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Note 3 - Loans Receivable and Related Allowance for Loan Losses

12 Months Ended

Dec. 31, 2021

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

3.	Loans Receivable and Related Allowance for Loan Losses

The following table summarizes the Corporation’s loans receivable as of December 31:

(Dollar amounts in thousands)	*December 31, 2021*		*December 31, 2020*
Mortgage loans on real estate:
Residential first mortgages	$	273,823	$	308,031
Home equity loans and lines of credit		75,810		87,088
Commercial real estate		326,341		285,625
Total real estate loans		675,974		680,744
Other loans:
Commercial business		65,877		89,139
Consumer		48,552		40,035
Total other loans		114,429		129,174
Total loans, gross		790,403		809,918
Less allowance for loan losses		10,393		9,580
Total loans, net	$	780,010	$	800,338

Included in total loans above are net deferred costs of $3.3 million and $2.5 million at December 31, 2021 and 2020, respectively. In addition, included in commercial loans are $1.2 million and $30.4 million of Paycheck Protection Program (PPP) loans at December 31, 2021 and 2020, respectively, that are guaranteed by the Small Business Administration (SBA). The Corporation received $1.6 million and $2.1 million of fees related to the origination of these loans during 2021 and 2020, respectively, of which $1.3 million was recognized in 2020, $2.4 million was recognized in 2021 and $41,000 is expected to be recognized in 2022 upon forgiveness by the SBA.

An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans. While the Corporation has historically experienced strong trends in asset quality, as a result of the ongoing COVID-19 pandemic, management has recognized the need to incorporate factors into the allowance evaluation to help compensate for the effects of any credit deterioration due to current economic conditions.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

Following is an analysis of the changes in the ALL for the years ended December 31:

(Dollar amounts in thousands)	*2021*			*2020*
Balance at the beginning of the year	$	9,580		$	6,556
Provision for loan losses		1,066			3,247
Charge-offs		(369	)		(473	)
Recoveries		116			250
Balance at the end of the year	$	10,393		$	9,580

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method at December 31, 2021 and 2020:

				Home Equity
	Residential			& Lines			Commercial			Commercial
(Dollar amounts in thousands)	Mortgages			of Credit			Real Estate			Business			Consumer			Total
At December 31, 2021:
Beginning Balance	$	2,774		$	620		$	5,180		$	677		$	329		$	9,580
Charge-offs		—			(41	)		(150	)		—			(178	)		(369	)
Recoveries		—			27			37			19			33			116
Provision (Credit)		(439	)		(81	)		1,186			208			192			1,066
Ending Balance	$	2,335		$	525		$	6,253		$	904		$	376		$	10,393

Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	1		$	—		$	88		$	196		$	—		$	285
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,334			525			6,165			708			376			10,108
Total	$	2,335		$	525		$	6,253		$	904		$	376		$	10,393

Total loans:
Individually evaluated for impairment	$	294		$	4		$	1,225		$	363		$	—		$	1,886
Acquired loans collectively evaluated for impairment		29,573			6,370			21,471			2,055			538			60,007
Originated loans collectively evaluated for impairment		243,956			69,436			303,645			63,459			48,014			728,510
Total	$	273,823		$	75,810		$	326,341		$	65,877		$	48,552		$	790,403

At December 31, 2020:
Beginning Balance	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556
Charge-offs		(27	)		(126	)		(75	)		(163	)		(82	)		(473	)
Recoveries		6			15			107			70			52			250
Provision		486			105			2,250			134			272			3,247
Ending Balance	$	2,774		$	620		$	5,180		$	677		$	329		$	9,580

Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	—		$	—		$	40		$	20		$	—		$	60
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,774			620			5,140			657			329			9,520
Total	$	2,774		$	620		$	5,180		$	677		$	329		$	9,580

Total loans:
Individually evaluated for impairment	$	329		$	3		$	1,639		$	143		$	—		$	2,114
Acquired loans collectively evaluated for impairment		44,209			8,491			30,913			5,131			1,017			89,761
Originated loans collectively evaluated for impairment		263,493			78,594			253,073			83,865			39,018			718,043
Total	$	308,031		$	87,088		$	285,625		$	89,139		$	40,035		$	809,918

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

At December 31, 2021 and 2020, there was no allowance for loan losses allocated to loans acquired from United American Savings Bank (2016), Northern Hancock Bank and Trust Co. (2017) or Community First Bancorp, Inc. (2018) because the unaccreted purchase discount still exceeded the calculated allowance.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2021						For the year ended December 31, 2021
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	68	$	68	$	1	$	28	$	3	$	3
Home equity and lines of credit		—		—		—		—		—		—
Commercial real estate		559		559		88		387		30		30
Commercial business		250		250		196		79		8		8
Consumer		—		—		—		—		—		—
Total	$	877	$	877	$	285	$	494	$	41	$	41

	Impaired Loans with No Specific Allowance
	As of December 31, 2021				For the year ended December 31, 2021
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	338	$	226	$	284	$	3	$	3
Home equity and lines of credit		4		4		4		—		—
Commercial real estate		666		666		990		71		71
Commercial business		113		113		96		5		5
Consumer		—		—		—		—		—
Total	$	1,121	$	1,009	$	1,374	$	79	$	79

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2020						For the year ended December 31, 2020
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	—	$	—	$	—	$	43	$	—	$	—
Home equity and lines of credit		—		—		—		2		—		—
Commercial real estate		380		380		40		106		17		11
Commercial business		78		78		20		53		5		4
Consumer		—		—		—		—		—		—
Total	$	458	$	458	$	60	$	204	$	22	$	15

	Impaired Loans with No Specific Allowance
	As of December 31, 2020				For the year ended December 31, 2020
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	440	$	329	$	300	$	7	$	7
Home equity and lines of credit		3		3		2		—		—
Commercial real estate		1,259		1,259		1,167		76		66
Commercial business		65		65		80		10		6
Consumer		—		—		—		—		—
Total	$	1,767	$	1,656	$	1,549	$	93	$	79

Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans presented above or in the tables that follow based on the amounts not being material.

Troubled debt restructurings (TDR). The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would not have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do not include forgiveness of principal balances. The Corporation has no legal obligation to extend additional credit to borrowers with loans classified as TDRs.

At December 31, 2021 and 2020, the Corporation had $346,000 and $396,000, respectively, of loans classified as TDRs, which are included in impaired loans above. At December 31, 2021 and 2020, the Corporation had $6,000 and $6,000, respectively, of the allowance for loan losses allocated to these specific loans.

The Corporation did not have any loans modified to TDR status for the year ending December 31, 2021. During the year ended December 31, 2020, the Corporation modified one commercial term loan with a recorded investment of $64,000. In order to cure the delinquency on the loan, the maturity date was extended by 32 months and the loan payments were reamortized over the extended period. At December 31, 2021 and 2020, there was $6,000 of allowance for loan losses allocated to this loan. The modification did not have a material impact on the Corporation's income statement during the period.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the year ended December 31, 2021 and 2020, there were no loans classified as TDRs which defaulted within twelve months of their modification.

Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), during 2020 the Corporation had granted modifications on 410 loans with an aggregate balance of $110.4 million, representing 13.6% of gross outstanding loan balances. Of these loans, 31 loans with an aggregate balance of $32.1 million remained on deferral at December 31, 2020. As of December 31, 2021, one loan with a balance of $3.9 million remained on deferral. In each respective period, the remainder of the loans which had been on deferral either resumed normal repayment or were repaid in full. The characteristics of these modifications are considered short-term and do not result in a reclassification of these loans to TDR status.

Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.

Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.

Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit. These homogeneous loans are not rated unless identified as impaired.

Management uses the following definitions for risk ratings:

Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.

Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.

Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower.

Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of December 31, 2021 and 2020:

(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2021:
Residential first mortgages	$	272,722	$	—	$	—	$	1,101	$	—	$	273,823
Home equity and lines of credit		75,408		—		—		402		—		75,810
Commercial real estate		—		295,891		7,494		22,956		—		326,341
Commercial business		—		59,628		1,356		4,893		—		65,877
Consumer		48,538		—		—		14		—		48,552
Total loans	$	396,668	$	355,519	$	8,850	$	29,366	$	—	$	790,403

December 31, 2020:
Residential first mortgages	$	306,237	$	—	$	—	$	1,794	$	—	$	308,031
Home equity and lines of credit		86,867		—		—		221		—		87,088
Commercial real estate		—		249,357		19,669		16,599		—		285,625
Commercial business		—		83,059		2,054		4,026		—		89,139
Consumer		39,987		—		—		48		—		40,035
Total loans	$	433,091	$	332,416	$	21,723	$	22,688	$	—	$	809,918

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a required payment is past due. As of December 31, 2020 and 2021, the Corporation had made short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment for borrowers. Under the CARES Act, borrowers that are considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As such, the modifications made under the CARES Act are not included in the Corporation's past due or nonaccrual loans as of December 31, 2021 and 2020. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of December 31, 2021 and 2020:

(Dollar amounts in thousands)
	Performing						Nonperforming
	Accruing Loans Not Past Due		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccrual		Total
December 31, 2021:
Residential first mortgages	$	270,221	$	1,913	$	588	$	291	$	810	$	273,823
Home equity and lines of credit		74,853		230		325		160		242		75,810
Commercial real estate		325,018		73		—		—		1,250		326,341
Commercial business		65,305		—		—		234		338		65,877
Consumer		48,344		117		77		—		14		48,552
Total loans	$	783,741	$	2,333	$	990	$	685	$	2,654	$	790,403

December 31, 2020:
Residential first mortgages	$	304,161	$	1,836	$	239	$	176	$	1,619	$	308,031
Home equity and lines of credit		86,093		446		328		146		75		87,088
Commercial real estate		283,373		580		41		18		1,613		285,625
Commercial business		88,614		72		46		239		168		89,139
Consumer		39,917		28		42		—		48		40,035
Total loans	$	802,158	$	2,962	$	696	$	579	$	3,523	$	809,918

The following table presents the Corporation’s nonaccrual loans by aging category as of December 31, 2021 and 2020:

(Dollar amounts in thousands)
	Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
December 31, 2021:
Residential first mortgages	$	196	$	—	$	69	$	545	$	810
Home equity and lines of credit		4		—		—		238		242
Commercial real estate		1,052		10		—		188		1,250
Commercial business		338		—		—		—		338
Consumer		—		—		—		14		14
Total loans	$	1,590	$	10	$	69	$	985	$	2,654

December 31, 2020:
Residential first mortgages	$	220	$	70	$	—	$	1,329	$	1,619
Home equity and lines of credit		4		—		—		71		75
Commercial real estate		1,016		—		24		573		1,613
Commercial business		168		—		—		—		168
Consumer		—		—		—		48		48
Total loans	$	1,408	$	70	$	24	$	2,021	$	3,523