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Note 4 - Loans
 12 Months Ended
Dec. 31, 2023
Notes to Financial Statements  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 4. Loans

 

(In Thousands, Except Number of Loans)

 

The composition of LHFI, net at December 31, 2023 and 2022 is as follows:

 

  

2023

  

2022

 

Real Estate:

        

Land Development and Construction

 $66,942  $52,731 

Farmland

  10,825   11,437 

1-4 Family Mortgages

  95,161   92,148 

Commercial Real Estate

  358,226   316,541 

Total Real Estate Loans

  531,154   472,857 
         

Business Loans:

        

Commercial and Industrial Loans

  93,060   96,500 

Farm Production and Other Farm Loans

  424   504 

Total Business Loans

  93,484   97,004 
         

Consumer Loans:

        

Credit Cards

  3,377   2,738 

Other Consumer Loans

  14,013   12,992 

Total Consumer Loans

  17,390   15,730 
         
         

Total Gross Loans

  642,028   585,591 
         

Unearned Origination Fees

  (1,083)  (275)

Allowance for Loan Losses

  (6,551)  (5,264)
         
         

Loans, net

 $634,394  $580,052 

 

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews these policies and procedures and submits them to the Company’s Board of Directors for its approval when needed, but no less frequently than annually. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

 

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of this review are presented to management with quarterly reports made to the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by the lenders and credit personnel, as well as the Company’s policies and procedures.

 

Loans are made principally to customers in the Company’s market. The Company’s lending policy provides that loans collateralized by real estate are normally made with loan-to-value (“LTV”) ratios of 80 percent or less. Commercial loans are typically collateralized by property, equipment, inventories or receivables with LTV ratios from 50 percent to 80 percent. Residential real estate mortgage loans are collateralized by personal residences with LTV ratios of 80 percent or less. Consumer loans are typically collateralized by real estate, vehicles and other consumer durable goods. Approximately $152,262 and $104,261 of the loans outstanding at December 31, 2023 and 2022, respectively, were variable rate loans.

 

In the ordinary course of business, the Company has granted loans to certain directors, significant shareholders and their affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Activity in related party loans during 2023 is presented in the following table.

 

Balance outstanding at December 31, 2022

 $923 
     

Principal additions

  584 
     

Principal reductions

  (45)
     

Balance outstanding at December 31, 2023

 $1,462 

 

In addition to the loans outstanding above, the Company has an outstanding letter of credit with one of the Company’s directors with availability of $2,275 at December 31, 2022. The letter of credit was not drawn on during 2022 or 2023 and is no longer oultstanding at December 31, 2023. The letter of credit was made on substantially the same terms as comparable transactions with other unaffiliated persons.

 

Loans are considered to be past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status, when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether such loans are considered past due. When interest accruals are discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

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

 

December 31, 2023

            

Loans secured by real estate:

            

Land Development and Construction

 $-  $-  $- 

Farmland

  -   95   - 

1-4 Family Mortgages

  -   1,670   - 

Commercial Real Estate

  399   504   - 

Total Real Estate Loans

  399   2,269   - 

Business Loans:

            

Commercial and Industrial Loans

  124   267   4 

Farm Production and Other Farm Loans

  -   -   - 

Total Business Loans

  124   267   - 

Consumer Loans:

            

Other Consumer Loans

  -   40   - 

Credit Cards

  -   -   12 

Total Consumer Loans

  -   40   12 

Total

 $523  $2,576  $16 

 

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:

        

Other Consumer Loans

  24   - 

Credit Cards

  -   12 

Total Consumer Loans

  24   12 

Total

 $2,988  $111 

 

In the event that non-accrual loans had performed in accordance with their original terms, the Company would have recognized additional interest income of approximately $431, $354 and $281 in 2023, 2022 and 2021, respectively.

 

An aging analysis of past due loans, segregated by class of loans, as of December 31, 2023 is as follows:

 

December 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

 $32  $-  $32  $66,910  $66,942 

Farmland

  90   -   90   10,735   10,825 

1-4 Family Mortgages

  1,024   179   1,203   93,958   95,161 

Commercial Real Estate

  1,080   67   1,147   357,079   358,226 

Total Real Estate Loans

  2,226   246   2,472   528,682   531,154 

Business Loans:

                    

Commercial and Industrial Loans

  54   270   324   92,736   93,060 

Farm Production and Other Farm Loans

  -   -   -   424   424 

Total Business Loans

  54   270   324   93,160   93,484 

Consumer Loans:

                    

Credit Cards

  65   12   77   3,300   3,377 

Other Consumer Loans

  116   -   116   13,897   14,013 

Total Consumer Loans

  181   12   193   17,197   17,390 

Total

 $2,461  $528  $2,989  $639,039  $642,028 

 

An aging analysis of past due loans, segregated by class of loans, as of December 31, 2022 is as follows:

 

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:

                    

Credit Cards

  56   12   89   2,649   2,738 

Other Consumer Loans

  66   23   68   12,924   12,992 

Total Consumer Loans

  122   35   157   15,573   15,730 

Total

 $3,005  $1,271  $4,276  $581,315  $585,591 

 

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.

 

$124 of interest income was recognized in the income statement on impaired LHFI for the periods ended December 31, 2023. The amount was immaterial for the period ended December 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

 

2022

 

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:

                        

Commercial and Industrial

  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 2023.

 

At December 31, 2023, LHFI classified as modified loans totaled $2,224. At December 31, 2023, modified loans were primarily comprised of interest rate concessions. The Company had $-0- in unused commitments on modified loans at December 31, 2023.

 

The allocated ACL attributable to modified loans was $142 at December 31, 2023. The Company had no commitments to lend additional funds on these loans as of December 31, 2023.

 

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

 

At December 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 December 31, 2023:

 

December 31, 2023

 

Stocks

  

Inventory

  

Real Estate

  

Receivables

  

Total

 

Loans secured by real estate:

                    

Land Development and Construction

 $-  $-  $-  $-  $- 

1-4 Family Mortgages

  -   -   81   -   81 

Commercial Real Estate

  -   -   2,399   -   2,399 

Total Real Estate Loans

  -   -   2,480   -   2,480 

Business Loans:

                    

Commercial and Industrial Loans

  1,280   92   -   32   1,404 

Farm Production and Other Farm Loans

  -   -   -   -   - 

Total Business Loans

  1,280   92   -   32   1,404 
                     

Total

 $1,280  $92  $2,480  $32  $3,884 

 

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.

 

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 statement of 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 December 31, 2023.

 

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

 

Term Loans Amortized Cost Basis by Origination Year

                     

December 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

 $23,439  $3,514  $1,173  $13,160  $860  $226  $23,282  $65,654 

Special Mention - Category 5 & 6

  -   348   679   -   -   -   -   1,027 

Substandard - Category 7

  -   261   -   -   -   -   -   261 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Land Development and Construction

  23,439   4,123   1,852   13,160   860   226   23,282   66,942 
                                 

Farmland

                                

Satisfactory - Categories 1-4

  1,929   1,520   1,143   1,395   3,003   492   995   10,477 

Special Mention - Category 5 & 6

  -   -   80   -   129   37   -   246 

Substandard - Category 7

  -   32   6   4   17   43   -   102 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Farmland

  1,929   1,552   1,229   1,399   3,149   572   995   10,825 
                                 

1-4 Family Mortgages

                                

Satisfactory - Categories 1-4

  14,355   18,980   11,305   10,988   9,353   5,163   19,976   90,120 

Special Mention - Category 5 & 6

  497   184   93   464   296   157   76   1,767 

Substandard - Category 7

  275   34   274   262   79   1,918   351   3,193 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   81   -   -   81 

Total 1-4 Family Mortgages

  15,127   19,198   11,672   11,714   9,809   7,238   20,403   95,161 
                                 

Commercial Real Estate

                                

Satisfactory - Categories 1-4

  82,361   51,185   58,021   52,120   24,368   29,836   17,920   315,811 

Special Mention - Category 5 & 6

  9,172   2,414   2,193   917   4,481   288   3,855   23,320 

Substandard - Category 7

  -   67   3,636   -   264   15,128   -   19,095 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Commercial Real Estate

  91,533   53,666   63,850   53,037   29,113   45,252   21,775   358,226 

Total Real Estate Loans

  132,028   78,539   78,603   79,310   42,931   53,288   66,455   531,154 

Business Loans:

                                

Commercial and Industrial Loans

                                

Satisfactory - Categories 1-4

  28,036   18,428   4,415   14,052   5,988   7,390   10,136   88,445 

Special Mention - Category 5 & 6

  23   116   -   246   -   441   2,141   2,967 

Substandard - Category 7

  -   16   83   -   4   720   825   1,648 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Commercial & Industrial

  28,059   18,560   4,498   14,298   5,992   8,551   13,102   93,060 
                                 

Farm Production and Other Farm Loans

                                

Satisfactory - Categories 1-4

  109   162   -   -   -   91   62   424 

Special Mention - Category 5 & 6

  -   -   -   -   -   -   -   - 

Substandard - Category 7

  -   -   -   -   -   -   -   - 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Farm Production & Other Farm

  109   162   -   -   -   91   62   424 

Total Business Loans

  28,168   18,722   4,498   14,298   5,992   8,642   13,164   93,484 

Consumer Loans:

                                

Satisfactory - Categories 1-4

  7,368   3,071   1,188   586   836   185   367   13,601 

Special Mention - Category 5 & 6

  2   -   -   -   3   -   -   5 

Substandard - Category 7

  337   37   31   -   -   -   -   405 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  2   -   -   -   -   -   -   2 

Total Consumer Loans

  7,709   3,108   1,219   586   839   185   367   14,013 
                                 

Credit Cards

                                

Performing

  -   -   -   -   -   -   3,365   3,365 

Nonperforming

  -   -   -   -   -   -   12   12 

Total Credit Card

  -   -   -   -   -   -   3,377   3,377 

Gross LHFI

 $167,905  $100,369  $84,320  $94,194  $49,762  $62,115  $83,363  $642,028 

Less Unearned Origination Fees

                              (1,083)

Less ACL

                              (6,551)

Net LHFI

                             $634,394 

 

There were no revolving loans converted to term loans during the year ended December 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