Loans, Allowance for Credit Losses and Credit Quality

9 Months Ended

Sep. 30, 2023

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

Loans, Allowance for Credit Losses and Credit Quality

Note 5 – Loans, Allowance for Credit Losses and Credit Quality

Major classifications of loans at September 30, 2023 and December 31, 2022 are summarized as follows (amounts in thousands):

	September 30, 2023						December 31, 2022
	Amount			% of Total			Amount			% of Total
Residential real estate:
Closed-end 1-4 family - first lien	$	727,298			34.7	%	$	573,033			32.2	%
Closed-end 1-4 family - junior lien		11,666			0.6	%		9,422			0.5	%
Multi-family		19,162			0.9	%		14,106			0.8	%
Total residential real estate		758,126			36.2	%		596,561			33.5	%
Commercial real estate:
Nonfarm nonresidential		548,800			26.2	%		497,766			28.0	%
Farmland		58,981			2.8	%		53,691			3.0	%
Total commercial real estate		607,781			29.0	%		551,457			31.0	%
Construction and land development:
Residential		106,716			5.1	%		121,363			6.8	%
Other		169,031			8.1	%		135,127			7.6	%
Total construction and land development		275,747			13.2	%		256,490			14.4	%
Home equity lines of credit		84,405			4.0	%		64,215			3.6	%
Commercial loans:
Other commercial loans		244,890			11.7	%		193,053			10.9	%
Agricultural		66,320			3.2	%		56,946			3.2	%
State, county, and municipal loans		36,058			1.7	%		40,964			2.3	%
Total commercial loans		347,268			16.6	%		290,963			16.4	%
Consumer loans		57,029			2.7	%		49,592			2.8	%
Total gross loans		2,130,356			101.7	%		1,809,278			101.7	%
Allowance for credit losses		(27,832	)		-1.3	%		(24,310	)		-1.4	%
Net discounts		(140	)		0.0	%		(279	)		0.0	%
Net deferred loan fees		(7,773	)		-0.4	%		(5,872	)		-0.3	%
Net loans	$	2,094,611			100.0	%	$	1,778,817			100.0	%

The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations located in its general trade area. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios and financial performance on non-consumer loans and credit scores, debt-to-income, collateral type and loan-to-value ratios for consumer loans.

The loan portfolio has been disaggregated into segments and then further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are three primary loan portfolio segments that include real estate, commercial, and consumer. A class is generally determined based on the initial measurement attribute, risk characteristic of the loan, and the Company’s method for monitoring and assessing credit risk. Classes within the real estate portfolio segment include residential real estate, commercial real estate, construction and land development and home equity lines of credit. The portfolio segments of non-real estate commercial loans and consumer loans have not been further segregated by class.

The following describe risk characteristics relevant to each of the portfolio segments:

Real estate - As discussed below, the Company offers various types of real estate loan products. All loans within this portfolio segment are particularly sensitive to the valuation of real estate:

Residential real estate and home equity lines of credit are repaid by various means such as through a borrower’s income, sale of the property, or rental income derived from the property.

Commercial real estate loans include both owner-occupied commercial real estate loans and other commercial real estate loans secured by income producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as office and industrial buildings and retail shopping centers are repaid from rent income derived from the properties. Loans secured by farmland are repaid by various means such as through a borrower’s income, sale of the property, or rental income derived from the property.

Construction and land development loans are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio class includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral.

Commercial loans - The commercial loan portfolio segment includes commercial and industrial loans, agricultural loans and loans to states and municipalities. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows or tax revenues. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly by cash flows from the customers’ business operations.

Consumer loans - The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

Under the current expected credit losses (CECL) methodology, the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. For loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis. For all loan segments collectively evaluated, losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable forecast period losses are reverted to long-term historical averages. The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses.

The following tables present the balance in the allowance for credit losses by portfolio segment. It also includes the balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on impairment method for the periods indicated below (amounts in thousands).

	Real Estate Mortgage Loans
					Construction			Home equity
					and land			lines
Allowance for Credit Losses	Residential		Commercial		development			of credit		Commercial			Consumer			Total
Balance - December 31, 2022 prior to adoption of ASC 326	$	5,088	$	10,057	$	3,377		$	562	$	4,778		$	448		$	24,310
Impact of adopting ASC 326		-		-		-			-		73			7			80
Provision for credit loss		1,397		1,048		539			328		412			209			3,933
Loan charge-offs		-		-		(196	)		-		(510	)		(98	)		(804	)
Loan recoveries		-		81		-			-		205			27			313
Balance - September 30, 2023	$	6,485	$	11,186	$	3,720		$	890	$	4,958		$	593		$	27,832
Ending balance:
Individually evaluated for impairment	$	14	$	322	$	-		$	-	$	26		$	37		$	399
Collectively evaluated for impairment		6,471		10,864		3,720			890		4,932			556			27,433
Total	$	6,485	$	11,186	$	3,720		$	890	$	4,958		$	593		$	27,832
Loans:
Individually evaluated for impairment	$	1,403	$	3,712	$	-		$	527	$	26		$	37		$	5,705
Collectively evaluated for impairment		756,723		604,069		275,747			83,878		347,242			56,992			2,124,651
Total	$	758,126	$	607,781	$	275,747		$	84,405	$	347,268		$	57,029		$	2,130,356

	Real Estate Mortgage Loans
						Construction		Home equity
						and land		lines
Allowance for Loan Losses	Residential			Commercial		development		of credit		Commercial			Consumer			Total
Balance - December 31, 2021	$	2,596		$	8,038	$	2,992	$	396	$	6,486		$	414		$	20,922
Provision (credit) for loan losses		1,940			1,285		317		93		(1,378	)		3			2,260
Loan charge-offs		(42	)		-		-		-		(205	)		(22	)		(269	)
Loan recoveries		-			63		5		41		50			19			178
Balance - September 30, 2022	$	4,494		$	9,386	$	3,314	$	530	$	4,953		$	414		$	23,091
Ending balance:
Individually evaluated for impairment	$	20		$	230	$	-	$	-	$	40		$	50		$	340
Collectively evaluated for impairment		4,474			9,156		3,314		530		4,913			364			22,751
Total	$	4,494		$	9,386	$	3,314	$	530	$	4,953		$	414		$	23,091
Loans:
Individually evaluated for impairment	$	1,320		$	4,564	$	203	$	104	$	40		$	50		$	6,281
Collectively evaluated for impairment		522,426			503,042		243,732		60,632		269,622			47,312			1,646,766
Acquired loans with deteriorated credit quality		-			-		7		-		-			-			7
Total	$	523,746		$	507,606	$	243,942	$	60,736	$	269,662		$	47,362		$	1,653,054

The Company's unfunded lending commitments are unconditionally cancellable and therefore no allowance for credit losses has been recorded.

Treatment of Pandemic-related Loan Modifications Pursuant to the CARES Act and Interagency Statement

Section 4013 of the CARES Act, enacted on March 27, 2020, provided that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), we may elect to suspend GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDR) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension was applicable for the term of the loan modification that occurred during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension was not applicable to any adverse impact on the credit of a borrower that was not related to the pandemic.

In addition, our banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encouraged financial institutions to work prudently with borrowers who were unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that did not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the staff of the Financial Accounting Standards Board that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief were not TDRs under GAAP. This included short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that were insignificant. Borrowers considered current were those that were less than 30 days past due on their contractual payments at the time a modification program was implemented. Appropriate allowances for loan and lease losses were expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions were not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also stated that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

We have received requests from our borrowers for loan and lease deferrals and modifications including the deferral of principal payments or the deferral of principal and interest payments for terms generally around 90-180 days. Requests are evaluated individually and approved modifications are based on the unique circumstances of each borrower. In total, the Bank placed approximately $167 million of loans on a loan deferral plan as part of COVID-19 modifications. As of September 30, 2023, however, none of these loans remain on deferral. In accordance with Section 4013 of the CARES Act and the interagency statement, we have not accounted for such loans as TDRs, nor have we designated them as past due or nonaccrual. The risk ratings for these loans are evaluated regularly and evaluated for impairment if deemed necessary.

The following table presents collateral dependent impaired loans by class of loans as of September 30, 2023 (amounts in thousands). Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. The Company considers all impaired loans to be collateral dependent.

Nonaccruing Collateral Dependent Loans	Unpaid Principal Balance		Recorded Investment		Impaired Loans With No Allowance		Impaired Loans With Allowance		Allowance for Credit Losses
Mortgage loans on real estate:
Residential real estate	$	770	$	770	$	770	$	-	$	-
Commercial real estate		2,938		2,938		1,569		1,369		322
Construction and land development		-		-		-		-		-
Total mortgage loans on real estate		3,708		3,708		2,339		1,369		322
Home equity lines of credit		527		527		527		-		-
Commercial loans		-		-		-		-		-
Consumer loans		-		-		-		-		-
Total Loans	$	4,235	$	4,235	$	2,866	$	1,369	$	322

Accruing Collateral Dependent Loans	Unpaid Principal Balance		Recorded Investment		Impaired Loans With No Allowance		Impaired Loans With Allowance		Allowance for Credit Losses
Mortgage loans on real estate:
Residential real estate	$	633	$	633	$	466	$	167	$	14
Commercial real estate		774		774		774		-		-
Construction and land development		-		-		-		-		-
Total mortgage loans on real estate		1,407		1,407		1,240		167		14
Home equity lines of credit		-		-		-		-		-
Commercial loans		26		26		-		26		26
Consumer loans		37		37		-		37		37
Total Loans	$	1,470	$	1,470	$	1,240	$	230	$	77

Total Collateral Dependent Loans	Unpaid Principal Balance		Recorded Investment		Impaired Loans With No Allowance		Impaired Loans With Allowance		Allowance for Credit Losses
Mortgage loans on real estate:
Residential real estate	$	1,403	$	1,403	$	1,236	$	167	$	14
Commercial real estate		3,712		3,712		2,343		1,369		322
Construction and land development		-		-		-		-		-
Total mortgage loans on real estate		5,115		5,115		3,579		1,536		336
Home equity lines of credit		527		527		527		-		-
Commercial loans		26		26		-		26		26
Consumer loans		37		37		-		37		37
Total Loans	$	5,705	$	5,705	$	4,106	$	1,599	$	399

The following table presents impaired loans by class of loans as of December 31, 2022 (amounts in thousands).

Nonaccruing Impaired Loans	Unpaid Principal Balance		Recorded Investment		Impaired Loans With No Allowance		Impaired Loans With Allowance		Allowance for Loan Losses
Mortgage loans on real estate:
Residential real estate	$	239	$	239	$	239	$	-	$	-
Commercial real estate		599		599		373		226		241
Construction and land development		-		-		-		-		-
Total mortgage loans on real estate		838		838		612		226		241
Home equity lines of credit		-		-		-		-		-
Commercial loans		-		-		-		-		-
Consumer loans		-		-		-		-		-
Total Loans	$	838	$	838	$	612	$	226	$	241

Accruing Impaired Loans	Unpaid Principal Balance		Recorded Investment		Impaired Loans With No Allowance		Impaired Loans With Allowance		Allowance for Loan Losses
Mortgage loans on real estate:
Residential real estate	$	1,012	$	1,012	$	1,012	$	-	$	-
Commercial real estate		6,178		6,178		6,178		-		-
Construction and land development		190		190		190		-		-
Total mortgage loans on real estate		7,380		7,380		7,380		-		-
Home equity lines of credit		-		-		-		-		-
Commercial loans		595		595		-		595		317
Consumer loans		47		47		-		47		47
Total Loans	$	8,022	$	8,022	$	7,380	$	642	$	364

Total Impaired Loans	Unpaid Principal Balance		Recorded Investment		Impaired Loans With No Allowance		Impaired Loans With Allowance		Allowance for Loan Losses
Mortgage loans on real estate:
Residential real estate	$	1,251	$	1,251	$	1,251	$	-	$	-
Commercial real estate		6,777		6,777		6,551		226		241
Construction and land development		190		190		190		-		-
Total mortgage loans on real estate		8,218		8,218		7,992		226		241
Home equity lines of credit		-		-		-		-		-
Commercial loans		595		595		-		595		317
Consumer loans		47		47		-		47		47
Total Loans	$	8,860	$	8,860	$	7,992	$	868	$	605

The following table presents the average recorded investment in impaired loans and the interest income recognized on impaired loans in the nine months ended September 30, 2023 and 2022 by loan category (amounts in thousands).

	Nine Months Ended						Nine Months Ended
	September 30, 2023						September 30, 2022
	Average		Ending				Average		Ending
	Recorded		Recorded		Interest		Recorded		Recorded		Interest
	Investment		Investment		Income		Investment		Investment		Income
Mortgage loans on real estate:
Residential real estate	$	1,540	$	1,403	$	47	$	1,256	$	1,320	$	36
Commercial real estate		6,033		3,712		352		5,382		4,564		381
Construction and land development		133		-		10		270		203		11
Total mortgage loans on real estate		7,706		5,115		409		6,908		6,087		428
Home equity lines of credit		182		527		-		153		104		-
Commercial loans		441		26		2		228		40		9
Consumer loans		41		37		2		81		50		4
Total Loans	$	8,370	$	5,705	$	413	$	7,370	$	6,281	$	441

The following tables present the performance status of loans as of September 30, 2023 and December 31, 2022, by class of loans (amounts in thousands).

As of September 30, 2023	Performing		Nonperforming		Total
Mortgage loans on real estate:
Residential real estate	$	756,926	$	1,200	$	758,126
Commercial real estate		604,843		2,938		607,781
Construction and land development		275,740		7		275,747
Total mortgage loans on real estate		1,637,509		4,145		1,641,654
Home equity lines of credit		83,856		549		84,405
Commercial loans		347,244		24		347,268
Consumer loans		56,977		52		57,029
Total Loans	$	2,125,586	$	4,770	$	2,130,356

As of December 31, 2022	Performing		Nonperforming		Total
Mortgage loans on real estate:
Residential real estate	$	595,792	$	769	$	596,561
Commercial real estate		550,858		599		551,457
Construction and land development		256,481		9		256,490
Total mortgage loans on real estate		1,403,131		1,377		1,404,508
Home equity lines of credit		64,166		49		64,215
Commercial loans		290,897		66		290,963
Consumer loans		49,590		2		49,592
Total Loans	$	1,807,784	$	1,494	$	1,809,278

The following tables present the aging of loans and non-accrual loans as of September 30, 2023 and December 31, 2022, by class of loans (amounts in thousands).

	Accruing Loans
As of September 30, 2023	Current		30-89 Days Past Due		90+ Days Past Due		Nonaccrual Loans		Total Loans		Nonaccrual With No ACL
Mortgage loans on real estate:
Residential real estate	$	754,202	$	2,724	$	-	$	1,200	$	758,126	$	1,200
Commercial real estate		604,528		315		-		2,938		607,781		1,569
Construction and land development		275,629		111		-		7		275,747		7
Total mortgage loans on real estate		1,634,359		3,150		-		4,145		1,641,654		2,776
Home equity lines of credit		83,543		313		-		549		84,405		549
Commercial loans		346,791		453		-		24		347,268		24
Consumer loans		56,625		352		-		52		57,029		52
Total Loans	$	2,121,318	$	4,268	$	-	$	4,770	$	2,130,356	$	3,401

	Accruing Loans
As of December 31, 2022	Current		30-89 Days Past Due		90+ Days Past Due		Nonaccrual Loans		Total Loans		Nonaccrual With No ACL
Mortgage loans on real estate:
Residential real estate	$	594,055	$	1,737	$	72	$	697	$	596,561	$	454
Commercial real estate		545,354		5,504		-		599		551,457		-
Construction and land development		255,989		492		-		9		256,490		9
Total mortgage loans on real estate		1,395,398		7,733		72		1,305		1,404,508		463
Home equity lines of credit		64,016		150		-		49		64,215		26
Commercial loans		290,485		412		66		-		290,963		-
Consumer loans		49,251		339		-		2		49,592		2
Total Loans	$	1,799,150	$	8,634	$	138	$	1,356	$	1,809,278	$	491

The Bank categorizes loans in risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Bank uses the following definitions for its risk ratings:

Special Mention - Weakness exists that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. Collateral values generally afford adequate coverage but may not be immediately marketable.

Substandard - Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

Doubtful - Specific weaknesses characterized as Substandard that are severe enough to make collection in full unlikely. There is no reliable secondary source of full repayment. Loans classified as doubtful will be placed on non-accrual, analyzed and fully or partially charged-off based on review of collateral and other relevant factors.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.

The following table presents loan balances classified by credit quality indicator, loan type and based on year of origination as of September 30, 2023 (amounts in thousands).

	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Residential real estate
Pass	$	172,113	$	337,429	$	124,637	$	70,483	$	17,634	$	25,328	$	3,780	$	751,404
Special Mention		1,452		2,203		598		159		27		181		-		4,620
Substandard		36		447		153		336		530		600		-		2,102
Doubtful		-		-		-		-		-		-		-		-
Total residential real estate	$	173,601	$	340,079	$	125,388	$	70,978	$	18,191	$	26,109	$	3,780	$	758,126
Commercial real estate
Pass	$	63,815	$	199,303	$	101,590	$	98,419	$	52,673	$	67,957	$	13,591	$	597,348
Special Mention		763		-		-		892		-		4,919		-		6,574
Substandard		49		765		-		180		51		2,805		9		3,859
Doubtful		-		-		-		-		-		-		-		-
Total commercial real estate	$	64,627	$	200,068	$	101,590	$	99,491	$	52,724	$	75,681	$	13,600	$	607,781
Construction and land development
Pass	$	93,330	$	123,686	$	25,990	$	6,085	$	2,710	$	4,981	$	18,432	$	275,214
Special Mention		211		172		15		-		23		12		-		433
Substandard		-		-		91		9		-		-		-		100
Doubtful		-		-		-		-		-		-		-		-
Total construction and land development	$	93,541	$	123,858	$	26,096	$	6,094	$	2,733	$	4,993	$	18,432	$	275,747
Current-period gross charge-offs	$	-	$	-	$	196	$	-	$	-	$	-	$	-	$	196
Home equity lines of credit
Pass	$	253	$	450	$	-	$	628	$	-	$	-	$	82,285	$	83,616
Special Mention		-		-		-		-		-		-		150		150
Substandard		-		-		-		-		-		22		617		639
Doubtful		-		-		-		-		-		-		-		-
Total home equity lines of credit	$	253	$	450	$	-	$	628	$	-	$	22	$	83,052	$	84,405
Commercial loans
Pass	$	70,927	$	78,914	$	31,935	$	17,607	$	7,389	$	11,412	$	123,325	$	341,509
Special Mention		69		152		55		354		88		4,101		890		5,709
Substandard		-		-		-		26		-		-		24		50
Doubtful		-		-		-		-		-		-		-		-
Total commercial loans	$	70,996	$	79,066	$	31,990	$	17,987	$	7,477	$	15,513	$	124,239	$	347,268
Current-period gross charge-offs	$	184	$	46	$	-	$	-	$	-	$	280	$	-	$	510
Consumer loans
Pass	$	19,912	$	15,439	$	9,017	$	4,399	$	2,152	$	2,748	$	2,864	$	56,531
Special Mention		52		110		32		18		6		17		24		259
Substandard		116		43		28		5		-		36		11		239
Doubtful		-		-		-		-		-		-		-		-
Total consumer loans	$	20,080	$	15,592	$	9,077	$	4,422	$	2,158	$	2,801	$	2,899	$	57,029
Current-period gross charge-offs	$	-	$	84	$	-	$	14	$	-	$	-	$	-	$	98
Total Loans
Pass	$	420,350	$	755,221	$	293,169	$	197,621	$	82,558	$	112,426	$	244,277	$	2,105,622
Special Mention		2,547		2,637		700		1,423		144		9,230		1,064		17,745
Substandard		201		1,255		272		556		581		3,463		661		6,989
Doubtful		-		-		-		-		-		-		-		-
Total loans	$	423,098	$	759,113	$	294,141	$	199,600	$	83,283	$	125,119	$	246,002	$	2,130,356
Current-period gross charge-offs	$	184	$	130	$	196	$	14	$	-	$	280	$	-	$	804

As of December 31, 2022, the risk category of loans by class of loans is as follows (amounts in thousands):

As of December 31, 2022	Pass		Special Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential real estate	$	591,882	$	2,648	$	2,031	$	-	$	596,561
Commercial real estate		539,777		4,706		6,974		-		551,457
Construction and land development		256,200		77		213		-		256,490
Total mortgage loans on real estate		1,387,859		7,431		9,218		-		1,404,508
Home equity lines of credit		63,861		212		142		-		64,215
Commercial loans		283,359		7,008		596		-		290,963
Consumer loans		49,206		238		148		-		49,592
Total Loans	$	1,784,285	$	14,889	$	10,104	$	-	$	1,809,278