting

one

period of charge-off activity.

The following table presents changes in the accretable discount on the loans acquired at fair value for the dates indicated (dollars in thousands).

	Accretable Discount
(Dollars in Thousands)

December 31, 2019	$	1,628
Accretable Yield		(76	)
March 31, 2020	$	1,552

The following table presents the major classifications of loans summarized by individually evaluated for impairment and collectively evaluated for potential impairment as of the dates indicated.

	March 31, 2020
	Real		Real		Real		Commercial
	Estate		Estate		Estate		and
	Residential		Commercial		Construction		Industrial		Consumer		Other		Total
(Dollars in thousands)

Individually Evaluated for Impairment	$	1,495	$	6,806	$	853	$	2,428	$	-	$	-	$	11,582
Collectively Evaluated for Potential Impairment		345,369		347,568		49,164		78,293		121,494		21,180		963,068
Total Loans	$	346,864	$	354,374	$	50,017	$	80,721	$	121,494	$	21,180	$	974,650

	December 31, 2019
	Real		Real		Real		Commercial
	Estate		Estate		Estate		and
	Residential		Commercial		Construction		Industrial		Consumer		Other		Total
(Dollars in thousands)

Individually Evaluated for Impairment	$	549	$	4,704	$	-	$	2,511	$	-	$	-	$	7,764
Collectively Evaluated for Potential Impairment		347,217		346,656		35,605		83,075		113,637		18,542		944,732
Total Loans	$	347,766	$	351,360	$	35,605	$	85,586	$	113,637	$	18,542	$	952,496