Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2022

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

NOTE 3. Loans and Allowance for Loan Losses

The following is a summary of the balances in each class of the Company’s portfolio of loans held for investment as of the dates indicated:

	December 31,
(dollars in thousands)	2022		2021
Mortgage loans on real estate:
Residential 1-4 family	$	169,248	$	130,776
Commercial - owner occupied		184,586		198,413
Commercial - non-owner occupied		245,277		184,190
Multifamily		26,675		19,050
Construction		77,944		58,440
Second mortgages		8,828		7,877
Equity lines of credit		54,340		48,665
Total mortgage loans on real estate		766,898		647,411
Commercial and industrial loans		72,578		68,690
Consumer automobile loans		163,018		85,023
Other consumer loans		22,251		33,418
Other  (1)		2,340		8,984
Total loans, net of deferred fees		1,027,085		843,526
Less:  Allowance for loan losses		10,526		9,865
Loans, net of allowance and deferred fees (2)	$	1,016,559	$	833,661

(1) Overdrawn accounts are reclassified as loans and included in the Other catergory in the table above. Overdrawn deposit accounts, excluding internal use accounts, totaled $269 thousand and $304 thousand at December 31, 2022 and 2021, respectively.

(2) Net deferred loan costs totaled $1.0 million and $1.3 million at December 31, 2022 and December 31, 2021, respectively.

CREDIT QUALITY INFORMATION

The Company uses internally-assigned risk grades to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company’s internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.

The Company’s internally assigned risk grades are as follows:

• Pass: Loans are of acceptable risk.

• Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management’s close attention.

• Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature.

• Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions and values highly questionable or improbable.

• Loss: Loans have been identified for charge-off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

The following tables present credit quality exposures by internally assigned risk ratings as of the dates indicated:

Credit Quality Information
As of December 31, 2022
(dollars in thousands)	Pass		OAEM		Substandard		Total
Mortgage loans on real estate:
Residential 1-4 family	$	169,094	$	-	$	154	$	169,248
Commercial - owner occupied		184,301		285		-		184,586
Commercial - non-owner occupied		245,277		-		-		245,277
Multifamily		26,675		-		-		26,675
Construction		76,999		-		945		77,944
Second mortgages		8,828		-		-		8,828
Equity lines of credit		54,340		-		-		54,340
Total mortgage loans on real estate	$	765,514	$	285	$	1,099	$	766,898
Commercial and industrial loans		72,434		-		144		72,578
Consumer automobile loans		162,738		-		280		163,018
Other consumer loans		22,251		-		-		22,251
Other		2,340		-		-		2,340
Total	$	1,025,277	$	285	$	1,523	$	1,027,085

Credit Quality Information
As of December 31, 2021
(dollars in thousands)	Pass		OAEM		Substandard		Total
Mortgage loans on real estate:
Residential 1-4 family	$	130,584	$	-	$	192	$	130,776
Commercial - owner occupied		195,512		788		2,113		198,413
Commercial - non-owner occupied		183,093		434		663		184,190
Multifamily		19,050		-		-		19,050
Construction		57,224		218		998		58,440
Second mortgages		7,877		-		-		7,877
Equity lines of credit		48,665		-		-		48,665
Total mortgage loans on real estate	$	642,005	$	1,440	$	3,966	$	647,411
Commercial and industrial loans		68,261		-		429		68,690
Consumer automobile loans		85,002		-		21		85,023
Other consumer loans		33,418		-		-		33,418
Other		8,984		-		-		8,984
Total	$	837,670	$	1,440	$	4,416	$	843,526

As of December 31, 2022 and 2021 the Company did not have any loans internally classified as Loss or Doubtful.

AGE ANALYSIS OF PAST DUE LOANS BY CLASS

All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection.

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

(dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due and still Accruing		Nonaccrual (2)		Total Current Loans (1)		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	290	$	-	$	525	$	154	$	168,279	$	169,248
Commercial - owner occupied		20		-		-		-		184,566		184,586
Commercial - non-owner occupied		206		-		-		-		245,071		245,277
Multifamily		-		-		-		-		26,675		26,675
Construction		-		-		-		945		76,999		77,944
Second mortgages		19		-		-		-		8,809		8,828
Equity lines of credit		56		288		-		-		53,996		54,340
Total mortgage loans on real estate	$	591	$	288	$	525	$	1,099	$	764,395	$	766,898
Commercial and industrial loans		221		284		23		144		71,906		72,578
Consumer automobile loans		1,538		221		212		-		161,047		163,018
Other consumer loans		445		372		80		-		21,354		22,251
Other		47		-		-		-		2,293		2,340
Total	$	2,842	$	1,165	$	840	$	1,243	$	1,020,995	$	1,027,085

(1) For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

(2) For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column.

In the table above, the past due totals include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $38 thousand million at December 31, 2022.

Age Analysis of Past Due Loans as of December 31, 2021

(dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due and still Accruing		Nonaccrual (2)		Total Current Loans (1)		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	120	$	-	$	-	$	191	$	130,465	$	130,776
Commercial - owner occupied		-		-		-		-		198,413		198,413
Commercial - non-owner occupied		-		-		-		113		184,077		184,190
Multifamily		-		-		-		-		19,050		19,050
Construction		-		-		-		-		58,440		58,440
Second mortgages		24		-		-		-		7,853		7,877
Equity lines of credit		51		-		-		-		48,614		48,665
Total mortgage loans on real estate	$	195	$	-	$	-	$	304	$	646,912	$	647,411
Commercial and industrial loans		37		-		169		174		68,310		68,690
Consumer automobile loans		814		118		296		-		83,795		85,023
Other consumer loans		1,284		439		550		-		31,145		33,418
Other		31		3		10		-		8,940		8,984
Total	$	2,361	$	560	$	1,025	$	478	$	839,102	$	843,526

(1) For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

(2) For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column

In the table above, the past due totals include small business and student loans with principal and interest amounts that are 97 – 100% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $1.4 million at December 31, 2021.

NONACCRUAL LOANS

The Company generally places commercial loans (including construction loans and commercial loans secured and not secured by real estate) in nonaccrual status when the full and timely collection of interest or principal becomes uncertain, part of the principal balance has been charged off and no restructuring has occurred or the loan reaches 90 days past due, unless the credit is well-secured and in the process of collection.

Under regulatory rules, consumer loans, which are loans to individuals for household, family and other personal expenditures, and consumer loans secured by real estate (including residential 1 - 4 family mortgages, second mortgages, and equity lines of credit) are not required to be placed in nonaccrual status. Although consumer loans and consumer loans secured by real estate are not required to be placed in nonaccrual status, the Company may elect to place these loans in nonaccrual status, if necessary to avoid a material overstatement of interest income. Generally, consumer loans secured by real estate are placed in nonaccrual status only when payments are 120 days past due.

Generally, consumer loans not secured by real estate are placed in nonaccrual status only when part of the principal has been charged off. If a charge-off has not occurred sooner for other reasons, a consumer loan not secured by real estate will generally be placed in nonaccrual status when payments are 120 days past due. These loans are charged off or written down to the net realizable value of the collateral when deemed uncollectible, when classified as a “loss,” when repayment is unreasonably protracted, when bankruptcy has been initiated, or when the loan is 120 days or more past due unless the credit is well-secured and in the process of collection.

When management places a loan in nonaccrual status, the accrued unpaid interest receivable is reversed against interest income and the loan is accounted for by the cost recovery method, until it qualifies for return to accrual status or is charged off. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or when the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments for at least six months.

The following table presents loans in nonaccrual status by class of loan as of the dates indicated:

(dollars in thousands)	December 31, 2022		December 31, 2021
Mortgage loans on real estate:
Residential 1-4 family	$	154	$	191
Commercial - non-owner occupied		-		113
Construction and land development		945		-
Total mortgage loans on real estate		1,099		304
Commercial and industrial loans		144		174
Total	$	1,243	$	478

The following table presents the interest income that the Company would have earned under the original terms of its nonaccrual loans and the actual interest recorded by the Company on nonaccrual loans for the periods presented:

	Years Ended December 31,
(dollars in thousands)	2022		2021
Interest income that would have been recorded under original loan terms	$	111	$	11
Actual interest income recorded for the period		15		2
Reduction in interest income on nonaccrual loans	$	96	$	9

TROUBLED DEBT RESTRUCTURINGS

The Company’s loan portfolio may include certain loans classified as TDRs, where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company defines a TDR as nonperforming if the TDR is in nonaccrual status or is 90 days or more past due and still accruing interest at the report date. When the Company modifies a loan, management evaluates any possible impairment as discussed further below under Impaired Loans.

There were no new TDRs in 2022 or 2021.

At December 31, 2022 and 2021, the Company had no outstanding commitments to disburse additional funds on any TDR. There were no loans secured by residential 1 - 4 family real estate that were in the process of foreclosure at December 31, 2022 and 2021, respectively.

In the years ended December 31, 2022 and 2021 there were no defaulting TDRs where the default occurred within twelve months of restructuring. The Company considers a TDR in default when any of the following occurs: the loan, as restructured, becomes 90 days or more past due; the loan is moved to nonaccrual status following the restructure; the loan is restructured again under terms that would qualify it as a TDR if it were not already so classified; or any portion of the loan is charged off.

All TDRs are factored into the determination of the allowance for loan losses and included in the impaired loan analysis, as discussed below.

IMPAIRED LOANS

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans include nonperforming loans and loans modified in a TDR. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole or remaining source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, when foreclosure is probable, instead of the discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost recovery method. For financial statement purposes, the recorded investment in the loan is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash basis method.

The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans, exclusive of purchased credit-impaired loans, with the associated allowance amount, if applicable, as of the dates presented. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the periods presented. The average balances are calculated based on daily average balances.

									For the Year Ended
	As of December 31, 2022								December 31, 2022
(Dollars in thousands)	Unpaid Principal Balance		Without Valuation Allowance		With Valuation Allowance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family	$	285	$	44	$	235	$	21	$	282	$	7
Commercial		430		55		358		3		420		-
Construction		1,321		829		191		6		1,208		3
Total mortgage loans on real estate		2,036		928		784		30		1,910		10
Commercial and industrial loans		144		144		-		-		144		5
Total	$	2,180	$	1,072	$	784	$	30	$	2,054	$	15

									For the Year Ended
	As of December 31, 2021								December 31, 2021
(Dollars in thousands)	Unpaid Principal Balance		Without Valuation Allowance		With Valuation Allowance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family	$	353	$	25	$	300	$	30	$	328	$	7
Commercial		610		178		413		8		601		1
Construction		80		79		-		-		80		4
Second mortgages		127		-		125		3		126		5
Total mortgage loans on real estate		1,170		282		838		41		1,135		17
Commercial and industrial loans		188		-		174		87		181		17
Other consumer loans		9		7		-		-		8		-
Total	$	1,367	$	289	$	1,012	$	128	$	1,324	$	34

ALLOWANCE FOR LOAN LOSSES

Loans are either individually evaluated for impairment or pooled with like loans and collectively evaluated for impairment. Also, various qualitative factors are applied to each segment of the loan portfolio. The allowance for loan losses is the accumulation of these components. Management’s estimate is based on certain observable, historical data and other factors that management believes are most reflective of the underlying credit losses being estimated.

Management provides an allocated component of the allowance for loans that are individually evaluated for impairment. An allocated allowance is established when the discounted value of expected future cash flows from the impaired loan (or the collateral value or observable market price of the impaired loan) is lower than the carrying value of that loan. This allocation represents the sum of management’s estimated losses on each loan.

Loans collectively evaluated for impairment are pooled, with a historical loss rate, based on migration analysis, applied to each pool, segmented by risk grade or days past due, depending on the type of loan. Based on credit risk assessments and management’s analysis of qualitative factors , additional loss factors are applied to loan balances. These additional qualitative factors include: economic conditions (including uncertainties associated with the COVID-19 pandemic), trends in growth, loan concentrations, changes in certain loans, changes in underwriting, changes in management and changes in the legal and regulatory environment.

ALLOWANCE FOR LOAN LOSSES BY SEGMENT

The following table presents, by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

For the Year ended December 31, 2022

(Dollars in thousands)	Commercial and Industrial			Real Estate Construction		Real Estate - Mortgage (1)			Real Estate - Commercial			Consumer (2)			Other			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	683		$	459	$	2,390		$	4,787		$	1,362		$	184		$	-	$	9,865
Charge-offs		(297	)		-		(25	)		-			(1,368	)		(332	)		-		(2,022	)
Recoveries		134			-		61			22			648			112			-		977
Provision for loan losses		153			93		149			(310	)		1,423			192			6		1,706
Ending Balance	$	673		$	552	$	2,575		$	4,499		$	2,065		$	156		$	6	$	10,526
Individually evaluated for impairment	$	-		$	6	$	21		$	3		$	-		$	-		$	-	$	30
Collectively evaluated for impairment		673			546		2,554			4,496			2,065			156			6		10,496
Ending Balance	$	673		$	552	$	2,575		$	4,499		$	2,065		$	156		$	6	$	10,526
Loans Balances:
Individually evaluated for impairment		144			1,020		279			413			-			-			-		1,856
Collectively evaluated for impairment		72,434			76,924		258,812			429,450			185,269			2,340			-		1,025,229
Ending Balance	$	72,578		$	77,944	$	259,091		$	429,863		$	185,269		$	2,340		$	-	$	1,027,085

For the Year ended December 31, 2021

(Dollars in thousands)	Commercial and Industrial			Real Estate Construction		Real Estate - Mortgage (1)			Real Estate - Commercial		Consumer (2)			Other			Unallocated			Total
Allowance for loan losses:
Balance, beginning	$	650		$	339	$	2,560		$	4,434	$	1,302		$	123		$	133		$	9,541
Charge-offs		(27	)		-		(14	)		-		(800	)		(278	)		-			(1,119	)
Recoveries		41			-		76			44		390			98			-			649
Provision for loan losses		19			120		(232	)		309		470			241			(133	)		794
Ending Balance	$	683		$	459	$	2,390		$	4,787	$	1,362		$	184		$	-		$	9,865
Individually evaluated for impairment	$	87		$	-	$	33		$	8	$	-		$	-		$	-		$	128
Collectively evaluated for impairment		596			459		2,357			4,779		1,362			184			-			9,737
Ending Balance	$	683		$	459	$	2,390		$	4,787	$	1,362		$	184		$	-		$	9,865
Loans Balances:
Individually evaluated for impairment		174			79		450			591		7			-			-			1,301
Collectively evaluated for impairment		68,516			58,361		205,918			382,012		118,434			8,984			-			842,225
Ending Balance	$	68,690		$	58,440	$	206,368		$	382,603	$	118,441		$	8,984		$	-		$	843,526

(1)
The real estate – mortgage segment included residential 1-4 family, second mortgages and equity lines of credit.

(2)
The consumer segment includes consumer automobile loans.