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Note 4 - Loans Receivable and Related Allowance for Loan Losses

3 Months Ended

Mar. 31, 2022

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

4.	Loans Receivable and Related Allowance for Loan Losses

The Corporation’s loans receivable as of the respective dates are summarized as follows:

(Dollar amounts in thousands)	*March 31, 2022*		*December 31, 2021*
Mortgage loans on real estate:
Residential first mortgages	$	273,724	$	273,823
Home equity loans and lines of credit		73,731		75,810
Commercial real estate		347,447		326,341
Total real estate loans		694,902		675,974
Other loans:
Commercial business		61,381		65,877
Consumer		48,917		48,552
Total other loans		110,298		114,429
Total loans, gross		805,200		790,403
Less allowance for loan losses		10,268		10,393
Total loans, net	$	794,932	$	780,010

Included in total loans above are net deferred costs of $3.2 million and $3.3 million at March 31, 2022 and December 31, 2021, respectively. In addition, included in commercial loans at March 31, 2022 and December 31, 2021 were $945,000 and $1.2 million, respectively, of Paycheck Protection Program (PPP) loans that are guaranteed by the Small Business Administration (SBA). The Corporation received $3.7 million of fees related to the origination of these loans, of which $1.3 million was recognized in 2020, $2.4 million was recognized in 2021, $19,000 was recognized in the quarter ended March 31, 2022 and $22,000 is expected to be recognized in future periods 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 situation regarding the 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 the current economic situation.

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.

The allowance for loan losses is based on estimates and actual losses may 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 March 31, 2022, 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 table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:

(Dollar amounts in thousands)	Residential Mortgages			Home Equity & Lines of Credit			Commercial Real Estate			Commercial Business			Consumer			Total
Three months ended March 31, 2022:
Allowance for loan losses:
Beginning Balance	$	2,335		$	525		$	6,253		$	904		$	376		$	10,393
Charge-offs		—			(15	)		—			—			(83	)		(98	)
Recoveries		—			—			47			—			6			53
Provision		(25	)		(25	)		144			(253	)		79			(80	)
Ending Balance	$	2,310		$	485		$	6,444		$	651		$	378		$	10,268

At March 31, 2022:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	7		$	—		$	118		$	3		$	—		$	128
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,303			485			6,326			648			378			10,140
Total	$	2,310		$	485		$	6,444		$	651		$	378		$	10,268
Total loans:
Individually evaluated for impairment	$	287		$	4		$	2,601		$	89		$	—		$	2,981
Acquired loans collectively evaluated for impairment		27,156			6,203			20,108			2,077			523			56,067
Originated loans collectively evaluated for impairment		246,281			67,524			324,738			59,215			48,394			746,152
Total	$	273,724		$	73,731		$	347,447		$	61,381		$	48,917		$	805,200

At December 31, 2021:
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

Three months ended March 31, 2021:
Allowance for loan losses:
Beginning Balance	$	2,774		$	620		$	5,180		$	677		$	329		$	9,580
Charge-offs		—			—			(94	)		—			(90	)		(184	)
Recoveries		—			8			—			—			6			14
Provision		(114	)		(43	)		386			(65	)		111			275
Ending Balance	$	2,660		$	585		$	5,472		$	612		$	356		$	9,685

The following table presents 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 March 31, 2022:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of March 31, 2022						For the three months ended March 31, 2022
	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	$	7	$	68	$	—	$	—
Home equity and lines of credit		—		—		—		—		—		—
Commercial real estate		443		443		118		501		6		6
Commercial business		3		3		3		126		—		—
Consumer		—		—		—		—		—		—
Total	$	514	$	514	$	128	$	695	$	6	$	6

	Impaired Loans with No Specific Allowance
	As of March 31, 2022				For the three months ended March 31, 2022
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	330	$	219	$	223	$	1	$	1
Home equity and lines of credit		4		4		4		—		—
Commercial real estate		2,158		2,158		1,412		31		9
Commercial business		86		86		99		4		4
Consumer		—		—		—		—		—
Total	$	2,578	$	2,467	$	1,738	$	36	$	14

(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 March 31, 2021						For the three months ended March 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	$	69	$	69	$	1	$	35	$	1	$	1
Home equity and lines of credit		—		—		—		—		—		—
Commercial real estate		373		373		33		376		4		4
Commercial business		64		64		6		71		1		1
Consumer		—		—		—		—		—		—
Total	$	506	$	506	$	40	$	482	$	6	$	6

	Impaired Loans with No Specific Allowance
	As of March 31, 2021				For the three months ended March 31, 2021
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	363	$	251	$	290	$	1	$	1
Home equity and lines of credit		4		4		4		—		—
Commercial real estate		1,110		1,094		1,177		12		12
Commercial business		65		65		65		1		1
Consumer		—		—		—		—		—
Total	$	1,542	$	1,414	$	1,536	$	14	$	14

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 generally does not extend additional credit to borrowers with loans classified as TDRs.

At March 31, 2022 and December 31, 2021, the Corporation had $336,000 and $346,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $7,000 and $6,000 of specific allowance for these loans at March 31, 2022 and December 31, 2021, respectively.

During the three months ended March 31, 2022 and 2021, the Corporation did not modify any loans as TDRs.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three months ended March 31, 2022 and 2021, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

COVID-19 related deferrals. Under the provisions of the CARES Act, at the peak, 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. As of March 31, 2022, one loan with a balance of $3.9 million remained on deferral while the remaining loans have resumed normal repayment or have been repaid in full. The characteristics of these modifications were considered short-term and did 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.

The reserve allocation for risk rated loan pools is developed by applying the following factors:

Historic: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A twelve-quarter rolling weighted-average is utilized to estimate probable incurred losses in the portfolios.

Qualitative: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans to allow for: quality of lending policies and procedures; national and local economic and business conditions; changes in the nature and volume of the portfolio; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.

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 a 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 March 31, 2022 and December 31, 2021:

(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2022:
Residential first mortgages	$	272,544	$	—	$	—	$	1,180	$	—	$	273,724
Home equity and lines of credit		73,534		—		—		197		—		73,731
Commercial real estate		—		317,367		7,459		22,621		—		347,447
Commercial business		—		55,593		1,308		4,480		—		61,381
Consumer		48,907		—		—		10		—		48,917
Total loans	$	394,985	$	372,960	$	8,767	$	28,488	$	—	$	805,200

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

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 recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of March 31, 2022 and December 31, 2021:

(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
March 31, 2022:
Residential first mortgages	$	270,100	$	2,190	$	254	$	450	$	730	$	273,724
Home equity and lines of credit		73,030		299		206		74		122		73,731
Commercial real estate		344,447		358		41		—		2,601		347,447
Commercial business		61,030		56		—		206		89		61,381
Consumer		48,738		158		10		—		11		48,917
Total loans	$	797,345	$	3,061	$	511	$	730	$	3,553	$	805,200

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

The following table presents the Corporation’s nonaccrual loans by aging category as of March 31, 2022 and December 31, 2021:

(Dollar amounts in thousands)
	Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
March 31, 2022:
Residential first mortgages	$	190	$	68	$	—	$	472	$	730
Home equity and lines of credit		4		—		—		118		122
Commercial real estate		2,420		9		6		166		2,601
Commercial business		89		—		—		—		89
Consumer		—		—		—		11		11
Total loans	$	2,703	$	77	$	6	$	767	$	3,553

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