Loans, Allowance For Credit Losses And OREO

3 Months Ended

Mar. 31, 2023

Loans, allowance for credit losses and OREO [Abstract]

Loans, allowance for credit losses and OREO

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Note 8 – Loans, allowance for credit losses and OREO

On January 1, 2023, the Company adopted the amendments within ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Accordingly, the Company’s financials results for reporting periods beginning after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts have not been adjusted and continue to be reported with legacy GAAP. For a detailed discussion of the impact of the adoption of ASU 2016-13 and information related to loans and credit quality, including accounting policies and methodologies used to estimate the allowance for credit losses, see Note 1.

The Company’s primary portfolio segments have changed to align with the methodology applied in estimating the allowance for credit losses under CECL and are reflected as such in the disclosures as of and for the period ended March 31, 2023 as provided below.

Previously, management’s established methodology used to determine the adequacy of the allowance for credit losses that assessed the risks and losses expected in the loan portfolio. For purposes of determining the allowance for credit losses prior to the adoption of CECL, the Bank segmented certain loans in the portfolio by product type. Within these segments, the Bank sub-segmented its portfolio into classes, based on the associated risks. The classifications set forth below for December 31, 2022 and prior periods do not correspond directly to the classifications set forth in the call report (Form FFIEC 041). Management determined that prior to the adoption of CECL, the classifications set forth below were more appropriate for use in identifying and managing risk in the loan portfolio.


Loan Segments After CECL Adoption:		Loan Classes After CECL Adoption:
Commercial		Commercial and Industrial Loans
Commercial Real Estate		Commercial Mortgages – Owner Occupied
		Commercial Mortgages – Non-Owner Occupied
		Commercial Construction/Land
Consumer		Consumer Open-End
		Consumer Closed-End
Residential		Residential Mortgages
		Residential Consumer Construction/Land

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

A summary of loans, net (1) is as follows (dollars in thousands):


	As of
	March 31, 2023
Commercial	$ 71,652
Commercial Real Estate:
Commercial Mortgages-Owner Occupied	131,171
Commercial Mortgages-Non-Owner Occupied	180,053
Commercial Construction/Land	23,472
Consumer
Consumer Open-End	50,449
Consumer Closed-End	27,285
Residential:
Residential Mortgages	101,688
Residential Consumer Construction/Land	40,168

Total loans	$ 625,938

Less allowance for credit losses	7,715

Net loans	$ 618,223

	As of
	December 31, 2022
Commercial	$ 95,885
Commercial Real Estate:
Commercial Mortgages-Owner Occupied	135,189
Commercial Mortgages-Non-Owner Occupied	206,701
Commercial Construction	12,135
Consumer
Consumer Unsecured	2,828
Consumer Secured	95,131
Residential:
Residential Mortgages	43,049
Residential Consumer Construction	20,707

Total loans	$ 611,625

Less allowance for credit losses	6,259

Net loans	$ 605,366

(1)Includes net deferred costs of $1,054 and $1,114 as of March 31, 2023 and December 31, 2022, respectively.

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

The following table presents the amortized cost basis of collateral dependent loans by loan segment:


Collateral Dependent Loans	March 31, 2023
(dollars in thousands)	Business/Other Assets	Real Estate
Commercial	$ 346	$ -
Commercial Real Estate	-	3,633
Consumer	-	399
Residential	-	1,339
Total	$ 346	$ 5,371

Impaired loans by class as of and for the period ended December 31, 2022 were as follows:



		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 (1)	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

(1)Recorded Investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

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

The following tables present the activity in the allowance for credit losses for the year-to-date periods ended and the distribution of the allowance by segment as of March 31, 2023 and December 31, 2022.



	Allowance for Credit Losses and Recorded Investment in Loans
	(dollars in thousands)
	As of and For the Three Months Ended March 31, 2023

		Commercial
2023	Commercial	Real Estate	Consumer	Residential	Total

Allowance for Credit Losses:

Beginning Balance, December 31, 2022	$ 1,102	$ 2,902	$ 904	$ 1,351	$ 6,259
Adoption of ASU 2016-13	(526)	1,157	257	357	1,245
Charge-Offs	(17)	-	(16)	-	(33)
Recoveries	9	88	5	2	104
Provision (Recovery of)	33	(52)	11	148	140
Ending Balance, March 31, 2023	601	4,095	1,161	1,858	7,715

Ending Balance: Individually evaluated	-	-	2	-	2

Ending Balance: Collectively evaluated	601	4,095	1,159	1,858	7,713

Totals:	$ 601	$ 4,095	$ 1,161	$ 1,858	$ 7,715

Financing Receivables:
Ending Balance: Individually evaluated	$ 346	$ 3,633	$ 399	$ 1,339	$ 5,717

Ending Balance: Collectively evaluated	71,306	331,063	77,335	140,517	620,221

Totals:	$ 71,652	$ 334,696	$ 77,734	$ 141,856	$ 625,938

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





	As of and For the Year Ended December 31, 2022

		Commercial
2022	Commercial	Real Estate	Consumer	Residential	Total

Allowance for Credit 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)	(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 8 – Loans, allowance for credit losses and OREO (continued)

Credit Quality Indicators

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

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

The table below details the amortized cost of the classes of loans by credit quality indicator and year of origination as of March 31, 2023.


	Term Loans Amortized Cost Basis by Origination Year
	2023	2022	2021	2020	2019	Prior	Revolving Loans Amortized Cost Basis	Total	Revolving Loans Converted to Term
Commercial:
Risk Rating
Pass	$ 2,986	$ 5,994	$ 14,357	$ 8,355	$ 3,417	$ 12,746	$ 22,721	$ 70,576	$ -
Special Mention	-	95	-	143	-	-	413	651	-
Substandard	-	21	58	-	8	149	189	425	-
Total	$ 2,986	$ 6,110	$ 14,415	$ 8,498	$ 3,425	$ 12,895	$ 23,323	$ 71,652	$ -

Commercial Real Estate:
Commercial Mort. - Owner Occupied
Risk Rating
Pass	$ 2,719	$ 23,189	$ 49,580	$ 8,696	$ 9,832	$ 34,648	$ -	$ 128,664	$ -
Special Mention	-	-	-	-	-	475	-	475	-
Substandard	-	-	-	46	302	1,684	-	2,032	-
Total	$ 2,719	$ 23,189	$ 49,580	$ 8,742	$ 10,134	$ 36,807	$ -	$ 131,171	$ -

Commercial Mort. - Non-Owner Occupied
Risk Rating
Pass	$ 7,778	$ 54,870	$ 36,512	$ 10,760	$ 8,387	$ 60,570	$ -	$ 178,877	$ -
Special Mention	-	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	1,176	-	-	1,176	-
Total	$ 7,778	$ 54,870	$ 36,512	$ 10,760	$ 9,563	$ 60,570	$ -	$ 180,053	$ -

Commercial Construction/Land
Risk Rating
Pass	$ -	$ 6,093	$ 10,708	$ 3,227	$ 756	$ 2,264	$ -	$ 23,048	$ -
Special Mention	-	-	-	-	-	-	-	-	-
Substandard	-	-	424	-	-	-	-	424	-
Total	$ -	$ 6,093	$ 11,132	$ 3,227	$ 756	$ 2,264	$ -	$ 23,472	$ -

Consumer:
Consumer - Open-End
Risk Rating
Pass	$ -	$ -	$ -	$ -	$ -	$ -	$ 50,231	$ 50,231	$ 1,448
Special Mention	-	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	-	-	218	218	-
Total	$ -	$ -	$ -	$ -	$ -	$ -	$ 50,449	$ 50,449	$ 1,448

Consumer - Closed-End
Risk Rating
Pass	$ 2,071	$ 12,988	$ 819	$ 630	$ 9,546	$ 963	$ -	$ 27,017	$ -
Special Mention	-	-	-	18	-	-	-	18	-
Substandard	-	-	-	-	217	33	-	250	-
Total	$ 2,071	$ 12,988	$ 819	$ 648	$ 9,763	$ 996	$ -	$ 27,285	$ -

Residential:
Residential Mortgages
Risk Rating
Pass	$ 14,430	$ 26,460	$ 10,540	$ 10,142	$ 8,308	$ 28,433	$ -	$ 98,313	$ -
Special Mention	-	-	-	-	-	1,770	-	1,770	-
Substandard	-	-	-	-	60	1,545	-	1,605	-
Total	$ 14,430	$ 26,460	$ 10,540	$ 10,142	$ 8,368	$ 31,748	$ -	$ 101,688	$ -

Residential Consumer Constr./Land
Risk Rating
Pass	$ 1,437	$ 20,134	$ 10,527	$ 2,815	$ 2,253	$ 3,002	$ -	$ 40,168	$ -
Special Mention	-	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	-	-	-	-	-
Total	$ 1,437	$ 20,134	$ 10,527	$ 2,815	$ 2,253	$ 3,002	$ -	$ 40,168	$ -

Totals:
Risk Rating
Pass	$ 31,421	$ 149,728	$ 133,043	$ 44,625	$ 42,499	$ 142,626	$ 72,952	$ 616,894	$ 1,448
Special Mention	-	95	-	161	-	2,245	413	2,914	-
Substandard	-	21	482	46	1,763	3,411	407	6,130	-
Total	$ 31,421	$ 149,844	$ 133,525	$ 44,832	$ 44,262	$ 148,282	$ 73,772	$ 625,938	$ 1,448

The following table details the current period gross charge-offs of loans by year of origination as of March 31, 2023


Current Period Gross Charge-Offs by Origination Year (in thousands)


	2023	2022	2021	2020	2019	Prior	Revolving Loans Amortized Cost Basis	Total	Revolving Loans Converted to Term
Commercial	$ -	$ -	$ -	$ 17	$ -	$ -	$ -	$ 17	$ -
Commercial Real Estate:
Commercial Mortgages-Owner Occupied	-	-	-	-	-	-	-	-	-
Commercial Mortgages-Non-Owner Occupied	-	-	-	-	-	-	-	-	-
Commercial Construction/Land	-	-	-	-	-	-	-	-	-
Consumer:
Consumer Open-End	-	-	-	-	-	-	6	6	-
Consumer Closed-End	-	-	10	-	-	-	-	10	-
Residential:
Residential Mortgages	-	-	-	-	-	-	-	-	-
Residential Consumer Construction/Land	-	-	-	-	-	-	-	-	-

Total	$ -	$ -	$ 10	$ 17	$ -	$ -	$ 6	$ 33	$ -

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

The following tables present credit quality information by class of loans as of December 31, 2022.


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

Loans on Non-Accrual Status

(dollars in thousands)


	CECL			Incurred Loss
	March 31, 2023			December 31, 2022
	Nonaccrual Loans			Nonaccrual Loans
	With No Allowance	With an Allowance	Total
Commercial Real Estate:
Commercial Mortgages-Non-Owner Occupied	$ -	$ -	$ -	$ 518
Commercial Construction/Land	424	-	424	-
Consumer
Consumer Open-End	7	-	7	-
Consumer Closed-End	94	-	94	20
Residential:
Residential Mortgages	-	-	-	95
Total	$ 525	$ -	$ 525	$ 633

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

The following tables present an aging analysis of the loan portfolio by class and past due as of March 31, 2023 and December 31, 2022.


Age Analysis of Past Due Loans as of March 31, 2023
														Recorded
						Greater								Investment
2023		30-59 Days		60-89 Days		than		Total Past				Total		> 90 Days &
		Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
Commercial	$	—	$	—	$	—	$	—	$	71,652	$	71,652	$	—
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		—		—		—		—		131,171		131,171		—
Commercial Mortgages-Non-Owner Occupied		—		—		—		—		180,053		180,053		—
Commercial Construction/Land		—		—		—		—		23,472		23,472		—
Consumer:
Consumer Open-End		113		—		—		113		50,336		50,449		—
Consumer Closed-End		123		—		94		217		27,068		27,285		—
Residential:
Residential Mortgages		382		665		—		1,047		100,641		101,688		—
Residential Consumer Construction/Land		274		—		—		274		39,894		40,168		—
Total	$	892	$	665	$	94	$	1,651	$	624,287	$	625,938	$	—


Age Analysis of Past Due Loans as of December 31, 2022

2022						Greater								Investment
		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	$	—

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

Occasionally, the Bank modifies loans to borrowers experiencing financial difficulties by providing principal forgiveness, term extensions, interest rate reductions or payment deferrals. As the effect of most modifications is already included in the allowance for credit losses due to the measurement methodologies used in its estimate, the allowance for credit losses is typically not adjusted upon modification. When principal forgiveness is provided at modification, the amount forgiven is charged against the allowance for credit losses.

There were no loan modifications during the three months ended March 31, 2023.

Troubled Debt Restructurings (TDR)

There were no loan modifications that would have been classified as TDRs during the three months ended March 31, 2022.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three months ended March 31, 2022.

The Company adopted ASU 2022-02 on January 1, 2023, which eliminated the accounting guidance for TDRs.

ACL on Unfunded Commitments

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable by the Company. The allowance for off-balance sheet credit exposures is adjusted as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for loan credit losses. The allowance for credit losses for unfunded loan commitments of $779,000 at March 31, 2023 and December 31, 2022, is separately classified within Other Liabilities on the Consolidated Balance Sheets.

The following table presents the balance and activity in the ACL for unfunded commitments for the three months ended March 31, 2023:


Allowance for Credit Losses on Unfunded Commitments
Balance, December 31, 2022	$ -
Adoption of ASU 2016-13	779
Provision for credit losses	-
Balance March 31, 2023	$ 779

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

Other Real Estate Owned

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 $540 on March 31, 2023 from $566 on December 31, 2022. The decrease was a result of the write-down of a property by $26. The following table represents the changes in OREO balance during the three months ended March 31, 2023 and year ended December 31, 2022.

OREO Changes

(dollars in thousands)


	Three Months Ended Year Ended
	March 31, 2023		December 31, 2022
Balance at the beginning of the year (net)	$	566	$	761
Transfers from loans		—		—
Capitalized costs		—		—
Valuation adjustments		(26)		(195)
Sales proceeds		—		—
Loss on disposition		—		—
Balance at the end of the period (net)	$	540	$	566

At March 31, 2023 and December 31, 2022, 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 properties in other real estate owned as of March 31, 2023 and December 31, 2022.