Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2021

Loans and Allowance for Loan Losses

Loans and Allowance for Loan Losses

Note 3:      Loans and Allowance for Loan Losses

Categories of loans include:

	September 30,		December 31,
	2021		2020
	(In thousands)
Commercial loans	$	99,880	$	103,277
Commercial real estate		266,023		246,167
Residential real estate		89,280		85,789
Installment loans		6,936		8,258
Total gross loans		462,119		443,491
Less allowance for loan losses		(4,123)		(5,113)
Total loans	$	457,996	$	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 and Installment

Residential and installment 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 installment 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 and nine month periods ended September 30, 2021

			Commercial
	Commercial		Real Estate		Residential		Installment		Total
	(In thousands)
Allowance for loan losses:
Balance, July 1, 2021	$	1,140	$	1,710	$	1,353	$	339	$	4,542
Provision (credit) charged to expense		(249)		(155)		(34)		38		(400)
Losses charged off		—						(31)		(31)
Recoveries		3		—		—		9		12
Balance, September 30, 2021	$	894	$	1,555	$	1,319	$	355	$	4,123
Balance, January 1, 2021	$	1,397	$	1,821	$	1,471	$	424	$	5,113
Provision (credit) charged to expense		(428)		(266)		(133)		(28)		(855)
Losses charged off		(78)		—		(26)		(69)		(173)
Recoveries		3		—		7		28		38
Balance, September 30, 2021	$	894	$	1,555	$	1,319	$	355	$	4,123
Allocation:
Ending balance: individually evaluated for impairment	$	—	$	85	$	—	$	—	$	85
Ending balance: collectively evaluated for impairment	$	894	$	1,470	$	1,319	$	355	$	4,038
Loans:
Ending balance: individually evaluated for impairment	$	—	$	2,640	$	—	$	—	$	2,640
Ending balance: collectively evaluated for impairment	$	99,880	$	263,383	$	89,280	$	6,936	$	459,479

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three and nine month period ended September 30, 2020

					Residential
			Commercial		Real
	Commercial		Real Estate		Estate		Installment		Total
	(In thousands)
Allowance for loan losses:
Balance, July 1, 2020	$	2,344	$	751	$	600	$	320	$	4,015
Provision charged to expense		(1,031)		1,202		988		174		1,333
Losses charged off		(5)		(63)		(21)		(55)		(144)
Recoveries		13		—		1		10		24
Balance, September 30, 2020	$	1,321	$	1,890	$	1,568	$	449	$	5,228
Balance, January 1, 2020	$	568	$	792	$	572	$	299	$	2,231
Provision charged to expense		777		1,288		1,027		212		3,304
Losses charged off		(47)		(190)		(33)		(115)		(385)
Recoveries		23		—		2		53		78
Balance, September 30, 2020	$	1,321	$	1,890	$	1,568	$	449	$	5,228
Allocation:
Ending balance: individually evaluated for impairment	$	4	$	21	$	—	$	—	$	25
Ending balance: collectively evaluated for impairment	$	1,317	$	1,869	$	1,568	$	449	$	5,203
Loans:
Ending balance: individually evaluated for impairment	$	22	$	614	$	525	$	134	$	1,295
Ending balance: collectively evaluated for impairment	$	100,438	$	244,729	$	88,093	$	8,721	$	441,981

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.

	September 30, 2021
			Commercial
Loan Class	Commercial		Real Estate		Residential		Installment		Total
	(In thousands)
Pass Grade	$	99,880	$	263,166	$	89,280	$	6,936	$	459,262
Special Mention		—		217		—		—		217
Substandard		—		2,640		—		—		2,640
Doubtful		—		—		—		—		—
	$	99,880	$	266,023	$	89,280	$	6,936	$	462,119

	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 current and past year to date periods presented.

Loan Portfolio Aging Analysis

As of September 30, 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	$	—	$	—	$	—	$	—	$	—	$	99,880	$	99,880
Commercial real estate		—		38		—		2,591		2,629		263,394		266,023
Residential		101		79		—		279		459		88,821		89,280
Installment		4		—		—		—		4		6,932		6,936
Total	$	105	$	117	$	—	$	2,870	$	3,092	$	459,027	$	462,119

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

							For the three months ended				For the nine months ended
		As of September 30, 2021					September 30, 2021				September 30, 2021
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Specific		Investment in		Income		Investment in		Income
	Balance		Balance		Allowance		Impaired Loans		Recognized		Impaired Loans		Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	—	$	—	$	—	$	—	$	2	$	156	$	3
Commercial real estate		151		151		—		158		—		—		—
Residential		—		—		—		—		—		—		—
Installment		—		—		—		—		—		—		—
		151		151		—		158		2		156		3
Loans with a specific valuation allowance:
Commercial		—		—		—		—		—		—		—
Commercial real estate		2,489		2,489		85		2,489		—		2,489		—
Residential		—		—		—		—		—		—		––
Installment		––		––		––		––		—		—		—
		2,489		2,489		85		2,489		—		2,489		—
Total:
Commercial	$	—	$	—	$	—	$	—	$	2	$	—	$	—
Commercial real estate	$	2,640	$	2,640	$	85	$	85	$	—	$	2,645	$	3
Residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Installment	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Impaired Loans

							For the three months ended				For the nine months ended
		As of December 31, 2020					September 30, 2020				September 30, 2020
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Specific		Investment in		Income		Investment in		Income
	Balance		Balance		Allowance		Impaired Loans		Recognized		Impaired Loans		Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	80	$	80	$	—	$	—	$	(5)	$	—	$	1
Commercial real estate		110		196		—		593		9		589		14
Residential		114		121		—		525		7		493		21
Installment		—		14		—		150		1		151		5
		304		411		—		1,268		12		1,233		41
Loans with a specific valuation allowance:
Commercial		—		—		—		23		—		24		1
Commercial real estate		72		72		1		92		3		92		3
Residential		––		—		—		—		––		—		—
Installment		––		—		—		––		––		––		—
		72		72		1		115		3		116		4
Total:
Commercial	$	80	$	80	$	—	$	23	$	(5)	$	24	$	2
Commercial real estate	$	182	$	268	$	1	$	685	$	12	$	681	$	17
Residential	$	114	$	121	$	—	$	525	$	7	$	493	$	21
Installment	$	—	$	14	$	—	$	150	$	1	$	151	$	5

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 September 30, 2021
		Pre- Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment
	(In thousands)
Commercial	—	$	—	$	—
Commercial real estate	—		—		—
Residential	—		—		—
Installment	—		—		—

	Three Months Ended September 30, 2021
	Interest						Total
	Only		Term		Combination		Modification
	(In thousands)
Commercial	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—
Residential		—		—		—		—
Consumer		—		—		—		—

	Nine Months ended September 30, 2021
		Pre- Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment
	(In thousands)
Commercial	—	$	—	$	—
Commercial real estate	—		—		—
Residential	—		—		—
Installment	—		—		—

	Nine Months Ended September 30, 2021
	Interest						Total
	Only		Term		Combination		Modification
	(In thousands)
Commercial	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—
Residential		—		—		—		—
Consumer		—		—		—		—

	Three Months ended September 30, 2020
		Pre- Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment
	(In thousands)
Commercial	––	$	––	$	––
Commercial real estate	––		––		––
Residential	––		––		––
Installment	––		––		––

	Three Months Ended September 30, 2020
	Interest						Total
	Only		Term		Combination		Modification
	(In thousands)
Commercial	$	—	$	––	$	—	$	––
Commercial real estate		––		––		––		––
Residential		––		––		––		––
Consumer		––		––		––		––

	Nine Months ended September 30, 2020
		Pre- Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment
	(In thousands)
Commercial	3	$	67	$	67
Commercial real estate	1		86		86
Residential	––		––		––
Installment	––		––		––

	Nine Months Ended September 30, 2020
	Interest						Total
	Only		Term		Combination		Modification
	(In thousands)
Commercial	$	––	$	23	$	44	$	67
Commercial real estate		––		86		––		87
Residential		––		––		––		––
Consumer		––		––		––		––

During the nine months ended September 30, 2021 and 2020 troubled debt restructurings did not have an impact on the allowance for loan losses. At September 30, 2021 and 2020 and for three and nine month periods then ended, there were no 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.