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Loans and allowance for loan losses

12 Months Ended

Dec. 31, 2022

Loans and allowance for loan losses [Abstract]

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Note 5 - Loans and allowance for loan losses

The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

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 by classes within the segments, based on the associated risks within these classes. 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

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Note 5 - Loans and allowance for loan losses (continued)

The evaluation also considers the following risk characteristics of each loan segment:

Commercial loans carry risks associated with the successful operation of a business because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

Commercial real estate loans carry risks associated with a real estate project and other risks associated with the ownership of real estate. In addition, for real estate construction loans there is a risk that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral (e.g., rapidly-depreciating assets such as automobiles), or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy. Unsecured consumer loans carry additional risks associated with the continued credit-worthiness of borrowers who may be unable to meet payment obligations.

Residential mortgage and construction loans carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral. Equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.

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.

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

Based on the above criteria, we segregate loans into the above categories for special mention, substandard, doubtful and loss from non-classified, or pass rated, loans. We review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:

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Note 5 - Loans and allowance for loan losses (continued)

“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 provide 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 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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Note 5 - Loans and allowance for loan losses (continued)

The Bank grants primarily commercial, real estate, and installment loans to customers throughout its market area. The real estate portfolio can be affected by the condition of the local real estate markets. The commercial and installment loan portfolio can be affected by the local economic conditions.

A summary of loans, net is as follows:



	December 31,
	2022		2021

Commercial	$	95,885	$	105,067
Commercial real estate		354,025		338,149
Consumer		97,959		89,102
Residential		63,756		51,066

Total loans (1)		611,625		583,384

Less allowance for loan losses		6,259		6,915

Net loans	$	605,366	$	576,469

(1)Includes net deferred costs/premiums of $1,114 and $372 as of December 31, 2022 and 2021, respectively.

The amounts of overdrafts reclassified as loans were $45 and $182 as of December 31, 2022 and 2021, respectively.

The Company’s officers, directors and their related interests have various types of loan relationships with the Bank. The total outstanding balances of these related party loans at December 31, 2022 and 2021 were $10,738 and $11,200 respectively. The beginning balance was adjusted during 2022 to include $52 in loans to two new executive officers that were not included as related-party loans at the end of 2021. During 2022, new loans and advances amounted to $3,907 and repayments amounted to $4,369.

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Note 5 - Loans and allowance for loan losses (continued)

The following tables set forth information regarding impaired and non-accrual loans as of December 31, 2022 and 2021:



Loans on Non-Accrual Status

	As of December 31,
	2022		2021
Commercial	$	—	$	25
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		—		501
Commercial Mortgages-Non-Owner Occupied		518		138
Commercial Construction		—		—
Consumer
Consumer Unsecured		—		—
Consumer Secured		20		127
Residential:
Residential Mortgages		95		163
Residential Consumer Construction		—		—

Totals	$	633	$	954

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Note 5 - Loans and allowance for loan losses (continued)



		Impaired Loans
		(dollars in thousands)
			As of and For the Year Ended December 31, 2022
					Unpaid				Average		Interest
			Recorded		Principal		Related		Recorded		Income
	2022		Investment		Balance		Allowance		Investment		Recognized
With No Related Allowance Recorded:
	Commercial	$	-	$	-	$	-	$	9	$	-
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		554		581		-		1,573		48
	Commercial Mortgage Non-Owner Occupied		518		526		-		310		23
	Commercial Construction		-		-		-		-		-
	Consumer
	Consumer Unsecured		-		-		-		-		-
	Consumer Secured		249		249		-		154		12
	Residential
	Residential Mortgages		1,345		1,428		-		1,331		54
	Residential Consumer Construction		-		-		-		-		-

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

Totals:
	Commercial	$	-	$	-	$	-	$	9	$	-
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		554		581		-		1,573		48
	Commercial Mortgage Non-Owner Occupied		518		526		-		310		23
	Commercial Construction		-		-		-		-		-
	Consumer
	Consumer Unsecured		-		-		-		-		-
	Consumer Secured		249		249		-		154		12
	Residential
	Residential Mortgages		1,345		1,428		-		1,331		54
	Residential Consumer Construction		-		-		-		-		-
		$	2,666	$	2,784	$	-	$	3,377	$	137

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Note 5 - Loans and allowance for loan losses (continued)



		Impaired Loans
		(dollars in thousands)
			As of and For the Year Ended December 31, 2021
					Unpaid				Average		Interest
			Recorded		Principal		Related		Recorded		Income
	2021		Investment		Balance		Allowance		Investment		Recognized
With No Related Allowance Recorded:
	Commercial	$	17	$	67	$	-	$	179	$	5
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		2,592		2,971		-		2,368		154
	Commercial Mortgage Non-Owner Occupied		102		102		-		371		13
	Commercial Construction		-		-		-		-		-
	Consumer
	Consumer Unsecured		-		-		-		-		-
	Consumer Secured		59		60		-		201		2
	Residential
	Residential Mortgages		1,316		1,390		-		1,332		47
	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		-		-		-		-		-
	Residential
	Residential Mortgages		-		-		-		-		-
	Residential Consumer Construction		-		-		-		-		-

Totals:
	Commercial	$	17	$	67	$	-	$	181	$	5
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		2,592		2,971		-		2,368		154
	Commercial Mortgage Non-Owner Occupied		102		102		-		371		13
	Commercial Construction		-		-		-		-		-
	Consumer
	Consumer Unsecured		-		-		-		-		-
	Consumer Secured		59		60		-		201		2
	Residential
	Residential Mortgages		1,316		1,390		-		1,332		47
	Residential Consumer Construction		-		-		-		-		-
		$	4,086	$	4,590	$	-	$	4,453	$	221

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Note 5 - Loans and allowance for loan losses (continued)

The following tables set forth the allowance for loan losses activity for the years ended December 31, 2022 and 2021:



	Allowance for Loan Losses and Recorded Investment in Loans
	(dollars in thousands)
	As of and For the Year Ended December 31, 2022

			Commercial
2022	Commercial		Real Estate		Consumer		Residential		Total

Allowance for Loan Losses:

Beginning Balance	$	1,471	$	3,637	$	860	$	947	$	6,915
Charge-Offs		-		(137)		(25)		-		(162)
Recoveries		104		212		18		72		406
Provision (recovery of provision)		(473)		(810)		51		332		(900)
Ending Balance		1,102		2,902		904		1,351		6,259

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

Ending Balance: Collectively evaluated for impairment		1,102		2,902		904		1,351		6,259

Totals:	$	1,102	$	2,902	$	904	$	1,351	$	6,259

Financing Receivables:
Ending Balance: Individually evaluated for impairment		-		1,072		249		1,345		2,666

Ending Balance: Collectively evaluated for impairment		95,885		352,953		97,710		62,411		608,959

Totals:	$	95,885	$	354,025	$	97,959	$	63,756	$	611,625

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Note 5 - Loans and allowance for loan losses (continued)



	Allowance for Loan Losses and Recorded Investment in Loans
	(dollars in thousands)
	As of and For the Year Ended December 31, 2021

			Commercial
2021	Commercial		Real Estate		Consumer		Residential		Total

Allowance for Loan Losses:

Beginning Balance	$	2,001	$	3,550	$	868	$	737	$	7,156
Charge-Offs		(53)		-		(38)		-		(91)
Recoveries		112		72		29		137		350
Provision (recovery of provision)		(589)		15		1		73		(500)
Ending Balance		1,471		3,637		860		947		6,915

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

Ending Balance: Collectively evaluated for impairment		1,471		3,637		860		947		6,915

Totals:	$	1,471	$	3,637	$	860	$	947	$	6,915

Financing Receivables:
Ending Balance: Individually evaluated for impairment		17		2,694		59		1,316		4,086

Ending Balance: Collectively evaluated for impairment		105,050		335,455		89,043		49,750		579,298

Totals:	$	105,067	$	338,149	$	89,102	$	51,066	$	583,384

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Note 5 - Loans and allowance for loan losses (continued)

The following tables set forth the age analysis of past due loans as of the years ended December 31, 2022 and 2021:


Age Analysis of Past Due Loans as of December 31, 2022
														Recorded
						Greater								Investment
2022		30-59 Days		60-89 Days		than		Total Past				Total		> 90 Days &
		Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
Commercial	$	52	$	194	$	—	$	246	$	95,639	$	95,885	$	—
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		—		—		—		—		135,189		135,189		—
Commercial Mortgages-Non-Owner Occupied		55		—		—		55		206,646		206,701		—
Commercial Construction		—		397		—		397		11,738		12,135		—
Consumer:
Consumer Unsecured		15		—		—		15		2,813		2,828		—
Consumer Secured		62		—		13		75		95,056		95,131		—
Residential:
Residential Mortgages		139		—		95		234		42,815		43,049		—
Residential Consumer Construction		—		—		—		—		20,707		20,707		—
Total	$	323	$	591	$	108	$	1,022	$	610,603	$	611,625	$	—


Age Analysis of Past Due Loans as of December 31, 2021
														Recorded
														Investment
2021		30-59 Days		60-89 Days		Greater than		Total Past				Total		> 90 Days &
		Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
Commercial	$	—	$	1	$	25	$	26	$	105,041	$	105,067	$	—
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		464		—		501		965		127,869		128,834		—
Commercial Mortgages-Non-Owner Occupied		1,310		—		—		1,310		177,803		179,113		—
Commercial Construction		—		—		—		—		30,202		30,202		—
Consumer:
Consumer Unsecured		8		1		—		9		2,596		2,605		—
Consumer Secured		111		3		118		232		86,265		86,497		—
Residential:
Residential Mortgages		948		—		163		1,111		30,814		31,925		—
Residential Consumer Construction		—		—		—		—		19,141		19,141		—
Total	$	2,841	$	5	$	807	$	3,653	$	579,731	$	583,384	$	—

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Note 5 - Loans and allowance for loan losses (continued)

The following tables set forth the credit quality information by segment as of December 31, 2022 and 2021:


Credit Quality Information - by Class
December 31, 2022
2022		Pass		Monitor		Special		Substandard		Doubtful		Totals
						Mention
Commercial	$	89,889	$	4,418	$	1,465	$	113	$	—	$	95,885
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		132,686		1,931		—		572		—		135,189
Commercial Mortgages-Non-Owner Occupied		204,810		—		1,182		709		—		206,701
Commercial Construction		12,126		9		—		—		—		12,135
Consumer
Consumer Unsecured		2,809		—		19		—		—		2,828
Consumer Secured		94,788		—		—		343		—		95,131
Residential:
Residential Mortgages		41,591		—		—		1,458		—		43,049
Residential Consumer Construction		19,178		1,529		—		—		—		20,707

Totals	$	597,877	$	7,887	$	2,666	$	3,195	$	—	$	611,625


Credit Quality Information - by Class
December 31, 2021
2021		Pass		Monitor		Special		Substandard		Doubtful		Totals
						Mention
Commercial	$	92,789	$	7,965	$	4,262	$	51	$	—	$	105,067
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		116,098		5,986		4,130		2,620		—		128,834
Commercial Mortgages-Non-Owner Occupied		176,291		2,506		—		316		—		179,113
Commercial Construction		30,202		—		—		—		—		30,202
Consumer
Consumer Unsecured		2,581		—		23		1		—		2,605
Consumer Secured		86,265		—		—		232		—		86,497
Residential:
Residential Mortgages		30,486		—		—		1,439		—		31,925
Residential Consumer Construction		19,141		—		—		—		—		19,141

Totals	$	553,853	$	16,457	$	8,415	$	4,659	$	—	$	583,384

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Note 5 - Loans and allowance for loan losses (continued)

Troubled Debt Restructurings (TDRs)

There was one loan modification during the twelve months ended December 31, 2022 that was classified as a Troubled Debt Restructuring (TDR). The commercial owner-occupied real estate loan was modified to allow for multiple payment deferrals.

During the twelve months ended December 31, 2021 there no loan modifications classified as TDRs.

Loans that were previously classified as TDRs in prior periods and currently outstanding are factored into the determination of the allowance for loan losses and are included in the Bank’s impaired loan analysis and individually evaluated for impairment.

At December 31, 2022 and December 31, 2021, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

There were no loan modifications classified as TDRs within the last twelve months that defaulted (90 days past due) during the twelve months ended December 31, 2022 and 2021.