Note 3: Loans and Allowance for Loan Losses

Categories of loans include:


	March 31,		December 31,
	2021		2020
	(In thousands)
Commercial loans	$	99,728	$	103,277
Commercial real estate		254,577		246,167
Residential real estate		88,114		85,789
Installment loans		7,615		8,258

Total gross loans		450,034		443,491

Less allowance for loan losses		(4,807)		(5,113)

Total loans	$	445,227	$	438,378

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans.

Residential Real Estate and Consumer

Residential real estate and consumer loans consist of two segments - residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three month period ended March 31, 2021


			Commercial
	Commercial		Real Estate		Residential		Installment		Total
	(In thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,397	$	1,821	$	1,471	$	424	$	5,113
Provision (credit) charged to expense		(98)		(1)		(75)		(31)		(205)
Losses charged off		(78)		—		(17)		(18)		(113)
Recoveries		—		—		2		10		12
Balance, end of period	$	1,221	$	1,820	$	1,381	$	385	$	4,807
Ending balance: individually evaluated for impairment	$	—	$	85	$	—	$	—	$	85
Ending balance: collectively evaluated for impairment	$	1,221	$	1,735	$	1,381	$	385	$	4,722

Loans:
Ending balance: individually evaluated for impairment	$	—	$	2,594	$	114	$	—	$	2,708
Ending balance: collectively evaluated for impairment	$	99,728	$	251,983	$	88,000	$	7,615	$	447,326

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three month period ended March 31, 2020


			Commercial
	Commercial		Real Estate		Residential		Installment		Total
	(In thousands)
Allowance for loan losses:
Balance, beginning of period	$	568	$	792	$	572	$	299	$	2,231
Provision charged to expense		529		19		1		14		563
Losses charged off		(42)		(30)		(6)		(31)		(109)
Recoveries		—		—		—		23		23
Balance, end of period	$	1,055	$	781	$	567	$	305	$	2,708
Ending balance: individually evaluated for impairment	$	16	$	—	$	—	$	—	$	16
Ending balance: collectively evaluated for impairment	$	1,039	$	781	$	567	$	305	$	2,692

Loans:
Ending balance: individually evaluated for impairment	$	138	$	758	$	505	$	—	$	1,401
Ending balance: collectively evaluated for impairment	$	106,338	$	251,593	$	79,646	$	9,359	$	446,936

Allowance for Loan Losses and Recorded Investment in Loans

As of December 31, 2020


			Commercial
	Commercial		Real Estate		Residential		Installment		Total
	(In thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	—	$	1	$	––	$	––	$	1
Ending balance: collectively evaluated for impairment	$	1,397	$	1,820	$	1,471	$	424	$	5,112

Loans:
Ending balance: individually evaluated for impairment	$	80	$	182	$	114	$	—	$	376
Ending balance: collectively evaluated for impairment	$	103,197	$	245,985	$	85,675	$	8,258	$	443,115

The following tables show the portfolio quality indicators.


	March 31, 2021
			Commercial
Loan Class	Commercial		Real Estate		Residential		Installment		Total
	(In thousands)
Pass Grade	$	99,721	$	248,895	$	88,000	$	7,615	$	444,231
Special Mention		7		2,885		—		—		2,892
Substandard		—		2,797		114		—		2,911
Doubtful		—		—		—		—		—

	$	99,728	$	254,577	$	88,114	$	7,615	$	450,034


	December 31, 2020
			Commercial
Loan Class	Commercial		Real Estate		Residential		Installment		Total
	(In thousands)
Pass Grade	$	103,181	$	239,862	$	85,675	$	8,258	$	436,976
Special Mention		15		3,422		—		—		3,437
Substandard		81		2,883		114		—		3,078
Doubtful		—		—		—		—		—

	$	103,277	$	246,167	$	85,789	$	8,258	$	443,491

To facilitate the monitoring of credit quality within the loan portfolio, and for purposes of analyzing historical loss rates used in the determination of the ALLL, the Company utilizes the following categories of credit grades: pass, special mention, substandard, and doubtful. The four categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on at least a quarterly basis.

The Company assigns a special mention rating to loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the Company’s credit position.

The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies noted are not addressed and corrected.

The Company assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the past year to date period.

Loan Portfolio Aging Analysis

As of March 31, 2021


	30-59 Days		60‑89 Days		Greater
	Past Due		Past Due		Than 90				Total Past
	and		and		Days and		Non		Due and				Total Loans
	Accruing		Accruing		Accruing		Accrual		Non Accrual		Current		Receivable
	(In thousands)
Commercial	$	124	$	—	$	—	$	—	$	124	$	99,604	$	99,728
Commercial real estate		—		—		—		2,586		2,586		251,991		254,577
Residential		—		74		—		377		451		87,663		88,114
Installment		—		—		—		19		19		7,596		7,615
Total	$	124	$	74	$	—	$	2,982	$	3,180	$	446,854	$	450,034

Loan Portfolio Aging Analysis

As of December 31, 2020


	30‑59 Days		60‑89 Days		Greater
	Past Due		Past Due		Than 90				Total Past
	and		and		Days and		Non		Due and				Total Loans
	Accruing		Accruing		Accruing		Accrual		Non Accrual		Current		Receivable
	(In thousands)
Commercial	$	—	$	—	$	—	$	83	$	83	$	103,194	$	103,277
Commercial real estate		—		—		—		98		98		246,069		246,167
Residential		120		59		—		445		624		85,165		85,789
Installment		7		20		—		—		27		8,231		8,258
Total	$	127	$	79	$	—	$	626	$	832	$	442,659	$	443,491

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 commercial loans but also include loans modified in troubled debt restructurings 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.

Impaired Loans


							Three Months Ended
		As of March 31, 2021					March 31, 2021
			Unpaid				Average		Interest
	Recorded		Principal		Specific		Investment in		Income
	Balance		Balance		Allowance		Impaired Loans		Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate		105		105		—		112		—
Residential		114		114		—		118		—
		219		219		—		230		—
Loans with a specific valuation allowance:
Commercial		—		—		—		—		—
Commercial real estate		2,489		2,489		85		2,489		—
Residential		—		—		—		—		—
		2,489		2,489		85		2,489		—
Total:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate	$	2,594	$	2,594	$	85	$	2,601	$	—
Residential	$	114	$	114	$	—	$	118	$	—

Impaired Loans


							Three Months Ended
		As of December 31, 2020					March 31, 2020
			Unpaid				Average		Interest
	Recorded		Principal		Specific		Investment in		Income
	Balance		Balance		Allowance		Impaired Loans		Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	80	$	80	$	—	$	101	$	7
Commercial real estate		110		196		—		761		—
Residential		114		121		—		590		2
Installment		—		14		—		—		—
		304		411		—		1,452		9
Loans with a specific valuation allowance:
Commercial		—		—		—		42		1
Commercial real estate		72	$	72		1		—		—
Residential		—		—		—		—		––
		72		72		1		42		1
Total:
Commercial	$	80	$	80	$	—	$	143	$	8
Commercial real estate	$	182		268	$	1	$	761	$	—
Residential	$	114		121	$	—	$	590	$	2
Installment	$	—		14	$	—	$	—	$	—

Interest income recognized on a cash basis was not materiality different than interest income recognized.

For the TDRs noted in the tables below, the Company extended the maturity dates and granted interest rate concessions as part of each of those loan restructurings. The loans included in the tables are considered impaired and specific loss calculations are performed on the individual loans. In conjunction with the restructuring there were no amounts charged-off.


	Three Months ended March 31, 2021
		Pre- Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment
	(In thousands)
Commercial	1	$	86	$	67
Commercial real estate	—		—		—
Residential	—		—		—
Installment	—		—		—


	Three Months ended March 31, 2021
	Interest						Total
	Only		Term		Combination		Modification
	(In thousands)
Commercial	$	—	$	67	$	—	$	67
Commercial real estate		—		—		—		—
Residential		—		—		—		—
Consumer		—		—		—		—


	Three Months ended March 31, 2020
		Pre- Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment
	(In thousands)
Commercial	2	$	83	$	83
Commercial real estate	—		—		—
Residential	—		—		—
Installment	—		—		—


	Three Months Ended March 31, 2020
	Interest						Total
	Only		Term		Combination		Modification
	(In thousands)
Commercial	$	—	$	83	$	—	$	83
Commercial real estate		—		—		—		—
Residential		—		—		—		—
Consumer		—		—		—		—

During the three months ended March 31, 2021 and 2020, there were no material defaults of any troubled debt restructurings that were modified in the last 12 months. The Company generally considers TDR’s that become 90 days or more past due under the modified terms as subsequently defaulted.