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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2022

Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31, include:


	2022		2021

	(In thousands)
Commercial loans	$	90,548	$	90,892
Commercial real estate		270,312		266,777
Residential real estate		94,012		90,132
Installment loans		6,003		6,571
Total gross loans		460,875		454,372
Less allowance for loan losses		(2,052)		(3,673)
Total loans	$	458,823	$	450,699

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 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.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2022 and 2021:


	2022
			Commercial
	Commercial		Real Estate		Residential		Installment		Unallocated		Total

	(In thousands)
Allowance for loan losses:
Balance, beginning of year	$	1,046	$	1,235	$	1,121	$	271	$	—	$	3,673
(Credit) Provision charged to expense		(842)		141		(303)		49		—		(955)
Losses charged off		(16)		(561)		(2)		(143)		—		(722)
Recoveries		27		—		—		29		—		56
Balance, end of year	$	215	$	815	$	816	$	206	$	—	$	2,052
Ending balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively evaluated for impairment	$	215	$	815	$	816	$	206	$	—	$	2,052
Loans:
Ending balance: individually evaluated for impairment	$	—	$	123	$	—	$	—	$	—	$	123
Ending balance: collectively evaluated for impairment	$	90,548	$	270,189	$	94,012	$	6,003	$	—	$	460,875


	2021
			Commercial
	Commercial		Real Estate		Residential		Installment		Unallocated		Total

	(In thousands)
Allowance for loan losses:
Balance, beginning of year	$	1,397	$	1,821	$	1,471	$	424	$	—	$	5,113
Provision charged to expense		(276)		(586)		(331)		(62)		—		(1,255)
Losses charged off		(78)		—		(26)		(126)		—		(230)
Recoveries		3		—		7		35		—		45
Balance, end of year	$	1,046	$	1,235	$	1,121	$	271	$	—	$	3,673
Ending balance: individually evaluated for impairment	$	—	$	230	$	—	$	—	$	—	$	230
Ending balance: collectively evaluated for impairment	$	1,046	$	1,005	$	1,121	$	271	$	—	$	3,443
Loans:
Ending balance: individually evaluated for impairment	$	—	$	3,933	$	—	$	—	$	—	$	3,933
Ending balance: collectively evaluated for impairment	$	90,892	$	262,844	$	90,132	$	6,571	$	—	$	450,439

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 allowance for loan loss estimate, 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.

We have successfully maintained credit-related strength and stability within our loan portfolio over the course of the past two years during the pandemic-induced economic downturn and this trend continued for our Company this past year. For the years ended December 31, 2022 and 2021 the Company recorded a credit to the loan loss provision of $955,000 and $1,255,000, respectively.

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 following table shows the portfolio quality indicators as of December 31, 2022:


			Commercial
Loan Class	Commercial		Real Estate		Residential		Installment		Total

	(In thousands)
Pass Grade	$	90,548	$	262,472	$	94,012	$	6,003	$	453,035
Special Mention		—		4,066		—		—		4,066
Substandard		—		3,774		—		—		3,774
Doubtful		—		—		—		—		—
	$	90,548	$	270,312	$	94,012	$	6,003	$	460,875

The following table shows the portfolio quality indicators as of December 31, 2021:


			Commercial
Loan Class	Commercial		Real Estate		Residential		Installment		Total

	(In thousands)
Pass Grade	$	90,892	$	254,760	$	90,132	$	6,571	$	442,355
Special Mention		—		4,115		—		—		7,943
Substandard		—		7,902		—		—		4,074
Doubtful		—		—		—		—		—
	$	90,892	$	266,777	$	90,132	$	6,571	$	454,372

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant methodology changes were made during 2022 and 2021.

The following table shows the loan portfolio aging analysis of the recorded investment in loans as of December 31, 2022:


	30‑59 Days		60‑89 Days		Greater
	Past		Past		Than 90				Total Past
	Due and		Due and		Days and		Non		Due and				Total Loans
	Accruing		Accruing		Accruing		Accrual		Non Accrual		Current		Receivable

	(In thousands)
Commercial	$	126	$	—	$	—	$	—	$	126	$	90,422	$	90,548
Commercial real estate		158		—		—		9		167		270,145		270,312
Residential		102		24		—		173		299		93,713		94,012
Installment		15		—		—		—		15		5,988		6,003
Total	$	401	$	24	$	—	$	182	$	607	$	460,268	$	460,875

The following table shows the loan portfolio aging analysis of the recorded investment in loans as of December 31, 2021:


	30‑59 Days		60‑89 Days		Greater
	Past		Past		Than 90				Total Past
	Due and		Due and		Days and		Non		Due and				Total Loans
	Accruing		Accruing		Accruing		Accrual		Non Accrual		Current		Receivable

	(In thousands)
Commercial	$	63	$	—	$	—	$	—	$	63	$	90,829	$	90,892
Commercial real estate		220		—		—		3,818		4,038		262,739		266,777
Residential		22		—		—		391		413		89,719		90,132
Installment		40		—		—		—		40		6,531		6,571
Total	$	345	$	—	$	—	$	4,209	$	4,554	$	449,818	$	454,372

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.

The following table presents impaired loans for the year ended December 31, 2022:


							Average
			Unpaid				Investment in		Interest
	Recorded		Principal		Specific		Impaired		Income
	Balance		Balance		Allowance		Loans		Recognized

	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	—	$	—	$	—	$	27	$	1
Commercial real estate		123		123		—		130		11
Real Estate		—		—		—		—		—
Installment		—		—		—		—		—
	$	123	$	123	$	—	$	157	$	12
Loans with a specific valuation allowance:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		3,653		40
Real Estate		—		—		—		—		—
	$	—	$	—	$	—	$	3,653	$	40

Total:
Commercial	$	—	$	—	$	—	$	27	$	1
Commercial Real Estate	$	123	$	123	$	—	$	3,783	$	51
Real Estate	$	—	$	—	$	—	$	—	$	—
Installment	$	—	$	—	$	—	$	—	$	—

The following table presents impaired loans for the year ended December 31, 2021:


							Average
			Unpaid				Investment in		Interest
	Recorded		Principal		Specific		Impaired		Income
	Balance		Balance		Allowance		Loans		Recognized

	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate		128		128		—		128		6
Real Estate		—		—		—		—		—
Installment		—		—		—		—		—
		128		128		—		128		6
Loans with a specific valuation allowance:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate		3,805		3,805		230		3,822		105
Real Estate		—		—		—		—		—
	$	3,805	$	3,805	$	230	$	3,822	$	105

Total:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate	$	3,933	$	3,933	$	230	$	3,950	$	111
Real Estate	$	—	$	—	$	—	$	—	$	—
Installment	$	—	$	—	$	—	$	—	$	—

At December 31, 2022, the Company had certain loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate.

The following tables present information regarding troubled debt restructurings by class and by type of modification for the year ended December 31, 2022 and 2021:


	Year Ended December 31, 2022
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment

	(In thousands)
Commercial	—	$	—	$	—
Commercial Real Estate	1	$	48	$	48


	Year Ended December 31, 2022
	Interest						Total
	Only		Term		Combination		Modification

	(In thousands)
Commercial	$	—	$	—	$	—	$	—
Commercial Real Estate	$	1	$	1	$	—	$	1

The Company did not have any loan modifications during 2021.


	Year Ended December 31, 2021
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Contracts	Investment		Investment

	(In thousands)
Commercial	—	$	—	$	—
Commercial Real Estate	—	$	—	$	—

Year Ended December 31, 2021

Interest

Total

Only

Term

Combination

Modification

(In thousands)

Commercial

—

Commercial Real Estate

—

During the year ended December 31, 2022 and 2021, troubled debt restructurings did not have an impact on the allowance for loan losses. At December 31, 2022 and 2021 and for the years then ended, 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.