Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2022

NOTE 5. Loans and Allowance for Loan Losses

The composition of loans at September 30, 2022 and December 31, 2021 was as follows:


	September 30,			December 31,
	2022			2021
	(in thousands)
Mortgage loans on real estate:
Construction and land development	$	69,255		$	71,191
Secured by farmland		16,220			13,710
Secured by 1-4 family residential properties		280,880			263,723
Multifamily		38,877			29,093
Commercial		491,364			377,051
Commercial and industrial loans		179,848			143,378
Consumer installment loans		107,877			67,281
All other loans		11,167			16,798
Total loans	$	1,195,488		$	982,225
Net deferred loan costs and premiums		6,353			3,495
Allowance for loan losses		(10,742	)		(8,787	)
	$	1,191,099		$	976,933

At September 30, 2022, the Company was servicing $178.0 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 $466 thousand at September 30, 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 nine months ended September 30, 2022 and 2021 and the year ended December 31, 2021 were as follows:


	Nine Months Ended			Year Ended			Nine Months Ended
	September 30,			December 31,			September 30,
	2022			2021			2021
				(in thousands)
Balance, beginning	$	8,787		$	7,096		$	7,096
Provision for loan losses		900			1,483			1,183
Recoveries added to the allowance		1,224			318			238
Loan losses charged to the allowance		(169	)		(110	)		(69	)
Balance, ending	$	10,742		$	8,787		$	8,448

Nonaccrual and past due loans by class at September 30, 2022 and December 31, 2021 were as follows:


	September 30, 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	$	301	$	32	$	73	$	406	$	179,442	$	179,848	$	—	$	73
Commercial Real Estate:
Owner Occupied		—		—		—		—		219,493		219,493		—		22
Non-owner occupied		—		271		—		271		271,600		271,871		—		1,353
Construction and Farmland:
Residential		—		208		—		208		9,818		10,026		—		—
Commercial		—		—		103		103		75,346		75,449		—		655
Consumer:
Installment		262		—		—		262		107,615		107,877		—		1
Residential:
Equity Lines		137		—		—		137		40,835		40,972		—		19
Single family		—		172		156		328		239,580		239,908		—		304
Multifamily		—		—		—		—		38,877		38,877		—		—
All Other Loans		—		—		—		—		11,167		11,167		—		—
Total	$	700	$	683	$	332	$	1,715	$	1,193,773	$	1,195,488	$	—	$	2,427


	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 September 30, 2022 and December 31, 2021 were as follows:


	As of and For the Nine Months Ended
	September 30, 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		—			(2	)		—		—		(67	)		(100	)		—		(169	)
Recoveries		5			883			197		107		21			11			—		1,224
Provision		(84	)		(862	)		352		702		397			185			210		900
Ending balance	$	2,715		$	1,769		$	2,199	$	2,465	$	997		$	387		$	210	$	10,742
Ending balance: Individually evaluated for impairment	$	—		$	32		$	—	$	374	$	—		$	—		$	—	$	406
Ending balance: collectively evaluated for impairment	$	2,715		$	1,737		$	2,199	$	2,091	$	997		$	387		$	210	$	10,336
Loans:
Ending balance	$	85,475		$	319,757		$	491,364	$	179,848	$	107,877		$	11,167		$	—	$	1,195,488
Ending balance individually evaluated for impairment	$	1,042		$	3,482		$	1,989	$	453	$	24		$	—		$	—	$	6,990
Ending balance collectively evaluated for impairment	$	84,433		$	316,275		$	489,375	$	179,395	$	107,853		$	11,167		$	—	$	1,188,498


	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 September 30, 2022 and December 31, 2021 were as follows:


	As of
	September 30, 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	$	91	$	79	$	—	$	94	$	4
Commercial Real Estate:
Owner Occupied		208		204		—		209		9
Non-owner occupied		2,029		1,785		—		1,792		15
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		1,059		1,045		—		1,056		13
Consumer:
Installment		25		24		—		26		1
Residential
Equity lines		23		19		—		20		—
Single family		2,895		2,798		—		2,836		76
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	6,330	$	5,954	$	—	$	6,033	$	118
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	379	$	374	$	374	$	413	$	17
Commercial Real Estate:
Owner Occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Consumer:
Installment		—		—		—		—		—
Residential
Equity lines		—		—		—		—		—
Single family		699		678		32		687		20
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	1,078	$	1,052	$	406	$	1,100	$	37
Total:
Commercial	$	470	$	453	$	374	$	507	$	21
Commercial Real Estate		2,237		1,989		—		2,001		24
Construction and Farmland		1,059		1,045		—		1,056		13
Consumer		25		24		—		26		1
Residential		3,617		3,495		32		3,543		96
Other		—		—		—		—		—
Total	$	7,408	$	7,006	$	406	$	7,133	$	155

(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 $16 thousand at September 30, 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)

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 September 30, 2022 and December 31, 2021 was as follows:


	As of
	September 30, 2022
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	179,618	$	157	$	73	$	—	$	—	$	179,848
Commercial Real Estate:
Owner Occupied		200,192		19,279		22		—		—		219,493
Non-owner occupied		261,315		8,556		2,000		—		—		271,871
Construction and Farmland:
Residential		9,818		208		—		—		—		10,026
Commercial		63,482		3,203		8,764		—		—		75,449
Residential:
Equity Lines		40,952		—		20		—		—		40,972
Single family		235,445		3,041		1,306		116		—		239,908
Multifamily		38,877		—		—		—		—		38,877
All other loans		11,167		—		—		—		—		11,167
Total	$	1,040,866	$	34,444	$	12,185	$	116	$	—	$	1,087,611


	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	107,876	$	1


	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