Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2022

NOTE 5. Loans and Allowance for Loan Losses

The composition of loans at March 31, 2022 and December 31, 2021 was as follows:

	March 31,			December 31,
	2022			2021
	(in thousands)
Mortgage loans on real estate:
Construction and land development	$	73,223		$	71,191
Secured by farmland		14,728			13,710
Secured by 1-4 family residential properties		258,007			263,723
Multifamily		29,308			29,093
Commercial		405,714			377,051
Commercial and industrial loans		144,769			143,378
Consumer installment loans		75,307			67,281
All other loans		16,486			16,798
Total loans	$	1,017,542		$	982,225
Net deferred loan costs and premiums		3,917			3,495
Allowance for loan losses		(9,315	)		(8,787	)
	$	1,012,144		$	976,933

At March 31, 2022, the Company was servicing $129.0 million of marine loans for other financial institutions which are not included in the table above. Also excluded from the table above are net servicing assets of $192 thousand at March 31, 2022,

which are recorded in other assets in the Consolidated Balance Sheets. When loans are sold with servicing retained, servicing assets are recorded which represent the Company's right to service loans that were sold. Servicing assets are initially recorded by the Company at fair value and are subsequently amortized in proportion to, and over the period of, estimated net servicing income.

Changes in the allowance for loan losses for the three months ended March 31, 2022 and 2021 and the year ended December 31, 2021 were as follows:

	Three Months Ended			Year Ended			Three Months Ended
	March 31,			December 31,			March 31,
	2022			2021			2021
				(in thousands)
Balance, beginning	$	8,787		$	7,096		$	7,096
Provision for loan losses		540			1,483			599
Recoveries added to the allowance		35			318			66
Loan losses charged to the allowance		(47	)		(110	)		(5	)
Balance, ending	$	9,315		$	8,787		$	7,756

Nonaccrual and past due loans by class at March 31, 2022 and December 31, 2021 were as follows:

	March 31, 2022
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Days Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	48	$	247	$	—	$	295	$	144,474	$	144,769	$	—	$	77
Commercial Real Estate:
Owner Occupied		93		—		—		93		193,023		193,116		—		117
Non-owner occupied		—		—		—		—		212,598		212,598		—		1,374
Construction and Farmland:
Residential		—		—		—		—		10,766		10,766		—		—
Commercial		—		—		106		106		77,079		77,185		—		228
Consumer:
Installment		189		—		—		189		75,118		75,307		—		2
Residential:
Equity Lines		71		—		—		71		36,469		36,540		—		28
Single family		372		70		382		824		220,643		221,467		—		780
Multifamily		—		—		—		—		29,308		29,308		—		—
All Other Loans		—		—		—		—		16,486		16,486		—		—
Total	$	773	$	317	$	488	$	1,578	$	1,015,964	$	1,017,542	$	—	$	2,606

	December 31, 2021
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	8	$	7	$	—	$	15	$	143,363	$	143,378	$	—	$	—
Commercial Real Estate:
Owner Occupied		—		—		—		—		188,839		188,839		—		124
Non-owner occupied		146		—		130		276		187,936		188,212		—		1,547
Construction and Farmland:
Residential		—		—		—		—		10,077		10,077		—		—
Commercial		—		126		108		234		74,590		74,824		—		234
Consumer:
Installment		6		—		—		6		67,275		67,281		—		3
Residential:
Equity Lines		13		—		—		13		35,849		35,862		—		29
Single family		409		238		434		1,081		226,780		227,861		43		786
Multifamily		—		—		—		—		29,093		29,093		—		—
All Other Loans		—		—		—		—		16,798		16,798		—		—
Total	$	582	$	371	$	672	$	1,625	$	980,600	$	982,225	$	43	$	2,723

Allowance for loan losses by segment at March 31, 2022 and December 31, 2021 were as follows:

	As of and For the Three Months Ended
	March 31, 2022
	(in thousands)
	Construction and Farmland		Residential Real Estate			Commercial Real Estate		Commercial		Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	2,794	$	1,750		$	1,650	$	1,656	$	646		$	291		$	—	$	8,787
Charge-Offs		—		—			—		—		(24	)		(23	)		—		(47	)
Recoveries		2		24			—		2		3			4			—		35
Provision		89		(26	)		168		200		95			14			—		540
Ending balance	$	2,885	$	1,748		$	1,818	$	1,858	$	720		$	286		$	—	$	9,315
Ending balance: Individually evaluated for impairment	$	—	$	38		$	—	$	77	$	—		$	—		$	—	$	115
Ending balance: collectively evaluated for impairment	$	2,885	$	1,710		$	1,818	$	1,781	$	720		$	286		$	—	$	9,200
Loans:
Ending balance	$	87,951	$	287,315		$	405,714	$	144,769	$	75,307		$	16,486		$	—	$	1,017,542
Ending balance individually evaluated for impairment	$	250	$	2,708		$	2,113	$	176	$	14		$	—		$	—	$	5,261
Ending balance collectively evaluated for impairment	$	87,701	$	284,607		$	403,601	$	144,593	$	75,293		$	16,486		$	—	$	1,012,281

	December 31, 2021
	(in thousands)
	Construction and Farmland		Residential Real Estate			Commercial Real Estate			Commercial			Consumer			All Other Loans			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	1,604	$	1,929		$	1,645		$	1,374		$	198		$	346		$	—	$	7,096
Charge-Offs		—		(13	)		—			(10	)		(19	)		(68	)		—		(110	)
Recoveries		12		240			7			18			29			12			—		318
Provision		1,178		(406	)		(2	)		274			438			1			—		1,483
Ending balance	$	2,794	$	1,750		$	1,650		$	1,656		$	646		$	291		$	—	$	8,787
Ending balance: Individually evaluated for impairment	$	—	$	39		$	—		$	—		$	—		$	—		$	—	$	39
Ending balance: collectively evaluated for impairment	$	2,794	$	1,711		$	1,650		$	1,656		$	646		$	291		$	—	$	8,748
Loans:
Ending balance	$	84,901	$	292,816		$	377,051		$	143,378		$	67,281		$	16,798		$	—	$	982,225
Ending balance individually evaluated for impairment	$	257	$	2,778		$	2,295		$	108		$	16		$	—		$	—	$	5,454
Ending balance collectively evaluated for impairment	$	84,644	$	290,038		$	374,756		$	143,270		$	67,265		$	16,798		$	—	$	976,771

Impaired loans by class as of and for the periods ended March 31, 2022 and December 31, 2021 were as follows:

	As of
	March 31, 2022
	(in thousands)
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	111	$	99	$	—	$	104	$	1
Commercial Real Estate:
Owner Occupied		142		117		—		119		—
Non-owner occupied		2,280		1,997		—		1,998		14
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		268		250		—		251		—
Consumer:
Installment		15		14		—		15		—
Residential
Equity lines		34		28		—		29		—
Single family		2,006		1,915		—		1,927		14
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	4,856	$	4,420	$	—	$	4,443	$	29
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	77	$	77	$	77	$	77	$	1
Commercial Real Estate:
Owner Occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Consumer:
Installment		—		—		—		—		—
Residential
Equity lines		—		—		—		—		—
Single family		804		779		38		783		7
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	881	$	856	$	115	$	860	$	8
Total:
Commercial	$	188	$	176	$	77	$	181	$	2
Commercial Real Estate		2,422		2,114		—		2,117		14
Construction and Farmland		268		250		—		251		—
Consumer		15		14		—		15		—
Residential		2,844		2,722		38		2,739		21
Other		—		—		—		—		—
Total	$	5,737	$	5,276	$	115	$	5,303	$	37

(1)	Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, net deferred loan fees or costs, and any partial charge-offs. Accrued interest and net deferred loan fees or costs totaled $15 thousand at March 31, 2022.

	As of
	December 31, 2021
	(in thousands)
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	143	$	109	$	—	$	166	$	11
Commercial Real Estate:
Owner Occupied		148		124		—		142		—
Non-owner occupied		2,539		2,177		—		2,186		—
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		271		257		—		267		9
Consumer:
Installment		17		16		—		19		1
Residential:
Equity lines		35		29		—		32		—
Single family		2,088		1,974		—		2,012		62
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	5,241	$	4,686	$	—	$	4,824	$	83
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Owner Occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Consumer:
Installment		—		—		—		—		—
Residential:
Equity lines		—		—		—		—		—
Single family		811		787		39		802		30
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	811	$	787	$	39	$	802	$	30
Total:
Commercial	$	143	$	109	$	—	$	166	$	11
Commercial Real Estate		2,687		2,301		—		2,328		—
Construction and Farmland		271		257		—		267		9
Consumer		17		16		—		19		1
Residential		2,934		2,790		39		2,846		92
Other		—		—		—		—		—
Total	$	6,052	$	5,473	$	39	$	5,626	$	113

(1)	Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, net deferred loan fees or costs, and any partial charge-offs. Accrued interest and net deferred loan fees or costs totaled $19 thousand at December 31, 2021.

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 nonaccrual loans 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 Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Consumer loans are evaluated for collection based on payment performance. Descriptions of these ratings are as follows:


Pass	Pass loans exhibit acceptable history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.

Special Mention	Special mention loans exhibit negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt.

Substandard	Substandard loans exhibit well defined weaknesses resulting in a higher probability of default. The borrowers exhibit adverse financial trends and a diminishing ability or willingness to service debt.

Doubtful	Doubtful loans exhibit all of the characteristics inherent in substandard loans; however given the severity of weaknesses, the collection of 100% of the principal is unlikely under current conditions.

Loss	Loss loans are considered uncollectible over a reasonable period of time and of such little value that its continuance as a bankable asset is not warranted.

Credit quality information by class at March 31, 2022 and December 31, 2021 was as follows:

	As of
	March 31, 2022
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	140,031	$	4,661	$	77	$	—	$	—	$	144,769
Commercial Real Estate:
Owner Occupied		185,535		7,464		117		—		—		193,116
Non-owner occupied		209,837		999		1,762		—		—		212,598
Construction and Farmland:
Residential		10,766		—		—		—		—		10,766
Commercial		66,401		10,486		298		—		—		77,185
Residential:
Equity Lines		36,512		—		28		—		—		36,540
Single family		218,475		1,312		1,564		116		—		221,467
Multifamily		29,308		—		—		—		—		29,308
All other loans		16,486		—		—		—		—		16,486
Total	$	913,351	$	24,922	$	3,846	$	116	$	—	$	942,235

		Performing				Nonperforming
Consumer Credit Exposure by Payment Activity		$	75,118			$	189

	As of
	December 31, 2021
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	143,197	$	176	$	5	$	—	$	—	$	143,378
Commercial Real Estate:
Owner Occupied		185,978		2,703		158		—		—		188,839
Non-owner occupied		180,830		4,819		2,563		—		—		188,212
Construction and Farm land:
Residential		10,077		—		—		—		—		10,077
Commercial		59,318		15,198		308		—		—		74,824
Residential:
Equity Lines		35,832		—		30		—		—		35,862
Single family		224,510		1,601		1,633		117		—		227,861
Multifamily		26,952		2,141		—		—		—		29,093
All other loans		16,798		—		—		—		—		16,798
Total	$	883,492	$	26,638	$	4,697	$	117	$	—	$	914,944

		Performing				Nonperforming
Consumer Credit Exposure by Payment Activity		$	67,275			$	6