| 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. The following table is a summary of loans receivable by loan portfolio segment and class. June 30, December 31, 2023 2022 (dollars in thousands) Amount % Amount % Loans Secured by Real Estate Construction and land $ 5,116 3 $ 4,499 2 Farmland 328 — 333 — Single-family residential 82,337 45 80,251 43 Multi-family 5,236 3 5,304 3 Commercial 42,557 24 42,936 23 Total loans secured by real estate 135,574 133,323 Commercial and Industrial Commercial and industrial 10,250 6 8,990 5 SBA guaranty 6,023 3 6,158 3 Total commercial and industrial loans 16,273 15,148 Consumer Loans Consumer 1,430 1 1,521 1 Automobile 27,274 15 36,448 20 Total consumer loans 28,704 37,969 Loans, net of deferred fees and costs 180,551 100 186,440 100 Less: Allowance for credit losses (2,222) (2,162) Loans, net $ 178,329 $ 184,278 The Bank’s net loans totaled . Construction and land loans increased from . Farmland loans were million at June 30, 2023 and December 31, 2022. Single-family residential loans increased from . Multi-family residential loans were %. Commercial real estate loans decreased $ million on December 31, 2022. Commercial and industrial loans increased by $ 10.2 million on December 31, 2022. SBA guaranty loans were $ million at December 31, 2022. Consumer loans decreased by $ million on December 31, 2022. Automobile loans decreased from 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 six months ended June 30, 2023 and the year ended December 31, 2022 were as follows: Loans Secured By Real Estate Commercial and Industrial Loans Consumer Loans June 30, 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 — — — — — — — — (88) (88) Recoveries — — — — — — — — 63 63 Release (provision) for credit losses 2 (1) 26 (4) (2) 143 — (3) (76) 85 Balance, end of quarter $ 46 $ 19 $ 1,256 $ 99 $ 219 $ 317 $ 22 $ 20 $ 224 $ 2,222 Individually evaluated for impairment: Balance in allowance $ — $ — $ 21 $ — $ 149 $ — $ — $ — $ — $ 170 Related loan balance — — 32 — 299 — — — — 331 Collectively evaluated for impairment: Balance in allowance $ 46 $ 19 $ 1,235 $ 99 $ 70 $ 317 $ 22 $ 20 $ 224 $ 2,052 Related loan balance 5,116 328 82,305 5,236 42,258 10,250 6,023 1,430 27,274 180,220 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) (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 $ 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 June 30, June 30, (dollars in thousands) 2023 2022 Average loans $ 183,240 $ 204,477 Net charge offs to average loans (annualized) 0.03 % 0.01 % During the six-month period ended June 30, 2023, loans to 5 borrowers and related entities totaling approximately $88,000 were determined to be uncollectible and were charged off. During the six-month period ended June 30, 2022, loans to 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 June 30, 2023, and 2022, the Bank had outstanding commitments totaling $30.7 million and $30.2 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: Six Months Ended Ended June 30, (dollars in thousands) 2023 2022 Beginning balance $ 477 $ 371 Reduction of unfunded reserve (4) (17) Provisions charged to operations 23 59 Ending balance $ 496 $ 413 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 June 30, 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 $ 5,116 $ — $ — $ — $ 5,116 Farmland 328 — — — 328 Single-family residential 82,121 — — 216 82,337 Multi-family 5,236 — — — 5,236 Commercial 42,557 — — — 42,557 Total loans secured by real estate 135,358 — — 216 135,574 Commercial and Industrial Commercial and industrial 9,954 — — 296 10,250 SBA guaranty 6,023 — — — 6,023 Total commercial and industrial loans 15,977 — — 296 16,273 Consumer Loans Consumer 1,430 — — — 1,430 Automobile 26,912 298 — 64 27,274 Total consumer loans 28,342 298 — 64 28,704 $ 179,677 $ 298 $ — $ 576 $ 180,551 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 June 30, 2023, the allowance for credit loss is $ million. For the period ended December 31, 2022, the allowance for credit loss is Non-accrual loans with specific reserves at June 30, 2023 are comprised of: Single–family residential established for the loan. This loan was also a troubled debt restructured loan. Commercial and industrial Below is a summary of the recorded investment amount and related allowance for losses of the Bank’s impaired loans at June 30, 2023 and December 31, 2022. June 30, 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 11 32 2 21 48 Multi-family — — — — — Commercial — — — — — Total loans secured by real estate 11 32 2 21 48 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 $ 161 $ 331 $ 2 $ 170 $ 547 Impaired loans with no specific reserve: Loans Secured by Real Estate Construction and land $ — $ — $ — $ n/a $ — Farmland — — — n/a — Single-family residential 184 184 2 n/a 195 Multi-family — — — n/a — Commercial — — — n/a — Total loans secured by real estate 184 184 2 — 195 Commercial and Industrial Commercial and industrial — — — n/a — SBA guaranty — — — n/a — Total commercial and industrial loans — — — — — Consumer Loans Consumer — — — n/a — Automobile 167 167 2 n/a 72 Total consumer loans 167 167 2 n/a 72 Total impaired loans with no specific reserve $ 351 $ 351 $ 4 $ — $ 267 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 June 30, December 31, (dollars in thousands) 2023 2022 Troubled debt restructured loans $ 41 $ 34 Non-accrual and 90+ days past due and still accruing loans to average loans 0.31 % 0.25 % Allowance for credit losses to nonaccrual & 90+ days past due and still accruing loans 385.8 % 433.9 % At June 30, 2023, there were two troubled debt restructured loans consisting of single-family residential loans in the amount of $40,876 . These loans are in a nonaccrual status. The following table shows the activity for non-accrual loans for the six months ended June 30, 2023 and 2022. Commercial and Loans Secured By Real Estate Industrial Loans Consumer Loans Single-family Commercial (dollars in thousands) Residential Commercial and Industrial SBA Guaranty Consumer Automobile Total December 31, 2021 $ 123 $ — $ — $ 71 $ — $ 144 $ 338 Transfers into nonaccrual 31 — — — 11 131 173 Loans paid down/payoffs (44) — — (61) (11) (63) (179) Loans returned to accrual status — — — — — (29) (29) Loans charged off — — — (10) — (73) (83) June 30, 2022 $ 110 $ — $ — $ — $ — $ 110 $ 220 December 31, 2022 $ 104 $ — $ 299 $ — $ — $ 85 $ 488 Transfers into nonaccrual 307 — — — — 3 310 Loans paid down/payoffs (195) — — — — (19) (214) Loans returned to accrual status — — — — — — — Loans charged off — — (3) — — (5) (8) June 30, 2023 $ 216 $ — $ 296 $ — $ — $ 64 $ 576 Other Real Estate Owned. The Company had no real estate acquired in partial or total satisfaction of debt at June 30, 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, classification 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 June 30, 2023, and December 31, 2022: Loans Secured By Real Estate Commercial and Industrial Loans Consumer Loans June 30, 2023 Construction Single-family Commercial (dollars in thousands) and Land Farmland Residential Multi-family Commercial and Industrial SBA Guaranty Consumer Automobile Total Pass $ 5,116 $ 328 $ 82,121 $ 5,236 $ 42,557 $ 9,951 $ 6,023 $ 1,430 $ 27,107 $ 179,869 Special mention — — — — — — — — — — Substandard — — 216 — — 299 — — 167 682 Doubtful — — — — — — — — — — Loss — — — — — — — — — — $ 5,116 $ 328 $ 82,337 $ 5,236 $ 42,557 $ 10,250 $ 6,023 $ 1,430 $ 27,274 $ 180,551 Nonaccrual $ — $ — $ 216 $ — $ — $ 296 $ — $ — $ 64 $ 576 Troubled debt restructures $ — $ — $ 41 $ — $ — $ — $ — $ — $ — $ 41 Number of TDRs accounts — — 2 — — — — — — 2 Non-performing TDRs $ — $ — $ 41 $ — $ — $ — $ — $ — $ — $ 41 Number of non-performing TDR accounts — — 2 — — — — — — 2 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 |
