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Loans, Allowance For Loan Losses And OREO

6 Months Ended

Jun. 30, 2021

Loans, Allowance For Loan Losses And OREO [Abstract]

Loans, Allowance For Loan Losses And OREO

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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:
	June 30,		December 31,
	2021		2020
Commercial	$	133,626	$	145,145
Commercial real estate		326,552		309,563
Consumer		88,905		92,344
Residential		53,301		62,038

Total loans (1)		602,384		609,090

Less allowance for loan losses		7,212		7,156

Net loans	$	595,172	$	601,934

(1)Includes net deferred (fees) of ($532) and ($18) as of June 30, 2021 and December 31, 2020, 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.
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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 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.

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Loans on Non-Accrual Status

(dollars in thousands)


	As of
	June 30, 2021		December 31, 2020
Commercial	$	114	$	121
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		764		940
Commercial Mortgages-Non-Owner Occupied		658		552
Commercial Construction		—		—
Consumer
Consumer Unsecured		—		—
Consumer Secured		237		240
Residential:
Residential Mortgages		212		210
Residential Consumer Construction		—		—

Totals	$	1,985	$	2,063

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 $761 on June 30, 2021 from $1,105 on December 31, 2020. The following table represents the changes in

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

OREO balance during the six months ended June 30, 2021 and year ended December 31, 2020.

OREO Changes

(dollars in thousands)


	Six Months Ended		Year Ended
	June 30, 2021		December 31, 2020
Balance at the beginning of the year (net)	$	1,105	$	2,339
Transfers from loans		66		18
Capitalized costs		—		—
Valuation adjustments		—		(437)
Sales proceeds		(344)		(844)
Gain (loss) on disposition		(66)		29
Balance at the end of the period (net)	$	761	$	1,105

At June 30, 2021 and December 31, 2020, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held no residential real estate property in other real estate owned as of June 30, 2021 and December 31, 2020.

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


	Impaired Loans
	(dollars in thousands)
	As of and For the Six Months Ended June 30, 2021
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
2021	Investment		Balance		Allowance		Investment		Recognized
With No Related Allowance Recorded:
Commercial	$	256	$	306	$	—	$	299	$	11
Commercial Real Estate
Commercial Mortgages-Owner Occupied		1,951		2,300		—		2,047		69
Commercial Mortgage Non-Owner Occupied		624		682		—		632		13
Commercial Construction		—		—		—		—		—
Consumer
Consumer Unsecured		—		—		—		—		—
Consumer Secured		222		222		—		283		7
Residential
Residential Mortgages		1,332		1,402		—		1,340		24
Residential Consumer Construction		—		—		—		—		—

With an Allowance Recorded:
Commercial	$	—	$	—	$	—	$	2	$	—
Commercial Real Estate
Commercial Mortgages-Owner Occupied		—		—		—		—		—
Commercial Mortgage Non-Owner Occupied		—		—		—		—		—
Commercial Construction		—		—		—		—		—
Consumer
Consumer Unsecured		—		—		—		—		—
Consumer Secured		177		181		19		89		1
Residential
Residential Mortgages		—		—		—		—		—
Residential Consumer Construction		—		—		—		—		—

Totals:
Commercial	$	256	$	306	$	—	$	301	$	11
Commercial Real Estate
Commercial Mortgages-Owner Occupied		1,951		2,300		—		2,047		69
Commercial Mortgage Non-Owner Occupied		624		682		—		632		13
Commercial Construction		—		—		—		—		—
Consumer
Consumer Unsecured		—		—		—		—		—
Consumer Secured		399		403		19		372		8
Residential
Residential Mortgages		1,332		1,402		—		1,340		24
Residential Consumer Construction		—		—		—		—		—
	$	4,562	$	5,093	$	19	$	4,692	$	125

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


	Impaired Loans
	(dollars in thousands)
	As of and For the Year Ended December 31, 2020
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
2020	Investment		Balance		Allowance		Investment		Recognized
With No Related Allowance Recorded:
Commercial	$	341	$	341	$	—	$	405	$	30
Commercial Real Estate
Commercial Mortgages-Owner Occupied		2,143		2,496		—		2,305		135
Commercial Mortgage Non-Owner Occupied		639		677		—		601		43
Commercial Construction		—		—		—		—		—
Consumer
Consumer Unsecured		—		—		—		—		—
Consumer Secured		343		346		—		225		16
Residential
Residential Mortgages		1,347		1,415		—		1,319		62
Residential Consumer Construction		—		—		—		—		—

With an Allowance Recorded:
Commercial	$	4	$	4	$	4	$	6	$	—
Commercial Real Estate
Commercial Mortgages-Owner Occupied		—		—		—		6		—
Commercial Mortgage Non-Owner Occupied		—		—		—		7		—
Commercial Construction		—		—		—		—		—
Consumer
Consumer Unsecured		—		—		—		—		—
Consumer Secured		—		—		—		—		—
Residential
Residential Mortgages		—		—		—		70		—
Residential Consumer Construction		—		—		—		—		—

Totals:
Commercial	$	345	$	345	$	4	$	411	$	30
Commercial Real Estate
Commercial Mortgages-Owner Occupied		2,143		2,496		—		2,311		135
Commercial Mortgage Non-Owner Occupied		639		677		—		608		43
Commercial Construction		—		—		—		—		—
Consumer
Consumer Unsecured		—		—		—		—		—
Consumer Secured		343		346		—		225		16
Residential
Residential Mortgages		1,347		1,415		—		1,389		62
Residential Consumer Construction		—		—		—		—		—
	$	4,817	$	5,279	$	4	$	4,944	$	286

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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 Six Months Ended June 30, 2021

			Commercial
2021	Commercial		Real Estate		Consumer		Residential		Total
Allowance for Credit Losses:

Beginning Balance	$	2,001	$	3,550	$	868	$	737	$	7,156
Charge-Offs		(52)		—		(12)		—		(64)
Recoveries		102		5		12		1		120
Provision		48		10		(45)		(13)		—
Ending Balance		2,099		3,565		823		725		7,212

Ending Balance: Individually evaluated for impairment		—		—		19		—		19

Ending Balance: Collectively evaluated for impairment		2,099		3,565		804		725		7,193

Totals:	$	2,099	$	3,565	$	823	$	725	$	7,212

Financing Receivables:
Ending Balance: Individually evaluated for impairment		256		2,575		399		1,332		4,562

Ending Balance: Collectively evaluated for impairment		133,370		323,977		88,506		51,969		597,822

Totals:	$	133,626	$	326,552	$	88,905	$	53,301	$	602,384

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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, 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		(96)		(224)		(75)		(53)		(448)
Recoveries		20		139		53		15		227
Provision		747		1,703		25		73		2,548
Ending Balance		2,001		3,550		868		737		7,156

Ending Balance: Individually evaluated for impairment		4		—		—		—		4

Ending Balance: Collectively evaluated for impairment		1,997		3,550		868		737		7,152

Totals:	$	2,001	$	3,550	$	868	$	737	$	7,156

Financing Receivables:
Ending Balance: Individually evaluated for impairment		345		2,782		343		1,347		4,817

Ending Balance: Collectively evaluated for impairment		144,800		306,781		92,001		60,691		604,273

Totals:	$	145,145	$	309,563	$	92,344	$	62,038	$	609,090

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


	Age Analysis of Past Due Loans as of
	June 30, 2021
	(dollars in thousands)
					Greater								Recorded Investment
	30-59 Days		60-89 Days		than		Total Past				Total		> 90 Days &
2021	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
Commercial	$	—	$	—	$	—	$	—	$	133,626	$	133,626	$	—
Commercial Real Estate:
Commercial Mortgages- Owner Occupied		159		—		502		661		117,187		117,848		—
Commercial Mortgages-Non-Owner Occupied		—		—		618		618		177,332		177,950		—
Commercial Construction		—		—		—		—		30,754		30,754		—
Consumer:
Consumer Unsecured		1		1		—		2		5,080		5,082		—
Consumer Secured		222		11		226		459		83,364		83,823		—
Residential:
Residential Mortgages		239		—		212		451		37,145		37,596		—
Residential Consumer Construction		231		—		—		231		15,474		15,705		—
Total	$	852	$	12	$	1,558	$	2,422	$	599,962	$	602,384	$	—


		Age Analysis of Past Due Loans as of
		December 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	$	157	$	—	$	—	$	157	$	144,988	$	145,145	$	—
Commercial Real Estate:
Commercial Mortgages- Owner Occupied		38		—		842		880		107,342		108,222		—
Commercial Mortgages-Non-Owner Occupied		252		116		394		762		170,307		171,069		—
Commercial Construction		—		—		—		—		30,272		30,272		—
Consumer:
Consumer Unsecured		7		—		—		7		3,764		3,771		—
Consumer Secured		309		27		229		565		88,008		88,573		—
Residential:
Residential Mortgages		575		243		210		1,028		45,868		46,896		—
Residential Consumer Construction		—		—		—		—		15,142		15,142		—
Total	$	1,338	$	386	$	1,675	$	3,399	$	605,691	$	609,090	$	—

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


	Credit Quality Information - by Class
	June 30, 2021
	(dollars in thousands)
2021		Pass		Monitor		Special ‎Mention		Substandard		Doubtful		Totals
Commercial	$	121,109	$	4,310	$	7,910	$	297	$	—	$	133,626
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		108,103		3,361		4,405		1,979		—		117,848
Commercial Mortgages-Non-Owner Occupied		169,953		7,150		61		786		—		177,950
Commercial Construction		30,754		—		—		—		—		30,754
Consumer
Consumer Unsecured		5,056		—		25		1		—		5,082
Consumer Secured		83,301		—		—		522		—		83,823
Residential:
Residential Mortgages		36,092		—		—		1,504		—		37,596
Residential Consumer Construction		15,705		—		—		—		—		15,705

Totals	$	570,073	$	14,821	$	12,401	$	5,089	$	—	$	602,384


	Credit Quality Information - by Class
	December 31, 2020
	(dollars in thousands)
2020	Pass		Monitor		Special ‎Mention		Substandard		Doubtful		Totals
Commercial	$	133,075	$	4,332	$	7,386	$	352	$	—	$	145,145
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		98,623		3,028		4,428		2,143		—		108,222
Commercial Mortgages-Non -Owner Occupied		161,300		7,277		1,682		810		—		171,069
Commercial Construction		30,272		—		—		—		—		30,272
Consumer
Consumer Unsecured		3,740		—		30		1		—		3,771
Consumer Secured		88,044		—		—		529		—		88,573
Residential:
Residential Mortgages		45,441		—		—		1,455		—		46,896
Residential Consumer Construction		15,142		—		—		—		—		15,142

Totals	$	575,637	$	14,637	$	13,526	$	5,290	$	—	$	609,090

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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 and six months ended June 30, 2021 and 2020.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and six months ended June 30, 2021 and 2020.

At June 30, 2021 and December 31, 2020, 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 offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These include short-term, 180 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.

Since the beginning of the pandemic in the spring of 2020, the Bank has modified a total of 191 loans. The principal balances of these loans on June 30, 2021 (adjusted for payoffs) totaled approximately $90 million. As of June 30, 2021, none of the 191 previously modified loans remain in deferment and all such previously deferred loans are current.

We are not currently evaluating any relationships, for additional deferrals.

In accordance with provisions of Section 4013 of the CARES Act (March 2020) and the Joint Interagency Regulatory Guidance (March 2020, revised April 2020), the above modifications were not considered to be TDRs. The CARES Act addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Interagency Guidance encouraged financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19 and explained that in consultation with the Financial Accounting Standards Board (FASB) staff, the federal banking agencies concluded that short-term modifications (e.g. six months or less) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. In December 2020, the Consolidated Appropriations Act extended the period established by Section 4013 of the CARES Act for providing temporary relief from TDR classification to the earlier of January 1, 2022 or 60 days after the date when the national emergency concerning COVID-19 terminates.