Loan Quality And Allowance For Credit Losses

3 Months Ended

Mar. 31, 2024

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.

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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 March 31, 2024 is adequate.

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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 March 31, 2024	2024		2023		2022		2021		2020		Prior		Cost Basis		to Term		Total
Residential real estate 1-4 family:
Commercial:
Risk rating:
Pass (1-5)	$	2,305	$	9,845	$	8,813	$	10,904	$	9,427	$	24,002	$	2,342	$	—	$	67,638
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		—		—		—
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		2,305		9,845		8,813		10,904		9,427		24,002		2,342		—		67,638
Consumer:
Performing		6,362		51,787		33,432		15,262		9,846		32,007		43,723		21,146		213,565
Nonperforming		—		—		—		—		—		—		—		—		—
Total Consumer		6,362		51,787		33,432		15,262		9,846		32,007		43,723		21,146		213,565
Total	$	8,667	$	61,632	$	42,245	$	26,166	$	19,273	$	56,009	$	46,065	$	21,146	$	281,203
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential real estate construction:
Commercial:
Risk rating:
Pass (1-5)	$	252	$	8,301	$	2,356	$	949	$	196	$	539	$	—	$	—	$	12,593
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		—		—		—
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		252		8,301		2,356		949		196		539		—		—		12,593
Consumer:
Performing		688		15,605		—		—		—		—		—		—		16,293
Nonperforming		—		—		—		—		—		—		—		—		—
Total Consumer		688		15,605		—		—		—		—		—		—		16,293
Total	$	940	$	23,906	$	2,356	$	949	$	196	$	539	$	—	$	—	$	28,886
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate:
Risk rating:
Pass (1-5)	$	17,044	$	193,141	$	110,031	$	98,514	$	33,814	$	239,161	$	12,727	$	—	$	704,432
OAEM (6)		—		2,941		1,341		1,000		6,762		2,157		124		—		14,325
Substandard (7)		—		—		—		—		—		2,513		50		—		2,563
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	17,044	$	196,082	$	111,372	$	99,514	$	40,576	$	243,831	$	12,901	$	—	$	721,320
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(2)	$	—	$	—	$	(2)

Commercial:
Risk rating:
Pass (1-5)	$	2,214	$	33,580	$	32,580	$	44,547	$	21,959	$	66,286	$	37,933	$	—	$	239,099
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		307		—		1		—		196		—		504
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	2,214	$	33,580	$	32,887	$	44,547	$	21,960	$	66,286	$	38,129	$	—	$	239,603
Current period gross charge-offs	$	(4)	$	—	$	—	$	—	$	—	$	—	$	(62)	$	—	$	(66)

Consumer:
Performing		648		1,544		588		1,911		113		64		1,710		—		6,578
Nonperforming		—		—		—		—		—		—		5		—		5
Total	$	648	$	1,544	$	588	$	1,911	$	113	$	64	$	1,715	$	—	$	6,583
Current period gross charge-offs	$	(12)	$	—	$	(2)	$	—	$	(6)	$	(1)	$	(7)	$	—	$	(28)

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(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)

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The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days and still accruing as of March 31, 2024:



	March 31, 2024						December 31, 2023
(Dollars in thousands)	Nonaccrual and Loans Past Due Over 90 Days+						Nonaccrual and Loans Past Due Over 90 Days+
					Loans Past Due						Loans Past Due
	Nonaccrual		Nonaccrual		Over 90 Days		Nonaccrual		Nonaccrual		Over 90 Days
	Without ACL		With ACL		Still Accruing		Without ACL		With ACL		Still Accruing
March 31, 2024
Residential Real Estate 1-4 Family
First liens	$	—	$	—	$	—	$	—	$	—	$	—
Junior liens and lines of credit		—		—		—		—		—		—
Total		—		—		—		—		—		—
Residential real estate - construction		—		—		—		—		—		—
Commercial real estate		407		—		—		—		—		—
Commercial		83		—		—		147		—		—
Consumer		—		—		5		—		—		5
Total	$	490	$	—	$	5	$	147	$	—	$	5

At March 31, 2024 the company had $407 thousand of commercial real estate loans and $1 thousand of commercial loans that were considered to be collateral dependent. A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty, and the repayment is expected to be provided substantially through the operation or sale of collateral. These loans were secured by farmland and business assets, respectively. No loans were considered collateral dependent at December 31, 2023.

At March 31, 2024 and December 31, 2023, the Bank had $0 of residential properties in the process of foreclosure.

The following table presents the aging of payments of the loan portfolio:



(Dollars in thousands)	Loans Past Due
							Total				Total
	30-59 Days		60-89 Days		90 Days+		Past Due		Current		Loans
March 31, 2024
Residential Real Estate 1-4 Family
First liens	$	410	$	7	$	—	$	417	$	208,577	$	208,994
Junior liens and lines of credit		514		30		—		544		71,665		72,209
Total		924		37		—		961		280,242		281,203
Residential real estate - construction		—		—		—		—		28,886		28,886
Commercial real estate		922		82		407		1,411		719,909		721,320
Commercial		162		375		83		620		238,983		239,603
Consumer		14		11		5		30		6,553		6,583
Total	$	2,022	$	505	$	495	$	3,022	$	1,274,573	$	1,277,595



							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

The following table presents, by class, the activity in the Allowance for Credit Losses (ACL) for the periods shown:



	Residential Real Estate 1-4 Family
	First		Junior Liens &				Commercial
(Dollars in thousands)	Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total

ACL at December 31, 2023	$	1,296	$	419	$	296	$	10,657	$	3,290	$	94	$	—	$	16,052
Charge-offs		—		—		—		(2)		(66)		(28)		—		(96)
Recoveries		—		—		4		—		60		23		—		87
Provision		12		(4)		37		402		40		3		—		490
ACL at March 31, 2024	$	1,308	$	415	$	337	$	11,057	$	3,324	$	92	$	—	$	16,533

ACL at June 30, 2023	$	465	$	245	$	289	$	8,096	$	5,076	$	119	$	725	$	15,015
ACL at December 31, 2022	$	459	$	234	$	343	$	7,493	$	4,846	$	133	$	667	$	14,175
Impact of adopting ASU 2016-13		1,096		493		(95)		584		(1,907)		(40)		(667)		(536)
Charge-offs		—		—		—		—		(86)		(34)		—		(120)
Recoveries		2		—		39		—		67		15		—		123
Provision		67		(37)		(97)		159		355		20		—		467
ACL at March 31, 2023	$	1,624	$	690	$	190	$	8,236	$	3,275	$	94	$	—	$	14,109

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.

As of March 31, 2024 and December 31, 2023 there were no modifications made to borrowers experiencing financial difficulty.