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Allowance for Loan Credit Losses

9 Months Ended

Sep. 30, 2023

Note 4— Allowance for Loan Credit Losses

On January 1, 2023, the Company adopted the CECL methodology as required under 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 in this Quarterly Report on Form 10-Q. All loan information presented as of September 30, 2023 is in accordance with ASC 326. All loan information presented prior to September 30, 2023 is in accordance with previous applicable GAAP.

Allowance for loan credit losses

The following tables present the activity in the allowance for loan credit losses for the nine months ended September 30, 2023.


	September 30, 2023
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Beginning balance, December 31, 2022	$	13,205	$	2,860	$	3,044	$	456	$	5	$	638	$	20,208
Adjustment to allowance for adoption of ASC 326		(2,649)		476		4,552		367		57		(638)		2,165
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		2		—		—		2
Provision for (recovery of) credit losses		2,187		(1,148)		(3,014)		(360)		(4)		—		(2,339)
Ending balance, September 30, 2023	$	12,743	$	2,188	$	4,582	$	465	$	58	$	—	$	20,036

The following table presents the activity for the allowance for loan losses for the nine months ended September 30, 2022.


	September 30, 2022
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance, December 31, 2021	$	13,091	$	2,824	$	2,769	$	711	$	5	$	632	$	20,032
Charge-offs		(1)		—		—		—		—		—		(1)
Recoveries		—		—		—		1		—		—		1
Provision for (recovery of) loan losses		345		97		(186)		(208)		1		(49)		—
Ending Balance, September 30, 2022	$	13,435	$	2,921	$	2,583	$	504	$	6	$	583	$	20,032

The following tables present the balance of the allowance for loan losses, the allowance by impairment methodology, total loans, and loans by impairment methodology as of December 31, 2022 and September 30, 2022, respectively. There were no collateral dependent or individually evaluated loans as of September 30, 2023.


	December 31, 2022
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		13,205		2,860		3,044		456		5		638		20,208
Total allowance	$	13,205	$	2,860	$	3,044	$	456	$	5	$	638	$	20,208

Loans:
Individually evaluated for impairment	$	—	$	—	$	418	$	—	$	—	$	—	$	418
Collectively evaluated for impairment		1,118,127		195,027		426,423		44,924		529		—		1,785,030
Total loans	$	1,118,127	$	195,027	$	426,841	$	44,924	$	529	$	—	$	1,785,448


	September 30, 2022
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		13,435		2,921		2,583		504		6		583		20,032
Total allowance	$	13,435	$	2,921	$	2,583	$	504	$	6	$	583	$	20,032

Loans:
Individually evaluated for impairment	$	—	$	—	$	530	$	—	$	—	$	—	$	530
Collectively evaluated for impairment		1,091,221		199,324		385,166		45,105		585		—		1,721,401
Total loans	$	1,091,221	$	199,324	$	385,696	$	45,105	$	585	$	—	$	1,721,931

Impaired loans

Prior to the adoption of ASC 326, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing TDRs. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value.

The following tables present a summary of impaired loans and the related allowance as of December 31, 2022.


	December 31, 2022
			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Interest
	Principal		with		with		Recorded		Related		Recorded		Income
(Dollars in thousands)	Balance		No Allowance		Allowance		Investment		Allowance		Investment⁽¹⁾		Recognized⁽¹⁾
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction and land development		—		—		—		—		—		—		—
Residential		418		418		—		418		—		427		15
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total Impaired Loans	$	418	$	418	$	—	$	418	$	—	$	427	$	15

(1)	Amounts shown for the twelve-month period ended December 31, 2022.

Delinquency Information

The following tables present a summary of past due and nonaccrual loans by segment as of September 30, 2023 and December 31, 2022.


	September 30, 2023
	30-59 Days		60-89 Days		90 Days or								90 Days or More
	Past		Past		More		Total Past				Total		Past Due and		Nonaccrual
(Dollars in thousands)	Due		Due		Past Due		Due		Current		Loans		Still Accruing		Loans
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	1,133,069	$	1,133,069	$	—	$	—
Construction and land development		—		—		—		—		179,570		179,570		—		—
Residential		—		—		—		—		464,509		464,509		—		—
Commercial		—		—		—		—		37,925		37,925		—		—
Consumer		—		—		—		—		467		467		—		—
Total Loans	$	—	$	—	$	—	$	—	$	1,815,540	$	1,815,540	$	—	$	—


	December 31, 2022
	30-59 Days		60-89 Days		90 Days or								90 Days or More
	Past		Past		More		Total Past				Total		Past Due and		Nonaccrual
(Dollars in thousands)	Due		Due		Past Due		Due		Current		Loans		Still Accruing		Loans
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	1,118,127	$	1,118,127	$	—	$	—
Construction and land development		—		—		—		—		195,027		195,027		—		—
Residential		—		—		—		—		426,841		426,841		—		—
Commercial		—		—		—		—		44,924		44,924		—		—
Consumer		—		—		—		—		529		529		—		—
Total Loans	$	—	$	—	$	—	$	—	$	1,785,448	$	1,785,448	$	—	$	—

Credit Quality Indicators

The Company assesses credit quality indicators based on internal risk rating of loans. Each loan is evaluated at least annually with more frequent evaluation of more severely criticized loans. The indicators represent the rating for loans as of the date presented is based on the most recent credit review performed. Internal risk rating definitions are:

Pass: These include satisfactory loans that have acceptable levels of risk.

Special Mention: Loans classified as special mention have a potential weakness that requires close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. These credits do not expose the Company to sufficient risk to warrant further adverse classification.

Substandard: A substandard asset is inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as 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 be received in the future.

The Company has a portfolio of smaller homogenous loans that are not individually risk rated and include residential permanent and construction mortgages, home equity lines of credit, and consumer installment loans. For these loans, management uses payment status

as the primary credit quality indicator. The payment status of these loans is then translated into an internal risk rating. The following table summarizes the translation of past due status to risk rating for loans that are not individually risk rated.


		Internal
Days Past Due		Risk Rating
0 - 29 days		Pass
30-59 days		Special Mention
60-89 days		Substandard
90-119 days		Doubtful
120+ days		Loss

The following table presents the Company’s recorded investment in loans by credit quality indicator by year of origination as of September 30, 2023.


	Term Loans by Year of Origination
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving		Total
Real Estate Loans - Commercial
Pass	$	56,696	$	303,898	$	205,417	$	122,694	$	97,273	$	342,686	$	3,168	$	1,131,832
Special mention		—		—		—		1,237		—		—		—		1,237
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Real Estate Loans - Commercial	$	56,696	$	303,898	$	205,417	$	123,931	$	97,273	$	342,686	$	3,168	$	1,133,069

Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Real Estate Loans - Construction and land development
Pass	$	33,136	$	58,071	$	31,471	$	18,087	$	30	$	8,845	$	27,780	$	177,420
Special mention		—		—		—		—		2,150		—		—		2,150
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Real Estate Loans - Construction and land development	$	33,136	$	58,071	$	31,471	$	18,087	$	2,180	$	8,845	$	27,780	$	179,570

Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Real Estate Loans - Residential
Pass	$	61,683	$	115,508	$	134,133	$	88,589	$	25,147	$	22,213	$	17,236	$	464,509
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Real Estate Loans - Residential	$	61,683	$	115,508	$	134,133	$	88,589	$	25,147	$	22,213	$	17,236	$	464,509

Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Loans
Pass	$	3,425	$	7,354	$	2,146	$	3,384	$	5,245	$	5,198	$	11,173	$	37,925
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Commercial Loans	$	3,425	$	7,354	$	2,146	$	3,384	$	5,245	$	5,198	$	11,173	$	37,925

Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer Loans
Pass	$	399	$	6	$	29	$	—	$	—	$	12	$	21	$	467
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Consumer Loans	$	399	$	6	$	29	$	-	$	—	$	12	$	21	$	467

Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2022.


	December 31, 2022
			Special								Total
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Loans
Real Estate Loans
Commercial	$	1,116,890	$	1,237	$	—	$	—	$	—	$	1,118,127
Construction and land development		192,877		2,150		—		—		—		195,027
Residential		426,841		—		—		—		—		426,841
Commercial		44,924		—		—		—		—		44,924
Consumer		529		—		—		—		—		529
Total Loans	$	1,782,061	$	3,387	$	—	$	—	$	—	$	1,785,448

The allowance for loan credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination. The starting point for the estimate of the allowance for loan credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. As part of the Company’s loan modification program to borrowers experiencing financial difficulty, the Company may provide concessions to minimize the economic loss and improve long-term loan performance and collectability. The Company did not make any loan modifications to borrowers experiencing financial difficulty during the three or nine months ended September 30, 2023.

The Company had a recorded investment in TDRs of $418 thousand as of December 31, 2022, all of which were in compliance with their modified terms at December 31, 2022. There were no loans modified in TDRs that subsequently defaulted within 12 months of their modification date during the three or nine months ended September 30, 2022. As of December 31, 2022, none of the Bank’s TDRs required a specific reserve. As of December 31, 2022, there were no additional commitments to disburse funds on loans classified TDRs. The Company adopted ASU 2022-02 on January 1, 2023, which eliminated the accounting guidance for TDRs.

Unfunded Commitments

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable by the Company. The allowance for off-balance sheet credit exposures is adjusted as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for loan credit losses. The allowance for credit losses for unfunded loan commitments of $908 thousand and $303 thousand at September 30, 2023 and December 31, 2022, respectively, is separately classified within Other Liabilities on the Consolidated Balance Sheets.

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the nine months ended September 30, 2023.


	Allowance for Credit Losses
(Dollars in thousands)	Unfunded Commitments
Beginning balance, December 31, 2022	$	303
Adjustment to allowance for unfunded commitments for adoption of ASC 326		737
Provision for (recovery of) credit losses		(132)
Ending balance, September 30, 2023	$	908