Loans and the Allowance for Credit Losses on Loans

9 Months Ended

Sep. 30, 2023

Loans and the Allowance for Credit Losses on Loans [Abstract]

Loans and the Allowance for Credit Losses on Loans

Note 3. Loans and the Allowance for Credit Losses on Loans

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, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to “Note 1. Description of Business and Summary of Significant Accounting Policies.” All loan information presented as of September 30, 2023, is in accordance with ASC 326. All loan information presented as of December 31, 2022, or a prior date is in accordance with previous applicable GAAP.

The following is a summary of the balances in each class of the Company’s portfolio of loans held for investment as of the dates indicated:

	September 30,		December 31,
(dollars in thousands)	2023		2022
Mortgage loans on real estate:
Residential 1-4 family	$	184,535	$	169,248
Commercial - owner occupied		162,611		184,586
Commercial - non-owner occupied		279,183		245,277
Multifamily		31,813		26,675
Construction and land development		94,143		77,944
Second mortgages		9,968		8,828
Equity lines of credit		53,784		54,340
Total mortgage loans on real estate		816,037		766,898
Commercial and industrial loans		73,279		72,578
Consumer automobile loans		170,637		163,018
Other consumer loans		20,309		22,251
Other  (1)		2,416		2,340
Total loans, net of deferred fees (2)		1,082,678		1,027,085
Less:  Allowance for credit losses on loans		11,844		10,526
Loans, net of allowance and deferred fees (2)	$	1,070,834	$	1,016,559

(1) Overdrawn accounts are reclassified as loans and included in the Other category in the table above.  Overdrawn deposit accounts, excluding internal use accounts, totaled $264 thousand and $269 thousand at September 30, 2023 and December 31, 2022, respectively.

(2) Net deferred loan fees totaled $1.3 million on September 30, 2023 and $1.0 million on December 31, 2022.

All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection. The following table shows the aging of the Company’s loan portfolio, by class, as of September 30, 2023.

Age Analysis of Past Due Loans as of September 30, 2023

(dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due and still Accruing		Nonaccrual (2)		Total Current Loans (1)		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	-	$	-	$	398	$	145	$	183,992	$	184,535
Commercial - owner occupied		-		407		-		-		162,204		162,611
Commercial - non-owner occupied		17		-		-		-		279,166		279,183
Multifamily		-		-		-		-		31,813		31,813
Construction and land development		-		-		-		1,391		92,752		94,143
Second mortgages		-		-		-		-		9,968		9,968
Equity lines of credit		-		-		-		47		53,737		53,784
Total mortgage loans on real estate	$	17	$	407	$	398	$	1,583	$	813,632	$	816,037
Commercial and industrial loans		507		17		116		335		72,304		73,279
Consumer automobile loans		2,857		264		148		-		167,368		170,637
Other consumer loans		231		375		135		-		19,568		20,309
Other		54		-		-		-		2,362		2,416
Total	$	3,666	$	1,063	$	797	$	1,918	$	1,075,234	$	1,082,678

(1) For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

(2) For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column.

The following table shows the Company’s amortized cost basis of loans on nonaccrual status as of January 1, 2023 as well as the amortized cost basis of loans on nonaccrual status and loans past due 90 days and accruing as of September 30, 2023 by class of loan.

	Nonaccrual
(dollars in thousands)	January 1, 2023		September 30, 2023		Nonaccrual with no ACLL		90 Days and still Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	154	$	145	$	-	$	398
Construction and land development		945		1,391		1,391		-
Equity lines of credit		-		47		47		-
Total mortgage loans on real estate		1,099		1,583		1,438		398
Commercial and industrial loans		144		335		35		116
Consumer automobile loans		-		-		-		148
Other consumer loans		-		-		-		135
Other		-		-		-		-
Total	$	1,243	$	1,918	$	1,473	$	797

The Company’s loan portfolio may include certain loans modified, where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company closely monitors the performance of modified loans to understand the effectiveness of modification efforts. Upon the determination that all or a portion of a modified loan is uncollectible, that amount is charged against the ACL. The Company did not grant any such modifications during the third quarter of 2023.

Allowance for Credit Losses on Loans

ACLL is a material estimate for the Company. The Company estimates its ACLL on a quarterly basis. The Company models the ACLL using two primary segments, commercial and consumer. Within each segment, loan classes are further identified based on similar risk characteristics. The Company has identified the following classes within each segment:

• Commercial: commercial and industrial, real estate - construction and land development, real estate – commercial (owner occupied and non-owner occupied), and other loans

• Consumer: real estate – mortgage, and consumer loans

Each portfolio class has risk characteristics as follows:

• Commercial and industrial: Commercial and industrial loans carry risks associated with the successful operation of a business or project, in addition to other risks associated with the ownership of a business. The repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

• Real estate - construction and land development: Construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may at any point in time be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be the loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

• Real estate - commercial: Commercial real estate loans carry risks associated with the successful operation of a business if owner occupied. If non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts.

• Real estate - mortgage: Residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.

• Consumer loans: Consumer loans carry risks associated with the continued credit-worthiness of the borrowers and the value of the collateral. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

• Other loans: Other loans are loans to mortgage companies, loans for purchasing or carrying securities, and loans to insurance, investment and finance companies. These loans carry risks associated with the successful operation of a business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time, depend on interest rates or fluctuate in active trading markets.

The following tables presents the activity in the ACLL by portfolio class for the nine months ended September 30, 2023.

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS

For the Nine Months ended September 30, 2023
(dollars in thousands)	Commercial and Industrial			Real Estate Construction and Land Development		Real Estate - Mortgage (1)		Real Estate - Commercial		Consumer (2)			Other			Unallocated			Total
Allowance for credit losses on loans:
Balance, beginning	$	673		$	552	$	2,575	$	4,499	$	2,065		$	156		$	6		$	10,526
Day 1 impact of adoption of CECL		(11	)		19		87		1,048		(365	)		(137	)		-			641
Charge-offs		(159	)		-		-		-		(813	)		(228	)		-			(1,200	)
Recoveries		64			-		28		-		393			41			-			526
Provision for loan losses		78			258		192		244		270			315			(6	)		1,351
Ending Balance	$	645		$	829	$	2,882	$	5,791	$	1,550		$	147		$	-		$	11,844
Individually evaluated	$	-		$	-	$	61	$	-	$	-		$	-		$	-		$	61
Collectively evaluated		645			829		2,821		5,791		1,550			147			-			11,783
Ending Balance	$	645		$	829	$	2,882	$	5,791	$	1,550		$	147		$	-		$	11,844
Loans Balances:
Individually evaluated	$	334		$	1,463	$	503	$	375	$	-		$	-		$	-		$	2,675
Collectively evaluated		72,945			92,680		279,597		441,419		190,946			2,416			-			1,080,003
Ending Balance	$	73,279		$	94,143	$	280,100	$	441,794	$	190,946		$	2,416		$	-		$	1,082,678

(1) The real estate-mortgage segment includes residential 1 – 4 family, multi-family, second mortgages and equity lines of credit.

(2) The consumer segment includes consumer automobile loans.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2023			2022			2023			2022
Provision for credit losses:
Provision for loans		$	478		$	402	$	1,351			$	1,073
Provison (recovery) for unfunded commitments			27			-		(109	)			-
Total		$	505		$	402	$	1,242			$	1,073

Credit Quality Indicators

Credit quality indicators are utilized to help estimate the collectability of each loan. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades. While other credit quality indicators are evaluated and analyzed as part of the Company’s credit risk management activities, the Company uses internally-assigned risk grades as the primary indicator to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company’s internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.

The Company’s internally assigned risk grades are as follows:

• Pass: Loans are of acceptable risk.

• Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management’s close attention.

• Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature.

• Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions and values highly questionable or improbable.

• Loss: Loans have been identified for charge-off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

The following tables present credit quality exposures by internally assigned risk ratings originated as of the dates indicated:

	September 30, 2023
	Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Construction and land development
Pass	$	27,785	$	34,339	$	24,879	$	3,399	$	301	$	419	$	1,630	$	92,752
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		117		1,274		-		-		-		1,391
Total construction and land development	$	27,785	$	34,339	$	24,996	$	4,673	$	301	$	419	$	1,630	$	94,143
Commercial real estate - owner occupied
Pass	$	7,352	$	34,082	$	21,805	$	13,859	$	10,899	$	64,449	$	5,247	$	157,693
OAEM		-		-		-		-		237		4,396		285		4,918
Substandard		-		-		-		-		-		-		-		-
Total commercial real estate - owner occupied	$	7,352	$	34,082	$	21,805	$	13,859	$	11,136	$	68,845	$	5,532	$	162,611
Commercial real estate - non-owner occupied
Pass	$	26,999	$	53,484	$	97,508	$	39,035	$	11,419	$	48,479	$	2,259	$	279,183
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total commercial real estate - non-owner occupied	$	26,999	$	53,484	$	97,508	$	39,035	$	11,419	$	48,479	$	2,259	$	279,183
Commercial and industrial
Pass	$	15,350	$	26,931	$	5,126	$	2,441	$	2,302	$	7,174	$	13,620	$	72,944
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		335		-		335
Total commercial and industrial	$	15,350	$	26,931	$	5,126	$	2,441	$	2,302	$	7,509	$	13,620	$	73,279
Multifamily real estate
Pass	$	9,699	$	3,502	$	2,168	$	612	$	5,991	$	9,188	$	653	$	31,813
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total multifamily real estate	$	9,699	$	3,502	$	2,168	$	612	$	5,991	$	9,188	$	653	$	31,813
Residential 1-4 family
Pass	$	23,298	$	38,752	$	40,529	$	26,889	$	13,286	$	53,167	$	51,824	$	247,745
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		350		47		145		-		542
Total residential 1-4 family	$	23,298	$	38,752	$	40,529	$	27,239	$	13,333	$	53,312	$	51,824	$	248,287
Consumer - automobile
Pass	$	49,881	$	92,976	$	14,922	$	4,932	$	2,029	$	5,897	$	-	$	170,637
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total consumer - automobile	$	49,881	$	92,976	$	14,922	$	4,932	$	2,029	$	5,897	$	-	$	170,637
Consumer - other
Pass	$	294	$	630	$	424	$	125	$	14	$	16,505	$	2,317	$	20,309
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total consumer - other	$	294	$	630	$	424	$	125	$	14	$	16,505	$	2,317	$	20,309
Other
Pass	$	1,121	$	-	$	-	$	-	$	-	$	1,295	$	-	$	2,416
OAEM		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total other	$	1,121	$	-	$	-	$	-	$	-	$	1,295	$	-	$	2,416
Total loans
Pass	$	161,779	$	284,696	$	207,361	$	91,292	$	46,241	$	206,573	$	77,550	$	1,075,492
OAEM		-		-		-		-		237		4,396		285		4,918
Substandard		-		-		117		1,624		47		480		-		2,268
Total loans	$	161,779	$	284,696	$	207,478	$	92,916	$	46,525	$	211,449	$	77,835	$	1,082,678

The following table details the current period gross charge-offs of loans by year of origination as of September 30, 2023:

	September 30, 2023
	Current Period Charge-offs by Origination Year
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial and industrial	$	-	$	140	$	15	$	4	$	-	$	-	$	-	$	159
Consumer - automobile		9		382		267		68		18		51		-		795
Consumer - other		-		-		5		-		3		10		-		18
Other (1)		206		22		-		-		-		-		-		228
Total	$	215	$	544	$	287	$	72	$	21	$	61	$	-	$	1,200

(1) Gross charge-offs of other loans for the first nine months ended September 30, 2023 included $206 thousand of demand deposit overdrafts that originated in 2023.

As of September 30, 2023, the Company had no collateral dependent loans for which repayment was expected to be derived substantially through the operation or sale of the collateral and where the borrower is experiencing financial difficulty.

Prior to the adoption of ASC 326

The following table shows the aging of the Company’s loan portfolio, by class, as of December 31, 2022.

Age Analysis of Past Due Loans as of December 31, 2022

(dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due and still Accruing		Nonaccrual (2)		Total Current Loans (1)		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	290	$	-	$	525	$	154	$	168,279	$	169,248
Commercial - owner occupied		20		-		-		-		184,566		184,586
Commercial - non-owner occupied		206		-		-		-		245,071		245,277
Multifamily		-		-		-		-		26,675		26,675
Construction and land development		-		-		-		945		76,999		77,944
Second mortgages		19		-		-		-		8,809		8,828
Equity lines of credit		56		288		-		-		53,996		54,340
Total mortgage loans on real estate	$	591	$	288	$	525	$	1,099	$	764,395	$	766,898
Commercial and industrial loans		221		284		23		144		71,906		72,578
Consumer automobile loans		1,538		221		212		-		161,047		163,018
Other consumer loans		445		372		80		-		21,354		22,251
Other		47		-		-		-		2,293		2,340
Total	$	2,842	$	1,165	$	840	$	1,243	$	1,020,995	$	1,027,085

(1) For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

(2) For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column.

As of December 31, 2022, the Company measured the amount of impairment by evaluating loans either in their collective homogenous pools or individually. The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans with the associated allowance amount, if applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the period presented. The average balances are calculated based on daily average balances.

Impaired Loans by Class

									For the Year Ended
	As of December 31, 2022								December 31, 2022
(dollars in thousands)	Unpaid Principal Balance		Without Valuation Allowance		With Valuation Allowance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family	$	285	$	44	$	235	$	21	$	282	$	7
Commercial		430		55		358		3		420		-
Construction		1,321		829		191		6		1,208		3
Total mortgage loans on real estate		2,036		928		784		30		1,910		10
Commercial and industrial loans		144		144		-		-		144		5
Total	$	2,180	$	1,072	$	784	$	30	$	2,054	$	15

The following tables present credit quality exposures by internally assigned risk ratings as of December 31, 2022:

Credit Quality Information

As of December 31, 2022
(dollars in thousands)	Pass		OAEM		Substandard		Total
Mortgage loans on real estate:
Residential 1-4 family	$	169,094	$	-	$	154	$	169,248
Commercial - owner occupied		184,301		285		-		184,586
Commercial - non-owner occupied		245,277		-		-		245,277
Multifamily		26,675		-		-		26,675
Construction		76,999		-		945		77,944
Second mortgages		8,828		-		-		8,828
Equity lines of credit		54,340		-		-		54,340
Total mortgage loans on real estate	$	765,514	$	285	$	1,099	$	766,898
Commercial and industrial loans		72,434		-		144		72,578
Consumer automobile loans		162,738		-		280		163,018
Other consumer loans		22,251		-		-		22,251
Other		2,340		-		-		2,340
Total	$	1,025,277	$	285	$	1,523	$	1,027,085

The following tables presents the activity in the ACLL by portfolio segment for the year ended December 31, 2022.

For the Year ended December 31, 2022

(dollars in thousands)	Commercial and Industrial			Real Estate Construction		Real Estate - Mortgage (1)			Real Estate - Commercial			Consumer (2)			Other			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	683		$	459	$	2,390		$	4,787		$	1,362		$	184		$	-	$	9,865
Charge-offs		(297	)		-		(25	)		-			(1,368	)		(332	)		-		(2,022	)
Recoveries		134			-		61			22			648			112			-		977
Provision for loan losses		153			93		149			(310	)		1,423			192			6		1,706
Ending Balance	$	673		$	552	$	2,575		$	4,499		$	2,065		$	156		$	6	$	10,526
Individually evaluated for impairment	$	-		$	6	$	21		$	3		$	-		$	-		$	-	$	30
Collectively evaluated for impairment		673			546		2,554			4,496			2,065			156			6		10,496
Ending Balance	$	673		$	552	$	2,575		$	4,499		$	2,065		$	156		$	6	$	10,526
Loans Balances:
Individually evaluated for impairment	$	144		$	1,020	$	279		$	413		$	-		$	-		$	-	$	1,856
Collectively evaluated for impairment		72,434			76,924		258,812			429,450			185,269			2,340			-		1,025,229
Ending Balance	$	72,578		$	77,944	$	259,091		$	429,863		$	185,269		$	2,340		$	-	$	1,027,085

(1) The real estate-mortgage segment includes residential 1 – 4 family, multi-family, second mortgages and equity lines of credit.

(2) The consumer segment includes consumer automobile loans.