Harford Bank : Form 10-Q~Quarterly Report

FEDERAL DEPOSIT INSURANCE CORPORATION

WASHINGTON, DC 20429

FORM 10-Q

(Mark One)

• QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

• TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________to___________

	FDIC Certificate Number: 19101
	HARFORD BANK
	(Exact name of registrant as specified in its charter)
Maryland	52-0799113
(State or other jurisdiction of		(IRS Employer incorporation or
organization)		Identification No.)
	8 West Bel Air Avenue, Aberdeen, Maryland 21001
	(Address of principal executive offices)
	[phone]
	(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No  (Not Applicable)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer 	Accelerated filer 
Non-accelerated filer 	Smaller reporting company 
Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 1,481,355 shares of common stock as of April 26, 2024.

This Quarterly Report of Harford Bank (the "Bank") on Form 10-Q may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of "forward-looking statements". Statements that are not historical in nature, including those that include the words "anticipate", "estimate", "should", "expect", "believe", "intend", and similar expressions, are forward-looking statements and are based on current expectations, estimates and projections about, among other things, the industry and the markets in which the Bank operates, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in the Bank's competitive position or competitive actions by other companies; changes in the quality or composition of loan and investment portfolios; the ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond the Bank's control. Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on the Bank's business or operations. These and other risks are discussed in detail in the periodic reports that the Bank files with the Federal Deposit Insurance Corporation ("FDIC") (see Item 1A of Part II of this report for further information). Except as required by applicable laws, the Bank does not intend to publish updates or revisions of forward-looking statements it makes to reflect new information, future events or otherwise.

PART I

Item 1. Financial Statements

The information required by this item can be found beginning on page F-1 immediately following the signatures to this report and is incorporated herein by reference.

AVAILABLE INFORMATION

The Bank maintains an internet website at www.HarfordBank.com on which it makes available its most recent periodic report filed with the FDIC pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All of the periodic and other reports filed by the Bank with the FDIC pursuant to the Exchange Act are available through the FDIC's website at: https://efr.fdic.gov/fcxweb/efr/index.html, and are also available for public inspection at: Federal Deposit Insurance Corporation, Accounting and Securities Disclosure Section, Division of Supervision and Consumer Protection, 550 17th Street, NW, Washington, DC 20429.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read and reviewed in conjunction with the interim consolidated financial statements and the notes thereto included elsewhere in this report, and with Management's Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements and notes thereto, and the other statistical information contained in the Bank's Annual Report on Form 10-K for the year ended December 31, 2023.

The Bank is a Maryland-chartered bank with its principal office in Aberdeen, Harford County, Maryland. Through its nine branches, seven of which are located throughout Harford County and two of which are located in Cecil County, the Bank offers a full range of deposit services that are typically offered by most banks, savings and loan associations, and credit unions, including checking accounts, savings accounts, money market accounts and time deposits consisting of certificates of deposit of various types. In addition, the Bank offers Individual Retirement Accounts. All deposits are insured by the FDIC up to the maximum allowed by law. The Bank offers a full range of consumer and commercial loans, including fixed-rate consumer mortgage loans, variable rate home equity lines of credit, fixed rate home equity loans, and other consumer loans as well as commercial lines of credit, commercial mortgage loans, and real estate construction loans. Other banking services include safe deposit boxes, direct deposit of payroll and social security checks, on-line banking with bill pay service, mobile banking, drive-through banking services, automated teller machine services, Visa check (debit) cards, as well as Visa gift cards and Visa credit cards issued through a third-party provider.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Bank's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which the Bank operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

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Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the consolidated financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by other third-party sources, whenever available.

The most significant accounting policies followed by the Bank are presented in Note 1 to the consolidated financial statements appearing elsewhere in this report. These policies, along with the disclosures presented in the other notes to the consolidated financial statements and in this financial review, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for credit losses as the accounting area that requires the most subjective or complex judgments, and as such may be most subject to revision as new information becomes available.

The allowance for credit losses on loans represents management's estimate of probable expected loan losses inherent in the loan portfolio. Determining the amount of the allowance for credit losses on loans is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on individually evaluated loans, estimated losses on pools of homogeneous loans based on historical loss experience, consideration of current economic trends and conditions and reasonable and supportable forecasts, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheets. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for credit losses on loans.

RESULTS OF OPERATIONS

Summary

For the three-month period ended March 31, 2024, the Bank reported net income of $1,598,948, compared to $1,573,914 for the same period of 2023, an increase of $25,034, or 1.6%. The increase in net income was due primarily to a decrease in credit loss expense of $183,287 and a decrease in income tax expense of $22,514, partially offset by a decrease in net interest income of $57,255, a decrease in noninterest income of $15,741 and an increase in noninterest expense of $107,771. The decrease in net interest income for the first quarter of 2024 was due primarily to the increase in yields paid on interest-bearing liabilities exceeding the increase in yields earned on interest-earning assets when compared to the same period of 2023. The increase in noninterest expense for the first quarter of 2024 was due primarily to an increase in salary and benefits and FDIC and state assessments when compared to the same period of 2023.

Basic net income per share of common stock for the three-month period ended March 31, 2024 was $1.08, compared to $1.07 for the same period in 2023. Diluted net income per share of common stock for the three-month period ended March 31, 2024 was $1.07, compared to $1.06 for the same period in 2023. Basic and diluted net income per share increased in the first quarter of 2024 when compared to the first quarter of 2023 due to an increase in net income earned partially offset by an increase in the weighted average number of common shares outstanding.

Annualized return on average assets was 0.95% for the three-month period ended March 31, 2024, compared to 1.08% for the same period in 2023. Annualized return on average stockholders' equity was 10.71% for the three-month period ended March 31, 2024, compared to 11.61% for the same period in 2023.

Details of the changes in the various components of net income are discussed below.

Net Interest Income and Net Interest Margin

The primary source of income for the Bank is net interest income, which is the difference between interest earned on interest-earning assets, such as investment securities and loans, and interest paid on interest-bearing sources of funds, such as deposits and borrowings. The level of net interest income is determined primarily by the average balance of interest-earning assets and funding sources and the various rate spreads between the interest-earning assets and the Bank's funding sources. Changes in net interest income from period- to-period result from increases or decreases in the volumes of interest-earning assets and interest-bearing liabilities, and increases or decreases in the average rates earned and paid on such assets and liabilities. The volumes of interest-earning assets and interest-bearing liabilities are affected by management's ability to effectively and efficiently manage the earning-asset portfolio (which includes loans), and the availability of particular sources of funds, such as noninterest-bearing deposits. The table below entitled "Average Balances, Interest, and Yields" shows the Bank's average volume of interest-earning assets and interest-bearing liabilities for the three-month periods ended March 31, 2024 and 2023 and related interest income, interest expense, and yields.

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Average Balances, Interest, and Yields
		For the Three Months			For the Three Months
		Ended March 31, 2024			Ended March 31, 2023
		Average					Average
		Balance		Interest	Yield		Balance		Interest	Yield
Assets
Federal Reserve Bank interest-bearing deposits	$	41,837,967	$	473,571	4.55%	$	15,833,951	$	135,534	3.47%
Federal Home Loan Bank interest-bearing deposits		205,912		2,809	5.49%		36,611		441	4.89%
Federal funds sold		-		-	0.00%		-		-	0.00%
Time deposits in other banks		1,870,734		2,284	0.49%		2,542,547		2,905	0.46%
Other		2,667,364		52,523	7.92%		458,356		7,869	6.96%
Investment securities:
U.S. Treasury securities		16,967,176		53,937	1.28%		20,559,251		58,766	1.16%
U.S. government agency securities		34,353,092		121,908	1.43%		36,762,132		129,380	1.43%
Mortgage-backed and CMO securities		40,224,084		232,814	2.33%		46,240,510		270,165	2.37%
SBA asset-backed securities		9,966,046		57,088	2.30%		11,657,555		46,422	1.61%
State and municipal securities		3,554,292		15,995	1.81%		3,569,261		16,722	1.90%
Total investment securities		105,064,690		481,742	1.84%		118,788,709		521,455	1.78%
Loans:
Overdrafts		56,818		-	0.00%		44,925		-	0.00%
Consumer		32,371,944		434,625	5.40%		16,730,811		201,203	4.88%
Credit lines		11,796,217		238,920	8.15%		14,524,542		262,021	7.32%
Commercial		70,896,586		1,368,008	7.76%		48,900,608		822,266	6.82%
Real estate		391,769,231		4,956,488	5.09%		356,365,715		3,953,323	4.50%
Other loan fees		-		105,847			-		47,181
Total loans *		506,890,796		7,103,888	5.64%		436,566,601		5,285,994	4.91%
Allowance for credit losses on loans		(5,705,740)					(4,767,637)
Total loans, net of allowance for credit losses on loans *		501,185,056		7,103,888	5.70%		431,798,964		5,285,994	4.96%
Total interest-earning assets		652,831,723		8,116,817	5.00%		569,459,138		5,954,198	4.24%
Noninterest-bearing cash		3,427,821					3,454,040
Bank premises and equipment, net		8,168,544					9,788,117
Other assets		11,537,837					10,504,086
Total assets	$	675,965,925				$	593,205,381
Liabilities and Stockholders' Equity
Interest-bearing deposits
Interest-bearing demand deposits	$	130,121,008		44,635	0.14%	$	138,409,759		22,467	0.07%
Savings		53,052,277		28,924	0.22%		67,321,240		36,430	0.22%
Money market		93,535,032		494,158	2.12%		93,577,755		104,092	0.45%
Time deposits		147,698,388		1,506,605	4.10%		81,294,927		288,224	1.44%
Total interest-bearing deposits		424,406,705		2,074,322	1.97%		380,603,681		451,213	0.48%
Federal Home Loan Bank overnight borrowings		29,516,484		415,619	5.66%		3,466,667		42,339	4.95%
Federal Home Loan Bank term borrowings		17,000,000		202,408	4.79%		-		-	0.00%
Total borrowed funds		46,516,484		618,027	5.34%		3,466,667		42,339	4.95%
Total interest-bearing deposits and borrowed funds		470,923,189		2,692,349	2.30%		384,070,348		493,552	0.52%
Noninterest-bearing demand deposits		140,682,457					151,644,340
Other liabilities		4,307,347					2,489,647
Stockholders' equity		60,052,932					55,001,046
Total liabilities and stockholders' equity	$	675,965,925				$	593,205,381
Net interest spread					2.70%					3.72%
Net interest income			$	5,424,468				$	5,460,646
Net margin on interest-earning assets					3.34%					3.89%

Interest on tax-exempt securities, loans and dividends are reported on a fully taxable equivalent basis. * Includes non-accrual loans.

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Interest income, on a fully taxable equivalent basis, on total interest-earning assets for the three-month period ended March 31, 2024 was $8,116,817, compared to $5,954,198 for the same period in 2023, an increase of $2,162,619, or 36.3%.

Interest income, on a fully taxable equivalent basis, on net loans for the three-month period ended March 31, 2024 was $7,103,888, compared to $5,285,994 for the same period in 2023, an increase of $1,817,894, or 34.4%. The average balance of net loans for the three-month period ended March 31, 2024 was $501,185,056, compared to $431,798,964 for the same period in 2023, an increase of $69,386,092, or 16.1%, primarily due to loan growth experienced in the final three quarters of 2023. The weighted average rate earned on net loans, on a fully taxable equivalent basis, for the three-month period ended March 31, 2024 was 5.70%, compared to 4.96% for the same period in 2023, an increase of 74 basis points, primarily due to increases in market interest rates since March 31, 2023.

Interest income, on a fully taxable equivalent basis, on interest-bearing deposits in the Federal Reserve Bank ("FRB") and the Federal Home Loan Bank of Atlanta ("FHLBA"), federal funds sold, and time deposits in other banks for the three-month period ended March 31, 2024 was $478,664, compared to $138,880 for the same period in 2023, an increase of $339,784, or 244.7%. The average balance of these instruments for the three-month period ended March 31, 2024 was $43,914,613, compared to $18,413,109 for the same period in 2023, an increase of $25,501,504, or 138.5%. The weighted average rate earned on these holdings, on a fully taxable equivalent basis, for the three-month period ended March 31, 2024 was 4.38%, compared to 3.06% for the same period in 2023, an increase of 132 basis points.

Interest income, on a fully taxable equivalent basis, on investment securities for the three-month period ended March 31, 2024 was $481,742, compared to $521,455 for the same period in 2023, a decrease of $39,713, or 7.6%. The average balance of investment securities for the three-month period ended March 31, 2024 was $105,064,690, compared to $118,788,709 for the same period in 2023, a decrease of $13,724,019, or 11.6%. The weighted average rate earned on investment securities, on a fully taxable equivalent basis, for the three-month period ended March 31, 2024 was 1.84%, compared to 1.78% for the same period in 2023, an increase of six basis points.

The Bank is a member of the FHLBA and is required to purchase capital stock of the FHLBA as a condition to obtaining a line of credit. Dividends on FHLBA capital stock may be paid to member banks subject to the discretion of the Board of Directors of the FHLBA. For the three-month period ended March 31, 2024, the Bank recorded dividends received or accrued on stock issued by the FHLBA in the amount of $52,523 on a fully taxable equivalent basis, compared to $7,869 for the same period in 2023, an increase of $44,654, or 567.5%. The average balance of FHLBA capital stock for the three-month period ended March 31, 2024 was $2,667,364, compared to $458,356 for the same period in 2023, an increase of $2,209,008, or 481.9%. The weighted average rate earned on FHLBA capital stock, on a fully taxable equivalent basis, for the three-month period ended March 31, 2024 was 7.92%, compared to 6.96% for the same period in 2023, an increase of 96 basis points.

Interest expense on interest-bearing deposit liabilities for the three-month period ended March 31, 2024 was $2,074,322, compared to $451,213 for the same period in 2023, an increase of $1,623,109, or 359.7%. The average balance of interest-bearing deposit liabilities for the three-month period ended March 31, 2024 was $424,406,705, compared to $380,603,681 for the same period in 2023, an increase of $43,803,024, or 11.5%. The weighted-average rate paid on these deposit liabilities for the three-month period ended March 31, 2024 was 1.97%, compared to 0.48% for the same period in 2023, an increase of 149 basis points.

Interest expense on total borrowed funds for the three-month period ended March 31, 2024 was $618,027, compared to $42,339 for the same period in 2023, an increase of $575,688, or 1359.7%. The average balance of total borrowed funds for the three-month period ended March 31, 2024 was $46,516,484, compared to $3,466,667 for the same period in 2023, an increase of $43,049,817, or 1,241.8%. The weighted-average rate paid on total borrowed funds for the three-month period ended March 31, 2024 was 5.34%, compared to 4.95% for the same period in 2023, an increase of 39 basis points.

Net interest income, on a fully taxable equivalent basis, for the three-month period ended March 31, 2024 was $5,424,468, compared to $5,460,646 for the same period in 2023, a decrease of $36,178, or 0.7%. The key performance measure for net interest income is the "net margin on interest-earning assets," or annualized net interest income divided by average interest-earning assets. The Bank's net interest margin, on a fully taxable equivalent basis, for the three-month period ended March 31, 2024 was 3.34%, compared to 3.89% for the same period in 2023, a decrease of 55 basis points. The net interest margin may be adversely affected by increases in competition, volatile interest rates, decreases in loan demand, changes in the mix of earning assets, the Bank's cost of funds where it outpaces the return on the Bank's loans and investment securities, and other unpredictable changes in the marketplace. The "net interest spread" is the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities. The Bank's net interest spread, on a fully taxable equivalent basis, for the three-month period ended March 31, 2024 was 2.70%, compared to 3.72% for the same period in 2023, a decrease of 102 basis points.

Provision for Credit Losses on Loans

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The provision for or recovery of credit losses on loans is determined by management as the amount to be added to or subtracted from, respectively, the allowance for credit losses on loans after net charge-offs(charge-offs less recoveries) have been deducted to bring the allowance for credit losses on loans to a level which, in management's best estimation, is necessary to absorb probable expected losses inherent in the existing loan portfolio. The Bank recorded provision for credit losses on loans expense for the three-month period ended March 31, 2024 of $30,000, compared to provision expense of $172,461 recorded for the same period of 2023. The difference in the amount of the provision for credit losses on loans between the 2024 and 2023 periods resulted from changes in the volume and mix of loans, management's assessment of the current and a reasonable and supportable forecast of market conditions, and management's analysis of the inherent risk within the loan portfolio.

Provision for Credit Losses on Off-Balance Sheet Items

The provision for or recovery of credit losses on off-balance sheet items is determined by management as the amount to be added to or subtracted from, respectively, the allowance for credit losses on off-balance sheet items to bring the allowance for credit losses on off- balance sheet items to a level which, in management's best estimation, is necessary to absorb probable expected losses inherent in off- balance sheet items. The Bank recorded recovery of credit losses on off-balance sheet items expense for the three-month period ended March 31, 2024 of $72,501, compared to recovery of credit losses on off-balance sheet items expense of $31,675 for the same period of 2023. The difference in the amount of the provision for or recovery of credit losses on off-balance sheet items between the 2024 and 2023 periods resulted from changes in the volume and mix of the components making up off-balance sheet items, management's assessment of the current and a reasonable and supportable forecast of market conditions, and management's analysis of the inherent risk within the components making up off-balance sheet items.

Noninterest Revenue

Noninterest revenue for the three-month period ended March 31, 2024 was $479,621, compared to $495,362 for the same period in 2023, a decrease of $15,741, or 3.2%. The decrease was due to decreases of $9,170 in service charges on deposit accounts and $12,496 in other fees and commissions, partially offset by increases of $4,396 in debit card income and $1,529 in earnings on bank owned life insurance for the three-month period ended March 31, 2024 when compared to the same period in 2023.

Noninterest Expenses

Noninterest expenses for the three-month period ended March 31, 2024 were $3,765,890, compared to $3,658,119 for the same period in 2023, an increase of $107,771, or 2.9%. The increase was due primarily to increases of $79,510 in salaries and benefits expense, $26,514 in professional fees and $49,578 in FDIC and state assessments, partially offset by a decrease of $48,806 in other operating expenses when comparing the three-month period ended March 31, 2024 to the same period in 2023.

Income Tax Expense

Income tax expense for the three-month period ended March 31, 2024 was $516,332, compared to $538,846 for the same period of 2023, a decrease of $22,514 or 4.2%. The decrease was primarily due to a decline in the Bank's effective income tax rate for the three- month period ended March 31, 2024 to 24.41%, compared to 25.50% for the same period in 2023, with the decrease primarily due to a change in the mix of income tax components.

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FINANCIAL CONDITION

Assets

Total assets were $678,365,661 at March 31, 2024, compared to $665,617,205 at December 31, 2023, an increase of $12,748,456, or 1.9%.

The Bank invests excess cash balances in interest-bearing accounts at other banks and federal funds sold to correspondent banks. The balance on these instruments was $47,289,987 at March 31, 2024, compared to $30,427,507 at December 31, 2023, an increase of $16,862,480, or 55.4%.

Investment securities were $100,762,823 at March 31, 2024, compared to $106,495,906 at December 31, 2023, a decrease of $5,733,083, or 5.4%.

Loans

Loans, net of the allowance for credit losses on loans, were $504,120,299 at March 31, 2024, compared to $502,249,930 at December 31, 2023, an increase of $1,870,369, or 0.4%. The average net loan portfolio represented 76.8% of average earning assets for the three- month period ended March 31, 2024, compared to 75.8% for the same period in 2023.

The following table sets forth the major classifications of the Bank's loan portfolio.

		March 31, 2024		December 31, 2023
		Amount	% of Total		Amount	% of Total
Real estate
Construction, development and other land	$	31,339,262	6.14%	$	31,970,782	6.29%
Secured by farmland		8,645,879	1.69%		8,778,243	1.73%
Commercial		253,212,530	49.64%		254,009,724	49.98%
Residential		135,127,371	26.49%		134,764,915	26.52%
Commercial and industrial		50,148,987	9.83%		46,110,314	9.07%
Other consumer		31,571,416	6.19%		32,515,311	6.40%
Overdrafts		52,541	0.02%		68,905	0.01%
Gross loans		510,097,986	100.00%		508,218,194	100.00%
Net deferred (fees) costs		(245,190)			(258,437)
Allowance for credit losses on loans		(5,732,497)			(5,709,827)
Net loans	$	504,120,299		$	502,249,930
Allowance for credit losses on loans to gross loans		1.12%			1.12%

Loan Credit Risk Management

The Bank's loan portfolio is subject to varying degrees of credit risk. The Bank seeks to mitigate credit risk through portfolio diversification, limiting exposure to any single industry or customer, collateral protection and strong underwriting criteria. The following discussion provides information and statistics on the overall quality of the Bank's loan portfolio. Notes 1 and 4 to the consolidated financial statements included elsewhere in this report describe the accounting policies related to nonperforming loans and charge-offs, and foreclosed and repossessed assets, and describes the methodologies used to develop the allowance for credit losses on loans. Management believes the policies governing nonperforming loans and charge-offs are consistent with industry and regulatory standards. The amount of the allowance for credit losses on loans and the resulting provision for or recovery of credit losses on loans expense are reviewed and approved quarterly by the Board of Directors.

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The following table provides a comprehensive view of the allowance for credit losses on loans activity including the periodic activity of charge-offs and recoveries allocated by loan class for the three-month periods ended March 31, 2024 and 2023.

			Construction,	Commercial						Other
Three months ended:			Development	Real Estate	Residential	Commercial	Consumer &
M arch 31, 2024	Unallocated	& Other Land	& Farmland	Real Estate	& Industrial	Overdrafts		Total
Allowance for credit losses on loans:
Beginning balance	$	8,660	$	665,816	$	2,086,568	$	1,460,185	$	895,946	$	592,652	$	5,709,827
Charge-offs		-		-		-		-		-		(10,991)		(10,991)
Recoveries		-		-		-		2,000		-		1,661		3,661
Provision for (recovery of) credit
losses on loans		2,248		18,125		(64,681)		1,862		82,640		(10,194)		30,000
Ending balance	$	10,908	$	683,941	$	2,021,887	$	1,464,047	$	978,586	$	573,128	$	5,732,497
M arch 31, 2023
Allowance for credit losses on loans:
Beginning balance	$	13,670	$	446,024	$	2,550,667	$	986,573	$	452,861	$	245,973	$	4,695,768
Impact of ASC 326 adoption	$	(13,670)	$	(112,669)	$	97,825	$	219,576	$	(146,758)	$	162,017	$	206,321
Charge-offs		-		-		-		(766)		-		(4,765)		(5,531)
Recoveries		-		-		-		1,000		-		1,325		2,325
Provision for (recovery of) credit
losses on loans		-		31,792		(118,417)		46,540		62,279		150,267		172,461
Ending balance	$	-	$	365,147	$	2,530,075	$	1,252,923	$	368,382	$	554,817	$	5,071,344

The following table presents net (charge-offs) recoveries and the average balances of loans for the periods indicated.

	Periodic Net			Annualized Net (Charge-
Three months ended:	(Charge-Offs)			Offs) Recoveries
March 31, 2024	Recoveries		Average Loans	to Average Loans
	$	(7,330)	$	501,185,056	-0.01%
	Periodic Net			Annualized Net (Charge-
Three months ended:	(Charge-Offs)			Offs) Recoveries
March 31, 2023	Recoveries		Average Loans	to Average Loans
	$	(3,206)	$	431,798,964	0.00%

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The following table presents the allocation of allowance for credit losses on loans and the balances of loans that were individually and collectively evaluated at March 31, 2024 and December 31, 2023.

			Construction,		Commercial						Other
			Develop ment		Real Estate		Residential	Commercial	Consumer &
M arch 31, 2024	Unallocated	& Other Land		& Farmland		Real Estate	& Industrial	Overdrafts		Total
Allowance balance allocated to loans:
Individually evaluated	$	-	$	-	$	-	$	-	$	2,565	$	-	$	2,565
Collectively evaluated		10,908		683,941		2,021,887		1,464,047		976,021		573,128		5,729,932
	$	10,908	$	683,941	$	2,021,887	$	1,464,047	$	978,586	$	573,128	$	5,732,497
Loan balances:
Individually evaluated			$	-	$	6,797,192	$	154,058	$	130,607	$	1,071	$	7,082,928
Collectively evaluated				31,339,262		255,061,217		134,973,313		50,018,380		31,622,886		503,015,058
			$	31,339,262	$	261,858,409	$	135,127,371	$	50,148,987	$	31,623,957	$	510,097,986
December 31, 2023
Allowance balance allocated to loans:
Individually evaluated	$	-	$	-	$	56,000	$	-	$	2,587	$	-	$	58,587
Collectively evaluated		8,660		665,816		2,030,568		1,460,185		893,359		592,652		5,651,240
	$	8,660	$	665,816	$	2,086,568	$	1,460,185	$	895,946	$	592,652	$	5,709,827
Loan balances:
Individually evaluated			$	-	$	8,381,335	$	293,870	$	233,843	$	4,252	$	8,913,300
Collectively evaluated				31,970,782		254,406,632		134,471,045		45,876,471		32,579,964		499,304,894
			$	31,970,782	$	262,787,967	$	134,764,915	$	46,110,314	$	32,584,216	$	508,218,194

The allowance for credit losses on loans is increased by provisions for credit losses on loans charged to expense and recoveries of credit losses on loans previously charged-off. The allowance for credit losses on loans is decreased by loan charge-offs and recovery of provision for credit losses on loans expense. Provision for or recovery of provision for credit losses on loans are made to bring the allowance for credit losses on loans within the range of balances that are considered appropriate based upon the allowance methodology and to reflect expected losses inherent in the loan portfolio as of the balance sheet date. Accordingly, the methodology is based on historical loss experience by loan classification and on specific loss allocations, with adjustments for current and reasonable and supportable forecast events and conditions, or the "expected loss" approach. Management's process for determining the appropriate level of the allowance for credit losses on loans is designed to account for credit losses over the expected life of loans. The provision for or recovery of provision for credit losses on loans reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, and net charge-offs or recoveries, among other factors, and adjustments for current and reasonable and supportable forecast events and conditions. The provision for or recovery of provision for credit losses on loans also reflect the totality of actions taken on all loans for a particular period. The amount of the provision for or recovery of provision for credit losses on loans reflects not only the necessary increases or decreases in the allowance for credit losses on loans related to newly identified rated loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The allowance for credit losses on loans was $5,732,497 at March 31, 2024, compared to $5,709,827 at December 31, 2023, an increase of $22,670, or 0.4%. The increase in allowance for credit losses on loans was due to recoveries of amounts previously charged-off of $3,661, and provision for credit losses on loans of $30,000, partially offset by amounts charged-off of $10,991. The "Allowance for Credit Losses on Loans to Gross Loans" ratio at March 31, 2024 was 1.12% compared to 1.12% at December 31, 2023. The allowance level reflects the results of management's assessment of current and forecasted market conditions and analysis of expected inherent risk within the loan portfolio performed during the quarter.

The adequacy of the allowance for credit losses on loans is determined based upon management's estimate of the expected inherent risks associated with lending activities, estimated fair value of collateral, past experience and present indicators such as loan delinquency trends, nonaccrual loans and current and reasonable and supportable forecast market conditions. Management believes that the allowance for credit losses on loans is adequate as of March 31, 2024; however, future changes in the composition of the loan portfolio and financial condition of borrowers may result in additions to or subtractions from the allowance. Examination of the loan portfolio and the allowance for credit losses on loans by regulatory agencies, auditors and consultants engaged by the Bank may result in the need for additional provision for or recovery of provision for credit losses on loans based upon information available at the time of examination.

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