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Allowance for Loan Losses
 6 Months Ended
Jun. 30, 2022
Allowance For Loan Losses [Abstract]  
Allowance for Loan Losses

Note 5. Allowance for Loan Losses

The ALLL is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s quarterly evaluation of the collectability of the loan portfolio, credit concentrations, historical loss experience, specific impaired loans, and economic conditions. To determine the total ALLL, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.

For purposes of determining the ALLL on the outstanding loans that were not Acquired Loans, the Company has segmented certain loans in the portfolio by product type. Within these segments, the Company has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes. Note that under the acquisition method of accounting (ASC 805), the ALLL recorded in the books of Fauquier was not carried over into the books of the Company; however the Acquired Loans were subject to net fair value marks.

 

Management utilizes a loss migration model for determining the quantitative risk assigned to unimpaired loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, and increase efficiencies related to performing the calculations. The quantitative risk factor for each loan class primarily utilizes a migration analysis loss method based on loss history for the prior twelve quarters.

The migration analysis loss method is used for all loan pools except for the following:

•
All pools with a risk classification of excellent or good, as noted in the Risk Ratings and Historical Loss Factor Assigned section as follows.
•
Student loans purchased - The loss rate methodology for student loans is based on the average historical loss rate for each tranche of loans, using a twelve-quarter lookback period. Due to the declining balances in these pools, a balance weighted loss rate weight is used. In addition, qualitative factors are applied.
•
Commercial and industrial government guaranteed loans and PPP loans - These loans require no reserve as these are 100% guaranteed by either the SBA or the United States Department of Agriculture.
•
Minute Lender Loans – Commercial and Consumer - Minute Lender loans were acquired in the Merger and were historically assigned a loss rate of 4%, which was a recommendation of the vendor that administers the program. A 4% loss rate will be utilized until such time that a historical loss rate is available.

Under the migration analysis method, average loss rates are calculated at the risk grade and class levels by dividing the twelve-quarter average net charge-off amount by the twelve-quarter average loan balances. Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.

The Company’s internal creditworthiness grading system is based on experiences with similarly graded loans. The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Additionally, external reviews of a portion of the credits are conducted annually.

Loans that trend upward on the risk ratings scale, toward more positive risk ratings, generally exhibit lower risk factor characteristics. Conversely, loans that migrate toward more negative ratings generally will result in a higher risk factor being applied to those related loan balances.

 

Risk Ratings and Historical Loss Factor Assigned

Excellent

A 0% historical loss factor is applied, as these loans are secured by cash or fully guaranteed by a U.S. government agency and represent a minimal risk. The Company has never experienced a loss within this category.

Good

These loans represent a low risk and are secured by marketable collateral within margin. In an abundance of caution, a nominal loss reserve of 0.15% is applied to these loans. The Company has never experienced a loss within this category.

Pass

A historical loss factor for loans rated “Pass” is applied to current balances of like-rated loans, pooled by class. Loans with the following risk ratings are pooled by class and considered together as “Pass”:

Satisfactory – modest risk loans where the borrower has strong and liquid financial statements and more than adequate cash flow

Average – average risk loans where the borrower has reasonable debt service capacity

Marginal – acceptable risk loans where the borrower has acceptable financial statements but is leveraged

Watch

These loans have an acceptable risk but require more attention than normal servicing. A historical loss factor for loans rated “Watch” is applied to current balances of like-rated loans pooled by class.

Special Mention

These potential problem loans are currently protected but are potentially weak. A historical loss factor for loans rated “Special Mention” is applied to current balances of like-rated loans pooled by class.

Substandard

These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged. These loans may be considered impaired and evaluated on an individual basis. Otherwise, a historical loss factor for loans rated “Substandard” is applied to current balances of all other “Substandard” loans pooled by class.

Doubtful

Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable. These loans would be considered impaired and evaluated on an individual basis.

 

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of June 30, 2022 and December 31, 2021 (dollars in thousands). There were no loans rated “Doubtful” as of either period.

 

June 30, 2022

 

Excellent

 

 

Good

 

 

Pass

 

 

Watch

 

 

Special
Mention

 

 

Sub-
standard

 

 

TOTAL

 

Commercial

 

$

30,684

 

 

$

14,136

 

 

$

30,445

 

 

$

1,291

 

 

$

110

 

 

$

933

 

 

$

77,599

 

Real estate construction and land

 

 

-

 

 

 

-

 

 

 

47,821

 

 

 

342

 

 

 

1,446

 

 

 

5,531

 

 

 

55,140

 

1-4 family residential mortgages

 

 

-

 

 

 

-

 

 

 

314,514

 

 

 

6,953

 

 

 

839

 

 

 

7,614

 

 

 

329,920

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

383,299

 

 

 

45,396

 

 

 

7,416

 

 

 

10,171

 

 

 

446,282

 

Consumer

 

 

470

 

 

 

20,417

 

 

 

29,237

 

 

 

960

 

 

 

101

 

 

 

66

 

 

 

51,251

 

Total Loans

 

$

31,154

 

 

$

34,553

 

 

$

805,316

 

 

$

54,942

 

 

$

9,912

 

 

$

24,315

 

 

$

960,192

 

 

December 31, 2021

 

Excellent

 

 

Good

 

 

Pass

 

 

Watch

 

 

Special
Mention

 

 

Sub-
standard

 

 

TOTAL

 

Commercial

 

$

45,862

 

 

$

13,920

 

 

$

32,460

 

 

$

732

 

 

$

1,645

 

 

$

2,077

 

 

$

96,696

 

Real estate construction and land

 

 

-

 

 

 

-

 

 

 

51,098

 

 

 

7,360

 

 

 

2,849

 

 

 

18,024

 

 

 

79,331

 

1-4 family residential mortgages

 

 

-

 

 

 

2,030

 

 

 

334,300

 

 

 

5,013

 

 

 

1,520

 

 

 

15,285

 

 

 

358,148

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

382,108

 

 

 

61,563

 

 

 

8,530

 

 

 

21,431

 

 

 

473,632

 

Consumer

 

 

524

 

 

 

18,535

 

 

 

32,821

 

 

 

1,225

 

 

 

179

 

 

 

120

 

 

 

53,404

 

Total Loans

 

$

46,386

 

 

$

34,485

 

 

$

832,787

 

 

$

75,893

 

 

$

14,723

 

 

$

56,937

 

 

$

1,061,211

 

 

In addition, the adequacy of the Company’s ALLL is evaluated through reference to eight qualitative factors, listed below and ranked in order of importance:

1)
Changes in national and local economic conditions, including the condition of various market segments;
2)
Changes in the value of underlying collateral;
3)
Changes in volume of classified assets, measured as a percentage of capital;
4)
Changes in volume of delinquent loans;
5)
The existence and effect of any concentrations of credit and changes in the level of such concentrations;
6)
Changes in lending policies and procedures, including underwriting standards;
7)
Changes in the experience, ability and depth of lending management and staff; and
8)
Changes in the level of policy exceptions.

It has been the Company’s experience that the first five factors drive losses to a much greater extent than the last three factors; therefore, the first five factors are weighted more heavily. Qualitative factors are not assessed against loans rated “Excellent” or “Good,” as the Company has never experienced a loss within these categories.

For each segment and class of loans, management must exercise significant judgment to determine the estimation method that fits the credit risk characteristics of its various segments. Although this evaluation is inherently subjective, qualified management utilizes its significant knowledge and experience related to both the Company’s markets and the history of the Company’s loan losses.

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling $1.4 million at June 30, 2022, a specific valuation allowance was recognized after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower. The $9 thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans that required an allowance as of June 30, 2022.

A summary of the transactions in the Allowance for Loan Losses by major loan portfolio segment for the six months ended June 30, 2022 and the year ended December 31, 2021 appears below (dollars in thousands):

 

As of and for the period ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Commercial
Loans

 

 

Real Estate
Construction
and Land

 

 

Real Estate
Mortgages

 

 

Consumer
Loans

 

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of beginning of year

 

$

252

 

 

$

399

 

 

$

4,478

 

 

$

855

 

 

$

5,984

 

Charge-offs

 

 

(243

)

 

 

-

 

 

 

-

 

 

 

(421

)

 

 

(664

)

Recoveries

 

 

136

 

 

 

8

 

 

 

4

 

 

 

104

 

 

 

252

 

Provision for (recovery of) loan losses

 

 

110

 

 

 

(51

)

 

 

(300

)

 

 

172

 

 

 

(69

)

Ending Balance

 

$

255

 

 

$

356

 

 

$

4,182

 

 

$

710

 

 

$

5,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

9

 

 

$

9

 

Collectively evaluated for impairment

 

 

255

 

 

 

356

 

 

 

4,182

 

 

 

701

 

 

 

5,494

 

Acquired loans - purchased credit
   impaired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

604

 

 

$

835

 

 

$

1,439

 

Collectively evaluated for impairment

 

 

76,897

 

 

 

48,601

 

 

 

739,004

 

 

 

50,325

 

 

 

914,827

 

Acquired loans - purchased credit impaired

 

 

702

 

 

 

6,539

 

 

 

36,594

 

 

 

91

 

 

 

43,926

 

Ending Balance

 

$

77,599

 

 

$

55,140

 

 

$

776,202

 

 

$

51,251

 

 

$

960,192

 

 

As of and for the period ended December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial
Loans

 

 

Real Estate
Construction
and Land

 

 

Real Estate
Mortgages

 

 

Consumer
Loans

 

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of beginning of year

 

$

209

 

 

$

160

 

 

$

3,897

 

 

$

1,189

 

 

$

5,455

 

Charge-offs

 

 

(147

)

 

 

-

 

 

 

-

 

 

 

(688

)

 

 

(835

)

Recoveries

 

 

191

 

 

 

12

 

 

 

6

 

 

 

141

 

 

 

350

 

Provision for (recovery of) loan losses

 

 

(1

)

 

 

227

 

 

 

575

 

 

 

213

 

 

 

1,014

 

Ending Balance

 

$

252

 

 

$

399

 

 

$

4,478

 

 

$

855

 

 

$

5,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

6

 

 

$

6

 

Collectively evaluated for impairment

 

 

252

 

 

 

399

 

 

 

4,478

 

 

 

849

 

 

 

5,978

 

Acquired loans - purchased credit
   impaired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

594

 

 

$

935

 

 

$

1,529

 

Collectively evaluated for impairment

 

 

95,702

 

 

 

60,755

 

 

 

786,491

 

 

 

52,351

 

 

 

995,299

 

Acquired loans - purchased credit impaired

 

 

994

 

 

 

18,576

 

 

 

44,695

 

 

 

118

 

 

 

64,383

 

Ending Balance

 

$

96,696

 

 

$

79,331

 

 

$

831,780

 

 

$

53,404

 

 

$

1,061,211

 

 

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its ALLL is changes in the volume of delinquent loans. Management monitors payment activity on a regular basis. For all classes of loans, the Company considers the entire balance of the loan to be contractually delinquent if the minimum payment is not received by the due date. Interest and fees continue to accrue on past due loans until they are placed in nonaccrual or charged off.

The following tables show the aging of past due loans as of June 30, 2022 and December 31, 2021 (dollars in thousands).

 

Past Due Aging as of
June 30, 2022

 

30-59 Days

 

 

60-89 Days

 

 

90 Days or More

 

 

Total Past Due

 

 

PCI

 

 

Current

 

 

Total
Loans

 

 

90 Days Past Due and Still Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

762

 

 

$

235

 

 

$

596

 

 

$

1,593

 

 

$

702

 

 

$

75,304

 

 

$

77,599

 

 

$

596

 

Real estate construction and land

 

 

-

 

 

 

206

 

 

 

-

 

 

 

206

 

 

 

6,539

 

 

 

48,395

 

 

 

55,140

 

 

 

-

 

1-4 family residential mortgages

 

 

1,350

 

 

 

-

 

 

 

-

 

 

 

1,350

 

 

 

11,900

 

 

 

316,670

 

 

 

329,920

 

 

 

-

 

Commercial mortgages

 

 

-

 

 

 

154

 

 

 

-

 

 

 

154

 

 

 

24,694

 

 

 

421,434

 

 

 

446,282

 

 

 

-

 

Consumer loans

 

 

207

 

 

 

102

 

 

 

30

 

 

 

339

 

 

 

91

 

 

 

50,821

 

 

 

51,251

 

 

 

30

 

Total Loans

 

$

2,319

 

 

$

697

 

 

$

626

 

 

$

3,642

 

 

$

43,926

 

 

$

912,624

 

 

$

960,192

 

 

$

626

 

 

Past Due Aging as of
December 31, 2021

 

30-59 Days

 

 

60-89 Days

 

 

90 Days or More

 

 

Total Past Due

 

 

PCI

 

 

Current

 

 

Total
Loans

 

 

90 Days Past Due and Still Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

385

 

 

$

355

 

 

$

718

 

 

$

1,458

 

 

$

994

 

 

$

94,244

 

 

$

96,696

 

 

$

718

 

Real estate construction and land

 

 

873

 

 

 

1,283

 

 

 

-

 

 

 

2,156

 

 

 

18,576

 

 

 

58,599

 

 

 

79,331

 

 

 

-

 

1-4 family residential mortgages

 

 

1,508

 

 

 

100

 

 

 

495

 

 

 

2,103

 

 

 

16,020

 

 

 

340,025

 

 

 

358,148

 

 

 

-

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

28,675

 

 

 

444,957

 

 

 

473,632

 

 

 

-

 

Consumer loans

 

 

345

 

 

 

196

 

 

 

83

 

 

 

624

 

 

 

118

 

 

 

52,662

 

 

 

53,404

 

 

 

83

 

Total Loans

 

$

3,111

 

 

$

1,934

 

 

$

1,296

 

 

$

6,341

 

 

$

64,383

 

 

$

990,487

 

 

$

1,061,211

 

 

$

801