Loan Quality And Allowance For Credit Losses

12 Months Ended

Dec. 31, 2023

Loan Quality And Allowance For Credit Losses [Abstract]

Loan Quality And Allowance For Credit Losses

Note 6. Loan Quality and Allowance for Credit Losses

The Bank categorizes loans into 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, and current economic trends, among other factors. Management utilizes a risk rating scale ranging from 1-Prime to 9-Loss to evaluate loan quality. This risk rating scale is used primarily for commercial purpose loans. Consumer purpose loans are identified as either performing or nonperforming based on the payment status of the loans. Nonperforming consumer loans are loans that are nonaccrual or 90 days or more past due and still accruing. The Bank uses the following definitions for risk ratings:

Pass (1-5): are considered pass credits with lower or average risk and are not otherwise classified.

OAEM (6): Loans classified as OAEM have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the borrower’s credit position at some future date.

Substandard (7): Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful (8): Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, 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.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pool evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the sale of the collateral, the expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for any discounts and selling costs as appropriate.

Management monitors loan performance on a monthly basis and performs a quarterly evaluation of the adequacy of the Allowance for Credit Loss for loans (ACL). The Bank begins enhanced monitoring of all loans rated 6–OAEM or worse and obtains a new appraisal or asset valuation for any loans placed on nonaccrual and rated 7 - Substandard or worse. Management, at its discretion, may determine that additional adjustments to the appraisal or valuation are required. Valuation adjustments will be made as necessary based on factors, including, but not limited to: the economy, deferred maintenance, industry, type of property/equipment, age of the appraisal, etc. and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateral is also estimated and deducted from the valuation in order to determine the net realizable value to the Bank. When determining the ACL, certain factors involved in the evaluation are inherently subjective and require material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows. Management monitors the adequacy of the ACL on an ongoing basis and reports its adequacy quarterly to the Enterprise Risk Management Committee of the Board of Directors. Management believes the ACL at December 31, 2023 is adequate.

The following table presents loans by year of origination and internally assigned risk ratings:

(Dollars in thousands)													Revolving		Revolving
	Term Loans												Loans		Loans
	Amortized Cost Basis by Origination Year												Amortized		Converted
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Residential real estate 1-4 family:
Commercial:
Risk rating:
Pass (1-5)	$	9,867	$	9,088	$	11,038	$	9,691	$	2,433	$	22,906	$	2,057	$	—	$	67,080
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		—		—		—
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		9,867		9,088		11,038		9,691		2,433		22,906		2,057		—		67,080
Consumer:
Performing		53,128		34,136		15,625		10,245		5,222		28,423		43,968		20,022		210,769
Nonperforming		—		—		—		—		—		—		—		—		—
Total Consumer		53,128		34,136		15,625		10,245		5,222		28,423		43,968		20,022		210,769
Total	$	62,995	$	43,224	$	26,663	$	19,936	$	7,655	$	51,329	$	46,025	$	20,022	$	277,849
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate construction:
Commercial:
Risk rating:
Pass (1-5)	$	6,845	$	2,209	$	1,289	$	214	$	—	$	1,506	$	—	$	—	$	12,063
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		—		—		—
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		6,845		2,209		1,289		214		—		1,506		—		—		12,063
Consumer:
Performing		13,837		—		—		—		—		—		—		—		13,837
Nonperforming		—		—		—		—		—		—		—		—		—
Total Consumer		13,837		—		—		—		—		—		—		—		13,837
Total	$	20,682	$	2,209	$	1,289	$	214	$	—	$	1,506	$	—	$	—	$	25,900
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Risk rating:
Pass (1-5)	$	180,052	$	110,886	$	98,540	$	34,307	$	38,603	$	214,179	$	10,567	$	—	$	687,134
OAEM (6)		2,955		1,350		1,000		6,823		—		2,182		139		—		14,449
Substandard (7)		—		—		—		—		—		2,134		50		—		2,184
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	183,007	$	112,236	$	99,540	$	41,130	$	38,603	$	218,495	$	10,756	$	—	$	703,767
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial:
Risk rating:
Pass (1-5)	$	34,851	$	33,983	$	45,754	$	22,847	$	3,579	$	64,542	$	36,508	$	—	$	242,064
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		317		—		—		—		—		273		—		590
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	34,851	$	34,300	$	45,754	$	22,847	$	3,579	$	64,542	$	36,781	$	—	$	242,654
Current period gross charge-offs	$	(125)	$	—	$	(130)	$	—	$	—	$	—	$	(50)	$	—	$	(305)
Consumer:
Performing		1,863		669		1,985		148		80		5		2,060		—		6,810
Nonperforming		—		—		—		—		—		—		5		—		5
Total	$	1,863	$	669	$	1,985	$	148	$	80	$	5	$	2,065	$	—	$	6,815
Current period gross charge-offs	$	(63)	$	—	$	(10)	$	(2)	$	(6)	$	—	$	(36)	$	—	$	(117)

‎

The following presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days and still accruing as of December 31, 2023:

(Dollars in thousands)	Nonaccrual and Loans Past Due Over 90 Days+
					Loans Past Due
	Nonaccrual		Nonaccrual		Over 90 Days
	Without ACL		With ACL		Still Accruing
December 31, 2023
Residential Real Estate 1-4 Family
First liens	$	—	$	—	$	—
Junior liens and lines of credit		—		—		—
Total		—		—		—
Residential real estate - construction		—		—		—
Commercial real estate		—		—		—
Commercial		147		—		—
Consumer		—		—		5
Total	$	147	$	—	$	5

The following table reports on the risk rating for those loans in the portfolio that are assigned an individual risk rating as of December 31, 2022:

	Pass		OAEM		Substandard		Doubtful
(Dollars in thousands)	(1-5)		(6)		(7)		(8)		Total
December 31, 2022
Residential Real Estate 1-4 Family
First liens	$	146,748	$	—	$	120	$	—	$	146,868
Junior liens and lines of credit		73,688		—		—		—		73,688
Total		220,436		—		120		—		220,556
Residential real estate - construction		24,393		—		—		—		24,393
Commercial real estate		560,294		1,095		2,902		—		564,291
Commercial		228,085		2,751		4,766		—		235,602
Consumer		6,199		—		—		—		6,199
Total	$	1,039,407	$	3,846	$	7,788	$	—	$	1,051,041

Delinquent loans are a result of borrowers’ cash flow and/or alternative sources of cash being insufficient to repay loans. The Bank’s likelihood of collateral liquidation to repay the loans becomes more probable the further behind a borrower falls, particularly when loans reach 90 days or more past due. Management monitors the performance status of loans by the use of an aging report. The aging report can provide an early indicator of loans that may become severely delinquent and possibly result in a loss to the Bank.

The following table presents the aging of payments in the loan portfolio as of December 31, 2023 and 2022:

(Dollars in thousands)	Loans Past Due and Still Accruing
								Total				Total
		30-59 Days		60-89 Days		90 Days+		Past Due		Current		Loans
December 31, 2023
Residential Real Estate 1-4 Family
First liens		$	62	$	394	$	—	$	456	$	204,832	$	205,288
Junior liens and lines of credit			239		228		—		467		72,094		72,561
Total			301		622		—		923		276,926		277,849
Residential real estate - construction			—		—		—		—		25,900		25,900
Commercial real estate			3,232		—		—		3,232		700,535		703,767
Commercial			542		112		147		801		241,853		242,654
Consumer			21		12		5		38		6,777		6,815
Total		$	4,096	$	746	$	152	$	4,994	$	1,251,991	$	1,256,985

									Total
									Past Due &				Total
December 31, 2022	30-59 Days		60-89 Days		90 Days+		Nonaccrual		Nonaccrual		Current		Loans
Residential Real Estate 1-4 Family
First liens	$	340	$	177	$	—	$	120	$	637	$	146,231	$	146,868
Junior liens and lines of credit		490		—		—		—		490		73,198		73,688
Total		830		177		—		120		1,127		219,429		220,556
Residential real estate - construction		—		—		—		—		—		24,393		24,393
Commercial real estate		649		—		—		—		649		563,642		564,291
Commercial		681		50		—		—		731		234,871		235,602
Consumer		29		5		13		—		47		6,152		6,199
Total	$	2,189	$	232	$	13	$	120	$	2,554	$	1,048,487	$	1,051,041

At December 31, 2023, the Bank had $0 of residential properties in the process of foreclosure compared to $120 thousand at the end of 2022. Interest not recognized on nonaccrual loans was $6 thousand for the years ended December 31, 2023 and 2022, respectively.

On January 1, 2023, The Bank adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

No loan modifications were made to borrowers experiencing financial difficulties during 2023.

Prior to the adoption of ASU 2022-02, certain modified loans were reported as TDRs and impaired.

The following table presents impaired loans as of December 31, 2022:

	Impaired Loans
	With No Allowance				With Allowance
(Dollars in thousands)			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal		Related
December 31, 2022	Investment		Balance		Investment		Balance		Allowance
Residential Real Estate 1-4 Family
First liens	$	619	$	619	$	—	$	—	$	—
Junior liens and lines of credit		—		—		—		—		—
Total		619		619		—		—		—
Residential real estate - construction		—		—		—		—		—
Commercial real estate		2,331		2,331		—		—		—
Commercial		—		—		—		—		—
Total	$	2,950	$	2,950	$	—	$	—	$	—

	Twelve Months Ended
	December 31, 2022
	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Residential Real Estate 1-4 Family
First liens	$	641	$	33
Junior liens and lines of credit		—		—
Total		641		33
Residential real estate - construction		106		105
Commercial real estate		7,765		369
Commercial		—		—
Total	$	8,512	$	507

‎

The following table presents TDR loans as of December 31, 2022:

								Troubled Debt Restructurings
								Within the Last 12 Months
								That Have Defaulted
(Dollars in thousands)	Troubled Debt Restructurings							on Modified Terms
	Number of	Recorded						Number of	Recorded
	Contracts	Investment		Performing*		Nonperforming*		Contracts	Investment
December 31, 2022
Residential real estate - construction	—	$	—	$	—	$	—	—	$	—
Residential real estate	5		619		619		—	—		—
Commercial real estate - owner occupied	3		783		783		—	—		—
Commercial real estate - farmland	3		1,466		1,466		—	—		—
Commercial real estate - construction and land development	—		—		—		—	—		—
Commercial real estate	1		82		82		—	—		—
Total	12	$	2,950	$	2,950	$	—	—	$	—

*The performing status is determined by the loan’s compliance with the modified terms. 

Allowance for Credit Losses:

The following table shows the activity in the Allowance for Credit Loss (ACL), for the years ended December 31, 2023 and 2022:

	Residential Real Estate 1-4 Family
	First		Junior Liens &				Commercial
(Dollars in thousands)	Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total
ALL at December 31, 2022	$	459	$	234	$	343	$	7,493	$	4,846	$	133	$	667	$	14,175
Impact of adopting CECL on 1-1-23		1,096		493		(95)		584		(1,907)		(40)		(667)		(536)
Charge-offs		—		—		—		—		(305)		(117)		—		(422)
Recoveries		2		—		49		1		112		82		—		246
Provision		(261)		(308)		(1)		2,579		544		36		—		2,589
ACL at December 31, 2023	$	1,296	$	419	$	296	$	10,657	$	3,290	$	94	$	—	$	16,052
ALL at December 31, 2021	$	475	$	252	$	325	$	8,168	$	5,127	$	130	$	589	$	15,066
Charge-offs		(20)		—		—		(1,451)		(71)		(102)		—		(1,644)
Recoveries		48		2		—		1		26		26		—		103
Provision		(44)		(20)		18		775		(236)		79		78		650
ALL at December 31, 2022	$	459	$	234	$	343	$	7,493	$	4,846	$	133	$	667	$	14,175

The following table shows the loans that were evaluated for the ACL under a specific reserve (individually) and those that were evaluated under a general reserve (collectively), and the amount of the ACL established in each category as of December 31, 2023 and 2022:

	Residential Real Estate 1-4 Family
	First		Junior Liens &				Commercial
(Dollars in thousands)	Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total
December 31, 2023
Loans evaluated for ACL:
Individually	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively		205,288		72,561		25,900		703,767		242,654		6,815		—		1,256,985
Total	$	205,288	$	72,561	$	25,900	$	703,767	$	242,654	$	6,815	$	—	$	1,256,985
ACL established for ‎  loans evaluated:
Individually	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively		1,296		419		296		10,657		3,290		94		—		16,052
ACL at December 31, 2023	$	1,296	$	419	$	296	$	10,657	$	3,290	$	94	$	—	$	16,052
December 31, 2022
Loans evaluated for ALL:
Individually	$	619	$	—	$	—	$	2,331	$	—	$	—	$	—	$	2,950
Collectively		146,249		73,688		24,393		561,960		235,602		6,199		—		1,048,091
Total	$	146,868	$	73,688	$	24,393	$	564,291	$	235,602	$	6,199	$	—	$	1,051,041
ALL established for ‎  loans evaluated:
Individually	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively		459		234		343		7,493		4,846		133		667		14,175
ALL at December 31, 2022	$	459	$	234	$	343	$	7,493	$	4,846	$	133	$	667	$	14,175