Loans and allowance for credit losses

6 Months Ended

Jun. 30, 2023

Loans and allowance for credit losses

Loans and allowance for credit losses

Note 5 – Loans and allowance for credit losses

On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1 in this Quarterly report.  All information presented as of June 30, 2023 is in accordance with ASC 326.  All loan information presented prior to June 30, 2023 is in accordance with previous applicable GAAP.

Loans classified by type as of June 30, 2023 and December 31, 2022 are as follows (dollars in thousands):

	June 30, 2023				December 31, 2022
	Amount		%		Amount		%
Construction and land development
Residential	$	7,527	1.35	%	$	9,727	1.81	%
Commercial		43,411	7.81	%		35,400	6.57	%
		50,938	9.16	%		45,127	8.38	%
Commercial real estate
Owner occupied		114,964	20.67	%		119,643	22.22	%
Non-owner occupied		155,139	27.89	%		153,610	28.53	%
Multifamily		12,755	2.29	%		11,291	2.10	%
Farmland		63	0.01	%		73	0.01	%
		282,921	50.86	%		284,617	52.86	%
Consumer real estate
Home equity lines		17,335	3.12	%		18,421	3.42	%
Secured by 1-4 family residential,
First deed of trust		79,762	14.34	%		67,495	12.54	%
Second deed of trust		9,435	1.70	%		7,764	1.44	%
		106,532	19.16	%		93,680	17.40	%
Commercial and industrial loans
(except those secured by real estate)		91,394	16.43	%		90,348	16.78	%
Guaranteed student loans		20,002	3.60	%		20,617	3.83	%
Consumer and other		4,383	0.79	%		4,038	0.73	%
Total loans		556,170	100.0	%		538,427	100.0	%
Deferred (fees) and costs, net		746				588
Less: allowance for credit losses		(3,256)				(3,370)
	$	553,660			$	535,645

The Bank has a purchased portfolio of rehabilitated student loans guaranteed by the U.S. Department of Education (“DOE”). The guarantee covers approximately 98% of principal and accrued interest. The loans are serviced by a third-party servicer that specializes in handling the special needs of the DOE student loan programs.

Loans pledged as collateral with the FHLB as part of their lending arrangement with the Company totaled $36,705,000 and $33,706,000 as of June 30, 2023 and December 31, 2022, respectively.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due as long as the remaining recorded investment in the loan is deemed fully collectible.

When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table provides information on nonaccrual loans segregated by type at the dates indicated (in thousands):

	June 30,		December 31,
	2023		2022
Consumer real estate
Home equity lines	$	—	$	300
Secured by 1-4 family residential
First deed of trust		162		164
Second deed of trust		107		171
		269		635
Commercial and industrial loans
(except those secured by real estate)		17		19
Total loans	$	286	$	654

The Company recognized $13,000 of interest on nonaccrual loans as of June 30, 2023.

The Company assigns risk rating classifications to its loans. These risk ratings are divided into the following groups:

● Risk rated 1 to 4 (Pass) loans are considered of sufficient quality to preclude an adverse rating. These assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral;

● Risk rated 5 (Special Mention) loans are defined as having potential weaknesses that deserve management’s close attention;

● Risk rated 6 (Substandard) loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; and

● Risk rated 7 (Doubtful) loans have all the weaknesses inherent in substandard loans, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The following tables provide information on the risk rating of loans at the dates indicated (in thousands):

	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
	1‑4		5		6		7		Loans
December 31, 2022
Construction and land development
Residential	$	9,727	$	—	$	—	$	—	$	9,727
Commercial		32,763		2,637		—		—		35,400
		42,490		2,637		—		—		45,127
Commercial real estate
Owner occupied		115,825		2,583		1,235		—		119,643
Non-owner occupied		143,458		10,152		—		—		153,610
Multifamily		11,291		—		—		—		11,291
Farmland		73		—		—		—		73
		270,647		12,735		1,235		—		284,617
Consumer real estate
Home equity lines		17,507		614		300		—		18,421
Secured by 1-4 family residential
First deed of trust		66,616		407		472		—		67,495
Second deed of trust		7,517		72		175		—		7,764
		91,640		1,093		947		—		93,680
Commercial and industrial loans
(except those secured by real estate)		83,848		6,481		19		—		90,348
Guaranteed student loans		20,617		—		—		—		20,617
Consumer and other		4,017		—		21		—		4,038
Total loans	$	513,259	$	22,946	$	2,222	$	—	$	538,427

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination.  Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for purposes of the table below. As of June 30, 2023, based on the most recent analysis performed, the risk category of loans based on year of origination is as follows (in thousands):

																Revolving-	Total
	2023		2022		2021		2020			2019		Prior		Revolving		Term	Loans
June 30, 2023
Construction and land development
Residential
Pass	$	1,836	$	5,229	$	347	$	—	$	—	$	—	$	—	$	—	$	7,412
Special Mention		—		115		—		—		—		—		—		—		115
Substandard		—		—		—		—		—		—		—		—		—
Total Residential	$	1,836	$	5,344	$	347	$	—	$	—	$	—	$	—	$	—	$	7,527
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial
Pass		2,590		16,432		14,690		249		—		2,121		3,812		—		39,894
Special Mention		—		—		—		—		—		3,517		—		—		3,517
Substandard		—		—		—		—		—		—		—		—		—
Total Commercial	$	2,590	$	16,432	$	14,690	$	249	$	—	$	5,638	$	3,812	$	—	$	43,411
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Owner occupied
Pass		807		19,922		26,409		7,284		12,471		44,368		535		—		111,796
Special Mention		—		—		—		—		—		1,938		—		—		1,938
Substandard		—		—		—		—		1,230		—		—		—		1,230
Total Owner occupied	$	807	$	19,922	$	26,409	$	7,284	$	13,701	$	46,306	$	535	$	—	$	114,964
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

																Revolving-	Total
	2023		2022		2021		2020			2019		Prior		Revolving		Term	Loans
Non-owner occupied
Pass		4,303		25,969		26,261		26,806		10,145		50,424		4,980		—		148,888
Special Mention		—		—		2,201		—		—		4,050		—		—		6,251
Substandard		—		—		—		—		—		—		—		—		—
Total Non-owner occupied	$	4,303	$	25,969	$	28,462	$	26,806	$	10,145	$	54,474	$	4,980	$	—	$	155,139
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Multifamily
Pass		1,300		—		2,641		559		895		6,296		1,064		—		12,755
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Multifamily	$	1,300	$	—	$	2,641	$	559	$	895	$	6,296	$	1,064	$	—	$	12,755
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Farmland
Pass		—		—		30		—		—		33		—		—		63
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Farmland	$	—	$	—	$	30	$	—	$	—	$	33	$	—	$	—	$	63
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer real estate
Home equity lines
Pass		—		446		—		—		—		—		16,281		—		16,727
Special Mention		—		—		—		—		—		—		608		—		608
Substandard		—		—		—		—		—		—		—		—		—
Total Home equity lines	$	—	$	446	$	—	$	—	$	—	$	—	$	16,889	$	—	$	17,335
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential
First deed of trust
Pass		17,767		13,987		16,130		8,810		3,101		18,480		—		—		78,275
Special Mention		173		—		173		—		—		979		—		—		1,325
Substandard		—		—		—		—		—		162		—		—		162
Total First deed of trust	$	17,940	$	13,987	$	16,303	$	8,810	$	3,101	$	19,621	$	—	$	—	$	79,762
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Second deed of trust
Pass		2,053		3,524		982		435		1,244		767		260		—		9,265
Special Mention		—		—		—		—		46		70		—		—		116
Substandard		—		—		—		—		2		52		—		—		54
Total Second deed of trust	$	2,053	$	3,524	$	982	$	435	$	1,292	$	889	$	260	$		$	9,435
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial loans
(except those secured by real estate)
Pass		9,633		13,969		18,773		6,939		3,543		4,460		26,788		—		84,105
Special Mention		—		4,097		78		—		396		125		2,507		—		7,203
Substandard		—		—		—		—		—		17		69		—		86
Total Commercial and industrial	$	9,633	$	18,066	$	18,851	$	6,939	$	3,939	$	4,602	$	29,364	$	—	$	91,394
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Guaranteed student loans
Pass		—		—		—		—		—		20,002		—		—		20,002
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total Guaranteed student loans	$	—	$	—	$	—	$	—	$	—	$	20,002	$	—	$	—	$	20,002
Current period gross writeoff	$	7	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	7
Consumer and other
Pass		2,224		532		164		85		27		19		1,314		—		4,365
Special Mention		—		—		—		—		18		—		—		—		18
Substandard		—		—		—		—		—		—		—		—		—
Total Consumer and other	$	2,224	$	532	$	164	$	85	$	45	$	19	$	1,314	$		$	4,383
Current period gross writeoff	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total Current period gross writeoff	$	7	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	7
Total loans	$	42,686	$	104,222	$	108,879	$	51,167	$	33,118	$	157,880	$	58,218	$	—	$	556,170

The following table presents the aging of the recorded investment in past due loans and leases as of the dates indicated (in thousands):

					Greater								Investment >
	30‑59 Days		60‑89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
June 30, 2023
Construction and land development
Residential	$	—	$	—	$	—	$	—	$	7,527	$	7,527	$	—
Commercial		—		—		—		—		43,411		43,411		—
		—		—		—		—		50,938		50,938		—
Commercial real estate
Owner occupied		—		—		—		—		114,964		114,964		—
Non-owner occupied		—		—		—		—		155,139		155,139		—
Multifamily		—		—		—		—		12,755		12,755		—
Farmland		—		—		—		—		63		63		—
		—		—		—		—		282,921		282,921		—
Consumer real estate
Home equity lines		40		—		—		40		17,295		17,335		—
Secured by 1‑4 family residential
First deed of trust		—		—		—		—		79,762		79,762		—
Second deed of trust		—		—		—		—		9,435		9,435		—
		40		—		—		40		106,492		106,532		—
Commercial and industrial loans
(except those secured by real estate)		759		131		742		1,632		89,762		91,394		742
Guaranteed student loans		1,288		311		1,978		3,577		16,425		20,002		1,978
Consumer and other		3		—		—		3		4,380		4,383		—
Total loans	$	2,090	$	442	$	2,720	$	5,252	$	550,918	$	556,170	$	2,720

													Recorded
					Greater								Investment >
	30-59 Days		60-89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
December 31, 2022
Construction and land development
Residential	$	—	$	—	$	—	$	—	$	9,727	$	9,727	$	—
Commercial		—		—		—		—		35,400		35,400		—
		—		—		—		—		45,127		45,127		—
Commercial real estate
Owner occupied		—		—		—		—		119,643		119,643		—
Non-owner occupied		—		—		—		—		153,610		153,610		—
Multifamily		—		—		—		—		11,291		11,291		—
Farmland		—		—		—		—		73		73		—
		—		—		—		—		284,617		284,617		—
Consumer real estate
Home equity lines		—		50		—		50		18,371		18,421		—
Secured by 1-4 family residential
First deed of trust		—		—		—		—		67,495		67,495		—
Second deed of trust		54		—		—		54		7,710		7,764		—
		54		50		—		104		93,576		93,680		—
Commercial and industrial loans
(except those secured by real estate)		1,022		—		377		1,399		88,949		90,348		—
Guaranteed student loans		831		390		1,725		2,946		17,671		20,617		1,725
Consumer and other		—		—		—		—		4,038		4,038		—
Total loans	$	1,907	$	440	$	2,102	$	4,449	$	533,978	$	538,427	$	1,725

Loans greater than 90 days past due are United States Department of Agriculture loans which carry a 100% guarantee of the principal and interest and student loans that are guaranteed by the DOE which covers approximately 98% of the principal and interest. Accordingly, these loans will not be placed on nonaccrual status and are not considered to be collateral dependent.

Loans that are individually evaluated for credit losses are limited to loans that have specific risk characteristics that are not shared by other loans and based on current information and events it is probable the Company will be unable to collect all amounts when due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. The repayment of these loans is expected to be substantially through the operations or the sale of the collateral. The allowance for credit losses on loans that are individually evaluated will be measured based on the fair value of the collateral either through operations or the sale of the collateral. When repayment is expected through the sale of the collateral, the allowance will be based on the fair value of the collateral less estimated costs to sell. Collateral dependent loans, or portions thereof, are charged off when deemed uncollectible. Collateral dependent loans are set forth in the following table as of the dates indicated (in thousands):

	June 30, 2023						December 31, 2022
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Commercial real estate
Owner occupied	$	1,714	$	1,729	$	—	$	4,332	$	4,347	$	—
Non-owner occupied		—		—		—		312		312		—
		1,714		1,729		—		4,644		4,659		—
Consumer real estate
Home equity lines		—		—		—		300		300		—
Secured by 1‑4 family residential
First deed of trust		162		162		—		1,745		1,745		—
Second deed of trust		109		193		—		195		300		—
		271		355		—		2,240		2,345		—
Commercial and industrial loans
(except those secured by real estate)		86		86		—		19		19		—
		2,071		2,170		—		6,903		7,023		—
With an allowance recorded
Commercial real estate
Owner occupied		—		—		—		251		251		2
		—		—		—		251		251		2
Consumer real estate
Secured by 1-4 family residential
First deed of trust		—		—		—		136		136		6
		—		—		—		136		136		6
Consumer and other		—		—		—		21		21		1
		—		—		—		408		408		9
Total
Owner occupied		1,714		1,729		—		4,583		4,598		2
Non-owner occupied		—		—		—		312		312		—
		1,714		1,729		—		4,895		4,910		2
Consumer real estate
Home equity lines		—		—		—		300		300		—
Secured by 1-4 family residential,
First deed of trust		162		162		—		1,881		1,881		6
Second deed of trust		109		193		—		195		300		—
		271		355		—		2,376		2,481		6
Commercial and industrial loans
(except those secured by real estate)		86		86		—		19		19		—
Consumer and other		—		—		—		21		21		1
	$	2,071	$	2,170	$	—	$	7,311	$	7,431	$	9

The following is a summary of average recorded investment in collateral dependent loans with and without a valuation allowance and interest income recognized on those loans for the periods indicated (in thousands):

	For the Three Months Ended				For the Six Months Ended
	June 30, 2023				June 30, 2023
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial real estate
Owner occupied	$	1,475	$	92	$	2,854	$	123
Non-owner occupied		—		—		—		—
		1,475		92		2,854		123
Consumer real estate
Home equity lines		150		—		225		—
Secured by 1-4 family residential
First deed of trust		178		—		987		4
Second deed of trust		220		1		170		2
		548		1		1,382		6
Commercial and industrial loans
(except those secured by real estate)		52		4		52		5
		2,075		97		4,288		134
With an allowance recorded
Commercial real estate
Owner occupied		—		—		127		—
		—		—		127		—
Consumer real estate
Secured by 1-4 family residential
First deed of trust		—		—		50		—
Second deed of trust		—		—		—		—
		—		—		50		—
Consumer and other		—		—		16		—
		—		—		193		—
Total
Commercial real estate
Owner occupied		1,475		92		2,981		123
Non-owner occupied		—		—		—		—
		1,475		92		2,981		123
Consumer real estate
Home equity lines		150		—		225		—
Secured by 1-4 family residential,
First deed of trust		178		—		1,037		4
Second deed of trust		220		1		170		2
		548		1		1,432		6
Commercial and industrial loans
(except those secured by real estate)		52		4		52		5
Consumer and other		—		—		16		—
	$	2,075	$	97	$	4,481	$	134

Loan Modifications to Borrowers in Financial Difficulty

As part of its credit risk management, the Company may modify a loan agreement with a borrower experiencing financial difficulties through a refinancing or restructuring of the borrower’s loan agreement. There were no modified loans identified during the six months ended June 30, 2023.  

Prior Period Troubled Debt Restructuring Disclosures

Prior to adopting the new accounting standard on loan modifications, the Company accounted for modifications of loans to borrowers experiencing financial difficulties as TDRs, when the modification resulted in a concession. The following discussion reflects loans that are considered TDRs prior to January 1, 2023.

Included in impaired loans are loans classified as TDRs. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. For loans classified as impaired TDRs, the Company further evaluates the loans as performing or nonaccrual. To restore a nonaccrual loan that has been formally restructured in a TDR to accrual status, we perform a current, well documented credit analysis supporting a return to accrual status based on the borrower’s financial condition and prospects for repayment under the revised terms. Otherwise, the TDR must remain in nonaccrual status. The analysis considers the borrower’s sustained historical repayment performance for a reasonable period to the return-to-accrual date, but may take into account payments made for a reasonable period prior to the restructuring if the payments are consistent with the modified terms. A sustained period of repayment performance generally would be a minimum of six months and would involve payments in the form of cash or cash equivalents.

An accruing loan that is modified in a TDR can remain in accrual status if, based on a current well-documented credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical repayment performance for a reasonable period before modification. The following is a summary of performing and nonaccrual TDRs and the related specific valuation allowance by portfolio segment for the periods indicated (dollars in thousands).

							Specific
							Valuation
	Total		Performing		Nonaccrual		Allowance
December 31, 2022
Commercial real estate
Owner occupied	$	3,348	$	3,348	$	—	$	2
Non-owner occupied		312		312		—		—
		3,660		3,660		—		2
Consumer real estate
Secured by 1-4 family residential
First deeds of trust		1,409		1,409		—		6
Second deeds of trust		75		19		56		—
		1,484		1,428		56		6
Commercial and industrial loans
(except those secured by real estate)		19		—		19		—
	$	5,163	$	5,088	$	75	$	8
Number of loans		24		22		2		3

There were no new TDRs identified for the year ended December 31, 2022.

A TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due.  The specific reserve associated with a TDR is reevaluated when a TDR payment default occurs. There were no defaults on TDRs that were modified as TDRs during the prior 12 month periods ended June 30, 2023 and 2022.

In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics by call report code. The Company’s forecast of estimated expected losses is based on a twelve-month forecast of the national rate of unemployment and external observations of historical loan losses. The Company uses the Federal Open Market Committee’s projection of unemployment for its reasonable and supportable forecasting of current expected credit losses. For the periods beyond the reasonable and supportable forecast period, projections of expected credit losses are based on a reversion to the long-run mean for the national unemployment rate. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes in lending policies and procedures including changes in underwriting standards, and collections, charge-offs, and recovery practices, changes in international, national, regional, and local conditions, changes in the nature and volume of the portfolio and terms of loans, changes in experience, depth, and ability of lending management, changes in the volume and severity of past due loans and other similar conditions, changes in the quality of the organization’s loan review system, changes in the value of underlying collateral for collateral dependent loans, the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.

Activity in the allowance for credit losses is as follows for the periods indicated (in thousands):

			Impact of		Provision for
	Beginning		adopting		(Recovery of)						Ending
	Balance		ASC 326		Credit Losses		Charge-offs		Recoveries		Balance
Three Months Ended June 30, 2023
Construction and land development
Residential	$	51	$	—	$	10	$	—	$	—	$	61
Commercial		264		—		3		—		—		267
		315		—		13		—		—		328
Commercial real estate
Owner occupied		391		—		(12)		—		—		379
Non-owner occupied		1,460		—		(84)		—		—		1,376
Multifamily		40		—		—		—		—		40
Farmland		—		—		—		—		—		—
		1,891		—		(96)		—		—		1,795
Consumer real estate
Home equity lines		33		—		30		—		—		63
Secured by 1-4 family residential						—
First deed of trust		214		—		5		—		—		219
Second deed of trust		75		—		4		—		4		83
		322		—		39		—		4		365
Commercial and industrial loans
(except those secured by real estate)		549		—		118		—		6		673
Student loans		112		—		(95)		(4)		—		13
Consumer and other		34		—		1		—		—		35
Unallocated		49		—		(2)		—		—		47
	$	3,272	$	—	$	(22)	$	(4)	$	10	$	3,256

			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Three Months Ended June 30, 2022
Construction and land development
Residential	$	46	$	11	$	—	$	—	$	57
Commercial		199		(28)		—		—		171
		245		(17)		—		—		228
Commercial real estate
Owner occupied		892		(24)		—		—		868
Non-owner occupied		1,106		161		—		—		1,267
Multifamily		37		13		—		—		50
Farmland		2		—		—		—		2
		2,037		150		—		—		2,187
Consumer real estate
Home equity lines		12		—		—		—		12
Secured by 1-4 family residential
First deed of trust		118		(5)		—		1		114
Second deed of trust		80		(32)		—		1		49
		210		(37)		—		2		175
Commercial and industrial loans
(except those secured by real estate)		446		56		—		31		533
Student loans		63		10		(13)		—		60
Consumer and other		35		10		—		—		45
Unallocated		367		(172)		—		—		195
	$	3,403	$	—	$	(13)	$	33	$	3,423

			Impact of		Provision for
	Beginning		adopting		(Recovery of)						Ending
	Balance		ASC 326		Credit Losses		Charge-offs		Recoveries		Balance
Six Months Ended June 30, 2023
Construction and land development
Residential	$	79	$	3	$	(21)	$	—	$	—	$	61
Commercial		192		34		41		—		—		267
		271		37		20		—		—		328
Commercial real estate
Owner occupied		867		(475)		(13)		—		—		379
Non-owner occupied		1,289		192		(105)		—		—		1,376
Multifamily		33		7		—		—		—		40
Farmland		—		—		—		—		—		—
		2,189		(276)		(118)		—		—		1,795
Consumer real estate
Home equity lines		11		24		28		—		—		63
Secured by 1-4 family residential
First deed of trust		131		76		11		—		1		219
Second deed of trust		43		25		9		—		6		83
		185		125		48		—		7		365
Commercial and industrial loans
(except those secured by real estate)		576		1		84		—		12		673
Student loans		52		—		(32)		(7)		—		13
Consumer and other		37		(5)		3		—		—		35
Unallocated		60		(9)		(4)		—		—		47
	$	3,370	$	(127)	$	1	$	(7)	$	19	$	3,256

			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Six Months Ended June 30, 2022
Construction and land development
Residential	$	57	$	—	$	—	$	—	$	57
Commercial		229		(58)		—		—		171
		286		(58)		—		—		228
Commercial real estate
Owner occupied		833		35		—		—		868
Non-owner occupied		1,083		184		—		—		1,267
Multifamily		35		15		—		—		50
Farmland		2		—		—		—		2
		1,953		234		—		—		2,187
Consumer real estate
Home equity lines		12		(58)		—		58		12
Secured by 1-4 family residential
First deed of trust		123		(11)		—		2		114
Second deed of trust		47		(301)		—		303		49
		182		(370)		—		363		175
Commercial and industrial loans
(except those secured by real estate)		486		(12)		—		59		533
Student loans		65		17		(22)		—		60
Consumer and other		29		16		—		—		45
Unallocated		422		(227)		—		—		195
	$	3,423	$	(400)	$	(22)	$	422	$	3,423

			Provision for
	Beginning		(Recovery of)						Ending
	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Year Ended December 31, 2022
Construction and land development
Residential	$	57	$	22	$	—	$	—	$	79
Commercial		229		(37)		—		—		192
		286		(15)		—		—		271
Commercial real estate
Owner occupied		833		34		—		—		867
Non-owner occupied		1,083		206		—		—		1,289
Multifamily		35		(2)		—		—		33
Farmland		2		(2)		—		—		—
		1,953		236		—		—		2,189
Consumer real estate
Home equity lines		12		(59)		—		58		11
Secured by 1-4 family residential
First deed of trust		123		3		—		5		131
Second deed of trust		47		(311)		(27)		334		43
		182		(367)		(27)		397		185
Commercial and industrial loans
(except those secured by real estate)		486		180		(157)		67		576
Student loans		65		18		(31)		—		52
Consumer and other		29		10		(2)		—		37
Unallocated		422		(362)		—		—		60
	$	3,423	$	(300)	$	(217)	$	464	$	3,370

Loans are required to be measured at amortized costs and to be presented at the net amount expected to be collected. Off balance sheet credit exposures, including loan commitments, are not recorded on balance sheet, but expected credit losses arising from off balance sheet credit exposures are recorded as a reserve for unfunded commitments and reported in Other Liabilities. Credit losses on available for sale debt securities are accounted for as an allowance for credit losses, which is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value and the amount expected to be collected on the financial assets. The allowance for credit losses on loans, available for sale debt securities and the reserve for unfunded commitments are established through a provision for credit losses charged against earnings. Amounts reported for the six months ended June 30, 2023 are in accordance with ASC 326, whereas amounts reported for periods prior to January 1, 2023 are presented in accordance with previously applicable GAAP.

The following table presents a breakdown of the provision for credit losses for the periods indicated (in thousands):

	Three Months Ended June 30,
		2023		2022
Provision for credit losses:
Provision (recovery) for loans		$	(22)	$	—
Provision (recovery) for unfunded commitments			22		—
Total		$	—	$	—

	Six Months Ended June 30,
		2023		2022
Provision for credit losses:
Provision (recovery) for loans		$	1	$	(400)
Provision (recovery) for unfunded commitments			(1)		—
Total		$	—	$	(400)

On January 1, 2023, the Commercial Banking Segment adopted the CECL methodology for estimating credit losses, which resulted in an increase of $150,000 in the allowance for credit losses on January 1, 2023. The Allowance for Credit Losses included an allowance for credit losses on loans of $3.24 million and a reserve for unfunded commitments of $277,000.

As of June 30, 2023, the Allowance for Credit Losses was $3.53 million and included an allowance for credit losses on loans of $3.26 million and a reserve for unfunded commitments of $277,000.

The Company recorded a provision for credit losses for loans of $1,000 for the six months ended June 30, 2023, which was the result of loan growth being offset by improved credit metrics as non-performing loans as a percentage of loans decreased from 0.13% at December 31, 2022 to 0.06% at June 30, 2023. The Company recorded a recovery for credit losses for unfunded commitments of $1,000 for the six months ended June 30, 2023, which was driven by a slight decrease in the total balance outstanding at June 30, 2023.

The following information is presented prior to the adoption of ASC 326.

The amount of the allowance for loan losses is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, underlying collateral values, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions.

The level of the allowance reflects changes in the size of the portfolio or in any of its components as well as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company recorded a recovery of provision for loan losses expense of $400,000 for the six month period ended June 30, 2022.  The recovery of provision for the three month period ended June 30, 2022 was driven by improving macroeconomic conditions and credit quality remaining strong.

Loans were evaluated for credit losses as follows for the periods indicated (in thousands):

	Recorded Investment in Loans
	Allowance						Loans
	Ending						Ending
	Balance		Individually		Collectively		Balance		Individually		Collectively
Six Months Ended June 30, 2023
Construction and land development
Residential	$	61	$	—	$	61	$	7,527	$	—	$	7,527
Commercial		267		—		267		43,411		—		43,411
		328		—		328		50,938		—		50,938
Commercial real estate
Owner occupied		379		—		379		114,964		1,714		113,250
Non-owner occupied		1,376		—		1,376		155,139		—		155,139
Multifamily		40		—		40		12,755		—		12,755
Farmland		—		—		—		63		—		63
		1,795		—		1,795		282,921		1,714		281,207
Consumer real estate
Home equity lines		63		—		63		17,335		—		17,335
Secured by 1-4 family residential
First deed of trust		219		—		219		79,762		162		79,600
Second deed of trust		83		—		83		9,435		109		9,326
		365		—		365		106,532		271		106,261
Commercial and industrial loans
(except those secured by real estate)		673		—		673		91,394		86		91,308
Student loans		13		—		13		20,002		—		20,002
Consumer and other		82		—		82		4,383		—		4,383
	$	3,256	$	—	$	3,256	$	556,170	$	2,071	$	554,099
Year Ended December 31, 2022
Construction and land development
Residential	$	79	$	—	$	79	$	9,727	$	—	$	9,727
Commercial		192		—		192		35,400		—		35,400
		271		—		271		45,127		—		45,127
Commercial real estate
Owner occupied		867		2		865		119,643		4,583		115,060
Non-owner occupied		1,289		—		1,289		153,610		312		153,298
Multifamily		33		—		33		11,291		—		11,291
Farmland		—		—		—		73		—		73
		2,189		2		2,187		284,617		4,895		279,722
Consumer real estate
Home equity lines		11		—		11		18,421		300		18,121
Secured by 1-4 family residential						—
First deed of trust		131		6		125		67,495		1,881		65,614
Second deed of trust		43		—		43		7,764		195		7,569
		185		6		179		93,680		2,376		91,304
Commercial and industrial loans
(except those secured by real estate)		576		—		576		90,348		19		90,329
Student loans		52		—		52		20,617		—		20,617
Consumer and other		97		1		96		4,038		21		4,017
	$	3,370	$	9	$	3,361	$	538,427	$	7,311	$	531,116