ALLOWANCE FOR LOAN LOSSES |
NOTE 4 ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses for the years ended December 31, 2022 and 2021 is as follows (dollars in thousands): December 31, 2022 | | Beginning Balance | | | Charge-offs | | | Recoveries | | | Provision for (Recovery of) Loan Losses | | | Ending Balance | | | Individually Evaluated for Impairment | | | Collectively Evaluated for Impairment | | Allowance for loan losses: | | | | | | | | | | Construction/Land Development | | $ | 977 | | | $ | - | | | $ | - | | | $ | 41 | | | $ | 1,018 | | | $ | 228 | | | $ | 790 | | Farmland | | | 448 | | | | - | | | | - | | | | 122 | | | | 570 | | | | - | | | | 570 | | Real Estate | | | 1,162 | | | | 17 | | | | - | | | | 243 | | | | 1,388 | | | | 92 | | | | 1,296 | | Multi-Family | | | 29 | | | | - | | | | - | | | | 42 | | | | 71 | | | | - | | | | 71 | | Commercial Real Estate | | | 2,205 | | | | - | | | | - | | | | (190 | ) | | | 2,015 | | | | 11 | | | | 2,004 | | Home Equity – closed end | | | 41 | | | | - | | | | - | | | | (3 | ) | | | 38 | | | | - | | | | 38 | | Home Equity – open end | | | 407 | | | | 84 | | | | 130 | | | | (8 | ) | | | 445 | | | | - | | | | 445 | | Commercial & Industrial – Non- Real Estate | | | 288 | | | | 46 | | | | 49 | | | | 159 | | | | 450 | | | | - | | | | 450 | | Consumer | | | 520 | | | | 153 | | | | 84 | | | | (370 | ) | | | 81 | | | | - | | | | 81 | | Dealer Finance | | | 1,601 | | | | 1,280 | | | | 691 | | | | 780 | | | | 1,792 | | | | 13 | | | | 1,779 | | Credit Cards | | | 70 | | | | 66 | | | | 14 | | | | 50 | | | | 68 | | | | - | | | | 68 | | Total | | $ | 7,748 | | | $ | 1,646 | | | $ | 968 | | | $ | 866 | | | $ | 7,936 | | | $ | 344 | | | $ | 7,592 | |
December 31, 2021 | | Beginning Balance | | | Charge-offs | | | Recoveries | | | Provision for (Recovery of) Loan Losses | | | Ending Balance | | | Individually Evaluated for Impairment | | | Collectively Evaluated for Impairment | | Allowance for loan losses: | | | | | | | | | | Construction/Land Development | | $ | 1,249 | | | $ | - | | | $ | 307 | | | $ | (579 | ) | | $ | 977 | | | $ | - | | | $ | 977 | | Farmland | | | 731 | | | | - | | | | - | | | | (283 | ) | | | 448 | | | | - | | | | 448 | | Real Estate | | | 1,624 | | | | - | | | | 76 | | | | (538 | ) | | | 1,162 | | | | 119 | | | | 1,043 | | Multi-Family | | | 54 | | | | - | | | | - | | | | (25 | ) | | | 29 | | | | - | | | | 29 | | Commercial Real Estate | | | 3,662 | | | | - | | | | 19 | | | | (1,476 | ) | | | 2,205 | | | | 603 | | | | 1,602 | | Home Equity – closed end | | | 55 | | | | - | | | | - | | | | (14 | ) | | | 41 | | | | - | | | | 41 | | Home Equity – open end | | | 463 | | | | - | | | | 13 | | | | (69 | ) | | | 407 | | | | - | | | | 407 | | Commercial & Industrial – Non-Real Estate | | | 363 | | | | 40 | | | | 37 | | | | (72 | ) | | | 288 | | | | - | | | | 288 | | Consumer | | | 521 | | | | 33 | | | | 24 | | | | 8 | | | | 520 | | | | - | | | | 520 | | Dealer Finance | | | 1,674 | | | | 1,038 | | | | 754 | | | | 211 | | | | 1,601 | | | | 14 | | | | 1,587 | | Credit Cards | | | 79 | | | | 54 | | | | 29 | | | | 16 | | | | 70 | | | | - | | | | 70 | | Total | | $ | 10,475 | | | $ | 1,165 | | | $ | 1,259 | | | $ | (2,821 | ) | | $ | 7,748 | | | $ | 736 | | | $ | 7,012 | |
The following table presents the recorded investment in loans based on impairment method as of December 31, 2022 and 2021 (dollars in thousands): December 31, 2022 | | Loan Receivable | | | Individually Evaluated for Impairment | | | Collectively Evaluated for Impairment | | Construction/Land Development | | $ | 68,671 | | | $ | 853 | | | $ | 67,818 | | Farmland | | | 74,322 | | | | 2,079 | | | | 72,243 | | Real Estate | | | 153,281 | | | | 3,260 | | | | 150,021 | | Multi-Family | | | 9,622 | | | | - | | | | 9,622 | | Commercial Real Estate | | | 195,163 | | | | 9,111 | | | | 186,052 | | Home Equity – closed end | | | 4,707 | | | | - | | | | 4,707 | | Home Equity –open end | | | 46,928 | | | | - | | | | 46,928 | | Commercial & Industrial – Non-Real Estate | | | 56,625 | | | | - | | | | 56,625 | | Consumer | | | 6,488 | | | | - | | | | 6,488 | | Dealer Finance | | | 125,125 | | | | 62 | | | | 125,063 | | Credit Cards | | | 3,242 | | | | - | | | | 3,242 | | Gross Loans | | | 744,174 | | | | 15,365 | | | | 728,809 | | Less: Deferred loan fees, net of costs | | | (570 | ) | | | - | | | | (570 | ) | Total | | $ | 743,604 | | | $ | 15,365 | | | $ | 728,239 | | | | | | | | | | | | | | | December 31, 2021 | | Loan Receivable | | | Individually Evaluated for Impairment | | | Collectively Evaluated for Impairment | | Construction/Land Development | | $ | 75,236 | | | $ | 645 | | | $ | 74,591 | | Farmland | | | 66,344 | | | | 2,286 | | | | 64,058 | | Real Estate | | | 139,552 | | | | 3,920 | | | | 135,632 | | Multi-Family | | | 4,887 | | | | - | | | | 4,887 | | Commercial Real Estate | | | 163,564 | | | | 14,498 | | | | 149,066 | | Home Equity – closed end | | | 6,262 | | | | 147 | | | | 6,115 | | Home Equity –open end | | | 44,247 | | | | - | | | | 44,247 | | Commercial & Industrial – Non-Real Estate | | | 44,224 | | | | - | | | | 44,224 | | Consumer | | | 8,036 | | | | 5 | | | | 8,031 | | Dealer Finance | | | 107,346 | | | | 107 | | | | 107,239 | | Credit Cards | | | 3,000 | | | | - | | | | 3,000 | | Gross Loans | | | 662,698 | | | | 21,608 | | | | 641,090 | | Less: Deferred loan fees, net of costs | | | (277 | ) | | | - | | | | (277 | ) | Total | | $ | 662,421 | | | $ | 21,608 | | | $ | 640,813 | |
The following table shows the Company’s loan portfolio broken down by internal loan grade as of December 31, 2022 and 2021 (dollars in thousands): December 31, 2022 | | 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 | | $ | - | | | $ | 4 | | | $ | 11,112 | | | $ | 42,684 | | | $ | 13,116 | | | $ | 1,213 | | | $ | 542 | | | $ | - | | | $ | 68,671 | | Farmland | | | 155 | | | | 269 | | | | 11,373 | | | | 38,051 | | | | 22,069 | | | | 947 | | | | 1,458 | | | | - | | | | 74,322 | | Real Estate | | | - | | | | 553 | | | | 27,003 | | | | 86,269 | | | | 28,560 | | | | 6,950 | | | | 3,946 | | | | - | | | | 153,281 | | Multi-Family | | | - | | | | - | | | | 963 | | | | 5,116 | | | | 3,430 | | | | 113 | | | | - | | | | - | | | | 9,622 | | Commercial Real Estate | | | - | | | | 3,097 | | | | 55,662 | | | | 72,779 | | | | 41,749 | | | | 13,878 | | | | 7,998 | | | | - | | | | 195,163 | | Home Equity – closed end | | | - | | | | 48 | | | | 1,065 | | | | 2,560 | | | | 639 | | | | 382 | | | | 13 | | | | - | | | | 4,707 | | Home Equity – open end | | | 27 | | | | 1,272 | | | | 18,671 | | | | 23,207 | | | | 2,091 | | | | 1,611 | | | | 49 | | | | - | | | | 46,928 | | Commercial & Industrial - Non-Real Estate | | | 10 | | | | 516 | | | | 12,934 | | | | 26,310 | | | | 15,613 | | | | 911 | | | | 331 | | | | - | | | | 56,625 | | Consumer (excluding dealer) | | | 33 | | | | 286 | | | | 2,965 | | | | 3,105 | | | | 68 | | | | 16 | | | | 15 | | | | - | | | | 6,488 | | Gross loans | | $ | 225 | | | $ | 6,045 | | | $ | 141,748 | | | $ | 300,081 | | | $ | 127,335 | | | $ | 26,021 | | | $ | 14,352 | | | $ | - | | | $ | 615,807 | | Less: Deferred loan fees, net of costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (570 | ) | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 615,237 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit Cards | | | Dealer Finance | | Performing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 3,240 | | | $ | 124,910 | | Nonperforming | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2 | | | | 215 | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 3,242 | | | $ | 125,125 | |
December 31, 2021 | | 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 | | $ | - | | | $ | 6 | | | $ | 9,952 | | | $ | 43,861 | | | $ | 19,457 | | | $ | 1,658 | | | $ | 302 | | | $ | - | | | $ | 75,236 | | Farmland | | | 56 | | | | 291 | | | | 6,804 | | | | 42,615 | | | | 13,620 | | | | 1,638 | | | | 1,320 | | | | - | | | | 66,344 | | Real Estate | | | - | | | | 1,128 | | | | 30,268 | | | | 61,940 | | | | 28,895 | | | | 12,462 | | | | 4,859 | | | | - | | | | 139,552 | | Multi-Family | | | - | | | | - | | | | 1,021 | | | | 2,586 | | | | 1,154 | | | | 126 | | | | - | | | | - | | | | 4,887 | | Commercial Real Estate | | | - | | | | 2,124 | | | | 36,308 | | | | 72,414 | | | | 35,444 | | | | 4,428 | | | | 12,846 | | | | - | | | | 163,564 | | Home Equity – closed end | | | - | | | | 61 | | | | 1,268 | | | | 3,103 | | | | 762 | | | | 1,068 | | | | - | | | | - | | | | 6,262 | | Home Equity – open end | | | - | | | | 1,293 | | | | 17,333 | | | | 21,296 | | | | 2,477 | | | | 1,632 | | | | 216 | | | | - | | | | 44,247 | | Commercial & Industrial - Non-Real Estate | | | - | | | | 1,001 | | | | 7,562 | | | | 21,527 | | | | 13,538 | | | | 533 | | | | 63 | | | | - | | | | 44,224 | | Consumer (excluding dealer) | | | 10 | | | | 522 | | | | 2,919 | | | | 3,526 | | | | 980 | | | | 79 | | | | - | | | | - | | | | 8,036 | | Gross loans | | $ | 66 | | | $ | 6,426 | | | $ | 113,435 | | | $ | 272,868 | | | $ | 116,327 | | | $ | 23,624 | | | $ | 19,606 | | | $ | - | | | $ | 552,352 | | Less: Deferred loan fees, net of costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (277 | ) | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 552,075 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit Cards | | | Dealer Finance | | Performing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 3,000 | | | $ | 107,330 | | Nonperforming | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | 16 | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 3,000 | | | $ | 107,346 | |
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: Loans having 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.
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