Note 8 – Loans, allowance for loan losses and OREO

Management has an established methodology used to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type. Within these segments, the Bank has sub-segmented its portfolio into classes, based on the associated risks. The classifications set forth below do not correspond directly to the classifications set forth in the call report (Form FFIEC 041). Management has determined that the classifications set forth below are more appropriate for use in identifying and managing risk in the loan portfolio.

Loan Segments:		Loan Classes:
Commercial		Commercial and industrial loans
Commercial real estate		Commercial mortgages – owner occupied
		Commercial mortgages – non-owner occupied
		Commercial construction
Consumer		Consumer unsecured
		Consumer secured
Residential		Residential mortgages
		Residential consumer construction

A summary of loans, net is as follows (dollars in thousands):


	As of:
	March 31,	December 31,
	2020	2019

Commercial	$115,529	$114,257
Commercial real estate	302,562	303,900
Consumer	91,330	89,945
Residential	66,712	70,001

Total loans (1)	576,133	578,103

Less allowance for loan losses	5,474	4,829

Net loans	$570,659	$573,274

(1)

Includes net deferred costs and premiums of $550 and $572 as of March 31, 2020 and December 31, 2019, respectively.

The Bank’s internal risk rating system is in place to grade commercial and commercial real estate loans. Category ratings are reviewed periodically by lenders and the credit review area of the Bank based on the borrower’s individual situation. Additionally, internal and external monitoring and review of credits are conducted on an annual basis.

Note 8 – Loans, allowance for loan losses and OREO (continued)

Below is a summary and definition of the Bank’s risk rating categories:

RATING 1	Excellent
RATING 2	Above Average
RATING 3	Satisfactory
RATING 4	Acceptable / Low Satisfactory
RATING 5	Monitor
RATING 6	Special Mention
RATING 7	Substandard
RATING 8	Doubtful
RATING 9	Loss

We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:

“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

“Special Mention.” These are loans having a risk rating of 6. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. These loans do warrant more than routine monitoring due to a weakness caused by adverse events.

“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may

Note 8 – Loans, allowance for loan losses and OREO (continued)

not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.

“Doubtful.” These are loans having a risk rating of 8. Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but 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.

“Loss.” These are loans having a risk rating of 9. Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.


Loans on Non-Accrual Status
(dollars in thousands)
	As of
	March 31, 2020	December 31, 2019
Commercial	$331	$262
Commercial Real Estate:
Commercial Mortgages-Owner Occupied	392	262
Commercial Mortgages-Non-Owner Occupied	453	450
Commercial Construction	-	-
Consumer
Consumer Unsecured	-	-
Consumer Secured	33	47
Residential:
Residential Mortgages	245	280
Residential Consumer Construction	-	-

Totals	$1,454	$1,301

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank which was acquired through purchase at foreclosure or from the borrower through a deed in lieu of foreclosure. OREO decreased to $1,761 on March 31, 2020 from $2,339 on December 31, 2019. The following table represents the changes in

Note 8 – Loans, allowance for loan losses and OREO (continued)

OREO balance during the three months ended March 31, 2020 and year ended December 31, 2019.



OREO Changes
(dollars in thousands)
	Three Months Ended	Year Ended
	March 31, 2020	December 31, 2019
Balance at the beginning of the year (net)	$2,339	$2,430
Transfers from loans	18	785
Capitalized costs	-	-
Valuation adjustments	(102)	(287)
Sales proceeds	(500)	(570)
(Gain) loss on disposition	6	(19)
Balance at the end of the period (net)	$1,761	$2,339

At March 31, 2020 and December 31, 2019, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held one residential real estate property carried on the books in other real estate owned at a value of $18 as of March 31, 2020 and four residential real estate properties carried on the books at a value of $325 in other real estate owned as of December 31, 2019.

Note 8 – Loans, allowance for loan losses and OREO (continued)



		Impaired Loans
		(dollars in thousands)
		As of and For the the Three Months Ended March 31, 2020
			Unpaid		Average	Interest
		Recorded	Principal	Related	Recorded	Income
2020		Investment	Balance	Allowance	Investment	Recognized
With No Related Allowance Recorded:
	Commercial	$ 456	$ 1,038	$ -	$ 462	$ 5
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied	5,697	6,083	-	4,082	84
	Commercial Mortgage Non-Owner Occupied	549	570	-	556	15
	Commercial Construction	-	-	-	-	-
	Consumer
	Consumer Unsecured	-	-	-	-	-
	Consumer Secured	267	267	-	187	2
	Residential
	Residential Mortgages	1,382	1,444	-	1,336	17
	Residential Consumer Construction	-	-	-	-	-

With an Allowance Recorded:
	Commercial	$ 7	$ 7	$ 7	$ 7	$ -
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied	-	-	-	6	-
	Commercial Mortgage Non-Owner Occupied	13	13	-	14	-
	Commercial Construction	-	-	-	-	-
	Consumer
	Consumer Unsecured	-	-	-	-	-
	Consumer Secured	-	-	-	-	-
	Residential
	Residential Mortgages	-	-	-	70	-
	Residential Consumer Construction	-	-	-	-	-

Totals:
	Commercial	$ 463	$ 1,045	$ 7	$ 469	$ 5
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied	5,697	6,083	-	4,088	84
	Commercial Mortgage Non-Owner Occupied	562	583	-	570	15
	Commercial Construction	-	-	-	-	-
	Consumer
	Consumer Unsecured	-	-	-	-	-
	Consumer Secured	267	267	-	187	2
	Residential
	Residential Mortgages	1,382	1,444	-	1,406	17
	Residential Consumer Construction	-	-	-	-	-
		$ 8,371	$ 9,422	$ 7	$ 6,720	$ 123

Note 8 – Loans, allowance for loan losses and OREO (continued)



		Impaired Loans
		(dollars in thousands)
		As of and For the the Year Ended December 31, 2019
			Unpaid		Average	Interest
		Recorded	Principal	Related	Recorded	Income
2019		Investment	Balance	Allowance	Investment	Recognized
With No Related Allowance Recorded:
	Commercial	$ 468	$ 1,036	$ -	$ 949	$ 26
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied	2,467	2,643	-	2,441	183
	Commercial Mortgage Non-Owner Occupied	563	585	-	347	32
	Commercial Construction	-	-	-	-	-
	Consumer
	Consumer Unsecured	-	-	-	-	-
	Consumer Secured	107	107	-	98	7
	Residential
	Residential Mortgages	1,290	1,290	-	1,583	68
	Residential Consumer Construction	-	-	-	-	-

With an Allowance Recorded:
	Commercial	$ 7	$ 7	$ 7	$ 19	$ 1
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied	12	12	12	26	1
	Commercial Mortgage Non-Owner Occupied	14	14	3	52	1
	Commercial Construction	-	-	-	-	-
	Consumer
	Consumer Unsecured	-	-	-	1	-
	Consumer Secured	-	-	-	53	-
	Residential
	Residential Mortgages	139	158	33	257	4
	Residential Consumer Construction	-	-	-	-	-

Totals:
	Commercial	$ 475	$ 1,043	$ 7	$ 968	$ 27
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied	2,479	2,655	12	2,467	184
	Commercial Mortgage Non-Owner Occupied	577	599	3	399	33
	Commercial Construction	-	-	-	-	-
	Consumer
	Consumer Unsecured	-	-	-	1	-
	Consumer Secured	107	107	-	151	7
	Residential
	Residential Mortgages	1,429	1,448	33	1,840	72
	Residential Consumer Construction	-	-	-	-	-
		$ 5,067	$ 5,852	$ 55	$ 5,826	$ 323

Note 8 – Loans, allowance for loan losses and OREO (continued)



	Allowance for Loan Losses and Recorded Investment in Loans
	(dollars in thousands)
	As of and For the Three Months Ended March 31, 2020

		Commercial
2020	Commercial	Real Estate	Consumer	Residential	Total

Allowance for Credit Losses:

Beginning Balance	$ 1,330	$ 1,932	$ 865	$ 702	$ 4,829
Charge-Offs	-	(211)	(8)	(41)	(260)
Recoveries	4	-	12	1	17
Provision	219	534	108	27	888
Ending Balance	1,553	2,255	977	689	5,474

Ending Balance: Individually evaluated for impairment	7	-	-	-	7

Ending Balance: Collectively evaluated for impairment	1,546	2,255	977	689	5,467

Totals:	$ 1,553	$ 2,255	$ 977	$ 689	$ 5,474

Financing Receivables:
Ending Balance: Individually evaluated for impairment	463	6,259	267	1,382	8,371

Ending Balance: Collectively evaluated for impairment	115,066	296,303	91,063	65,330	567,762

Totals:	$ 115,529	$ 302,562	$ 91,330	$ 66,712	$ 576,133

Note 8 – Loans, allowance for loan losses and OREO (continued)



	Allowance for Loan Losses and Recorded Investment in Loans
	(dollars in thousands)
	As of and For the Year Ended December 31, 2019

		Commercial
2019	Commercial	Real Estate	Consumer	Residential	Total

Allowance for Credit Losses:

Beginning Balance	$ 1,136	$ 1,831	$ 956	$ 658	$ 4,581
Charge-Offs	(106)	(26)	(189)	(42)	(363)
Recoveries	35	5	44	4	88
Provision	265	122	54	82	523
Ending Balance	1,330	1,932	865	702	4,829

Ending Balance: Individually evaluated for impairment	7	15	-	33	55

Ending Balance: Collectively evaluated for impairment	1,323	1,917	865	669	4,774

Totals:	$ 1,330	$ 1,932	$ 865	$ 702	$ 4,829

Financing Receivables:
Ending Balance: Individually evaluated for impairment	475	3,056	107	1,429	5,067

Ending Balance: Collectively evaluated for impairment	113,782	300,844	89,838	68,572	573,036

Totals:	$ 114,257	$ 303,900	$ 89,945	$ 70,001	$ 578,103

Note 8 – Loans, allowance for loan losses and OREO (continued)


	Age Analysis of Past Due Loans as of
	March 31, 2020
	(dollars in thousands)
			Greater				Recorded Investment
	30-59 Days	60-89 Days	than	Total Past		Total	> 90 Days &
2020	Past Due	Past Due	90 Days	Due	Current	Loans	Accruing
Commercial	$931	$182	$110	$1,223	$114,306	$115,529	$ -
Commercial Real Estate:
Commercial Mortgages- Owner Occupied	3,596	291	273	4,160	99,213	103,373	-
Commercial Mortgages-Non-Owner Occupied	551	-	427	978	181,485	182,463	-
Commercial Construction	288	-	-	288	16,438	16,726	-
Consumer:
Consumer Unsecured	41	-	-	41	6,431	6,472	-
Consumer Secured	543	216	-	759	84,099	84,858	-
Residential:
Residential Mortgages	941	561	245	1,747	51,239	52,986	-
Residential Consumer Construction	-	-	-	-	13,726	13,726	-
Total	$6,891	$1,250	$1,055	$9,196	$566,937	$576,133	$ -


	Age Analysis of Past Due Loans as of
	December 31, 2019
	(dollars in thousands)
			Greater				Recorded Investment
	30-59 Days	60-89 Days	than	Total Past		Total	> 90 Days &
2019	Past Due	Past Due	90 Days	Due	Current	Loans	Accruing
Commercial	$146	$1,084	$116	$1,346	$112,911	$114,257	$ -
Commercial Real Estate:
Commercial Mortgages-Owner Occupied	234	192	143	569	104,223	104,792	-
Commercial Mortgages-Non-Owner Occupied	58	9	450	517	181,730	182,247	-
Commercial Construction	-	-	-	-	16,861	16,861	-
Consumer:
Consumer Unsecured	52	3	-	55	6,812	6,867	-
Consumer Secured	316	130	21	467	82,611	83,078	-
Residential:
Residential Mortgages	595	576	280	1,451	53,833	55,284	-
Residential Consumer Construction	492	-	-	492	14,225	14,717	-
Total	$1,893	$1,994	$1,010	$4,897	$573,206	$578,103	$ -

Note 8 – Loans, allowance for loan losses and OREO (continued)




	Credit Quality Information - by Class
	March 31, 2020
	(dollars in thousands)
2020	Pass	Monitor	Special	Substandard	Doubtful	Totals
			Mention
Commercial	$110,389	$1,301	$3,335	$504	$ -	$115,529
Commercial Real Estate:
Commercial Mortgages-Owner Occupied	92,250	986	4,441	5,696	-	103,373
Commercial Mortgages-Non-Owner Occupied	176,154	4,682	983	644	-	182,463
Commercial Construction	16,726	-	-	-	-	16,726
Consumer
Consumer Unsecured	6,430	-	-	42	-	6,472
Consumer Secured	84,491	-	-	367	-	84,858
Residential:
Residential Mortgages	51,465	-	-	1,521	-	52,986
Residential Consumer Construction	13,366	360	-	-	-	13,726

Totals	$551,271	$7,329	$8,759	$8,774	$ -	$576,133



	Credit Quality Information - by Class
	December 31, 2019
	(dollars in thousands)
2019	Pass	Monitor	Special	Substandard	Doubtful	Totals
			Mention
Commercial	$108,907	$313	$4,518	$519	$ -	$114,257
Commercial Real Estate:
Commercial Mortgages-Owner Occupied	93,553	446	8,316	2,477	-	104,792
Commercial Mortgages-Non -Owner Occupied	175,471	5,118	994	664	-	182,247
Commercial Construction	16,572	289	-	-	-	16,861
Consumer
Consumer Unsecured	6,867	-	-	-	-	6,867
Consumer Secured	82,860	-	-	218	-	83,078
Residential:
Residential Mortgages	53,714	-	-	1,570	-	55,284
Residential Consumer Construction	14,416	301	-	-	-	14,717

Totals	$552,360	$6,467	$13,828	$5,448	$-	$578,103

Note 8 – Loans, allowance for loan losses and OREO (continued)

Troubled Debt Restructurings (TDR)

There were no loan modifications that would have been classified as TDRs during the three months ended March 31, 2020 and 2019.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three months ended March 31, 2020 and 2019.

At March 31, 2020 and December 31, 2019, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. Accordingly, we are offering short-term modifications made in response to COVID-19 to certain borrowers who are current and otherwise not past due. These include short-term, 90 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that are insignificant.

As of March 31, 2020, the Bank had modified 69 loans as described in the preceding paragraph.

As of May 12, 2020, modifications described in the preceding paragraph attributed to COVID-19 were $82,189,000 representing 159 loans. This represented 14.27% of the total loan portfolio as of March 31, 2020. Of that total 142 were commercial loan borrowers representing $79,760,000 in loans, or 13.84% of our total loan portfolio as of March 31, 2020 and 17 were retail loan borrowers representing $2,429,000, or 0.42% of our total loan portfolio as of March 31, 2020. Of the total deferrals, 34.15% are for three-month deferrals of principal only. In accordance with the March 22, 2020 Joint Interagency Regulatory Guidance, the above modifications were not considered to be troubled debt restructurings and were excluded from the discussion above.