NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS
Nature of Operations
– New Peoples Bankshares, Inc. (New Peoples or the Company) is a financial holding company whose principal activity is the
ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). New Peoples and the Bank are organized and incorporated
under the laws of the Commonwealth of Virginia. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau
of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (the Federal
Reserve). The Bank provides general banking services to individuals, small and medium size businesses and the professional community
of southwest Virginia, southern West Virginia, western North Carolina and northeastern Tennessee. These services include commercial and
consumer loans along with traditional deposit products such as checking and savings accounts.
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated
financial statements conform to U. S. generally accepted accounting principles (GAAP) and to general industry practices. In the opinion
of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the Company’s financial position as of March 31, 2023 and December 31, 2022, and the results of operations
for the three months ended March 31, 2023 and 2022. The Notes included herein should be read in conjunction with the notes to the consolidated
financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The results of
operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any
future period.
The consolidated
financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (hereinafter, collectively
referred to as the Company, we, us or our). All significant intercompany balances and transactions have been eliminated. In accordance
with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not
included in the consolidated financial statements.
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy
of the allowance for credit is based on estimates that are particularly susceptible to significant changes in the economic environment
and market conditions.
Certain reclassifications
have been made to prior period amounts to conform to current period presentation. None of these reclassifications are considered material
and have no impact on net income.
The Company’s
significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in the Company’s
Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December
31, 2022, except for the following:
Accounting
Standards Adopted in 2023
On January 1, 2023,
the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current
expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of
the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to
financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet
credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the
net amount expected to be collected by using an allowance for credit losses.
In addition, CECL
made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as
an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe
that it is more likely than not, they will be required to sell.
The Company adopted
ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial
assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included
a decrease in the allowance for credit losses on loans of $80,000, which is presented as a reduction to net loans outstanding, and an
increase in the allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other liabilities. The
Company recorded a net decrease to retained earnings of $212,000 as of January 1, 2023 for the cumulative effect of adopting CECL, which
reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning
after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable
accounting standards (“Incurred Loss”).
The Company adopted
ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior
to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore,
upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not deemed
material.
The following table
illustrates the impact on the allowance for credit losses from the adoption of ASC 326:
Schedule of allowance for credit losses on available for sale securities | |
| | | |
| | | |
| | |
| |
January
1, 2023 As Reported Under ASC 326 | |
December
31, 2022 Pre-ASC 326 Adoption | |
Impact
of ASC 326 Adoption |
(Dollars
in thousands) | |
| | | |
| | | |
| | |
Assets: | |
| | | |
| | | |
| | |
Loans,
at amortized cost | |
| 584,613 | | |
| 584,613 | | |
$ | — | |
Allowance
for credit losses on loans: | |
| | | |
| | | |
| | |
Real estate
secured: | |
| | | |
| | | |
| | |
Commercial | |
| 2,065 | | |
| 2,364 | | |
| (299 | ) |
Construction
and land development | |
| 509 | | |
| 345 | | |
| 164 | |
Residential
1-4 family | |
| 2,639 | | |
| 2,364 | | |
| 275 | |
Multifamily | |
| 274 | | |
| 262 | | |
| 12 | |
Farmland | |
| 228 | | |
| 153 | | |
| 75 | |
Total
real estate loans | |
| 5,715 | | |
| 5,488 | | |
| 227 | |
Commercial | |
| 622 | | |
| 381 | | |
| 241 | |
Agriculture | |
| 27 | | |
| 32 | | |
| (5 | ) |
Consumer
and other loans | |
| 283 | | |
| 386 | | |
| (103 | ) |
Unallocated | |
| — | | |
| 440 | | |
| (440 | ) |
Total
allowance for credit losses for loans | |
| 6,647 | | |
| 6,727 | | |
| (80 | ) |
Deferred
tax asset | |
| 4,679 | | |
| 4,623 | | |
| 56 | |
Liabilities: | |
| | | |
| | | |
| | |
Allowance
for credit losses for unfunded commitments | |
| 348 | | |
| — | | |
| 348 | |
The Company elected
not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans
or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company
believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible
interest.
Allowance for
Credit Losses – Available for Sale Securities
For available for
sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic
or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the
Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the
above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In
making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost,
performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to
make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates
that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security
and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost
basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive
income.
Changes in the allowance
for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit
loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding
intent or requirement to sell is met. As of March 31, 2023, there was no allowance for credit loss related to the available for sale
portfolio.
Loans
Loans that management
has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost
is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable
related to loans totaled $1.9 million at March 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred
and recognized in interest income using methods that approximate a level yield without anticipating prepayments.
The accrual of interest
is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when
management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not
be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be
past due when a scheduled payment has not been received 30 days after the contractual due date.
All accrued interest
is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using
the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until
the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due
are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.
Allowance for
Credit Losses – Loans
The allowance for
credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected
on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable
is excluded from the estimate of credit losses.
The allowance for
credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance
for credit losses is estimated by management using relevant available information, from both internal and external sources, relating
to past events, current conditions, and reasonable and supportable forecasts.
The Company primarily
utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of
current expected credit losses. To further adjust the allowance for credit losses for expected losses not already included within the
quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes to: lending
policies and procedures, national and local economic conditions, the experience and ability of management and staff; the volume and severity
of past due, rated and nonaccrual assets, loan review system, collateral value, concentrations of credit, and legal or regulatory requirements
and competition.
The Company measures
expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following
portfolio segments and calculates the allowance for credit losses for each using a discounted cash flow methodology:
| · | Commercial
Loans. We make commercial loans to qualified businesses in our market area. Our commercial
lending consists primarily of commercial and industrial loans to finance accounts receivable,
inventory, property, plant and equipment. Commercial business loans generally have a higher
degree of risk than residential mortgage loans, but have commensurately higher yields. Residential
mortgage loans are generally made on the basis of the borrower’s ability to make repayment
from employment and other income and are secured by real estate whose value tends to be easily
ascertainable. In contrast, commercial business loans typically are made on the basis of
the borrower’s ability to make repayment from cash flow from its business and are secured
by business assets, such as commercial real estate, accounts receivable, equipment and inventory.
As a result, the availability of funds for the repayment of commercial business loans may
be substantially dependent on the success of the business itself. Further, the collateral
for commercial business loans may depreciate over time and cannot be appraised with as much
precision as residential real estate. To manage these risks, our underwriting guidelines
generally require us to secure commercial loans with both the assets of the borrowing business
and other additional collateral and guarantees that may be available. In addition, we actively
monitor certain measures of the borrower, including advance rate, cash flow, collateral value
and other appropriate credit factors. |
| · | Residential
Mortgage Loans. Our residential mortgage loans consist of residential first and second mortgage
loans, residential construction loans, home equity lines of credit and term loans secured
by first and second mortgages on the residences of borrowers for home improvements, education
and other personal expenditures. We make mortgage loans with a variety of terms, including
fixed and floating or variable rates and a variety of maturities. Under our underwriting
guidelines, residential mortgage loans are generally made on the basis of the borrower’s
ability to make repayment from employment and other income and are secured by real estate
whose value tends to be easily ascertainable. These loans are made consistent with our appraisal
policies and real estate lending policies, which detail maximum loan-to-value ratios and
maturities. |
| · | Construction
Loans. Construction lending entails significant additional risks compared to residential
mortgage lending. Construction loans often involve larger loan balances concentrated with
single borrowers or groups of related borrowers. Construction loans also involve additional
risks attributable to the fact that loan funds are advanced upon the security of property
under construction, which is of uncertain value prior to the completion of construction.
Thus, it is more difficult to evaluate the total loan funds required to complete a project
and related loan-to-value ratios accurately. To minimize the risks associated with construction
lending, loan-to-value limitations for residential, multi-family and non-residential construction
loans are in place. These are in addition to the usual credit analyses of borrowers. Management
feels that the loan-to-value ratios help to minimize the risk of loss and to compensate for
normal fluctuations in the real estate market. Maturities for construction loans generally
range from 4 to 12 months for residential property and from 6 to 18 months for non-residential
and multi-family properties. |
| · | Consumer
Loans. Our consumer loans consist primarily of installment loans to individuals for personal,
family and household purposes. The specific types of consumer loans that we make include
home improvement loans, debt consolidation loans and general consumer lending. Consumer loans
entail greater risk than residential mortgage loans, particularly in the case of consumer
loans that are unsecured, such as lines of credit, or secured by rapidly depreciating assets
such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan
may not provide an adequate source of repayment of the outstanding loan balance due to the
greater likelihood of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In addition, consumer
loan collections are dependent on the borrower’s continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
A borrower may also be able to assert against the Bank as an assignee any claims and defenses
that it has against the seller of the underlying collateral. |
Loans that do not
share risk characteristics are evaluated on an individual basis. The Company designates loan relationships of $250,000 or more that have
been determined to meet the regulatory definitions of “special mention” or “classified” (together known as “criticized”)
as individually evaluated. The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral
method”) or the DCF method.
| · | The
collateral method is applied to individually evaluated loans for which foreclosure is probable.
The collateral method is also applied to individually evaluated loans when borrowers are
experiencing financial difficulty and repayment is expected to be provided substantially
through the operation or sale of the collateral (“collateral dependent”). The
allowance for credit loss is measured based on the difference between the fair value of the
collateral and the amortized cost basis of the loan as of the measurement date. When repayment
is expected to be from the operation of the collateral, the allowance for credit loss is
calculated as the amount by which the amortized cost basis of the loan exceeds the present
value of expected cash flows from the operation of the collateral. When repayment is expected
to be from the sale of the collateral, the allowance for credit loss is calculated as the
amount by which the loan's amortized cost basis exceeds the fair value of the underlying
collateral less estimated cost to sell. The allowance for credit loss may be zero if the
fair value of the collateral at the measurement date exceeds the amortized cost basis of
the loan. |
| · | The
DCF method is applied to individually evaluated loans that do not meet the criteria for collateral
method measurement. Cash flows are projected and discounted using the same method as for
collectively evaluated loans, and the Company considers default and prepayment assumptions. |
Allowance for
Credit Losses – Unfunded Commitments
Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer
financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument
for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are
recorded when they are funded.
The Company records
an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable,
through a charge to provision for unfunded commitments, which is included in the provision for credit losses, in the Company’s
income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance
sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the
likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other
liabilities on the Company’s consolidated balance sheets.
On January 1, 2023,
concurrent with its adoption of ASU No. 2016-13, the Company adopted ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic
326), Troubled Debt Restructurings and Vintage Disclosures.” The amendments eliminate the accounting guidance for troubled debt
restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings
and restructurings made with borrowers experiencing financial difficulty. Disclosures about periods prior to adoption will be presented
under GAAP applicable for that period.
Similar to its policy
under previous GAAP, the Company continues to identify modifications to loans and to determine whether the borrower is experiencing financial
difficulty. If the Company determines that the borrower is experiencing financial difficulty, the loan's risk rating is evaluated to
determine whether it falls within the regulatory definition of “criticized” and requires individual evaluation. Under previous
GAAP, modifications to loans when the borrower was experiencing financial difficulty were designated as TDR and were individually evaluated
for the duration of the loan. Under CECL, if a previously modified loan with financial difficulty is subsequently upgraded to a pass
rating, it will no longer be individually evaluated.
NOTE 3 EARNINGS
PER SHARE
Basic earnings per
share computations are based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflect
the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the three-month
period ended March 31, 2023 and 2022, there were no potential common shares. Basic and diluted net income per common share calculations
follows:
Schedule of basic and diluted net loss per common share calculations | |
| | | |
| | |
(Dollars
in Thousands, Except Share and Per Share Data) | |
For
the Three Months Ended March 31, |
| |
2023 | |
2022 |
Net
income | |
$ | 2,021 | | |
$ | 1,921 | |
Weighted
average shares outstanding | |
| 23,841,162 | | |
| 23,922,086 | |
Weighted
average dilutive shares outstanding | |
| 23,841,162 | | |
| 23,922,086 | |
Basic
and diluted earnings per share | |
$ | 0.08 | | |
$ | 0.08 | |
NOTE 4 CAPITAL
Capital Requirements
and Ratios
Banks and bank
holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines
and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain
off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
To qualify
as a "Small Bank Holding Company" under federal regulations, a bank must have consolidated assets of $3 billion or less. The
primary benefit of being deemed a "Small Bank Holding Company" is the exemption from the requirement to maintain consolidated
regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.
The final rules
implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became fully phased in
on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based
capital ratios. The capital conservation buffer required is 2.50%. As of March 31, 2023, the Bank had a capital conservation buffer of
8.58%. Amounts recorded to accumulated other comprehensive income (loss) are not included in computing regulatory capital. Management
believes as of March 31, 2023, the Bank met all capital adequacy requirements to which it was subject.
Prompt corrective
action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized
and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth
and expansion, and capital restoration plans are required. As of March 31, 2023, the most recent regulatory notifications categorized
the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that
notification that management believes have changed the institution's category.
In February
2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option
to phase-in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. Additionally, in March
2020, the U.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the
estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years. The final
rule was adopted and became effective in September 2020. The Company implemented the CECL model commencing January 1, 2023, and elected
not to phase in the effect of CECL on regulatory capital.
The Bank’s
actual capital amounts and ratios are presented in the following table as of March 31, 2023 and December 31, 2022, respectively.
Schedule of capital requirements | |
| |
| |
| |
| |
| |
|
| |
Actual | |
Minimum
Capital Requirement | |
Minimum
to Be Well Capitalized Under Prompt Corrective Action Provisions |
(Dollars
are in thousands) | |
Amount | |
Ratio | |
Amount | |
Ratio | |
Amount | |
Ratio |
March 31, 2023: |
Total
capital to risk weighted assets | |
| 94,092 | | |
| 16.58 | % | |
$ | 45,389 | | |
| 8.0 | % | |
$ | 56,736 | | |
| 10.0 | % |
Tier
1 capital to risk weighted assets | |
| 87,106 | | |
| 15.35 | % | |
| 34,041 | | |
| 6.0 | % | |
| 45,389 | | |
| 8.0 | % |
Tier
1 capital to average assets | |
| 87,106 | | |
| 10.98 | % | |
| 31,743 | | |
| 4.0 | % | |
| 39,679 | | |
| 5.0 | % |
Common
equity Tier 1 capital | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
to
risk weighted assets | |
| 87,106 | | |
| 15.35 | % | |
| 25,531 | | |
| 4.5 | % | |
| 36,878 | | |
| 6.5 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December
31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
capital to risk weighted assets | |
| 93,028 | | |
| 16.50 | % | |
$ | 45,106 | | |
| 8.0 | % | |
$ | 56,382 | | |
| 10.0 | % |
Tier
1 capital to risk weighted assets | |
| 86,301 | | |
| 15.31 | % | |
| 33,829 | | |
| 6.0 | % | |
| 45,106 | | |
| 8.0 | % |
Tier
1 capital to average assets | |
| 86,301 | | |
| 10.40 | % | |
| 33,206 | | |
| 4.0 | % | |
| 41,508 | | |
| 5.0 | % |
Common
Equity Tier 1 capital | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
to
risk weighted assets | |
| 86,301 | | |
| 15.31 | % | |
| 25,372 | | |
| 4.5 | % | |
| 36,648 | | |
| 6.5 | % |
NOTE 5 INVESTMENT
SECURITIES
The amortized cost and estimated fair
value of securities (all available-for-sale) as of March 31, 2023 and December 31, 2022 are as follows:
Schedule of securities amortized cost and estimated fair value | |
| | | |
| | | |
| | | |
| | |
| |
| |
Gross | |
Gross | |
Approximate |
| |
Amortized | |
Unrealized | |
Unrealized | |
Fair |
(Dollars
are in thousands) | |
Cost | |
Gains | |
Losses | |
Value |
March 31, 2023 | |
| |
| |
| |
|
U.S.
Treasuries | |
$ | 12,645 | | |
$ | — | | |
$ | 743 | | |
$ | 11,902 | |
U.S.
Government Agencies | |
| 9,678 | | |
| 4 | | |
| 569 | | |
| 9,113 | |
Taxable
municipals | |
| 23,011 | | |
| — | | |
| 5,192 | | |
| 17,819 | |
Corporate
bonds | |
| 3,508 | | |
| — | | |
| 346 | | |
| 3,162 | |
Mortgage
backed securities | |
| 62,822 | | |
| 2 | | |
| 8,098 | | |
| 54,726 | |
Total
securities available for sale | |
$ | 111,664 | | |
$ | 6 | | |
$ | 14,948 | | |
$ | 96,722 | |
December
31, 2022 | |
| | | |
| | | |
| | | |
| | |
U.S.
Treasuries | |
$ | 12,642 | | |
$ | — | | |
$ | 957 | | |
$ | 11,685 | |
U.S.
Government Agencies | |
| 10,129 | | |
| 4 | | |
| 734 | | |
| 9,399 | |
Taxable
municipals | |
| 23,022 | | |
| — | | |
| 6,207 | | |
| 16,815 | |
Corporate
bonds | |
| 3,512 | | |
| — | | |
| 376 | | |
| 3,136 | |
Mortgage
backed securities | |
| 64,419 | | |
| — | | |
| 9,378 | | |
| 55,041 | |
Total
securities available for sale | |
$ | 113,724 | | |
$ | 4 | | |
$ | 17,652 | | |
$ | 96,076 | |
The following table
details unrealized losses and related fair values in the available-for-sale portfolio, for which no allowance for credit loss is recorded.
This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as
of March 31, 2023 and December 31, 2022.
Schedule of fair value and gross unrealized losses on investment securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Less
than 12 Months | |
12
Months or More | |
Total |
(Dollars
are in thousands) | |
Fair
Value | |
Unrealized
Losses | |
Fair
Value | |
Unrealized
Losses | |
Fair
Value | |
Unrealized
Losses |
March
31, 2023 | |
| |
| |
| |
| |
| |
|
U.S.
Treasuries | |
$ | 1,442 | | |
$ | 9 | | |
$ | 10,460 | | |
$ | 734 | | |
$ | 11,902 | | |
$ | 743 | |
U.S.
Government Agencies | |
| 3,552 | | |
| 85 | | |
| 5,398 | | |
| 484 | | |
| 8,950 | | |
| 569 | |
Taxable
municipals | |
| — | | |
| — | | |
| 17,319 | | |
| 5,192 | | |
| 17,319 | | |
| 5,192 | |
Corporate
bonds | |
| 997 | | |
| 5 | | |
| 2,165 | | |
| 341 | | |
| 3,162 | | |
| 346 | |
Mortgage
backed securities | |
| 2,392 | | |
| 28 | | |
| 52,247 | | |
| 8,070 | | |
| 54,639 | | |
| 8,098 | |
Total
securities available for sale | |
$ | 8,383 | | |
$ | 127 | | |
$ | 87,589 | | |
$ | 14,821 | | |
$ | 95,972 | | |
$ | 14,948 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December
31, 2022 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S.
Treasuries | |
$ | 4,761 | | |
$ | 145 | | |
$ | 6,922 | | |
$ | 812 | | |
$ | 11,683 | | |
$ | 957 | |
U.S.
Government Agencies | |
| 5,925 | | |
| 348 | | |
| 3,295 | | |
| 386 | | |
| 9,220 | | |
| 734 | |
Taxable
municipals | |
| 3,689 | | |
| 1,113 | | |
| 13,127 | | |
| 5,094 | | |
| 16,816 | | |
| 6,207 | |
Corporate
bonds | |
| 2,375 | | |
| 136 | | |
| 761 | | |
| 240 | | |
| 3,136 | | |
| 376 | |
Mortgage
backed securities | |
| 11,338 | | |
| 861 | | |
| 43,612 | | |
| 8,517 | | |
| 54,950 | | |
| 9,378 | |
Total
securities available for sale | |
$ | 28,088 | | |
$ | 2,603 | | |
$ | 67,717 | | |
$ | 15,049 | | |
$ | 95,805 | | |
$ | 17,652 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
As of March 31, 2023,
there were 218 securities in a loss position, of which 200 have been in a loss position for twelve months or more. Management believes
that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and are not a result
of credit deterioration. Management does not intend to sell, and it is not likely that the Bank will be required to sell any of the securities
referenced in the table above before recovery of their amortized cost. None of the individual securities held are past due as to principal
or interest payments and a number of these securities held have explicit or implicit payment guarantees. The remaining securities have
credit ratings at or above that necessary to be considered “bank qualified”.
Investment securities
with a carrying value of $37.9 million and $27.3 million as of March 31, 2023 and December 31, 2022, respectively, were pledged as collateral
to secure public deposits and for other purposes required or permitted by law.
There were no sales
of available for sale investment securities during the three months ended March 31, 2023 and 2022.
The amortized cost
and fair value of investment securities as of March 31, 2023, by contractual maturity, are shown in the following schedule. Expected
maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Schedule of amortized cost and fair value of investment securities contractual maturity | |
| |
| |
|
| |
Weighted |
(Dollars are in thousands) | |
Amortized | |
Fair | |
Average |
Securities Available-for-Sale | |
Cost | |
Value | |
Yield |
Due
in one year or less | |
$ | 2,488 | | |
$ | 2,454 | | |
| 3.31 | % |
Due after
one year through five years | |
| 15,775 | | |
| 15,032 | | |
| 2.18 | % |
Due after
five years through ten years | |
| 17,139 | | |
| 15,225 | | |
| 2.09 | % |
Due
after ten years | |
| 76,262 | | |
| 64,011 | | |
| 1.91 | % |
Total | |
$ | 111,664 | | |
$ | 96,722 | | |
| 2.01 | % |
| |
| | | |
| | | |
| | |
The Bank, as a member
bank of the Federal Reserve Bank of Richmond (Federal Reserve Bank) and the Federal Home Loan Bank of Atlanta (FHLB), is required to
hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which
are included in other assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $2.0 million
and $2.1 million at March 31, 2023 and December 31, 2022, respectively. The stock has no quoted market value and no ready market exists.
NOTE 6 LOANS
Loans receivable
outstanding as of March 31, 2023, and December 31, 2022, are summarized as follows:
Schedule of Loans receivable outstanding | |
| | | |
| | |
(Dollars
are in thousands) | |
March
31,
2023 | |
December
31, 2022 |
Real
estate secured: | |
| | | |
| | |
Commercial | |
| 197,820 | | |
$ | 197,069 | |
Construction
and land development | |
| 42,742 | | |
| 42,470 | |
Residential
1-4 family | |
| 228,727 | | |
| 227,232 | |
Multifamily | |
| 34,167 | | |
| 29,710 | |
Farmland | |
| 16,892 | | |
| 17,744 | |
Total
real estate loans | |
| 520,348 | | |
| 514,225 | |
Commercial | |
| 46,338 | | |
| 46,697 | |
Agriculture | |
| 3,931 | | |
| 3,756 | |
Consumer
installment loans | |
| 19,271 | | |
| 19,309 | |
All
other loans | |
| 602 | | |
| 626 | |
Total
loans | |
| 590,490 | | |
$ | 584,613 | |
Also included in
total loans above are deferred loan fees of $1.6 million as of March 31, 2023 and December 31, 2022. Deferred loan costs were $1.9 million,
as of March 31, 2023 and December 31, 2022. Income from net deferred fees and costs is recognized over the lives of the respective loans
as a yield adjustment. If loans repay prior to scheduled maturities, any unamortized fee or cost is recognized at that time.
Loans receivable
on nonaccrual status as of March 31, 2023, and December 31, 2022, are summarized as follows:
|
Summary of loans receivable on nonaccrual status |
|
|
|
|
|
|
|
|
|
|
|
|
CECL |
|
Incurred
Loss |
|
|
|
|
March
31, 2023 |
|
December
31, 2022 |
(Dollars
are in thousands) |
|
With
No Allowance |
|
With
an Allowance |
|
Total |
|
|
Real
estate secured: |
|
|
|
|
|
|
|
|
|
Commercial |
$ |
- |
$ |
268 |
$ |
268 |
$ |
- |
|
Construction
and land development |
|
447 |
|
- |
|
447 |
|
471 |
|
Residential
1-4 family |
|
1,869 |
|
- |
|
1,869 |
|
2,597 |
|
Multifamily |
|
207 |
|
- |
|
207 |
|
268 |
|
Farmland |
|
- |
|
- |
|
- |
|
41 |
|
|
Total
real estate loans |
|
2,523 |
|
268 |
|
2,791 |
|
3,377 |
Commercial |
|
- |
|
- |
|
- |
|
- |
Consumer
installment loans and other loans |
|
36 |
|
- |
|
36 |
|
36 |
Total
loans receivable on nonaccrual status |
$ |
2,559 |
$ |
268 |
$ |
2,827 |
$ |
3,413 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income
not recognized on nonaccrual loans for the three months ended March 31, 2023 and 2022, was $13,000 and $5,000, respectively.
Prior to the adoption
of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable
to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on
nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal
and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s
capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient
to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The
Company individually assessed for impairment all nonaccrual loans greater than $250,000 and all troubled debt restructurings, whether
or not currently classified as such. The tables below include all loans deemed impaired, whether or not individually assessed for impairment.
If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the
present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was
expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of
the principal amount was reasonably assured, in which case interest was recognized on a cash basis.
The following table
presents loans individually evaluated for impairment by class of loans as of December 31, 2022:
Schedule of summary of impaired loans | |
| | | |
| | | |
| | | |
| | |
As
of December 31, 2022 (Dollars
are in thousands) | |
Recorded
Investment | |
Unpaid
Principal Balance | |
Related
Allowance | |
Average
Recorded Investment |
With
no related allowance recorded: | |
| | | |
| | | |
| | | |
| | |
Real
estate secured: | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 90 | | |
$ | 131 | | |
$ | — | | |
$ | 124 | |
Construction
and land development | |
| 471 | | |
| 491 | | |
| — | | |
| 114 | |
Residential
1-4 family | |
| 1,617 | | |
| 1,972 | | |
| — | | |
| 1,585 | |
Multifamily | |
| — | | |
| — | | |
| — | | |
| — | |
Farmland | |
| 248 | | |
| 417 | | |
| — | | |
| 307 | |
Commercial | |
| 23 | | |
| 31 | | |
| — | | |
| 14 | |
Agriculture | |
| — | | |
| — | | |
| — | | |
| — | |
Consumer
installment loans | |
| — | | |
| — | | |
| — | | |
| 1 | |
All other
loans | |
| — | | |
| — | | |
| — | | |
| — | |
With
an allowance recorded: | |
| | | |
| | | |
| | | |
| | |
Real
estate secured: | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| 268 | | |
| 338 | | |
| 63 | | |
| 407 | |
Construction
and land development | |
| — | | |
| — | | |
| — | | |
| 291 | |
Residential
1-4 family | |
| 32 | | |
| 48 | | |
| 23 | | |
| 201 | |
Multifamily | |
| — | | |
| — | | |
| — | | |
| 20 | |
Farmland | |
| — | | |
| — | | |
| — | | |
| 63 | |
Commercial | |
| — | | |
| — | | |
| — | | |
| 27 | |
Agriculture | |
| — | | |
| — | | |
| — | | |
| — | |
Consumer
installment loans | |
| — | | |
| — | | |
| — | | |
| — | |
All
other loans | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 2,749 | | |
$ | 3,428 | | |
$ | 86 | | |
$ | 3,154 | |
| |
| | | |
| | | |
| | | |
| | |
Upon adoption of
ASU 2016-13 the Company began evaluating loans that do not share risk characteristics on an individual basis utilizing the collateral
or discounted cash flow methods as described in Note 2 Summary of Significant Accounting Policies. The following table presents the amortized
cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated
to those loans as March 31, 2023:
As
of March 31, 2023 (Dollars
are in thousands) | |
Unpaid
Principal Balance | |
Related
Allowance |
Real
estate secured: | |
| | | |
| | |
Commercial | |
$ | 268 | | |
$ | 64 | |
Construction
and land development | |
| 447 | | |
| — | |
Residential
1-4 family | |
| — | | |
| — | |
Multifamily | |
| — | | |
| — | |
Farmland | |
| — | | |
| — | |
Total
real estate secured | |
| 715 | | |
| | |
Commercial | |
| — | | |
| — | |
Agriculture | |
| — | | |
| — | |
Consumer
installment loans | |
| — | | |
| — | |
Total | |
$ | 715 | | |
$ | 64 | |
| |
| | | |
| | |
The following table
is an age analysis of past due loans receivable as of March 31, 2023, segregated by class:
Summary age analysis of past due loans receivable | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
As
of March 31, 2023 (Dollars
are in thousands) | |
Loans
30-59 Days Past Due | |
Loans
60-89 Days Past Due | |
Loans
90 or More Days Past Due | |
Total
Past Due Loans | |
Current
Loans | |
Total
Loans |
Real
estate secured: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | — | | |
$ | — | | |
$ | 268 | | |
$ | 268 | | |
$ | 197,552 | | |
$ | 197,820 | |
Construction
and land development | |
| 6 | | |
| — | | |
| — | | |
| 6 | | |
| 42,736 | | |
| 42,742 | |
Residential
1-4 family | |
| 1,174 | | |
| 475 | | |
| 260 | | |
| 1,909 | | |
| 226,818 | | |
| 228,727 | |
Multifamily | |
| 207 | | |
| — | | |
| — | | |
| 207 | | |
| 33,960 | | |
| 34,167 | |
Farmland | |
| 10 | | |
| — | | |
| — | | |
| 10 | | |
| 16,882 | | |
| 16,892 | |
Total
real estate loans | |
| 1,397 | | |
| 475 | | |
| 528 | | |
| 2,400 | | |
| 517,948 | | |
| 520,348 | |
Commercial | |
| 75 | | |
| — | | |
| — | | |
| 75 | | |
| 46,263 | | |
| 46,338 | |
Agriculture | |
| 2 | | |
| — | | |
| — | | |
| 2 | | |
| 3,929 | | |
| 3,931 | |
Consumer
installment loans | |
| 54 | | |
| 22 | | |
| 36 | | |
| 112 | | |
| 19,159 | | |
| 19,271 | |
All
other loans | |
| — | | |
| — | | |
| — | | |
| — | | |
| 602 | | |
| 602 | |
Total
loans | |
$ | 1,528 | | |
$ | 497 | | |
$ | 564 | | |
$ | 2,589 | | |
$ | 587,901 | | |
$ | 590,490 | |
The following
table is an age analysis of past due loans receivable as of December 31, 2022, segregated by class:
As
of December 31, 2022 (Dollars
are in thousands) | |
Loans
30-59 Days Past Due | |
Loans
60-89 Days Past Due | |
Loans
90 or More Days Past Due | |
Total
Past Due Loans | |
Current
Loans | |
Total
Loans |
Real
estate secured: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 268 | | |
$ | — | | |
$ | — | | |
$ | 268 | | |
$ | 196,801 | | |
$ | 197,069 | |
Construction
and land development | |
| 89 | | |
| — | | |
| — | | |
| 89 | | |
| 42,381 | | |
| 42,470 | |
Residential
1-4 family | |
| 3,521 | | |
| 543 | | |
| 341 | | |
| 4,405 | | |
| 222,827 | | |
| 227,232 | |
Multifamily | |
| 229 | | |
| — | | |
| — | | |
| 229 | | |
| 29,481 | | |
| 29,710 | |
Farmland | |
| 285 | | |
| — | | |
| — | | |
| 285 | | |
| 17,459 | | |
| 17,744 | |
Total
real estate loans | |
| 4,392 | | |
| 543 | | |
| 341 | | |
| 5,276 | | |
| 508,949 | | |
| 514,225 | |
Commercial | |
| 56 | | |
| — | | |
| — | | |
| 56 | | |
| 46,641 | | |
| 46,697 | |
Agriculture | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,756 | | |
| 3,756 | |
Consumer
installment Loans | |
| 73 | | |
| 17 | | |
| 17 | | |
| 107 | | |
| 19,202 | | |
| 19,309 | |
All
other loans | |
| 59 | | |
| — | | |
| — | | |
| 59 | | |
| 567 | | |
| 626 | |
Total
loans | |
$ | 4,580 | | |
$ | 560 | | |
$ | 358 | | |
$ | 5,498 | | |
$ | 579,115 | | |
$ | 584,613 | |
The Company categorizes
loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current
financial information, historical payment experience, credit documentation, public information, and current economic trends, among other
factors. The Company analyzes loans individually by classifying the loans receivable as to credit risk. The Company uses the following
definitions for risk ratings:
Pass - Loans
in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers
to service their debt and other factors.
Special Mention
- Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations,
credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying
a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances.
Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect
the Company’s credit position at some future date.
Substandard
- A substandard loan is inadequately protected by the current sound net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies
are not corrected.
Doubtful
- Loans classified doubtful have all the weaknesses
inherent in loans classified as substandard, plus 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 following table
present the credit risk grade of loans by origination year as of March 31, 2023:
Summary of risk category of loans receivable | |
| |
| |
| |
| |
| |
| |
| |
|
| |
| |
| |
| |
| |
| |
| |
| |
|
As of March 31, 2023 | |
| |
| |
| |
| |
| |
| |
| |
|
Dollars
in thousands | |
2023 | |
2022 | |
2021 | |
2020 | |
2019 | |
Prior | |
Revolving | |
Total |
Commercial
real estate | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 5,884 | | |
$ | 41,352 | | |
$ | 48,047 | | |
$ | 31,056 | | |
$ | 22,063 | | |
$ | 47,937 | | |
$ | 1,112 | | |
$ | 197,451 | |
Special
mention | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 101 | | |
| — | | |
| 101 | |
Substandard | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 268 | | |
| — | | |
| 268 | |
Total
commercial real estate | |
$ | 5,884 | | |
$ | 41,352 | | |
$ | 48,047 | | |
$ | 31,056 | | |
$ | 22,063 | | |
$ | 48,306 | | |
$ | 1,112 | | |
$ | 197,820 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current
period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Construction
and Land Development | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 1,531 | | |
$ | 20,860 | | |
$ | 11,315 | | |
$ | 4,643 | | |
$ | 1,558 | | |
$ | 2,204 | | |
$ | 71 | | |
$ | 42,182 | |
Special
mention | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 113 | | |
| — | | |
| 113 | |
Substandard | |
| — | | |
| — | | |
| — | | |
| — | | |
| 447 | | |
| — | | |
| — | | |
| 447 | |
Total
construction and land development | |
$ | 1,531 | | |
$ | 20,860 | | |
$ | 11,315 | | |
$ | 4,643 | | |
$ | 2,005 | | |
$ | 2,317 | | |
$ | 71 | | |
$ | 42,742 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current
period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential
1-4 family | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 6,741 | | |
$ | 34,122 | | |
$ | 44,471 | | |
$ | 14,619 | | |
$ | 14,799 | | |
$ | 92,868 | | |
$ | 18,922 | | |
$ | 226,542 | |
Special
mention | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 316 | | |
| — | | |
| 316 | |
Substandard | |
| — | | |
| — | | |
| 152 | | |
| — | | |
| 41 | | |
| 1,620 | | |
| 56 | | |
| 1,869 | |
Total
residential 1-4 family | |
$ | 6,741 | | |
$ | 34,122 | | |
$ | 44,623 | | |
$ | 14,619 | | |
$ | 14,840 | | |
$ | 94,804 | | |
$ | 18,978 | | |
$ | 228,727 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current
period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Multifamily | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 3,766 | | |
$ | 12,142 | | |
$ | 8,320 | | |
$ | 2,714 | | |
$ | 1,117 | | |
$ | 5,901 | | |
$ | — | | |
$ | 33,960 | |
Special
mention | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Substandard | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 207 | | |
| — | | |
| 207 | |
Total
multifamily | |
$ | 3,766 | | |
$ | 12,142 | | |
$ | 8,320 | | |
$ | 2,714 | | |
$ | 1,117 | | |
$ | 6,108 | | |
$ | — | | |
$ | 34,167 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current
period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Farmland | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 171 | | |
$ | 2,280 | | |
$ | 3,637 | | |
$ | 849 | | |
$ | 1,246 | | |
$ | 8,507 | | |
$ | — | | |
$ | 16,690 | |
Special
mention | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1 | | |
| 201 | | |
| — | | |
| 202 | |
Substandard | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total
farmland | |
$ | 171 | | |
$ | 2,280 | | |
$ | 3,637 | | |
$ | 849 | | |
$ | 1,247 | | |
$ | 8,708 | | |
$ | — | | |
$ | 16,892 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current
period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 4,925 | | |
$ | 13,233 | | |
$ | 7,513 | | |
$ | 2,124 | | |
$ | 2,886 | | |
$ | 7,894 | | |
$ | 7,760 | | |
$ | 46,335 | |
Special
mention | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3 | | |
| — | | |
| 3 | |
Substandard | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total
commercial | |
$ | 4,925 | | |
$ | 13,233 | | |
$ | 7,513 | | |
$ | 2,124 | | |
$ | 2,886 | | |
$ | 7,897 | | |
$ | 7,760 | | |
$ | 46,338 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current
period gross charge-offs | |
$ | — | | |
$ | (5 | ) | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | (5 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Agriculture | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 239 | | |
$ | 711 | | |
$ | 517 | | |
$ | 906 | | |
$ | 151 | | |
$ | 1,178 | | |
$ | 229 | | |
$ | 3,931 | |
Special
mention | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Substandard | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total
agriculture | |
$ | 239 | | |
$ | 711 | | |
$ | 517 | | |
$ | 906 | | |
$ | 151 | | |
$ | 1,178 | | |
$ | 229 | | |
$ | 3,931 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current
period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consumer
and All Other | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 2,165 | | |
$ | 7,860 | | |
$ | 3,934 | | |
$ | 1,461 | | |
$ | 954 | | |
$ | 1,429 | | |
$ | 2,032 | | |
$ | 19,835 | |
Special
mention | |
| — | | |
| 2 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2 | |
Substandard | |
| — | | |
| — | | |
| 17 | | |
| — | | |
| — | | |
| 19 | | |
| — | | |
| 36 | |
Total
consumer and all other | |
$ | 2,165 | | |
$ | 7,862 | | |
$ | 3,951 | | |
$ | 1,461 | | |
$ | 954 | | |
$ | 1,448 | | |
$ | 2,032 | | |
$ | 19,873 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current
period gross charge-offs | |
$ | (58 | ) | |
$ | (17 | ) | |
$ | (3 | ) | |
$ | — | | |
$ | — | | |
$ | — | | |
| | | |
$ | (78 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 25,422 | | |
$ | 132,562 | | |
$ | 127,923 | | |
$ | 58,372 | | |
$ | 45,263 | | |
$ | 170,766 | | |
$ | 30,182 | | |
$ | 590,490 | |
Total
current period gross charge-offs | |
$ | (58 | ) | |
$ | (22 | ) | |
$ | (3 | ) | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | (83 | ) |
The following table presents the credit
risk grade of loans as of December 31, 2022, prior to the adoption of ASU 2016-13, under the incurred loss model:
As
of December 31, 2022 (Dollars
are in thousands) | |
Pass | |
Special
Mention | |
Substandard | |
Doubtful | |
Total |
Real
estate secured: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 195,376 | | |
$ | 1,425 | | |
$ | 268 | | |
$ | — | | |
$ | 197,069 | |
Construction
and land development | |
| 41,882 | | |
| 117 | | |
| 471 | | |
| — | | |
| 42,470 | |
Residential
1-4 family | |
| 224,228 | | |
| 406 | | |
| 2,598 | | |
| — | | |
| 227,232 | |
Multifamily | |
| 29,503 | | |
| 207 | | |
| — | | |
| — | | |
| 29,710 | |
Farmland | |
| 16,848 | | |
| 855 | | |
| 41 | | |
| — | | |
| 17,744 | |
Total
real estate loans | |
| 507,837 | | |
| 3,010 | | |
| 3,378 | | |
| — | | |
| 514,225 | |
Commercial | |
| 46,471 | | |
| 226 | | |
| — | | |
| — | | |
| 46,697 | |
Agriculture | |
| 3,756 | | |
| — | | |
| — | | |
| — | | |
| 3,756 | |
Consumer
installment loans | |
| 19,272 | | |
| 2 | | |
| 35 | | |
| — | | |
| 19,309 | |
All
other loans | |
| 626 | | |
| — | | |
| — | | |
| — | | |
| 626 | |
Total | |
$ | 577,962 | | |
$ | 3,238 | | |
$ | 3,413 | | |
$ | — | | |
$ | 584,613 | |
NOTE 7 ALLOWANCE
FOR CREDIT LOSSES FOR LOANS (“ACLL”)
In determining the
amount of our allowance for credit losses, we rely on an analysis of our loan portfolio, our experience and our evaluation of general
economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses
and we may experience significant increases to our provision.
The following
table presents a disaggregated analysis of activity in the allowance for credit losses as of March 31, 2023:
Schedule of allocation of portion of allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured |
|
|
|
|
|
|
|
|
|
|
(Dollars are in thousands) |
|
Commercial |
|
Construction
and Land Development |
|
Residential
1-4 family |
|
Multifamily |
|
Farmland |
|
Commercial |
|
Agriculture |
|
Consumer
and All Other |
|
Unallocated |
|
Total |
Three months ended
March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
$ |
2,364 |
$ |
345 |
$ |
2,364 |
$ |
262 |
$ |
153 |
$ |
381 |
$ |
32 |
$ |
386 |
$ |
440 |
$ |
6,727 |
Adjustment to allowance for adoption of ASU 2016-13 |
|
(299) |
|
164 |
|
275 |
|
12 |
|
75 |
|
241 |
|
(5) |
|
(103) |
|
(440) |
|
(80) |
Charge-offs |
|
- |
|
- |
|
- |
|
- |
|
- |
|
(5) |
|
- |
|
(78) |
|
- |
|
(83) |
Recoveries |
|
- |
|
5 |
|
9 |
|
- |
|
- |
|
1 |
|
- |
|
58 |
|
- |
|
73 |
Provision for credit losses |
|
92 |
|
(42) |
|
(29) |
|
28 |
|
(36) |
|
(30) |
|
4 |
|
37 |
|
- |
|
24 |
Ending balance |
$ |
2,157 |
$ |
472 |
$ |
2,619 |
$ |
302 |
$ |
192 |
$ |
588 |
$ |
31 |
$ |
300 |
$ |
- |
$ |
6,661 |
The following
tables present a disaggregated analysis of activity in the allowance for loan losses, for comparative periods, prior to the adoption
of ASU 2016-13:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured |
|
|
|
|
|
|
|
|
|
|
(Dollars are in thousands) |
|
Commercial |
|
Construction
and Land Development |
|
Residential
1-4 family |
|
Multifamily |
|
Farmland |
|
Commercial |
|
Agriculture |
|
Consumer
and All Other |
|
Unallocated |
|
Total |
Year ended December
31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
$ |
2,134 |
$ |
189 |
$ |
2,237 |
$ |
254 |
$ |
149 |
$ |
1,099 |
$ |
28 |
$ |
108 |
$ |
537 |
$ |
6,735 |
Charge-offs |
|
(5) |
|
(149) |
|
(64) |
|
(111) |
|
(1) |
|
(45) |
|
(1) |
|
(559) |
|
- |
|
(935) |
Recoveries |
|
33 |
|
6 |
|
100 |
|
2 |
|
14 |
|
31 |
|
1 |
|
115 |
|
- |
|
302 |
Provision |
|
202 |
|
299 |
|
91 |
|
117 |
|
(9) |
|
(704) |
|
4 |
|
722 |
|
(97) |
|
625 |
Ending balance |
$ |
2,364 |
$ |
345 |
$ |
2,364 |
$ |
262 |
$ |
153 |
$ |
381 |
$ |
32 |
$ |
386 |
$ |
440 |
$ |
6,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses at December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
63 |
$ |
- |
$ |
23 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
86 |
Collectively evaluated for impairment |
|
2,301 |
|
345 |
|
2,341 |
|
262 |
|
153 |
|
381 |
|
32 |
|
386 |
|
440 |
|
6,641 |
Allowance for loan losses |
$ |
2,364 |
$ |
345 |
$ |
2,364 |
$ |
262 |
$ |
153 |
$ |
381 |
$ |
32 |
$ |
386 |
$ |
440 |
$ |
6,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans at December 31,
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
358 |
$ |
471 |
$ |
1,649 |
$ |
- |
$ |
248 |
$ |
23 |
$ |
- |
$ |
- |
$ |
- |
$ |
2,749 |
Collectively evaluated for impairment |
|
196,711 |
|
41,999 |
|
225,583 |
|
29,710 |
|
17,496 |
|
46,965 |
|
3,756 |
|
19,644 |
|
- |
|
581,864 |
Loans |
$ |
197,069 |
$ |
42,470 |
$ |
227,232 |
$ |
29,710 |
$ |
17,744 |
$ |
46,988 |
$ |
3,756 |
$ |
19,644 |
$ |
- |
$ |
584,613 |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| |
Real
estate secured | |
| |
| |
| |
| |
|
(Dollars
are in thousands) | |
Commercial | |
Construction
and Land Development | |
Residential
1-4 family | |
Multifamily | |
Farmland | |
Commercial | |
Agriculture | |
Consumer
and All Other | |
Unallocated | |
Total |
For the three
months ended March 31, 2022 | |
| |
| |
| |
| |
| |
| |
| |
| |
|
Beginning
balance | |
$ | 2,134 | | |
$ | 189 | | |
$ | 2,237 | | |
$ | 254 | | |
$ | 149 | | |
$ | 1,099 | | |
$ | 28 | | |
$ | 108 | | |
$ | 537 | | |
$ | 6,735 | |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| (61 | ) | |
| — | | |
| (28 | ) | |
| — | | |
| (14 | ) | |
| — | | |
| (103 | ) |
Recoveries | |
| — | | |
| — | | |
| 14 | | |
| — | | |
| — | | |
| 11 | | |
| — | | |
| 2 | | |
| — | | |
| 27 | |
Provision | |
| (2 | ) | |
| 40 | | |
| (53 | ) | |
| 120 | | |
| (6 | ) | |
| (77 | ) | |
| — | | |
| 16 | | |
| 62 | | |
| 100 | |
Ending balance | |
$ | 2,132 | | |
$ | 229 | | |
$ | 2,198 | | |
$ | 313 | | |
$ | 143 | | |
$ | 1,005 | | |
$ | 28 | | |
$ | 112 | | |
$ | 599 | | |
$ | 6,759 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for loan
losses as of March 31, 2022 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated
for impairment | |
$ | 86 | | |
$ | — | | |
$ | 49 | | |
$ | 50 | | |
$ | 13 | | |
$ | 1 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 199 | |
Collectively
evaluated for impairment | |
| 2,046 | | |
| 229 | | |
| 2,149 | | |
| 263 | | |
| 130 | | |
| 1,004 | | |
| 28 | | |
| 112 | | |
| 599 | | |
| 6,560 | |
Allowance for loan losses | |
$ | 2,132 | | |
$ | 229 | | |
$ | 2,198 | | |
$ | 313 | | |
$ | 143 | | |
$ | 1,005 | | |
$ | 28 | | |
$ | 112 | | |
$ | 599 | | |
$ | 6,759 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans as of March 31,
2022 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated
for impairment | |
$ | 404 | | |
$ | 17 | | |
$ | 1,786 | | |
$ | 50 | | |
$ | 494 | | |
$ | 26 | | |
$ | — | | |
$ | 1 | | |
$ | — | | |
$ | 2,778 | |
Collectively
evaluated for impairment | |
| 206,935 | | |
| 38,829 | | |
| 222,692 | | |
| 34,359 | | |
| 17,613 | | |
| 47,594 | | |
| 3,916 | | |
| 20,416 | | |
| — | | |
| 592,354 | |
Loans | |
$ | 207,339 | | |
$ | 38,846 | | |
$ | 224,478 | | |
$ | 34,409 | | |
$ | 18,107 | | |
$ | 47,620 | | |
$ | 3,916 | | |
$ | 20,417 | | |
$ | — | | |
$ | 595,132 | |
Allocation of a portion
of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
NOTE 8 MODIFICATIONS MADE TO BORROWERS
EXPERIENCING FINANCIAL DIFFICULTY
The allowance for
credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition.
The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications
of receivables to borrowers experiencing financial difficulty. The Company uses a discounted cash flow methodology to determine the allowance
for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
Because the effect
of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because
of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded
upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When
principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The
amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a
reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
In some cases, the
Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension,
is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness,
may be granted.
There were no loans
modified to borrowers experiencing financial difficulty in the three months ended March 31, 2023. Additionally, there were no loans that
had a payment default during the quarter that were modified in the previous 12 months.
Prior to adoption
of ASC 2022-02, there were $2.0 million in loans classified as troubled debt restructurings as of December 31, 2022. All loans considered
to be troubled debt restructurings are individually evaluated for impairment as part of the allowance for loan losses calculation. No
loans modified during the three months ended March 31, 2022, were considered to be troubled debt restructurings.
For the three months
ended March 31, 2022, there were no loans modified as a troubled debt restructuring that subsequently defaulted within twelve months
of the loan modification. Generally, a restructured troubled debt is considered to be in default once it becomes 90 days or more past
due following a modification.
NOTE 9 CREDIT
ALLOWANCE FOR UNFUNDED COMMITMENTS
The Company maintains
a separate allowance for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included
in other liabilities on the consolidated balance sheet. The allowance for credit losses for off-balance-sheet credit exposures is adjusted
through a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will
occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models
and approaches for the Company's other loan portfolio segments described above, as these unfunded commitments share similar risk characteristics
as its loan portfolio segments. The Company has identified the unfunded portion of certain lines of credit as unconditionally cancellable
credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for off-balance-sheet
credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn
prior to the cancellation of the arrangement.
On January 1, 2023,
the Company recorded an adjustment to initiate an allowance for credit losses for unfunded commitments of $348,000 for the adoptions
of ASC Topic 326. For the three months ended March 31, 2023, the Company recorded a reversal to the provision for credit losses for unfunded
commitments of $24,000. At March 31, 2023, the liability for credit losses on off-balance-sheet credit exposures included in other liabilities
was $324,000.
NOTE 10 OTHER
REAL ESTATE OWNED
The following table
summarizes the activity in other real estate owned for the three months ended March 31, 2023, and the year ended December 31, 2022:
Schedule of other real estate owned | |
| | | |
| | |
(Dollars
are in thousands) | |
March
31, 2023 | |
December
31, 2022 |
Balance,
beginning of period | |
$ | 261 | | |
$ | 1,361 | |
Additions | |
| — | | |
| — | |
Transfers
from premises and equipment | |
| — | | |
| — | |
Proceeds
from sales | |
| — | | |
| (207 | ) |
Proceeds
from insurance claims | |
| — | | |
| — | |
Loans
made to finance sales | |
| — | | |
| (711 | ) |
Adjustment
of carrying value | |
| — | | |
| (197 | ) |
Net
gains from sales | |
| — | | |
| 15 | |
Balance,
end of period | |
$ | 261 | | |
$ | 261 | |
NOTE 11 FAIR VALUES
The Company uses
fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In
accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (the FASB) ASC, the fair value
of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market and in an orderly transaction between market participants at the measurement date. Fair value is
best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various
financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates
of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance
provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market and in an orderly
transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current
market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change
in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which
willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances
and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair
value under current market conditions.
In accordance with
this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based
on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1:
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2:
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported
date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and
items that are valued using other financial instruments, the parameters of which can be directly observed.
Level 3:
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets
and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require
significant management judgment or estimation.
A description of
the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy are as follows:
Investment Securities
Available for Sale - Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement
is based upon quoted prices. The Company’s available for sale securities, totaling $96.7 million and $96.1 million as of March
31, 2023 and December 31, 2022, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs
from an independent pricing service.
Collateral Dependent
Loans with an ACL - In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate
it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and
excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower's
ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's
industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower
is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling
costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral
dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by
appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.
Other Real Estate
Owned –Other real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to other real estate
owned. These assets are carried at the lower of their carrying value or fair value. Fair value is based upon observable market prices,
when available, reduced by estimated disposition costs, which the Company considers to be nonrecurring Level 2 inputs. When observable
market prices are not available, management determines the fair value of the foreclosed asset using independent third-party appraisals,
evaluated to determine whether or not the property is further impaired below the appraised value, and adjusts for estimated costs of
disposition. The Company records foreclosed assets as nonrecurring Level 3.
Assets and liabilities
measured at fair value are as follows as of March 31, 2023:
Schedule of summary of assets and liabilities measured at fair value | |
| |
| |
|
March
31, 2023 (Dollars
are in thousands) | |
Quoted
market price in active markets (Level 1) | |
Significant
other observable inputs (Level 2) | |
Significant
unobservable inputs (Level 3) |
(On a
recurring basis) Available for sale investments | |
| | | |
| | | |
| | |
U.S.
Treasuries | |
$ | — | | |
$ | 11,902 | | |
$ | — | |
U.S.
Government Agencies | |
| — | | |
| 9,113 | | |
| — | |
Taxable
municipals | |
| — | | |
| 17,819 | | |
| — | |
Corporate
bonds | |
| — | | |
| 3,162 | | |
| — | |
Mortgage-backed
securities | |
| — | | |
| 54,726 | | |
| — | |
| |
| | | |
| | | |
| | |
(On a
non-recurring basis) Other real estate owned | |
| — | | |
| — | | |
| 261 | |
Collateral
dependent loans with ACL: | |
| | | |
| | | |
| | |
Commercial
real estate | |
| — | | |
| — | | |
| 204 | |
Total | |
$ | — | | |
$ | 96,722 | | |
$ | 465 | |
Assets and liabilities
measured at fair value are as follows as of December 31, 2022 (for purpose of this table the impaired loans are shown net of the related
allowance):
| |
| |
| |
|
December
31, 2022 (Dollars
are in thousands) | |
Quoted
market price in active markets (Level 1) | |
Significant
other observable inputs (Level 2) | |
Significant
unobservable inputs (Level 3) |
(On a
recurring basis) Available for sale investments | |
| | | |
| | | |
| | |
U.S.
Treasuries | |
$ | — | | |
$ | 11,685 | | |
| — | |
U.S.
Government Agencies | |
| — | | |
| 9,399 | | |
$ | — | |
Taxable
municipals | |
| — | | |
| 16,815 | | |
| — | |
Corporate
bonds | |
| — | | |
| 3,136 | | |
| — | |
Mortgage-backed
securities | |
| — | | |
| 55,041 | | |
| — | |
| |
| | | |
| | | |
| | |
(On a
non-recurring basis) Other real estate owned | |
| — | | |
| — | | |
| 261 | |
Impaired
loans | |
| — | | |
| — | | |
| 213 | |
Total | |
$ | — | | |
$ | 96,076 | | |
$ | 474 | |
For Level 3 assets
measured at fair value on a recurring or non-recurring basis as of March 31, 2023 and December 31, 2022, the significant unobservable
inputs used in the fair value measurements were as follows:
Schedule of significant unobservable inputs In level 3 assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fair Value
at March 31, 2023 |
|
Fair Value
at
December 31,
2022 |
|
Valuation Technique |
|
Significant
Unobservable Inputs |
|
General
Range of Significant Unobservable Input Values |
|
|
|
|
|
|
|
|
|
|
|
Collateral
dependent loans with ACL: |
|
|
|
|
|
|
|
|
|
|
Commercial
real estate |
$ |
204 |
$ |
213 |
|
Appraised
Value |
|
Discounts
to reflect current market conditions, ultimate collectability, and estimated costs to sell |
|
0
– 18% |
|
|
|
|
|
|
|
|
|
|
|
Other
Real Estate Owned |
$ |
261 |
$ |
261 |
|
Appraised
Value/Comparable Sales/Other Estimates from Independent Sources |
|
Discounts
to reflect current market conditions and estimated costs to sell |
|
0
– 18% |
Fair Value
of Financial Instruments
Fair value information
about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based
upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership
in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash
for another financial instrument.
The
following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments
presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results
may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and
interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that
will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.
The carrying amount
and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring
basis as of March 31, 2023, and December 31, 2022, are as follows:
Schedule of estimated fair value of financial instruments | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| |
| |
Fair
Value Measurements |
(Dollars
are in thousands) | |
Carrying
Amount | |
Fair
Value | |
Quoted
market price in active markets (Level 1) | |
Significant
other observable inputs (Level 2) | |
Significant
unobservable inputs (Level 3) |
| |
| |
| |
| |
| |
|
March
31, 2023 | |
| | | |
| | | |
| | | |
| | | |
| | |
Financial
Instruments – Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
Loans | |
$ | 583,829 | | |
$ | 563,647 | | |
$ | — | | |
$ | — | | |
$ | 563,647 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial
Instruments – Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Time
Deposits | |
| 207,283 | | |
| 206,206 | | |
| — | | |
| 206,206 | | |
| — | |
Borrowed
funds | |
| 16,496 | | |
| 15,063 | | |
| — | | |
| 15,063 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
December
31, 2022 | |
| | | |
| | | |
| | | |
| | | |
| | |
Financial
Instruments – Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
Loans | |
$ | 577,886 | | |
$ | 552,675 | | |
$ | — | | |
$ | 552,462 | | |
$ | 213 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial
Instruments – Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Time
Deposits | |
| 188,233 | | |
| 187,179 | | |
| — | | |
| 187,179 | | |
| — | |
Borrowed
funds | |
| 16,496 | | |
| 14,825 | | |
| — | | |
| 14,825 | | |
| — | |
Fair value estimates
are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates
do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a
particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair
value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.
Estimated fair values
have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation
methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are
set forth below for the Company’s other financial instruments.
The carrying values
of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities and accrued interest approximates
fair value and are excluded from the table above.
In accordance with
our adoption of Accounting Standards Update (ASU) 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments
as of March 31, 2023 and December 31, 2022, represent an approximation of exit price; however, an actual exit price may differ.
NOTE 12 LEASING
ACTIVITIES
As
of March 31, 2023, the Bank leases four branch offices and sublets of a lot adjacent to another branch office. The lease agreements have
maturity dates ranging from May 2032 to December 2041. It is assumed that there are currently no circumstances in which the leases would
be terminated prior to expiration. The weighted average remaining life of the lease terms at March 31, 2023 was 9.35 years.
The
discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded to
the lease term for each transaction. This methodology is expected to be used for any other subsequent lease agreements. The weighted
average discount rate for the leases as of March 31, 2023 was 3.29%.
For the three months
ended March 31, 2023 and 2022, operating lease expenses were $114,000 and $114,000, respectively.
The
Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. As of March 31, 2023,
future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):
Schedule of future minimum rental commitments under the non-cancellable operating leases |
|
|
2023 |
$ |
342 |
2024 |
|
456 |
2025 |
|
456 |
2026 |
|
456 |
2027 |
|
477 |
Thereafter |
|
2,226 |
Total
lease payments |
|
4,413 |
Less
imputed interest |
|
772 |
Total |
$ |
3,641 |
|
|
|
NOTE
13 REVENUE FROM CONTRACTS WITH CUSTOMERS
All
our revenue from contracts with customers as defined in ASC 606 is recognized within noninterest income. Refer to Note 23 in our Annual
Report on Form 10-K for the year ended December 31, 2022 for a description of how each revenue stream is accounted for under ASC 606.
The following table presents Noninterest income by revenue stream for the three months ended March 31, 2023 and 2022:
Schedule of revenue from contracts with customers | |
| | | |
| | |
| |
For
the Three Months Ended March 31, |
(Dollars
in thousands) | |
2023 | |
2022 |
Service
charges and fees | |
$ | 917 | | |
$ | 1,007 | |
Card
processing and interchange income | |
| 899 | | |
| 916 | |
Insurance
and investment fees | |
| 257 | | |
| 241 | |
Other
noninterest income | |
| 326 | | |
| 205 | |
Total
noninterest income | |
$ | 2,399 | | |
$ | 2,369 | |
| |
| | | |
| | |
NOTE 14 NONINTEREST EXPENSES
Other operating expenses,
included as part of noninterest expenses, consisted of the following for the periods presented:
Schedule of noninterest expenses | |
| | | |
| | |
| |
For
the Three Months Ended March 31, |
(Dollars
are in thousands) | |
2023 | |
2022 |
Advertising,
sponsorships and donations | |
$ | 35 | | |
$ | 28 | |
ATM network
expense | |
| 360 | | |
| 367 | |
Legal,
accounting and professional fees | |
| 335 | | |
| 231 | |
Consulting
fees | |
| 91 | | |
| 67 | |
Loan
related expenses | |
| 88 | | |
| 97 | |
Printing
and supplies | |
| 42 | | |
| 33 | |
FDIC
insurance premiums | |
| 88 | | |
| 49 | |
Other
real estate owned expenses, net | |
| 6 | | |
| 130 | |
Other
operating expenses | |
| 674 | | |
| 602 | |
Total
other operating expenses | |
$ | 1,719 | | |
$ | 1,604 | |
NOTE 15 SUBSEQUENT
EVENTS
Subsequent events
are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent
events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including
the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence
about conditions that did not exist at the date of the balance sheet but arose after that date. There were no subsequent events requiring
recognition or disclosure.
NOTE 16 RECENT
ACCOUNTING DEVELOPMENTS
The following is
a summary of recent authoritative announcements:
In June 2016, per
ASU No. 2016-13, ‘Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,’
the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The
Company adopted this guidance on January 1, 2023. The Company recognized an adjustment to retained earnings in the amount of $212,000,
and recorded an adjustment to the allowance for credit losses in loans and unfunded commitments on loans in the amount of $80,000 and
$348,000, respectively.
In June 2022, the
FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual
Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part
of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal
years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company
does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
In March 2022, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit
Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as
part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate
the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements
for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a
public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of
origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method
related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting
in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02
is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that
have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption
is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure
enhancements separately from the amendments related to vintage disclosures. The Company adopted this guidance on January 1, 2023 and
it did not have a material impact on the consolidated financial statements.
In December 2022,
the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends
the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic
848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations
of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed
the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.
To ensure the relief
in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date
of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic
848. The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022-06 and its impact on the Company’s
transition away from LIBOR for its loan and other financial instruments that have not already been transitioned to an alternative reference
rate.
Other accounting
standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact
on the Company’s financial position, results of operations or cash flows.