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LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2023

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

NOTE 5 – LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company's loan portfolio is subject to varying degrees of credit risk. These risks entail both general risks, which are inherent in the lending process, and risks specific to individual borrowers. The Company's credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type.

The Company currently manages its credit products and the respective exposure to credit losses by specific portfolio segments and classes, which are levels at which the Company develops and documents its systematic methodology to determine the allowance for credit losses. The Company believes each portfolio segment has unique risk characteristics. The Company's loans held for investment is divided into three portfolio segments: loans secured by real estate, commercial and industrial loans, and consumer loans. Each of these segments is further divided into loan classes for purposes of estimating the allowance for credit losses.

For additional information, including the accounting policies and CECL methodology used to estimate the allowance for credit losses, see Note 2 “Basis of Presentation” and Note 7 “Recent Accounting Pronouncements.”

The following table is a summary of loans receivable by loan portfolio segment and class.


	March 31,			December 31,
	2023			2022
(dollars in thousands)	Amount		%	Amount		%
Loans Secured by Real Estate
Construction and land	$	4,320	2	$	4,499	2
Farmland		331	—		333	—
Single-family residential		81,506	44		80,251	43
Multi-family		5,269	3		5,304	3
Commercial		43,205	24		42,936	23
Total loans secured by real estate		134,631			133,323
Commercial and Industrial
Commercial and industrial		10,336	6		8,990	5
SBA guaranty		6,076	3		6,158	3
Total commercial and industrial loans		16,412			15,148
Consumer Loans
Consumer		1,577	1		1,521	1
Automobile		31,521	17		36,448	20
Total consumer loans		33,098			37,969

Loans, net of deferred fees and costs		184,141	100		186,440	100
Less: Allowance for credit losses		(2,161)			(2,162)
Loans, net	$	181,980		$	184,278

The Bank’s net loans totaled $182.0 million on March 31, 2023, compared to $184.3 million on December 31, 2022, a decrease of $2.3 million, or 1.25%. Construction and land loans decreased from $4.5 million on December 31, 2022, to $4.3 million on March 31, 2023, a decrease of $0.2 million, or 3.97%. Farmland loans were $0.3 million at March 31, 2023 and December 31, 2022. Single-family residential loans increased from $80.3 million on December 31, 2022, to $81.5 million on March 31, 2023, an increase of $1.3 million, or 1.56%. Multi-family residential loans were $5.3 million on March 31, 2023 and on December 31, 2022. Commercial real estate loans increased $0.3 million, or 0.63%, to $ 43.2 at March 31, 2023, compared to $42.9 million on December 31, 2022. Commercial and industrial loans increased by $1.3 million, or 14.97%, to $10.3 million on March 31, 2023, compared to $9.0 million on December 31, 2022. SBA guaranty loans were $6.1 million on March 31, 2023, a decrease of $0.1 million, or 1.33%, compared to $6.2 million at December 31, 2022. Consumer loans increased by $0.1 million, or 3.66% to $1.6 million on March 31, 2023, compared to $1.5 million on December 31, 2022. Automobile loans decreased from $36.4 million on December 31, 2022, to $31.5 million on March 31, 2023, a decrease of $4.9 million or 13.52%.

Credit Risk and Allowance for Credit Losses. Credit risk is the risk of loss arising from the inability of a borrower to meet his or her obligations and entails both general risks, which are inherent in the process of lending, and risks specific to individual borrowers. Credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type. Residential mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans secured by personal property, such as auto loans, generally experience medium credit losses. Unsecured loan products, such as personal revolving credit, have the highest credit loss experience and for that reason, the Bank has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Inconsistent economic conditions may have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.

On January 1, 2021, the Company early adopted ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”) which replaces the “incurred loss approach” for estimating credit losses with an expected loss methodology. The incurred loss model delayed the recognition of credit losses until it was probable that a loss had occurred, while the CECL model requires the immediate recognition of expected credit losses over the contractual term for financial instruments that fall within the scope of CECL at the date of origination or purchase of the financial instrument. The CECL model, which is applicable to the measurement of credit losses on financial assets measured at amortized cost and certain off-balance sheet credit exposures, affects the Company’s estimates of the allowance for credit losses for our loan portfolio and the reserve for our off-balance sheet credit exposures related to loan commitments. The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. The allowance, based on all available information from internal and external sources, relevant to assessing the collectability of loans over their contractual terms, adjusted for expected prepayments when appropriate, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations are performed for each class of loans and take into consideration factors such as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, value of collateral securing the loans and current economic conditions and trends that may affect the borrowers’ ability to pay. For example, delinquencies in unsecured loans and indirect automobile installment loans will be reserved for at significantly higher ratios than loans secured by real estate. Finally, the Company considers forecasts about future economic conditions or changes in collateral values that are reasonable and supportable. Based on that analysis, the Bank deems its allowance for credit losses in proportion to the total nonaccrual loans and past due loans to be sufficient.

Transactions in the allowance for credit losses for the three months ended March 31, 2023 and the year ended December 31, 2022 were as follows:


	Loans Secured By Real Estate										Commercial and Industrial Loans				Consumer Loans
March 31, 2023	Construction				Single-family						Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		Consumer		Automobile		Total

Balance, beginning of year	$	44	$	20	$	1,230	$	103	$	221	$	174	$	22	$	23	$	325	$	2,162
Charge-offs		—		—		—		—		—		—		—		—		(8)		(8)
Recoveries		—		—		—		—		—		—		—		—		49		49
Release (provision) for credit losses		(4)		(1)		(29)		(3)		(5)		110		(3)		(1)		(106)		(42)

Balance, end of quarter	$	40	$	19	$	1,201	$	100	$	216	$	284	$	19	$	22	$	260	$	2,161

Individually evaluated for impairment:
Balance in allowance	$	—	$	—	$	21	$	—	$	149	$	—	$	—	$	—	$	—	$	170
Related loan balance		—		—		33		—		299		—		—		—		—		332

Collectively evaluated for impairment:
Balance in allowance	$	40	$	19	$	1,180	$	100	$	67	$	284	$	19	$	22	$	260	$	1,991
Related loan balance		4,320		331		81,473		5,269		42,906		10,336		6,076		1,577		31,521		183,809


	Loans Secured By Real Estate										Commercial and Industrial Loans				Consumer Loans
December 31, 2022	Construction				Single-family						Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		Consumer		Automobile		Total

Balance, beginning of year	$	5	$	11	$	1,357	$	105	$	278	$	115	$	30	$	36	$	533	$	2,470
Charge-offs		—		—		—		—		—		(200)		(9)	-14	(14)		(169)		(392)
Recoveries		—		—		—		—		—		—		—		8		188		196
Release (provision) for credit losses		39		9		(127)		(2)		(57)		259		1		(7)		(227)		(112)

Balance, end of the year	$	44	$	20	$	1,230	$	103	$	221	$	174	$	22	23	23	$	325	$	2,162

Individually evaluated for impairment:
Balance in allowance	$	—	$	—	$	20	$	—	$	—	$	59	$	—	$	—	$	—	$	79
Related loan balance		—		—		34		—		—		300		—		—		—		334

Collectively evaluated for impairment:
Balance in allowance	$	44	$	20	$	1,210	$	103	$	221	$	115	$	22	$	23	$	325	$	2,083
Related loan balance		4,499		333		80,217		5,304		42,936		8,690		6,158		1,521		36,448		186,106


	March 31,			March 31,
(dollars in thousands)	2023			2022
Average loans	$	184,787		$	207,321
Net charge offs to average loans (annualized)		(0.09)	%		(0.02)	%

During the three-month period ended March 31, 2023, loans to 3 borrowers and related entities totaling approximately $8,000 were determined to be uncollectible and were charged off. During the three-month period ended March 31, 2022, loans to 5 borrowers and related entities totaling approximately $64,000 were determined to be uncollectible and were charged off.

Reserve for Unfunded Commitments. Loan commitments and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Bank generally requires collateral to support financial instruments with credit risk on the same basis as it does for on-balance sheet instruments. The collateral requirement is based on management's credit evaluation of the counter party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

As of March 31, 2023, and 2022, the Bank had outstanding commitments totaling $34.6 million and $28.1 million, respectively. The reserve for unfunded commitments represents the expected lifetime credit losses on off-balance sheet obligations such as commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments that are unconditionally cancellable by the Company. The allowance for credit losses on unfunded commitments is determined by estimating future draws, including the effects of risk mitigation actions, and applying the expected loss rates on those draws. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit losses related to the respective loan portfolio class.

The following table shows the Bank’s reserve for unfunded commitments arising from these transactions:


	Three Months Ended
	Ended March 31,
(dollars in thousands)	2023		2022
Beginning balance	$	477	$	371
Reduction of unfunded reserve		—		(17)
Provisions charged to operations		5		—

Ending balance	$	482	$	354

Contractual Obligations and Commitments. No material changes, outside the normal course of business, have been made during the first quarter of 2023.

Asset Quality. The following tables set forth the amount of the Bank’s current, past due, and non-accrual loans by categories of loans and restructured loans, at the dates indicated.


At March 31, 2023					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total
Loans Secured by Real Estate
Construction and land	$	4,320	$	—	$	—	$	—	$	4,320
Farmland		331		—		—		—		331
Single-family residential		81,284		111		10		100		81,506
Multi-family		5,269		—		—		—		5,269
Commercial		43,205		—		—		—		43,205
Total loans secured by real estate		134,409		111		10		100		134,631
Commercial and Industrial
Commercial and industrial		10,036		—		—		300		10,336
SBA guaranty		6,076		—		—		—		6,076
Total commercial and industrial loans		16,112		—		—		300		16,412
Consumer Loans
Consumer		1,529		48		—		—		1,577
Automobile		31,258		195		—		68		31,521
Total consumer loans		32,787		243		—		68		33,098

	$	183,308	$	354	$	10	$	468	$	184,141


At December 31, 2022					90 Days or
(dollars in thousands)			30-89 Days		More and
	Current		Past Due		Still Accruing		Nonaccrual		Total
Loans Secured by Real Estate
Construction and land	$	4,499	$	—	$	—	$	—	$	4,499
Farmland		333		—		—		—		333
Single-family residential		79,952		185		10		104		80,251
Multi-family		5,304		—		—		—		5,304
Commercial		42,936		—		—		—		42,936
Total loans secured by real estate		133,024		185		10		104		133,323
Commercial and Industrial										—
Commercial and industrial		8,691		—		—		299		8,990
SBA guaranty		6,158		—		—		—		6,158
Total commercial and industrial loans		14,849		—		—		299		15,148
Consumer Loans
Consumer		1,521		—		—		—		1,521
Automobile		36,037		326		—		85		36,448
Total consumer loans		37,558		326		—		85		37,969

	$	185,431	$	511	$	10	$	488	$	186,440

The balances in the above charts have not been reduced by the allowance for credit losses. For the period ended March 31, 2023, the allowance for credit loss is $2.2 million. For the period ended December 31, 2022, the allowance for credit loss is $2.2 million.

Non-accrual loans with specific reserves at March 31, 2023 are comprised of:

Single–family residential – One loan to one borrower that totaled $32,983 with specific reserves of $20,629 established for the loan. This loan was also a troubled debt restructured loan.

Commercial and industrial – One loan to one borrower that totaled $299,453 with specific reserves of $149,453 established for the loan

Below is a summary of the recorded investment amount and related allowance for losses of the Bank’s impaired loans at March 31, 2023 and December 31, 2022.


March 31, 2023			Unpaid		Interest				Average
(dollars in thousands)	Recorded		Principal		Income		Specific		Recorded
	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—
Single-family residential		12		33		1		21		44
Multi-family		—		—		—		—		—
Commercial		—		—		—		—		—
Total loans secured by real estate		12		33		1		21		44
Commercial and Industrial
Commercial and industrial		150		299		—		149		499
SBA guaranty		—		—		—		—		—
Total commercial and industrial loans		150		299		—		149		499
Consumer Loans
Consumer		—		—		—		—		—
Automobile		—		—		—		—		—
Total consumer loans		—		—		—		—		—
Total impaired loans with specific reserves	$	162	$	332	$	1	$	170	$	543

Impaired loans with no specific reserve:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	n/a	$	—
Farmland		—		—		—		n/a		—
Single-family residential		78		78		1		n/a		89
Multi-family		—		—		—		n/a		—
Commercial		—		—		—		n/a		—
Total loans secured by real estate		78		78		1		—		89
Commercial and Industrial
Commercial and industrial		—		—		—		n/a		—
SBA guaranty		—		—		—		n/a		—
Total commercial and industrial loans		—		—		—		—		—
Consumer Loans
Consumer		—		—		—		n/a		—
Automobile		193		193		3		n/a		89
Total consumer loans		193		193		3		n/a		89
Total impaired loans with no specific reserve	$	271	$	271	$	4	$	—	$	178


December 31, 2022			Unpaid		Interest				Average
(dollars in thousands)	Recorded		Principal		Income		Specific		Recorded
	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—
Single-family residential		14		34		2		20		48
Multi-family		—		—		—		—		—
Commercial		—		—		—		—		—
Total loans secured by real estate		14		34		2		20		48
Commercial and Industrial
Commercial and industrial		240		299		19		59		499
SBA guaranty		—		—		—		—		—
Total commercial and industrial loans		240		299		19		59		499
Consumer Loans
Consumer		—		—		—		—		—
Automobile		—		—		—		—		—
Total consumer loans		—		—		—		—		—
Total impaired loans with specific reserves	$	254	$	333	$	21	$	79	$	547

Impaired loans with no specific reserve:
Loans Secured by Real Estate
Construction and land	$	—	$	—	$	—	$	n/a	$	—
Farmland		—		—		—		n/a		—
Single-family residential		70		70		2		n/a		79
Multi-family		—		—		—		n/a		—
Commercial		—		—		—		n/a		—
Total loans secured by real estate		70		70		2		—		79
Commercial and Industrial
Commercial and industrial		—		—		—		n/a		—
SBA guaranty		—		—		—		n/a		—
Total commercial and industrial loans		—		—		—		—		—
Consumer Loans
Consumer		—		—		—		n/a		—
Automobile		85		85		6		n/a		107
Total consumer loans		85		85		6		n/a		107
Total impaired loans with no specific reserve	$	155	$	155	$	8	$	—	$	186


	March 31,			December 31,
(dollars in thousands)	2023			2022

Troubled debt restructured loans	$	33		$	34
Non-accrual and 90+ days past due and still accruing loans to average loans		0.26	%		0.26	%
Allowance for credit losses to nonaccrual & 90+ days past due and still accruing loans		451.6	%		433.9	%

At March 31, 2023, there was one troubled debt restructured loan consisting of a single-family residential loan in the amount of $32,983. This loan is in a nonaccrual status.

The following table shows the activity for non-accrual loans for the three months ended March 31, 2023 and 2022.


					Commercial and				Consumer
	Loans Secured By Real Estate				Industrial Loans				Loans
	Single-family				Commercial
(dollars in thousands)	Residential		Commercial		and Industrial		SBA Guaranty		Automobile		Total

December 31, 2021	$	123	$	—	$	—	$	71	$	144	$	338
Transfers into nonaccrual		—		—		—		—		61		61
Loans paid down/payoffs		(41)		—		—		(61)		(46)		(148)
Loans returned to accrual status		—		—		—		—		—		—
Loans charged off		—		—		—		(10)		(39)		(49)

March 31, 2022	$	82	$	—	$	—	$	—	$	120	$	202


December 31, 2022	$	104	$	—	$	299	$	—	$	85	$	488
Transfers into nonaccrual		187		—		—		—		3		190
Loans paid down/payoffs		(191)		—		—		—		(11)		(202)
Loans returned to accrual status		—		—		—		—		—		—
Loans charged off		—		—		(3)		—		(5)		(8)

March 31, 2023	$	100	$	—	$	296	$	—	$	72	$	468

Other Real Estate Owned. The Company had no real estate acquired in partial or total satisfaction of debt at March 31, 2023, and December 31, 2022. All such properties are initially recorded at the lower of cost or fair value (net realizable value) at the date acquired and carried on the balance sheet as other real estate owned. Losses arising at the date of acquisition are charged against the allowance for credit losses. Subsequent write-downs that may be required and expense of operation are included in noninterest expense. Gains and losses realized from the sale of other real estate owned were included in noninterest income.

Credit Quality Information

In addition to monitoring the performance status of the loan portfolio, the Company utilizes a risk rating scale (1-8) to evaluate loan asset quality for all loans. Loans that are rated 1-4 are classified as pass credits. For the pass rated loans, management believes there is a low risk of loss related to these loans and, as necessary, credit may be strengthened through improved borrower performance and/or additional collateral.

The Bank’s internal risk ratings are as follows:

1 – 4 (Pass) - Pass credits are loans in grades “superior” through “acceptable”. These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.

5 (Special Mention) - Special mention credits have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified, classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.

6 (Substandard) - Substandard credits are inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

7 (Doubtful) - A doubtful credit has all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded Substandard. The following tables provides information with respect to the Company's credit quality indicators by loan portfolio segment on March 31, 2023, and December 31, 2022:


	Loans Secured By Real Estate										Commercial and Industrial Loans				Consumer Loans
March 31, 2023	Construction				Single-family						Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		Consumer		Automobile		Total

Pass	$	4,320	$	331	$	81,395	$	5,269	$	43,205	$	10,037	$	6,076	$	1,577	$	31,328	$	183,538
Special mention		—		—		10		—		—		—		—		—		—		10
Substandard		—		—		101		—		—		299		—		—		193		593
Doubtful		—		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—		—

	$	4,320	$	331	$	81,506	$	5,269	$	43,205	$	10,336	$	6,076	$	1,577	$	31,521	$	184,141

Nonaccrual	$	—	$	—	$	100	$	—	$	—	$	296	$	—	$	—	$	72	$	468
Troubled debt restructures	$	—	$	—	$	33	$	—	$	—	$	—	$	—	$	—	$	—	$	33
Number of TDRs accounts		—		—		1		—		—		—		—		—		—		1
Non-performing TDRs	$	—	$	—	$	33	$	—	$	—	$	—	$	—	$	—	$	—	$	33
Number of non-performing TDR accounts		—		—		1		—		—		—		—		—		—		1


	Loans Secured By Real Estate										Commercial and Industrial Loans				Consumer Loans
December 31, 2022	Construction				Single-family						Commercial
(dollars in thousands)	and Land		Farmland		Residential		Multi-family		Commercial		and Industrial		SBA Guaranty		Consumer		Automobile		Total

Pass	$	4,499	$	333	$	80,147	$	5,304	$	42,936	$	8,691	$	6,158	$	1,521	$	36,363	$	185,982
Special mention		—		—		—		—		—		—		—		—		—		—
Substandard		—		—		104		—		—		299		—		—		80		483
Doubtful		—		—		—		—		—		—		—		—		5		5
Loss		—		—		—		—		—		—		—		—		—		—

	$	4,499	$	333	$	80,251	$	5,304	$	42,936	$	8,990	$	6,158	$	1,521	$	36,448	$	186,440

Nonaccrual	$	—	$	—	$	104	$	—	$	—	$	299	$	—	$	—	$	85	$	488
Troubled debt restructures	$	—	$	—	$	34	$	—	$	—	$	—	$	—	$	—	$	—	$	34
Number of TDRs accounts		—		—		1		—		—		—		—		—		—		1
Non-performing TDRs	$	—	$	—	$	34	$	—	$	—	$	—	$	—	$	—	$	—	$	34
Number of non-performing TDR accounts		—		—		1		—		—		—		—		—		—		1