Note 7- LHFL and ACL

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 7. LHFI and ACL

(in thousands, except number of loans)

The composition of LHFI at March 31, 2023 and December 31, 2022 was as follows:

	March 31, 2023			December 31, 2022
Loans secured by real estate:
Land Development and Construction	$	53,528		$	52,731
Farmland		11,423			11,437
1-4 Family Mortgages		93,480			92,148
Commercial Real Estate		312,276			316,541
Total Real Estate Loans		470,707			472,857
Business Loans:
Commercial and Industrial Loans		80,207			96,500
Farm Production and Other Farm Loans		474			504
Total Business Loans		80,681			97,004
Consumer Loans:
Consumer Loans		13,072			12,992
Credit Cards		2,780			2,738
Total Consumer Loans		15,852			15,730
Gross LHFI		567,240			585,591
Less Allowance for credit losses		(6,017	)		(5,264	)
Net LHFI	$	561,223		$	580,327

Nonaccrual and Past Due LHFI

The amortized cost basis of period-end, nonaccrual and past due LHFI, segregated by class, were as follows:

	Nonaccrual With No Allowance for Credit Loss		Nonaccrual		Loans Past Due 90 Days or More Still Accruing
March 31, 2023
Loans secured by real estate:
Land Development and Construction	$	-	$	2	$	-
Farmland		28		108		-
1-4 Family Mortgages		184		1,712		-
Commercial Real Estate		691		825		-
Total Real Estate Loansg		903		2,647		-
Business Loans:
Commercial and Industrial Loans		196		307		-
Farm Production and Other Farm Loans		-		-		-
Total Business Loans		196		307		-
Consumer Loans:
Consumer Loans		-		39		-
Credit Cards		-		-		5
Total Consumer Loans		-		39		5
Total	$	1,099	$	2,993	$	5

The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior period.

	Nonaccrual		Loans Past Due 90 Days or More Still Accruing
December 31, 2022
Loans secured by real estate:
Land Development and Construction	$	-	$	4
Farmland		117		-
1-4 Family Mortgages		1,720		-
Commercial Real Estate		846		95
Total Real Estate Loans		2,683		99
Business Loans:
Commercial and Industrial Loans		281		-
Farm Production and Other Farm Loans		-		-
Total Business Loans		281		-
Consumer Loans:
Consumer Loans		24		-
Credit Cards		-		12
Total Consumer Loans		24		12
Total	$	2,988	$	111

No material interest income was recognized in the income statement on nonaccrual LHFI for each of the periods ended March 31, 2023 and 2022.

An aging analysis of the amortized cost basis of LHFI (including nonaccrual LHFI), segregated by class, was as follows:

March 31, 2023	30 - 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current Loans		Total
Loans secured by real estate:
Land Development and Construction	$	250	$	-	$	250	$	53,278	$	53,528
Farmland		233		-		233		11,190		11,423
1-4 Family Mortgages		1,527		216		1,743		91,737		93,480
Commercial Real Estate		640		504		1,144		311,132		312,276
Total Real Estate Loans		2,650		720		3,370		467,337		470,707
Business Loans:
Commercial and Industrial Loans		271		266		537		79,670		80,207
Farm Production and Other Farm Loans		-		-		-		474		474
Total Business Loans		271		266		537		80,144		80,681
Consumer Loans:
Consumer Loans		126		-		126		12,946		13,072
Credit Cards		60		5		65		2,715		2,780
Total Consumer Loans		186		5		191		15,661		15,852
Total	$	3,107	$	991	$	4,098	$	563,142	$	567,240

December 31, 2022	30 - 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current Loans		Total
Loans secured by real estate:
Land Development and Construction	$	-	$	4	$	4	$	52,727	$	52,731
Farmland		38		30		68		11,369		11,437
1-4 Family Mortgages		1,799		439		2,238		89,910		92,148
Commercial Real Estate		933		486		1,419		315,122		316,541
Total Real Estate Loans		2,770		959		3,729		469,128		472,857
Business Loans:
Commercial and Industrial Loans		109		277		386		96,114		96,500
Farm Production and Other Farm Loans		4		-		4		500		504
Total Business Loans		113		277		390		96,614		97,004
Consumer Loans:
Consumer Loans		66		23		89		12,903		12,992
Credit Cards		56		12		68		2,670		2,738
Total Consumer Loans		122		35		157		15,573		15,730
Total	$	3,005	$	1,271	$	4,276	$	581,315	$	585,591

Impaired LHFI

Prior to the adoption of FASB ASC Topic 326, the Company’s individually evaluated impaired LHFI included all commercial substandard relationships of $100 or more, which were specifically reviewed for impairment and deemed impaired, and all LHFI classified as troubled-debt restructurings (“TDRs”) in accordance with FASB ASC Subtopic 310-10-50-20 “Impaired Loans.” Once a LHFI was deemed to be impaired, the full difference between book value and the most likely estimate of the collateral’s net realizable value was charged off or a specific reserve was established.

No material interest income was recognized in the income statement on impaired LHFI for the period ended March 31, 2022.

The following disclosures are presented under GAAP in effect prior to the adoption of CECL that are no longer applicable or required. The Company has included these disclosures to address the applicable prior periods.

Loans formerly accounted for under FASB ASC 310-20, “Nonrefundable Fees and Other Cost” (“ASC 310-20”), and which are impaired loans recognized in conformity with ASC 310, “Receivables” (“ASC 310”), segregated by class, were as follows as of December 31, 2022:

			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	-	$	-	$	-	$	-	$	-	$	86
Farmland		30		30		-		30		-		32
1-4 Family Mortgages		190		190		-		190		-		479
Commercial Real Estate		3,023		795		2,066		2,861		116		1,996
Total Real Estate Loans		3,243		1,015		2,066		3,081		116	$	2,593
Business Loans:
Commercial and Industrial Loans		304		196		-		196		-	$	214
Total Business Loans		304		196		-		196		-	$	214
Total Loans	$	3,547	$	1,211	$	2,066	$	3,277	$	116	$	2,807

Loan Modifications

The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023. The amendments in this ASU were applied prospectively, and therefore, loan modification and charge off information is provided only for those items occurring after the January 1, 2023 adoption date.

Based on the guidance in ASU 2022-02, a loan modification or refinancing results in a new loan if the terms of the new loan are at least as favorable to the lender as the terms with customers with similar collection risks that are not refinancing or restructuring their loans and the modification to the terms of the loans are more than minor. If a loan modification or refinancing does not result in a new loan, it is classified as a loan modification. There are additional disclosures for the modification of loans with borrowers experiencing financial difficulty that results in a direct change in the timing or amount of contractual cash flows. The disclosures are applicable to situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions or a combination of any of these terms. If the Company modifies any loans to borrowers in financial distress that involves principal forgiveness, the amount of principal forgiven is charged off against the ACL.

The Company had no loan modifications to borrowers experiencing financial difficulties in the first quarter of 2023.

At March 31, 2023, LHFI classified as modified loans totaled $2,050. At March 31, 2023, modified loans were primarily comprised of interest rate concessions. The Company had $-0- thousand in unused commitments on modified loans at March 31, 2023.

The allocated ACL attributable to modified loans was $100 at March 31, 2023. The Company had no commitments to lend additional funds on this troubled debt restructuring as of March 31, 2023.

There were no loans modified within the last twelve months for which there was a payment default during the three months ended March 31, 2023.

At March 31, 2023 and December 31, 2022, the amortized cost of loans secured by Real Estate – 1-4 Family Mortgage in the process of foreclosure was $-0- and $-0-, respectively.

Collateral-Dependent Loans

The following tables present the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of March 31, 2023:

March 31, 2023	Inventory		Real Estate		Receivables		Total
Loans secured by real estate:
Land Development and Construction	$	-	$	-	$	-	$	-
Farmland		-		28		-		28
1-4 Family Mortgages		-		184		-		184
Commercial Real Estate		-		2,741		-		2,741
Total Real Estate Loans		-		2,953		-		2,953
Business Loans:
Commercial and Industrial Loans		92		-		104		196
Farm Production and Other Farm Loans		-		-		-		-
Total Business Loans		92		-		104		196
Total	$	92	$	2,953	$	104	$	3,149

A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale of the collateral. The following provides a qualitative description by class of loan of the collateral that secures the Company’s collateral-dependent LHFI:

● Loans secured by real estate – Loans within these loan classes are secured by liens on real estate properties. There have been no significant changes to the collateral that secures these financial assets during the period.

● Business loans – Loans within this loan class are primarily secured by inventory, accounts receivables, equipment and other non-real estate collateral. There have been no significant changes to the collateral that secures these financial assets during the period.

Credit Quality Indicators

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans when originated and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows.

Grade 1. MINIMAL RISK - These loans are without loss exposure to the Company. This classification is reserved for only the best, well secured loans to borrowers with significant capital strength, low leverage, stable earnings and growth and other readily available financing alternatives. This type of loan would also include loans secured by a program of the government.

Grade 2. MODEST RISK - These loans include borrowers with solid credit quality and moderate risk of loss. These loans may be fully secured by certificates of deposit with another reputable financial institution or secured by readily marketable securities with acceptable margins.

Grade 3. AVERAGE RISK - This is the rating assigned to most of the loans held by the Company. This includes loans with average loss exposure and average overall quality. These loans should liquidate through possessing adequate collateral and adequate earnings of the borrower. In addition, these loans are properly documented and are in accordance with all aspects of the current loan policy.

Grade 4. ACCEPTABLE RISK - Borrower generates sufficient cash flow to fund debt service but most working asset and capital expansion needs are provided from external sources. Profitability and key balance sheet ratios are usually close to peers but one or more may not align with peers.

Grade 5. MANAGEMENT ATTENTION - Borrower has potential weaknesses resulting from performance trends or management concerns. The financial condition of the borrower has taken a negative turn and may be temporarily strained. Cash flow is weak but cash reserves remain adequate to meet debt service. Management weakness is evident.

Grade 6. OTHER LOANS ESPECIALLY MENTIONED (“OLEM”) - Loans in this category are fundamentally sound but possess some weaknesses. OLEM loans have weaknesses, which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss.

Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss.

Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of loss is extremely high, but because of certain important and reasonable 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. A doubtful classification could reflect the fact that the primary source of repayment is gone and serious doubt exists as to the quality of a secondary source of repayment.

Grade 9. LOSS - Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Also included in this classification is the defined loss portion of loans rated substandard assets and doubtful assets.

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at March 31, 2023.

The following table details the amortized cost basis of LHFI, segregated by loan origination year, grade and class, as of March 31, 2023:

Term Loans Amortized Cost Basis by Origination Year

March 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total Loans
Loans secured by real estate:
Land Development and Construction
Satisfactory - Categories 1-4	$	2,496	$	7,876	$	6,566	$	7,982	$	950	$	1,167	$	24,425	$	51,462
Special Mention - Category 5 & 6		-		1,104		679		-		-		-		-		1,783
Substandard - Category 7		-		279		-		-		-		4		-		283
Doubtful - Category 8		-		-		-		-		-		-		-		-
Loss 9		-		-		-		-		-		-		-		-
Total Land Development and Construction		2,496		9,259		7,245		7,982		950		1,171		24,425		53,528
Farmland
Satisfactory - Categories 1-4		315		1,830		1,443		2,066		3,253		1,222		885		11,014
Special Mention - Category 5 & 6		-		-		88		-		138		38		-		264
Substandard - Category 7		-		37		17		11		29		51		-		145
Doubtful - Category 8		-		-		-		-		-		-		-		-
Loss 9		-		-		-		-		-		-		-		-
Total Farmland		315		1,867		1,548		2,077		3,420		1,311		885		11,423
1-4 Family Mortgages
Satisfactory - Categories 1-4		4,356		20,671		12,882		12,645		11,051		9,529		16,911		88,045
Special Mention - Category 5 & 6		-		198		46		135		305		984		176		1,844
Substandard - Category 7		-		37		288		378		137		2,340		411		3,591
Doubtful - Category 8		-		-		-		-		-		-		-		-
Loss 9		-		-		-		-		-		-		-		-
Total 1-4 Family Mortgages		4,356		20,906		13,216		13,158		11,493		12,853		17,498		93,480
Commercial Real Estate
Satisfactory - Categories 1-4		4,719		53,935		61,039		56,352		42,180		36,853		16,612		271,690
Special Mention - Category 5 & 6		66		2,493		2,285		1,073		1,487		463		-		7,867
Substandard - Category 7		-		187		3,758		2,805		269		25,700		-		32,719
Doubtful - Category 8		-		-		-		-		-		-		-		-
Loss 9		-		-		-		-		-		-		-		-
Total Commercial Real Estate		4,785		56,615		67,082		60,230		43,936		63,016		16,612		312,276
Total Real Estate Loans		11,952		88,647		89,091		83,447		59,799		78,351		59,420		470,707
Business Loans:
Commercial and Industrial Loans
Satisfactory - Categories 1-4		1,706		24,185		5,629		14,380		6,906		11,748		10,546		75,100
Special Mention - Category 5 & 6		-		133		-		337		8		1,368		2,811		4,657
Substandard - Category 7		-		3		55		-		59		261		72		450
Doubtful - Category 8		-		-		-		-		-		-		-		-
Loss 9		-		-		-		-		-		-		-		-
Total Commercial & Industrial Loans		1,706		24,321		5,684		14,717		6,973		13,377		13,429		80,207
Farm Production and Other Farm Loans
Satisfactory - Categories 1-4		-		272		-		9		-		92		91		464
Special Mention - Category 5 & 6		-		-		-		-		-		-		-		-
Substandard - Category 7		-		-		7		-		-		3		-		10
Doubtful - Category 8		-		-		-		-		-		-		-		-
Loss 9		-		-		-		-		-		-		-		-
Total Farm Production & Other Farm Loans		-		272		7		9		-		95		91		474
Total Business Loans		1,706		24,593		5,691		14,726		6,973		13,472		13,520		80,681
Consumer Loans:
Satisfactory - Categories 1-4		2,158		5,697		2,454		946		962		317		240		12,774
Special Mention - Category 5 & 6		-		-		-		-		-		4		-		4
Substandard - Category 7		238		24		27		3		1		1		-		294
Doubtful - Category 8		-		-		-		-		-		-		-		-
Loss 9		-		-		-		-		-		-		-		-
Total Consumer Loans		2,396		5,721		2,481		949		963		322		240		13,072
Credit Cards
Performing		-		-		-		-		-		-		2,775		2,775
Nonperforming		-		-		-		-		-		-		5		5
Total Credit Card		-		-		-		-		-		-		2,780		2,780
Gross LHFI	$	16,054	$	118,961	$	97,263	$	99,122	$	67,735	$	92,145	$	75,960	$	567,240
Less ACL																(6,017	)
Net LHFI															$	561,223

There were no revolving loans converted to term loans during the three months ended March 31, 2023.

The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior period.

A discussion of the Company’s policies regarding internal risk-rating of loans is discussed above and is applicable to these tables. The following table presents the Company’s loan portfolio by internal risk-rating grades as of December 31, 2022:

			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	50,015	$	2,427	$	289	$	-	$	-	$	52,731
Farmland		10,832		269		336		-		-		11,437
1-4 Family Mortgages		85,861		1,816		4,471		-		-		92,148
Commercial Real Estate		274,901		7,975		33,665		-		-		316,541
Total Real Estate Loans		421,609		12,487		38,761		-		-		472,857
Business Loans:
Commercial and Industrial Loans		91,016		4,902		577		-		5		96,500
Farm Production and Other Farm Loans		491		-		13		-		-		504
Total Business Loans		91,507		4,902		590		-		5		97,004
Consumer Loans:
Credit Cards		2,670		-		68		-		-		2,738
Other Consumer Loans		12,934		7		51		-		-		12,992
Total Consumer Loans		15,604		7		119		-		-		15,730
Total Loans	$	528,720	$	17,396	$	39,470	$	-	$	5	$	585,591