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LOANS

3 Months Ended

Mar. 31, 2021

NOTE 3 – LOANS

Major classifications of loans at March 31, 2021 and December 31, 2020 are summarized as follows:

	2021		2020
Residential real estate	$	379,679	$	378,659
Multifamily real estate		33,414		37,978
Commercial real estate:
Owner occupied		174,206		164,706
Non-owner occupied		332,765		329,031
Commercial and industrial		87,223		90,062
SBA PPP		98,298		61,169
Consumer		22,005		23,984
Construction and land		98,794		92,648
All other		35,524		36,141
	$	1,261,908	$	1,214,378

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2021 was as follows:

Loan Class	Balance Dec 31, 2020		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance March 31, 2021

Residential real estate	$	2,071	$	99		$	(60	)	$	1	$	2,111
Multifamily real estate		184		(18	)		-			-		166
Commercial real estate:
Owner occupied		2,874		95			-			1		2,970
Non-owner occupied		5,129		499			-			-		5,628
Commercial and industrial		1,538		(95	)		(63	)		5		1,385
Consumer		226		1			(26	)		4		205
Construction and land		946		74			-			2		1,022
All other		548		(7	)		(28	)		27		540
Total	$	13,516	$	648		$	(177	)	$	40	$	14,027

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020 was as follows:

Loan Class	Balance Dec 31, 2019		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance March 31, 2020

Residential real estate	$	1,711	$	216		$	(93	)	$	4	$	1,838
Multifamily real estate		1,954		150			-			-		2,104
Commercial real estate:
Owner occupied		2,441		342			(566	)		3		2,220
Non-owner occupied		3,184		479			(24	)		3		3,642
Commercial and industrial		1,767		22			-			28		1,817
Consumer		281		2			(69	)		27		241
Construction and land		1,724		(349	)		-			37		1,412
All other		480		138			(74	)		38		582
Total	$	13,542	$	1,000		$	(826	)	$	140	$	13,856

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at March 31, 2021 and December 31, 2020.

	2021		2020
Residential real estate	$	2,025	$	2,092
Commercial real estate
Owner occupied		680		1,012
Non-owner occupied		2,006		2,357
Commercial and industrial		14		16
Consumer		8		9
Construction and land		337		368
All other		38		110
Total carrying amount	$	5,108	$	5,964
Contractual principal balance	$	8,060	$	9,267

Carrying amount, net of allowance	$	5,108	$	5,964

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three-months ended March 31, 2021 and March 31, 2020.

For those purchased loans disclosed above, where the Company can reasonably estimate the cash flows expected to be collected on the loans, a portion of the purchase discount is allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion is being recognized as interest income over the remaining life of the loan.

Where the Company cannot reasonably estimate the cash flows expected to be collected on the loans, it has continued to account for those loans using the cost recovery method of income recognition. As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment on those loans accounted for using the cost recovery method. If, in the future, cash flows from the borrower(s) can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion would be recognized as interest income over the remaining life of the loan. Until such accretable yield can be calculated, under the cost recovery method of income recognition, all payments will be used to reduce the carrying value of the loan and no income will be recognized on the loan until the carrying value is reduced to zero. Any loan accounted for under the cost recovery method is also still included as a non-accrual loan in the amounts presented in the tables below.

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at March 31, 2021 and March 31, 2020.

	2021			2020
Balance at January 1	$	277		$	619
New loans purchased		-			-
Accretion of income		(87	)		(36	)
Loans placed on non-accrual		(5	)		-
Income recognized upon full repayment		-			(7	)
Reclassifications from non-accretable difference		219			-
Disposals		-			-
Balance at March 31	$	404		$	576

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2021 and December 31, 2020. The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

March 31, 2021	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	4,506	$	3,562	$	807
Commercial real estate
Owner occupied		3,861		3,602		94
Non-owner occupied		5,367		4,216		7
Commercial and industrial		1,066		490		-
Consumer		147		85		1
Construction and land		11		9		-
Total	$	14,958	$	11,964	$	909

December 31, 2020	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	5,144	$	3,955	$	1,348
Commercial real estate
Owner occupied		2,601		2,103		7
Non-owner occupied		3,305		2,230		975
Commercial and industrial		1,173		604		-
Consumer		168		94		1
Construction and land		12		10		1
Total	$	12,403	$	8,996	$	2,332

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the aging of the recorded investment in past due loans as of March 31, 2021 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due

Residential real estate	$	379,679	$	2,763	$	2,512	$	5,275	$	374,404
Multifamily real estate		33,414		-		-		-		33,414
Commercial real estate:
Owner occupied		174,206		1,999		580		2,579		171,627
Non-owner occupied		332,765		988		935		1,923		330,842
Commercial and industrial		87,223		30		367		397		86,826
SBA PPP		98,298		-		-		-		98,298
Consumer		22,005		144		13		157		21,848
Construction and land		98,794		-		4		4		98,790
All other		35,524		-		-		-		35,524
Total	$	1,261,908	$	5,924	$	4,411	$	10,335	$	1,251,573

The following table presents the aging of the recorded investment in past due loans as of December 31, 2020 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due

Residential real estate	$	378,659	$	3,978	$	3,190	$	7,168	$	371,491
Multifamily real estate		37,978		32		-		32		37,946
Commercial real estate:
Owner occupied		164,706		1,197		814		2,011		162,695
Non-owner occupied		329,031		987		2,196		3,183		325,848
Commercial and industrial		90,062		75		476		551		89,511
SBA PPP		61,169		-		-		-		61,169
Consumer		23,984		190		38		228		23,756
Construction and land		92,648		-		5		5		92,643
All other		36,141		23		-		23		36,118
Total	$	1,214,378	$	6,482	$	6,719	$	13,201	$	1,201,177

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2021:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	-	$	2,111	$	-	$	2,111	$	56	$	377,598	$	2,025	$	379,679
Multifamily real estate		-		166		-		166		-		33,414		-		33,414
Commercial real estate:
Owner occupied		291		2,679		-		2,970		3,797		169,729		680		174,206
Non-owner occupied		653		4,975		-		5,628		4,123		326,636		2,006		332,765
Commercial and industrial		277		1,108		-		1,385		400		86,809		14		87,223
SBA PPP		-		-		-		-		-		98,298		-		98,298
Consumer		-		205		-		205		-		21,997		8		22,005
Construction and land		-		1,022		-		1,022		-		98,457		337		98,794
All other		-		540		-		540		-		35,486		38		35,524
Total	$	1,221	$	12,806	$	-	$	14,027	$	8,376	$	1,248,424	$	5,108	$	1,261,908

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2020:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	-	$	2,071	$	-	$	2,071	$	57	$	376,510	$	2,092	$	378,659
Multifamily real estate		-		184		-		184		-		37,978		-		37,978
Commercial real estate:
Owner occupied		240		2,634		-		2,874		1,981		161,713		1,012		164,706
Non-owner occupied		385		4,744		-		5,129		1,843		324,831		2,357		329,031
Commercial and industrial		374		1,164		-		1,538		548		89,498		16		90,062
SBA PPP		-		-		-		-		-		61,169		-		61,169
Consumer		-		226		-		226		-		23,975		9		23,984
Construction and land		-		946		-		946		-		92,280		368		92,648
All other		-		548		-		548		-		36,031		110		36,141
Total	$	999	$	12,517	$	-	$	13,516	$	4,429	$	1,203,985	$	5,964	$	1,214,378

In the tables below, total individually evaluated impaired loans include certain purchased loans that were acquired with deteriorated credit quality that are still individually evaluated for impairment.

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2021. The table includes $71,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	172	$	56	$	-
Commercial real estate
Owner occupied		3,547		3,305		-
Non-owner occupied		1,320		421		-
Commercial and industrial		509		-		-
		5,548		3,782		-
With an allowance recorded:
Commercial real estate
Owner occupied		508		492		291
Non-owner occupied		4,019		3,773		653
Commercial and industrial		440		400		277
		4,967		4,665		1,221
Total	$	10,515	$	8,447	$	1,221

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2020. The table includes $689,000 of loans acquired with deteriorated credit quality for which the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	175	$	57	$	-
Commercial real estate
Owner occupied		2,295		1,815		-
Non-owner occupied		1,638		743		-
Commercial and industrial		509		-		-
		4,617		2,615		-
With an allowance recorded:
Commercial real estate
Owner occupied	$	506	$	490	$	240
Non-owner occupied		1,638		1,465		385
Commercial and industrial		581		548		374
		2,725		2,503		999
Total	$	7,342	$	5,118	$	999

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended March 31, 2021 and March 31, 2020. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended March 31, 2021						Three months ended March 31, 2020
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Residential real estate	$	57	$	-	$	-	$	62	$	-	$	-
Multifamily real estate		-		-		-		3,761		-		-
Commercial real estate:
Owner occupied		3,050		152		152		2,408		3		3
Non-owner occupied		3,201		-		-		4,362		36		36
Commercial and industrial		474		1		1		726		1		1
Construction and land		-		-		-		378		-		-
Total	$	6,782	$	153	$	153	$	11,697	$	40	$	40

Troubled Debt Restructurings

A loan is classified as a troubled debt restructuring ("TDR") when loan terms are modified due to a borrower's financial difficulties and a concession is granted to a borrower that would not have otherwise been considered. Most of the Company’s loan modifications involve a restructuring of loan terms prior to maturity to temporarily reduce the payment amount and/or to require only interest for a temporary period, usually up to six months. These modifications generally do not meet the definition of a TDR because the modifications are considered to be an insignificant delay in payment. The determination of an insignificant delay in payment is evaluated based on the facts and circumstances of the individual borrower(s).

The following table presents TDR’s as of March 31, 2021 and December 31, 2020:

March 31, 2021	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	1	$	215	$	216
Commercial real estate
Owner occupied		-		189		189
Non-owner occupied		856		-		856
Total	$	857	$	404	$	1,261

December 31, 2020	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	19	$	203	$	222
Commercial real estate
Owner occupied		-		195		195
Non-owner occupied		856		-		856
Total	$	875	$	398	$	1,273

At March 31, 2021, $306,000 in specific reserves was allocated to loans that had restructured terms resulting in a provision for loan losses of $30,000 for the three months ended March 31, 2021, compared to $203,000 in provision for loan losses on restructured loans during the three months ended March 31, 2020. At December 31, 2020, $276,000 in specific reserves was allocated to loans that had restructured terms. There were no commitments to lend additional amounts to these borrowers.

There were no TDR’s that occurred during the three months ended March 31, 2021 or the three months ended March 31, 2020.

During the three months ended March 31, 2021 and the three months ended March 31, 2020, there were no TDR’s for which there was a payment default within twelve months following the modification.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020. Provisions of the CARES Act permit certain loan payment modifications by banks that would normally be considered TDR’s to be exempt from the TDR rules. To date, management has exercised these provisions of the CARES Act on some loan modifications on an individually requested basis.

The following table presents the status of the remaining loans as of March 31, 2021 and December 31, 2020 with some degree of payment modification under the CARES Act.

March 31, 2021	Modified to Interest Only Payment		Modified to Defer Principal and Interest Payment		Total
Commercial real estate
Owner occupied	$	967	$	5,108	$	6,075
Non-owner occupied		3,839		12,293		16,132
Construction and land		5,769		-		5,769
Total	$	10,575	$	17,401	$	27,976

December 31, 2020	Modified to Interest Only Payment		Modified to Defer Principal and Interest Payment		Total

Residential real estate	$	560	$	338	$	898
Multifamily real estate		667		-		667
Commercial real estate
Owner occupied		10,567		396		10,963
Non-owner occupied		17,659		214		17,873
Construction and industrial		-		898		898
Consumer		7		19		26
Construction and land		2,472		3,849		6,321
Total	$	31,932	$	5,714	$	37,646

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured by residential real estate, on a monthly basis. For consumer loans, including consumer loans secured by residential real estate, and smaller balance non-homogeneous loans, the analysis involves monitoring the performing status of the loan. At the time such loans become past due by 90 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of March 31, 2021, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	366,902	$	2,950	$	9,827	$	-	$	379,679
Multifamily real estate		30,955		2,459		-		-		33,414
Commercial real estate:
Owner occupied		165,784		4,540		3,882		-		174,206
Non-owner occupied		303,662		24,348		4,755		-		332,765
Commercial and industrial		82,656		3,291		1,276		-		87,223
SBA PPP		98,298		-		-		-		98,298
Consumer		21,866		-		139		-		22,005
Construction and land		94,093		4,639		62		-		98,794
All other		35,498		26		-		-		35,524
Total	$	1,199,714	$	42,253	$	19,941	$	-	$	1,261,908

As of December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	365,397	$	3,093	$	10,169	$	-	$	378,659
Multifamily real estate		35,412		2,566		-		-		37,978
Commercial real estate:
Owner occupied		155,707		4,686		4,313		-		164,706
Non-owner occupied		312,139		13,959		2,933		-		329,031
Commercial and industrial		84,948		3,747		1,367		-		90,062
SBA PPP		61,169		-		-		-		61,169
Consumer		23,837		5		142		-		23,984
Construction and land		88,587		3,833		228		-		92,648
All other		36,141		-		-		-		36,141
Total	$	1,163,337	$	31,889	$	19,152	$	-	$	1,214,378

As of March 31, 2021 and December 31, 2020, there were no loans with payment deferrals under the CARES Act that were delinquent or on nonaccrual status. As of March 31, 2021, two non-owner occupied loans totaling $15,918,000 were risk rated special mention. As of December 31, 2020, one non-owner occupied loan totaling $3,839,000 was risk rated special mention and one residential real estate loan totaling $38,000 was risk rated substandard. The Company evaluates its deferred loans after a deferral period expires to determine if a further deferment should be granted and if a downgrade in risk rating is appropriate. Otherwise, loans are returned to their original payment terms.