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4. Allowance for Loan Losses
 3 Months Ended
Mar. 31, 2020
Allowance For Loan Losses  
Allowance for Loan Losses

A summary of changes in the allowance for loan losses (in thousands) for March 31, 2020 and December 31, 2019 is as follows:

 

March 31, 2020   Beginning Balance     Charge-offs     Recoveries     Provision     Ending Balance     Individually Evaluated for Impairment     Collectively Evaluated for Impairment  
Allowance for loan losses:                                          
Construction/Land Development   $ 1,190     $ 7     $ -     $ 114     $ 1,297     $ 3     $ 1,294  
Farmland     668       -       -       40       708       527       181  
Real Estate     1,573       36       2       290       1,829       672       1,157  
Multi-Family     20       -       -       22       42       -       42  
Commercial Real Estate     1,815       -       -       698       2,513       302       2,211  
Home Equity – closed end     42       -       -       9       51       -       51  
Home Equity – open end     457       -       1       (81 )     377       15       362  
 Commercial & Industrial – Non-Real Estate     585       35       2       65       617       70       547  
 Consumer     186       18       16       28       212       1       211  
Dealer Finance     1,786       580       212       304       1,722       12       1,710  
Credit Cards     68       17       7       11       69       -       69  
Total   $ 8,390     $ 693     $ 240     $ 1,500     $ 9,437     $ 1,602     $ 7,835  

 

December 31, 2019   Beginning Balance     Charge-offs     Recoveries     Provision     Ending Balance     Individually Evaluated for Impairment     Collectively Evaluated for Impairment  
Allowance for loan losses:                                          
Construction/Land Development   $ 2,094     $ 2,319     $ 50     $ 1,365     $ 1,190     $ 85     $ 1,105  
Farmland     15       -       -       653       668       537       131  
Real Estate     292       32       4       1,309       1,573       569       1,004  
Multi-Family     10       -       -       10       20       -       20  
Commercial Real Estate     416       677       16       2,060       1,815       213       1,602  
Home Equity – closed end     13       1       2       28       42       -       42  
Home Equity – open end     126       126       1       456       457       151       306  
 Commercial & Industrial – Non-Real Estate     192       127       81       439       585       192       393  
 Consumer     70       116       44       188       186       1       185  
Dealer Finance     1,974       2,118       1,144       786       1,786       7       1,779  
Credit Cards     38       110       29       111       68       -       68  
Total   $ 5,240     $ 5,626     $ 1,371     $ 7,405     $ 8,390     $ 1,755     $ 6,635  

 

 

The following table presents the recorded investment in loans (dollars in thousands) based on impairment method as of March 31, 2020 and December 31, 2019:

 

March 31, 2020   Loan Receivable     Individually Evaluated for Impairment     Collectively Evaluated for Impairment  
Construction/Land Development   $ 75,221     $ 1,962     $ 73,259  
Farmland     32,130       1,927       30,203  
Real Estate     176,068       15,387       160,681  
Multi-Family     6,335       -       6,335  
Commercial Real Estate     135,364       3,303       132,061  
Home Equity – closed end     9,232       707       8,525  
Home Equity –open end     47,663       152       47,511  
Commercial & Industrial – Non-Real Estate     32,699       258       32,441  
Consumer     10,731       3       10,728  
Dealer Finance     81,225       183       81,042  
Credit Cards     2,917       -       2,917  
                         
Total   $ 609,585     $ 23,882     $ 585,703  

 

December 31, 2019   Loan Receivable     Individually Evaluated for Impairment     Collectively Evaluated for Impairment  
Construction/Land Development   $ 77,131     $ 3,078     $ 74,053  
Farmland     29,718       1,933       27,785  
Real Estate     178,267       15,535       162,732  
Multi-Family     5,364       -       5,364  
Commercial Real Estate     129,850       1,940       127,910  
Home Equity – closed end     9,523       716       8,807  
Home Equity –open end     47,774       151       47,623  
Commercial & Industrial – Non-Real Estate     33,535       209       33,326  
Consumer     10,165       4       10,161  
Dealer Finance     78,976       215       78,761  
Credit Cards     3,122       -       3,122  
    $ 603,425     $ 23,781     $ 579,644  
Total                        

 

The following table shows the Company’s loan portfolio broken down by internal loan grade (dollars in thousands)

as of March 31, 2020, and December 31, 2019:

 

March 31, 2020  

 

Grade 1 Minimal Risk 

     Grade 2 Modest Risk     Grade 3 Average Risk     Grade 4 Acceptable Risk     Grade 5 Marginally Acceptable     Grade 6 Watch     Grade 7 Substandard     Grade 8 Doubtful     Total  
Construction/Land Development   $ -     $ 179     $ 12,899     $ 49,365     $ 8,895     $ 2,729     $ 1,154     $ -     $ 75,221  
Farmland     59       344       8,586       14,979       5,058       1,177       1,927       -       32,130  
Real Estate     -       1,944       46,852       81,815       23,346       5,078       17,033       -       176,068  
Multi-Family     -       -       2,353       3,659       149       174       -       -       6,335  
Commercial Real Estate     -       1,929       40,259       70,768       15,488       4,550       2,370       -       135,364  
Home Equity – closed end     -       183       2,781       3,728       1,284       1,256       -       -       9,232  
Home Equity – open end     34       1,708       18,272       22,388       3,735       812       714       -       47,663  
Commercial & Industrial (Non-Real Estate)     123       2,146       11,073       15,004       3,033       1,022       298       -       32,699  
Consumer (excluding dealer)     5       166       4,128       4,661       1,709       61       1       -       10,731  
Total   $ 221     $ 8,599     $ 147,203     $ 266,367     $ 62,697     $ 16,859     $  23,497     $ -     $ 525,443  
                                                                         
                                                    Credit Cards     Dealer Finance          
Performing                                                   $ 2,912     $ 81,033          
Non-performing                                                     5       192          
Total                                                   $ 2,917     $ 81,225          

 

 

December 31, 2019  

 

Grade 1 Minimal Risk

     Grade 2 Modest Risk     Grade 3 Average Risk     Grade 4 Acceptable Risk     Grade 5 Marginally Acceptable     Grade 6 Watch     Grade 7 Substandard     Grade 8 Doubtful     Total  
Construction/Land Development   $ -     $ 615     $ 21,904     $ 41,693     $ 8,218     $ 2,434     $ 2,267     $ -     $ 77,131  
Farmland     60       363       9,479       13,754       2,942       1,188       1,932       -       29,718  
Real Estate     -       1,900       48,308       81,371       23,876       5,635       17,177       -       178,267  
Multi-Family     -       -       1,327       3,711       153       173       -       -       5,364  
Commercial Real Estate     -       2,465       40,227       67,626       14,139       4,397       996       -       129,850  
Home Equity – closed end     -       189       2,999       3,816       1,154       1,365       -       -       9,523  
Home Equity – open end     17       1,965       17,789       22,705       3,769       1,198       331       -       47,774  
Commercial & Industrial (Non-Real Estate)     142       2,042       12,818       15,035       2,877       373       248       -       33,535  
Consumer (excluding dealer)     6       170       3,476       4,726       1,729       56       2       -       10,165  
Total   $ 225     $ 9,709     $ 158,327     $ 254,437     $ 58,857     $ 16,819     $ 22,953     $ -     $ 521,327  
                                                                         
                                                    Credit Cards     Dealer Finance          
Performing                                                   $ 3,118     $ 78,529          
Non-performing                                                     4       447          
Total                                                   $ 3,122     $ 78,976          

 

Description of internal loan grades:

 

Grade 1 – Minimal Risk: Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.

 

Grade 2 – Modest Risk: Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.

 

Grade 3 – Average Risk: Borrower generates sufficient cash flow to fund debt service. Employment (or business) is stable with good future trends. Credit is very good.

 

Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must by covered through additional long-term debt. Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.

 

Grade 5 – Marginally acceptable: Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable. Employment or business stability may be weak or deteriorating. May be currently performing as agreed but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects. Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.

 

Grade 6 – Watch: Loans are currently protected but are weak due to negative balance sheet or income statement trends. There may be a lack of effective control over collateral or the existence of documentation deficiencies. These loans have potential weaknesses that deserve management’s close attention. Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness. Existing loans that become 60 or more days past due are placed in this category pending a return to current status.

 

Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable. Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.

 

Grade 8 – Doubtful: The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety. Cash flow is insufficient to service the debt. It may be difficult to project the exact amount of loss, but the probability of some loss is great. Loans are to be placed on non-accrual status when any portion is classified doubtful.

 

Credit card and dealer finance loans are classified as performing or nonperforming. A loan is nonperforming when payments of principal and interest are past due 90 days or more.