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Allowance for Credit Losses
 12 Months Ended
Dec. 31, 2023
Allowance for Loan Losses [Abstract]  
Allowance for Credit Losses

Note 5 – Allowance for Credit Losses

On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. For further information and discussion regarding the Company's adoption of CECL, see Note 2 - Adoption of New Accounting Standards. All ACL information presented as of December 31, 2023 is in accordance with ASC 326. All ALLL information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.

The ACL on the loan portfolio is a material estimate for the Company. The Company estimates is ACL on its loan portfolio on a quarterly basis. The Company utilizes two methodologies in its development of the ACL, discounted cash flow and remaining life.

•
Discounted Cash Flow
o
DCF models, being periodic in nature, allow for effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner.
o
The analysis aligns well with other calculations/actions outside the ACL estimation, which will mitigate model risk in other areas and allow for symmetrical application. For example, fair value (exit price notion), profitability analysis, IRR calculations, ALM, stress testing, and other forms of cash flow analysis.
o
Peer data is available for certain inputs (Probability of Default and Loss Given Default) if first-party data is not available or meaningful. This is made possible by the periodic nature of the model.
o
The DCF methodology is utilized on the following pools: 1) Commercial & Industrial; 2) Construction; 3) Consumer; 4) CRE Non-Owner Occupied; 5) CRE Owner Occupied; 6) HELOC & Junior Lien; 7) Residential 1st Lien; and 8) Multifamily.
•
Remaining Life
o
This methodology leverages a quarterly loss rate as well as future expectations of portfolio balances to calculate a reserve.
o
There are two main strengths of this methodology. First, it is fairly easy to execute and does not rely on large quantities of historical loan-level data. Second, it can satisfy the need to incorporate a reasonable and supportable forecast in a straightforward manner by either applying a forecast policy of “applicable history” or leveraging an actual econometric model for the analysis.
o
The remaining life methodology is utilized on the following pools: 1) Minute Lender; and 2) Student Loans.

Maximum Loss Rate - Management utilizes the same model to calculate maximum loss rates and expected loss rates for each segment. No additional models or methodologies were used to quantify the maximum loss rate, rather, a worst-case economic environment is utilized in the models. This process ensures symmetry between the maximum loss rate and the quantified loss rate. This process also leverages the well-documented regression models used in model development.

The process for deriving the maximum loss rate is outlined below:

•
The economic forecast reflects the worst economic environment observed for each economic factor. This is done by quantifying a rolling 1-year average for each economic factor. Then, the most pessimistic 1-year average observations are captured and utilized as economic forecast inputs within the application.
•
The economic forecast assumed is a ‘worst-case’ economic environment with inputs reflective of the great recession.
•
The economic forecast is used to quantify credit risk in the form of Loss Rate. The resulting periodic default and loss rates are applied to the prepayment adjusted amortization schedules for each segment.
•
The resulting ACL, which represents a lifetime reserve (symmetrical to the base model), is input into the qualitative framework’s maximum loss rate field. The difference between the expected model and the maximum model results are then allocated based on weight and risk assignment.

Qualitative Factors - ASC 326 requires an entity to adjust historical loss information to reflect the extent to which management expects reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The adjustments for reasonable and supportable forecasts may be qualitative in nature and should reflect changes related to relevant data.

The Company utilizes a scorecard approach to assign qualitative factors. The scorecard approach is in alignment with the AICPA audit considerations for CECL which states:

These adjustments should be grounded in a methodology that is subject to appropriate governance, challenge, and periodic controlled reevaluation. Such methodology will generally require significant management judgment. The information used to support management’s adjustments may be publicly available information, information specifically developed for the entity via management’s specialist (internal or external), or other relevant and reliable information.

The purpose of the qualitative scorecard is to provide a qualitative estimate of the expected credit losses of the current loan portfolio in response to potential limitations of the quantitative model. It is used to aid in the assessment of the unquantifiable factors affecting expected credit losses in the loan portfolio. Benefits of the scorecard include directional consistency, objectivity, controls and quantification framework (auditable).

For each segment, the scorecard calculates the difference between the quantitative expected credit loss and the maximum loss rate. This difference represents all available qualitative adjustment that can be applied to that segment.

Individual Evaluation - In accordance with ASC 326, the Company will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. Loans will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for each loan, using one of four methods: 1) Fair Value of Collateral Method (Collateral Relationship); 2) Cash Flow Method; 3) Advanced Cash Flow Method; or 4) Loan Pricing Method.

Management has elected to perform an individual evaluation on all loans in nonaccrual status. As of December 31, 2023, after reviewing each loan in nonaccrual status, a specific reserve of $4 thousand was established.

The primary driver in the increase in reserves from adoption date of January 1, 2023 to December 31, 2023 is due to the increase in organic loan growth during the period.


 

 

A summary of the transactions in the allowance for credit losses for the years ended December 31, 2023 and 2022 appears below:

 

(Dollars in thousands)

 

2023

 

 

2022

 

Balance, beginning of period

 

$

5,552

 

 

$

5,984

 

Impact of ASC 326 adoption

 

$

2,491

 

 

$

—

 

Loans charged off

 

 

(721

)

 

 

(1,255

)

Recoveries

 

 

377

 

 

 

717

 

Net charge-offs

 

 

(344

)

 

 

(538

)

Provision for credit losses

 

 

696

 

 

 

106

 

Balance, December 31

 

$

8,395

 

 

$

5,552

 

 

The following table shows the ACL activity by loan portfolio for the twelve months ended December 31, 2023:

 

(Dollars in thousands)

 

Commercial
Loans

 

 

Real Estate
Construction
and Land

 

 

1-4 Family Residential Mortgages

 

 

Real
Estate
Mortgages

 

 

Consumer
Loans

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2022

 

$

194

 

 

$

221

 

 

$

1,618

 

 

$

2,820

 

 

$

699

 

 

$

5,552

 

Impact of ASC 326 adoption

 

 

(11

)

 

 

440

 

 

 

14

 

 

 

1,577

 

 

 

471

 

 

 

2,491

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(721

)

 

 

(721

)

Recoveries

 

 

168

 

 

 

-

 

 

 

10

 

 

 

42

 

 

 

157

 

 

 

377

 

Provision for (recovery of) credit losses

 

 

(158

)

 

 

(199

)

 

 

(150

)

 

 

822

 

 

 

381

 

 

 

696

 

Balance as of December 31, 2023

 

$

193

 

 

$

462

 

 

$

1,492

 

 

$

5,261

 

 

$

987

 

 

$

8,395

 

 

The following table presents a breakdown of the provision for credit losses for the periods indicated:

 

(Dollars in thousands)

December 31,
2023

 

 

December 31,
2022

 

  Provision for loan losses

$

696

 

 

$

106

 

  Provision for unfunded commitments

 

38

 

 

 

-

 

Total

$

734

 

 

$

106

 

 

The following table presents the Company's amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to those loans as of December 31, 2023:

 

(Dollars in thousands)

 

Real Estate Secured Loans

 

 

Allowance for Credit Losses - Loans

 

Commercial real estate - non owner occupied

 

$

414

 

 

$

-

 

Residential 1-4 family real estate

 

 

1,438

 

 

 

4

 

Total

 

$

1,852

 

 

$

4

 

 

 

Credit Quality Indicators

The Company utilizes the following credit quality indicators:

Pass

Loans with the following risk ratings are pooled by class and considered together as “Pass”:

Excellent– minimal risk loans secured by cash or fully guaranteed by a U.S. government agency

Good– low risk loans secured by marketable collateral within margin

Satisfactory– modest risk loans where the borrower has strong and liquid financial statements and more than adequate cash flow

Average– average risk loans where the borrower has reasonable debt service capacity

Marginal– acceptable risk loans where the borrower has acceptable financial statements but is leveraged

Watch

These loans have an acceptable risk but require more attention than normal servicing.

Special Mention

These potential problem loans are currently protected but are potentially weak.

Substandard

These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged. These loans may be considered impaired and evaluated on an individual basis.

Doubtful

Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable. These loans would be considered impaired and evaluated on an individual basis.


 

 

 

The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of December 31, 2023. Current period gross write-off amounts represent write-offs for twelve months ended December 31, 2023:

 

 

 

 

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving Loans

 

 

Loans Converted to Term

 

 

Total

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

85,529

 

 

$

12,344

 

 

$

2,712

 

 

$

4,989

 

 

$

7,121

 

 

$

16,873

 

 

$

21,806

 

 

$

112

 

 

$

151,486

 

Watch

 

 

-

 

 

 

41

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

41

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

79

 

 

 

8

 

 

 

-

 

 

 

87

 

Substandard

 

 

-

 

 

 

97

 

 

 

1

 

 

 

135

 

 

 

53

 

 

 

212

 

 

 

50

 

 

 

355

 

 

 

903

 

Total commercial

 

$

85,529

 

 

$

12,482

 

 

$

2,713

 

 

$

5,124

 

 

$

7,174

 

 

$

17,164

 

 

$

21,864

 

 

$

467

 

 

$

152,517

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate construction and land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

12,425

 

 

$

11,748

 

 

$

3,683

 

 

$

1,717

 

 

$

955

 

 

$

1,293

 

 

$

129

 

 

$

-

 

 

$

31,950

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

299

 

 

 

-

 

 

 

-

 

 

 

299

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

37

 

 

 

-

 

 

 

-

 

 

 

37

 

Substandard

 

 

1,351

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

-

 

 

 

1,396

 

Total real estate construction and land

 

$

13,776

 

 

$

11,748

 

 

$

3,683

 

 

$

1,717

 

 

$

955

 

 

$

1,674

 

 

$

129

 

 

$

-

 

 

$

33,682

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

19,482

 

 

$

14,712

 

 

$

54,066

 

 

$

74,539

 

 

$

24,999

 

 

$

85,836

 

 

$

20,571

 

 

$

524

 

 

$

294,729

 

Watch

 

 

-

 

 

 

1,621

 

 

 

1,874

 

 

 

602

 

 

 

-

 

 

 

7,149

 

 

 

1,166

 

 

 

-

 

 

 

12,412

 

Special Mention

 

 

-

 

 

 

1,089

 

 

 

1,458

 

 

 

1,958

 

 

 

270

 

 

 

1,591

 

 

 

78

 

 

 

138

 

 

 

6,582

 

Substandard

 

 

-

 

 

 

-

 

 

 

55

 

 

 

1,194

 

 

 

97

 

 

 

2,094

 

 

 

395

 

 

 

-

 

 

 

3,835

 

Total 1-4 family residential mortgage

 

$

19,482

 

 

$

17,422

 

 

$

57,453

 

 

$

78,293

 

 

$

25,366

 

 

$

96,670

 

 

$

22,210

 

 

$

662

 

 

$

317,558

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

112,093

 

 

$

41,433

 

 

$

46,315

 

 

$

101,205

 

 

$

45,809

 

 

$

171,184

 

 

$

1,502

 

 

$

76

 

 

$

519,617

 

Watch

 

 

-

 

 

 

-

 

 

 

1,196

 

 

 

166

 

 

 

165

 

 

 

14,188

 

 

 

-

 

 

 

-

 

 

 

15,715

 

Special Mention

 

 

-

 

 

 

-

 

 

 

391

 

 

 

278

 

 

 

-

 

 

 

4,130

 

 

 

-

 

 

 

-

 

 

 

4,799

 

Substandard

 

 

150

 

 

 

-

 

 

 

1,824

 

 

 

3,032

 

 

 

-

 

 

 

5,730

 

 

 

-

 

 

 

-

 

 

 

10,736

 

Total commercial mortgages

 

$

112,243

 

 

$

41,433

 

 

$

49,726

 

 

$

104,681

 

 

$

45,974

 

 

$

195,232

 

 

$

1,502

 

 

$

76

 

 

$

550,867

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

1,149

 

 

$

193

 

 

$

420

 

 

$

273

 

 

$

107

 

 

$

20,836

 

 

$

14,710

 

 

 

 

 

$

37,688

 

Watch

 

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

9

 

 

 

190

 

 

 

-

 

 

 

 

 

 

206

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

132

 

 

 

1

 

 

 

5

 

 

 

138

 

Substandard

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8

 

 

 

-

 

 

 

-

 

 

 

 

 

 

9

 

Total consumer

 

$

1,150

 

 

$

193

 

 

$

427

 

 

$

273

 

 

$

124

 

 

$

21,158

 

 

$

14,711

 

 

$

5

 

 

$

38,041

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

19

 

 

$

16

 

 

$

28

 

 

$

654

 

 

$

4

 

 

$

-

 

 

$

721

 

 

 

 

Prior to the adoption of ASC 326

The following table presents the changes in the ALLL by major classification during the year ended December 31, 2022:

 

(Dollars in thousands)

 

Commercial
Loans

 

 

Real Estate
Construction
and Land

 

 

1-4 Family Residential Mortgages

 

 

Real
Estate
Mortgages

 

 

Consumer
Loans

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2021

 

$

252

 

 

$

399

 

 

$

1,207

 

 

$

3,271

 

 

$

855

 

 

$

5,984

 

Impact of ASC 326 adoption

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

$

—

 

Charge-offs

 

 

(600

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(655

)

 

$

(1,255

)

Recoveries

 

 

519

 

 

 

9

 

 

 

7

 

 

 

4

 

 

 

178

 

 

$

717

 

Provision for (recovery of) credit losses

 

 

23

 

 

 

(187

)

 

 

404

 

 

 

(455

)

 

 

321

 

 

$

106

 

Balance as of December 31, 2022

 

$

194

 

 

$

221

 

 

$

1,618

 

 

$

2,820

 

 

$

699

 

 

$

5,552

 

 

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of December 31, 2022. There were no loans rated “Doubtful” as December 31, 2022.

 

December 31, 2022

 

Excellent

 

 

Good

 

 

Pass

 

 

Watch

 

 

Special
Mention

 

 

Sub-
standard

 

 

TOTAL

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

30,121

 

 

$

16,058

 

 

$

22,853

 

 

$

992

 

 

$

122

 

 

$

993

 

 

$

71,139

 

Real estate construction and land

 

 

-

 

 

 

-

 

 

 

35,258

 

 

 

342

 

 

 

532

 

 

 

1,409

 

 

 

37,541

 

1-4 family residential mortgages

 

 

-

 

 

 

-

 

 

 

308,041

 

 

 

7,935

 

 

 

5,431

 

 

 

1,778

 

 

 

323,185

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

408,513

 

 

 

34,828

 

 

 

3,872

 

 

 

11,912

 

 

 

459,125

 

Consumer

 

 

461

 

 

 

17,544

 

 

 

26,326

 

 

 

977

 

 

 

22

 

 

 

95

 

 

 

45,425

 

Total Loans

 

$

30,582

 

 

$

33,602

 

 

$

800,991

 

 

$

45,074

 

 

$

9,979

 

 

$

16,187

 

 

$

936,415