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Loans and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2023

Loans and Allowance for Credit Losses

Note 3: Loans and Allowance for Credit Losses

Categories of loans include:


	September 30,		December 31,
	2023		2022

	(In thousands)
Commercial and Industrial	$	94,840	$	90,548
Commercial real estate		272,457		270,312
Residential real estate		92,746		94,012
Consumer loans		6,799		6,003

Total gross loans		466,842		460,875

Less allowance for credit losses		(4,112)		(2,052)

Total loans	$	462,730	$	458,823

The amount of deferred loan fees at September 30, 2023 was $64 and $96 at December 31, 2022. The risk characteristics of each loan portfolio segment are as follows:

Commercial and Industrial, and Commercial Real Estate

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 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 Real Estate and Consumer

Residential real estate and consumer 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.

Allowance for Credit Losses and Recorded Investment in Loans

As of and for the three and nine month periods ended September 30, 2023


			Commercial
	Commercial		Real Estate		Residential		Consumer		Total

	(in thousands)
Allowance for credit losses:

Balance, July 1, 2023	$	902	$	1,079	$	2,092	$	208	$	4,281
Provision (credit) for credit loss exposure		(26)		11		(75)		(64)		(154)
Losses charged off		(1)		—		—		(32)		(33)
Recoveries		12		—		—		6		18
Balance, September 30, 2023	$	887	$	1,090	$	2,017	$	118	$	4,112
Balance, January 1, 2023	$	215	$	815	$	816	$	206	$	2,052
Impact of adopting ASC 326		755		388		1,379		(103)		2,419
Provision (credit) for credit loss exposure		(104)		(113)		(178)		95		(300)
Losses charged off		(1)		—		—		(94)		(95)
Recoveries		22		—		—		14		36
Balance, September 30, 2023	$	887	$	1,090	$	2,017	$	118	$	4,112

Allocation:

Ending balance: individually evaluated for credit losses	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively evaluated for credit losses	$	887	$	1,090	$	2,017	$	118	$	4,112
Loans:
Ending balance: individually evaluated for credit losses	$	—	$	24	$	—	$	—	$	24
Ending balance: collectively evaluated for credit losses	$	94,840	$	272,433	$	92,746	$	6,799	$	466,818

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three and nine month periods ended September 30, 2022


			Commercial
	Commercial		Real Estate		Residential		Consumer		Total

	(In thousands)
Allowance for loan losses:

Balance, July 1, 2022	$	497	$	1,219	$	814	$	123	$	2,653
Provision (credit) charged to expense		(125)		24		(7)		123		15
Losses charged off		(16)		—		(2)		(38)		(56)
Recoveries		—		—		—		7		7
Balance, September 30, 2022	$	356	$	1,243	$	805	$	215	$	2,619
Balance, January 1, 2022	$	1,046	$	1,235	$	1,121	$	271	$	3,673
Provision (credit) charged to expense		(696)		8		(314)		32		(970)
Losses charged off		(16)		—		(2)		(112)		(130)
Recoveries		22		—		—		24		46
Balance, September 30, 2022	$	356	$	1,243	$	805	$	215	$	2,619

Allocation:

Ending balance: individually evaluated for impairment	$	—	$	406	$	—	$	—	$	406
Ending balance: collectively evaluated for impairment	$	356	$	837	$	805	$	215	$	2,213
Loans:
Ending balance: individually evaluated for impairment	$	15	$	3,792	$	—	$	—	$	3,807
Ending balance: collectively evaluated for impairment	$	92,455	$	270,206	$	95,666	$	6,230	$	464,557

Allowance for Loan Losses and Recorded Investment in Loans

As of December 31, 2022


			Commercial
	Commercial		Real Estate		Residential		Consumer		Total

	(In thousands)
Allowance for loan losses:
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	$	—	$	57	$	—	$	—	$	57
Ending balance: collectively evaluated for impairment	$	90,548	$	270,255	$	94,012	$	6,003	$	460,875

The following tables show the portfolio quality indicators.

Based on the most recent analysis performed, the following table presents the recorded investment in non-homogeneous loans by internal risk rating system as of September 30, 2023 (in thousands):


													Revolving		Revolving
													Loans		Loans
													Amortized		Converted
September 30, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Commercial and industrial
Risk Rating
Pass	$	15,880	$	16,474	$	14,235	$	15,192	$	6,537	$	6,092	$	20,279	$	—	$	94,689
Special Mention		—		26		—		—		—		125		—		—		151
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	15,880	$	16,500	$	14,235	$	15,192	$	6,537	$	6,217	$	20,279	$	—	$	94,840

Commercial and industrial
Current period gross charge-offs	$	1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	1

Commercial real estate
Risk Rating
Pass	$	7,915	$	31,262	$	49,136	$	25,267	$	27,223	$	60,548	$	66,892	$	—	$	268,243
Special Mention		—		—		244		2,067		—		1,879		—		—		4,190
Substandard		—		—		—		—		—		24		—		—		24
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	7,915	$	31,262	$	49,380	$	27,334	$	27,223	$	62,451	$	66,892	$	—	$	272,457

Commercial real estate
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Total
Pass	$	23,795	$	47,736	$	63,371	$	40,459	$	33,760	$	66,640	$	87,171	$	—	$	362,932
Special Mention		—		26		244		2,067		—		2,004		—		—		4,341
Substandard		—		—		—		—		—		24		—		—		24
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	23,795	$	47,762	$	63,615	$	42,526	$	33,760	$	68,668	$	87,171	$	—	$	367,297
Current period gross charge-offs	$	1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	1

The Company monitors the credit risk profile by payment activity for residential and consumer loan classes. Loans past due 90 days or more and loans on nonaccrual status are considered nonperforming. Nonperforming loans are reviewed quarterly. The following table presents the amortized cost in residential and consumer loans based on payment activity (in thousands):


													Revolving		Revolving
													Loans		Loans
													Amortized		Converted
September 30, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Residential Real Estate
Payment Performance
Performing	$	8,489	$	18,664	$	16,479	$	20,070	$	5,945	$	22,891	$	—	$	—	$	92,538
Nonperforming		—		—		—		—		39		169		—		—		208
Total	$	8,489	$	18,664	$	16,479	$	20,070	$	5,984	$	23,060	$	—	$	—	$	92,746

Residential real estate
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer
Payment Performance
Performing	$	2,227	$	1,554	$	750	$	503	$	358	$	1,035	$	372	$	—	$	6,799
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	2,227	$	1,554	$	750	$	503	$	358	$	1,035	$	372	$	—	$	6,799

Consumer
Current period gross charge-offs	$	93	$	1	$	—	$	—	$	—	$	—	$	—	$	—	$	94

Total
Payment Performance
Performing	$	10,716	$	20,218	$	17,229	$	20,573	$	6,303	$	23,926	$	372	$	—	$	99,337
Nonperforming		—		—		—		—		39		169		—		—		208
Total	$	10,716	$	20,218	$	17,229	$	20,573	$	6,342	$	24,095	$	372	$	—	$	99,545


	December 31, 2022
			Commercial
Loan Class	Commercial		Real Estate		Residential		Consumer		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

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 credit losses, 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 credit losses methodology on an ongoing basis. No significant changes were made to either during the past year to date period.

Loan Portfolio Aging Analysis

As of September 30, 2023


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

	(In thousands)
Commercial	$	58	$	218	$	—	$	—	$	276	$	94,564	$	94,840
Commercial real estate		—		—		—		8		8		272,449		272,457
Residential		159		42		—		208		409		92,337		92,746
Consumer		16		—		—		—		16		6,783		6,799
Total	$	233	$	260	$	—	$	216	$	709	$	466,133	$	466,842

Loan Portfolio Aging Analysis

As of December 31, 2022


	30‑59 Days		60‑89 Days		Greater
	Past Due		Past Due		Than 90 Days				Total Past
	and		and		and				Due and				Total Loans
	Accruing		Accruing		Accruing		Non 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
Consumer		15		—		—		—		15		5,988		6,003
Total	$	401	$	24	$	—	$	182	$	607	$	460,268	$	460,875

Nonperforming Loans

The following table present the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing interest as of September 30, 2023:


							Loans Past
							Due Over 90 Days		Total
	Nonaccrual with no ACL		Nonaccrual with ACL		Total Nonaccrual		Still Accruing		Nonperforming

	(In thousands)
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate		—		8		8		—		8
Residential		192		16		208		—		208
Consumer		—		—		—		—		—
Total	$	192	$	24	$	216	$	—	$	216

The Company did recognized approximately $6,000 interest income on nonaccrual loans during the the period ended September 30, 2023.

Impaired Loans

For 2022, 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, 2022						September 30, 2022				September 30, 2022
			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	$	15	$	30	$	—	$	30	$	—	$	31	$	1
Commercial real estate		2,839		2,839		—		2,844		—		2,842		—
Residential		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
		2,854		2,869		—		2,874		—		2,873		—
Loans with a specific valuation allowance:
Commercial		—		—		—		—		—		—		—
Commercial real estate		953		953		406		983		—		983		30
Residential		—		—		—		—		—		—		––
Consumer		––		––		––		––		—		—		—
		953		953		406		983		—		983		30
Total:
Commercial	$	15	$	30	$	—	$	30	$	—	$	31	$	1
Commercial real estate	$	3,792	$	3,792	$	406	$	3,827	$	—	$	3,825	$	30
Residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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.


	Nine Months Ended September 30, 2022
	Interest						Total
	Only		Term		Combination		Modification

	(In thousands)
Commercial	$	—	$	—	$	—	$	—
Commercial real estate		1		1		—		1
Residential		—		—		—		—
Consumer		—		—		—		—

During the nine months ended September 30, 2022 there were no material defaults of any modified loans or 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.