NOTE 5 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company's loan portfolio is subject to varying degrees of credit risk. These risks entail both general risks, which are inherent in the lending process, and risks specific to individual borrowers. The Company's credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type.

The Company currently manages its credit products and the respective exposure to loan losses by specific portfolio segments and classes, which are levels at which the Company develops and documents its systematic methodology to determine the allowance for loan losses. The Company believes each portfolio segment has unique risk characteristics. The Company's loans held for investment is divided into three portfolio segments: loans secured by real estate, commercial and industrial loans, and consumer loans. Each of these segments is further divided into loan classes for purposes of estimating the allowance for credit losses.

For additional information, including the accounting policies and CECL methodology used to estimate the allowance for credit losses, see Note 2 “Basis of Presentation” and Note 7 “Recent Accounting Pronouncements.”

The following table is a summary of loans receivable by loan portfolio segment and class.


	March 31,			December 31,
	2021			2020
(dollars in thousands)	Amount		%	Amount		%
Loans Secured by Real Estate
Construction and land	$	3,174	1	$	2,553	1
Farmland		349	—		350	—
Single-family residential		82,820	34		82,520	33
Multi-family		6,069	2		6,105	2
Commercial		55,723	23		57,027	23
Total loans secured by real estate		148,135			148,555
Commercial and Industrial
Commercial and industrial		9,521	4		10,800	4
SBA guaranty		7,192	3		7,200	3
Comm SBA PPP		11,244	5		9,912	4
Total commercial and industrial loans		27,957			27,912
Consumer Loans
Consumer		2,482	1		3,063	1
Automobile		68,279	27		74,242	29
Total consumer loans		70,761			77,305

Loans, net of deferred fees and costs		246,853	100		253,772	100
Less: Allowance for loan losses	$	(2,921)		$	(1,476)
Loans, net		243,932			252,296

The Bank’s net loans totaled $243.9 million at March 31, 2021, compared to $252.3 million at December 31, 2020, a decrease of $8.4 million, or 3.32%. Construction and land loans increased from $2.6 million at December 31, 2020 to $3.2 million at March 31, 2021, a decrease of $0.6 million, or 24.34%. Farmland loans decreased by $0.1 million, or 0.42%, from $0.4 million at December 31, 2020 to $0.3 million at March 31, 2021. Single-family residential loans increased from $82.5 million at December 31, 2020 to $82.8 million at March 31, 2021, an increase of $0.3 million, or 0.36%. Multi-family residential loans were $6.1 million at March 31, 2021 and December 31, 2020. Commercial real estate loans decreased by $1.3 million to $55.7 million at March 31, 2021 from $57.0 million at December 31, 2020, a decrease of 2.29%. Commercial and industrial loans decreased by $1.3 million, or 11.84%, to $9.5 million at March 31, 2021 compared to $10.8 million at December 31, 2021. SBA guaranty loans were $7.2 million at March 31, 2021 and December 31, 2020. The Commercial Small Business Administration (SBA) Paycheck Protection Program (PPP) loan balance was $11.2 million at March 31, 2021 compared to $9.9 million at December 31, 2020, an increase of $1.3 million or 13.44%. This loan type is discussed in “Item 5. Other Information.” Consumer loans decreased by $0.6 million, or 18.97% to $2.5 million at March 31, 2021, compared to $3.1 million at December 31, 2020. Automobile loans decreased from $74.2 million at December 31, 2020 to $68.3 million at March 31, 2021, a decrease of $6.0 million or 8.03%.

Credit Risk and Allowance for Loan Losses. Credit risk is the risk of loss arising from the inability of a borrower to meet his or her obligations and entails both general risks, which are inherent in the process of lending, and risks specific to individual borrowers. Credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type. Residential mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans secured by personal property, such as auto loans, generally experience medium credit losses. Unsecured loan products, such as personal revolving credit, have the highest credit loss experience and for that reason, the Bank has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Inconsistent economic conditions may have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.

On January 1, 2021, the Company early adopted ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”) which replaces the “incurred loss approach” for estimating credit losses with an expected loss methodology. The incurred loss model delayed the recognition of credit losses until it was probable that a loss had occurred, while the CECL model requires the immediate recognition of expected credit losses over the contractual term for financial instruments that fall within the scope of CECL at the date of origination or purchase of the financial instrument. The CECL model, which is applicable to the measurement of credit losses on financial assets measured at amortized cost and certain off-balance sheet credit exposures, affects the Company’s estimates of the allowance for credit losses for our loan portfolio and the reserve for our off-balance sheet credit exposures related to loan commitments. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance, based on evaluations of the collectability of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations are performed for each class of loans and take into consideration factors such as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, value of collateral securing the loans and current economic conditions and trends that may affect the borrowers’ ability to pay. For example, delinquencies in unsecured loans and indirect automobile installment loans will be reserved for at significantly higher ratios than loans secured by real estate. Finally, the Company considers forecasts about future economic conditions or changes in collateral values that are reasonable and supportable. Based on that analysis, the Bank deems its allowance for loan losses in proportion to the total nonaccrual loans and past due loans to be sufficient.

As a result of the adoption of ASC 326 in the first quarter of 2021, with an effective date of January 1, 2021, there is a lack of comparability in both the allowance and provisions for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2021 are presented using the CECL methodology, while comparative period information continues to be reported in accordance with the incurred loss methodology in effect for prior years.

Transactions in the allowance for credit losses for the three months ended March 31, 2021 and the year ended December 31, 2020 were as follows:


	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
March 31, 2021	Construction				Single-family						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Balance, beginning of year	$	9	$	2	$	513	$	39	$	218	$	67	$	48	$	—	$	11	$	569	$	1,476
Impact of ASC 326 adoption		16		9		854		63		199		120		(6)		—		46		273		1,574
Charge-offs		—		—		—		—		—		—		—		—		—		(81)		(81)
Recoveries		—		—		275		—		—		—		—		—		—		81		356
Provision for loan losses		7		(1)		(272)		—		(8)		(19)		(1)		—		(11)		(99)		(404)

Balance, end of quarter	$	32	$	10	$	1,370	$	102	$	409	$	168	$	41	$	—	$	46	$	743	$	2,921

Individually evaluated for impairment:
Balance in allowance	$	—	$	—	$	11	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	11
Related loan balance		—		—		38		—		—		—		—		—		—		—		38

Collectively evaluated for impairment:
Balance in allowance	$	32	$	10	$	1,359	$	102	$	409	$	168	$	41	$	—	$	46	$	743	$	2,910
Related loan balance		3,174		349		82,782		6,069		55,723		9,521		7,192		11,244		2,482		68,279		246,815


	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
December 31, 2020	Construction				Single-family						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Balance, beginning of year	$	24	$	2	$	849	$	40	$	241	$	69	$	25	$	—	$	11	$	805	$	2,066
Charge-offs		—		—		—		—		—		—		—		—		—		(392)		(392)
Recoveries		—		—		266		—		—		20		—		—		6		199		491
Provision for loan losses		(15)		—		(602)		(1)		(23)		(22)		23		—		(6)		(43)		(689)

Balance, end of the year	$	9	$	2	$	513	$	39	$	218	$	67	$	48	$	—	$	11	$	569	$	1,476

Individually evaluated for impairment:
Balance in allowance	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	11	$	—	$	11
Related loan balance		—		—		132		—		—		4,493		—		—		39		—		4,664

Collectively evaluated for impairment:
Balance in allowance	$	9	$	2	$	513	$	39	$	218	$	67	$	48	$	—	$	—	$	569	$	1,465
Related loan balance		2,553		350		82,388		6,105		57,027		6,307		7,200		9,912		3,024		74,242		249,108


	March 31,			March 31,
(dollars in thousands)	2021			2020
Average loans	$	248,920		$	281,335
Net charge offs to average loans (annualized)		(0.44)	%		0.10	%

During the three-month period ended March 31, 2021, loans to 8 borrowers and related entities totaling approximately $81,000 were determined to be uncollectible and were charged off. During the three-month period ending March 31, 2020, loans to 14 borrowers and related entities totaling approximately $125,000 were determined to be uncollectible and were charged off.

Reserve for Unfunded Commitments. Loan commitments and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Bank generally requires collateral to support financial instruments with credit risk on the same basis as it does for on-balance sheet instruments. The collateral requirement is based on management's credit evaluation of the counter party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

As of March 31, 2021, and 2020, the Bank had outstanding commitments totaling $31.8 million and $31.2 million, respectively. The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws, including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class. The following table shows the Bank’s reserve for unfunded commitments arising from these transactions:


	Three Months Ended
	Ended March 31,
(dollars in thousands)	2021		2020
Beginning balance	$	33	$	37
Impact of ASC 326 adoption		457		—
Reduction of unfunded reserve		(12)		—
Provisions charged to operations		—		13

Ending balance	$	478	$	50

Contractual Obligations and Commitments. No material changes, outside the normal course of business, have been made during the first quarter of 2021.

Asset Quality. The following tables set forth the amount of the Bank’s current, past due, and non-accrual loans by categories of loans and restructured loans, at the dates indicated.


At March 31, 2021					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total
Loans Secured by Real Estate
Construction and land	$	3,174	$	—	$	—	$	—	$	3,174
Farmland		349		—		—		—		349
Single-family residential		82,616		51		16		137		82,820
Multi-family		6,069		—		—		—		6,069
Commercial		51,212		345		—		4,166		55,723
Total loans secured by real estate		143,420		396		16		4,303		148,135
Commercial and Industrial
Commercial and industrial		9,521		—		—		—		9,521
SBA guaranty		7,192		—		—		—		7,192
Comm SBA PPP		11,244		—		—		—		11,244
Total commercial and industrial loans		27,957		—		—		—		27,957
Consumer Loans
Consumer		2,481		1		—		—		2,482
Automobile		67,919		221		—		139		68,279
Total consumer loans		70,400		222		—		139		70,761

	$	241,777	$	618	$	16	$	4,442	$	246,853


At December 31, 2020					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total
Loans Secured by Real Estate
Construction and land	$	2,553	$	—	$	—	$	—	$	2,553
Farmland		350		—		—		—		350
Single-family residential		82,232		—		18		270		82,520
Multi-family		6,105		—		—		—		6,105
Commercial		52,245		753		—		4,029		57,027
Total loans secured by real estate		143,485		753		18		4,299		148,555
Commercial and Industrial										—
Commercial and industrial		10,800		—		—		—		10,800
SBA guaranty		7,200		—		—		—		7,200
Comm SBA PPP		9,912		—		—		—		9,912
Total commercial and industrial loans		27,912		—		—		—		27,912
Consumer Loans										—
Consumer		3,028		1		—		34		3,063
Automobile		73,551		512		—		179		74,242
Total consumer loans		76,579		513		—		213		77,305
										0
	$	247,976	$	1,266	$	18	$	4,512	$	253,772

The balances in the above charts have not been reduced by the allowance for credit losses. For the period ending March 31, 2021, the allowance for loan loss is $2.9 million. For the period ending December 31, 2020, the allowance for loan loss is $1.5 million.

Non-accrual loans with specific reserves at March 31, 2021 are comprised of:

Consumer loans – One loan to one borrower that totaled $37,961 with specific reserves of $10,589 established for the loan, which was also a troubled debt restructured loan.

Below is a summary of the recorded investment amount and related allowance for losses of the Bank’s impaired loans at March 31, 2021 and December 31, 2020.


March 31, 2021			Unpaid		Interest				Average
(dollars in thousands)	Recorded		Principal		Income		Specific		Recorded
	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—
Single-family residential		27		38		1		11		49
Multi-family		—		—		—		—		—
Commercial		—		—		—		—		—
Total loans secured by real estate		27		38		1		11		49
Commercial and Industrial
Commercial and industrial		—		—		—		—		—
SBA guaranty		—		—		—		—		—
Total commercial and industrial loans		—		—		—		—		—
Consumer Loans
Consumer		—		—		—		—		—
Automobile		—		—		—		—		—
Total consumer loans		—		—		—		—		—
Total impaired loans with specific reserves	$	27	$	38	$	1	$	11	$	49

Impaired loans with no specific reserve:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	n/a	$	—
Farmland		—		—		—		n/a		—
Single-family residential		99		99		—		n/a		100
Multi-family		—		—		—		n/a		—
Commercial		4,166		4,166		286		n/a		4,777
Total loans secured by real estate		4,265		4,265		286		—		4,877
Commercial and Industrial
Commercial and industrial		—		—		—		n/a		—
SBA guaranty		—		—		—		n/a		—
Total commercial and industrial loans		—		—		—		—		—
Consumer Loans
Consumer		—		—		—		n/a		—
Automobile		139		139		2		n/a		149
Total consumer loans		139		139		2		n/a		149
Total impaired loans with no specific reserve	$	4,404	$	4,404	$	288	$	—	$	5,027


December 31, 2020			Unpaid		Interest				Average
(dollars in thousands)	Recorded		Principal		Income		Specific		Recorded
	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—
Single-family residential		28		39		2		11		50
Multi-family		—		—		—		—		—
Commercial		—		—		—		—		—
Total loans secured by real estate		28		39		2		11		50
Commercial and Industrial
Commercial and industrial		—		—		—		—		—
SBA guaranty		—		—		—		—		—
Total commercial and industrial loans		—		—		—		—		—
Consumer Loans
Consumer		—		—		—		—		—
Automobile		—		—		—		—		—
Total consumer loans		—		—		—		—		—
Total impaired loans with specific reserves	$	28	$	39	$	2	$	11	$	50

Impaired loans with no specific reserve:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	n/a	$	—
Farmland		—		—		—		n/a		—
Single-family residential		171		322		—		n/a		544
Multi-family		—		—		—		n/a		—
Commercial		4,493		4,493		185		n/a		4,315
Total loans secured by real estate		4,664		4,815		185		—		4,859
Commercial and Industrial
Commercial and industrial		—		—		—		n/a		—
SBA guaranty		—		—		—		n/a		—
Total commercial and industrial loans		—		—		—		—		—
Consumer Loans
Consumer		34		34		4		n/a		43
Automobile		178		178		10		n/a		227
Total consumer loans		212		212		14		n/a		270
Total impaired loans with no specific reserve	$	4,876	$	5,027	$	199	$	—	$	5,129


	March 31,			December 31,
(dollars in thousands)	2021			2020

Troubled debt restructured loans	$	38		$	39
Non-accrual and 90+ days past due and still accruing loans to average loans		1.79	%		1.63	%
Allowance for loan losses to nonaccrual & 90+ days past due and still accruing loans		65.5	%		32.6	%

At March 31, 2021, there was one troubled debt restructured loan consisting of a consumer loan in the amount of $37,961. The consumer loan is in a nonaccrual status.

The following table shows the activity for non-accrual loans for the three months ended March 31, 2020 and 2021.


	Loans Secured By Real Estate						Consumer Loans
	Single-family
(dollars in thousands)	Residential		Multi-family		Commercial		Consumer		Automobile		Total

December 31, 2019	$	790	$	24	$	3,139	$	51	$	123	$	4,127
Transfers into nonaccrual		—		—		—		—		177		177
Loans paid down/payoffs		(11)		(4)		(32)		(5)		(22)		(74)
Loans returned to accrual status		—		—		—		—		(17)		(17)
Loans charged off		—		—		—		—		(125)		(125)

March 31, 2020	$	779	$	20	$	3,107	$	46	$	136	$	4,088


December 31, 2020	$	270	$	—	$	4,029	$	34	$	179	$	4,512
Transfers into nonaccrual		—		—		574		—		69		643
Loans paid down/payoffs		(133)		—		(437)		(1)		(27)		(598)
Loans returned to accrual status	$	—	$	—	$	—	$	(33)	$	—	$	(33)
Loans charged off		—		—		—		—		(82)		(82)

March 31, 2021	$	137	$	—	$	4,166	$	—	$	139	$	4,442

Other Real Estate Owned. At March 31, 2021 and December 31, 2020, the Company had $575,000 in real estate acquired in partial or total satisfaction of debt. All such properties are initially recorded at the lower of cost or fair value (net realizable value) at the date acquired and carried on the balance sheet as other real estate owned. Losses arising at the date of acquisition are charged against the allowance for credit losses. Subsequent write-downs that may be required and expense of operation are included in noninterest expense. Gains and losses realized from the sale of other real estate owned were included in noninterest income.

Credit Quality Information

In addition to monitoring the performance status of the loan portfolio, the Company utilizes a risk rating scale (1-8) to evaluate loan asset quality for all loans. Loans that are rated 1-4 are classified as pass credits. For the pass rated loans, management believes there is a low risk of loss related to these loans and, as necessary, credit may be strengthened through improved borrower performance and/or additional collateral.

The Bank’s internal risk ratings are as follows:

Superior – minimal risk. (normally supported by pledged deposits, United States government securities, etc.)

Above Average - low risk. (all of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Average – moderately low risk. (most of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Acceptable – moderate risk. (the weighted overall risk associated with this credit based on each of the bank’s creditworthiness criteria is acceptable)

Other Assets Especially Mentioned – moderately high risk. (possesses deficiencies which corrective action by the bank would remedy; potential watch list)

Substandard – (the bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected)

Doubtful – (weaknesses make collection or liquidation in full, based on currently existing facts, improbable)

Loss – (of little value; not warranted as a bankable asset)

The following tables provides information with respect to the Company's credit quality indicators by loan portfolio segment at March 31, 2021 and December 31, 2020:


	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
March 31, 2021	Construction				Single-family						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Pass	$	3,174	$	349	$	82,721	$	6,069	$	51,557	$	9,521	$	7,192	$	11,244	$	2,482	$	68,140	$	242,449
Special mention		—		—		—		—		559		—		—		—		—		—		559
Substandard		—		—		99		—		3,607		—		—		—		—		88		3,794
Doubtful		—		—		—		—		—		—		—		—		—		51		51
Loss		—		—		—		—		—		—		—		—		—		—		—

	$	3,174	$	349	$	82,820	$	6,069	$	55,723	$	9,521	$	7,192	$	11,244	$	2,482	$	68,279	$	246,853

Nonaccrual	$	—	$	—	$	137	$	—	$	4,166	$	—	$	—	$	—	$	—	$	139	$	4,442
Troubled debt restructures	$	—	$	—	$	38	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	38
Number of TDRs accounts		—		—		1		—		—		—		—		—		—		—		1
Non-performing TDRs	$	—	$	—	$	38	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Number of non-performing TDR accounts		—		—		1		—		—		—		—		—		—		—		1


	Loans Secured By Real Estate										Commercial and Industrial Loans						Consumer Loans
December 31, 2020	Construction				Singlefamily						Commercial				Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multifamily		Commercial		and Industrial		SBA Guaranty		SBA PPP		Consumer		Automobile		Total

Pass	$	2,553	$	350	$	82,310	$	6,105	$	52,534	$	10,800	$	7,200	$	9,912	$	3,030	$	74,064	$	248,858
Special mention		—		—		—		—		—		—		—		—		—		—		—
Substandard		—		—		210		—		4,493		—		—		—		33		62		4,798
Doubtful		—		—		—		—		—		—		—		—		—		116		116
Loss		—		—		—		—		—		—		—		—		—		—		—

	$	2,553	$	350	$	82,520	$	6,105	$	57,027	$	10,800	$	7,200	$	9,912	$	3,063	$	74,242	$	253,772

Nonaccrual	$	—	$	—	$	270	$	—	$	4,029	$	—	$	—	$	—	$	34	$	179	$	4,512
Troubled debt restructures	$	—	$	—	$	39	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	39
Number of TDRs accounts		—		—		1		—		—		—		—		—		—		—		1
Non-performing TDRs	$	—	$	—	$	39	$	—	$	—	$	—	$	—	$	—	$	39	$	—	$	39
Number of non-performing TDR accounts		—		—		1		—		—		—		—		—		1		—		1