Loan Quality And Allowance For Credit Losses

9 Months Ended

Sep. 30, 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.

Other Assets Especially Mentioned (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 September 30, 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 September 30, 2024	2024		2023		2022		2021		2020		Prior		Cost Basis		to Term		Total
Residential real estate 1-4 family:
Commercial:
Risk rating:
Pass (1-5)	$	4,234	$	9,675	$	8,184	$	10,482	$	8,625	$	21,049	$	3,411	$	—	$	65,660
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		—		—		—
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		4,234		9,675		8,184		10,482		8,625		21,049		3,411		—		65,660
Consumer:
Performing		30,731		64,035		31,664		14,565		9,198		28,896		52,232		18,741		250,062
Nonperforming		—		—		—		—		—		—		38		—		38
Total Consumer		30,731		64,035		31,664		14,565		9,198		28,896		52,270		18,741		250,100
Total	$	34,965	$	73,710	$	39,848	$	25,047	$	17,823	$	49,945	$	55,681	$	18,741	$	315,760
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential real estate construction:
Commercial:
Risk rating:
Pass (1-5)	$	4,766	$	5,034	$	403	$	963	$	171	$	1,009	$	—	$	—	$	12,346
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		—		—		—
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		4,766		5,034		403		963		171		1,009		—		—		12,346
Consumer:
Performing		11,734		4,418		—		—		—		—		—		—		16,152
Nonperforming		—		—		—		—		—		—		—		—		—
Total Consumer		11,734		4,418		—		—		—		—		—		—		16,152
Total	$	16,500	$	9,452	$	403	$	963	$	171	$	1,009	$	—	$	—	$	28,498
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate:
Risk rating:
Pass (1-5)	$	59,106	$	214,677		106,382		94,819	$	33,483	$	227,850	$	13,773	$	—	$	750,090
OAEM (6)		—		2,913		2,052		1,717		6,671		1,061		94		—		14,508
Substandard (7)		—		5,929		—		—		—		2,048		50		—		8,027
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	59,106	$	223,519	$	108,434	$	96,536	$	40,154	$	230,959	$	13,917	$	—	$	772,625
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(2)	$	—	$	—	$	(2)

Commercial:
Risk rating:
Pass (1-5)	$	11,914	$	28,812	$	28,968	$	40,361	$	19,004	$	62,461	$	47,542	$	—	$	239,062
OAEM (6)		—		11		434		1,543		12		—		250		—		2,250
Substandard (7)		—		—		208		—		—		—		108		—		316
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	11,914	$	28,823	$	29,610	$	41,904	$	19,016	$	62,461	$	47,900	$	—	$	241,628
Current period gross charge-offs	$	(10)	$	—	$	(79)	$	—	$	—	$	—	$	(62)	$	—	$	(151)

Consumer:
Performing		1,710		1,311		450		1,754		54		34		2,064		—		7,377
Nonperforming		—		—		—		2		—		—		3		—		5
Total	$	1,710	$	1,311	$	450	$	1,756	$	54	$	34	$	2,067	$	—	$	7,382
Current period gross charge-offs	$	(35)	$	—	$	(2)	$	(2)	$	(6)	$	(2)	$	(24)	$	—	$	(71)

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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 90 days or more and still accruing as of September 30, 2024:



	September 30, 2024						December 31, 2023
(Dollars in thousands)	Nonaccrual and Loans past due 90 Days or more						Nonaccrual and Loans past due 90 Days or more
					Loans past due						Loans past due
	Nonaccrual		Nonaccrual		90 Days or more		Nonaccrual		Nonaccrual		90 Days or more
	Without ACL		With ACL		Still Accruing		Without ACL		With ACL		Still Accruing
September 30, 2024
Residential Real Estate 1-4 Family
First liens	$	—	$	—	$	38	$	—	$	—	$	—
Junior liens and lines of credit		—		—		—		—		—		—
Total		—		—		38		—		—		—
Residential real estate - construction		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—
Commercial		—		308		—		147		—		—
Consumer		—		—		5		—		—		5
Total	$	—	$	308	$	43	$	147	$	—	$	5

At September 30, 2024 the Corporation had one commercial loan relationship for $308 thousand of commercial loans that was 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. This loan is secured by business assets and the Bank has established a specific reserve of $205 thousand for this loan. No loans were considered collateral dependent at December 31, 2023.

At September 30, 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
September 30, 2024
Residential Real Estate 1-4 Family
First liens	$	180	$	484	$	38	$	702	$	234,325	$	235,027
Junior liens and lines of credit		237		189		—		426		80,307		80,733
Total		417		673		38		1,128		314,632		315,760
Residential real estate - construction		—		—		—		—		28,498		28,498
Commercial real estate		220		266		—		486		772,139		772,625
Commercial		122		—		308		430		241,198		241,628
Consumer		22		6		5		33		7,349		7,382
Total	$	781	$	945	$	351	$	2,077	$	1,363,816	$	1,365,893



	Loans Past Due						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 June 30, 2024	$	1,384	$	429	$	318	$	11,423	$	3,364	$	100	$	—	$	17,018
Charge-offs		—		—		—		—		(2)		(25)		—		(27)
Recoveries		—		—		4		3		32		3		—		42
Provision		81		26		9		230		95		33		—		474
ACL at September 30, 2024	$	1,465	$	455	$	331	$	11,656	$	3,489	$	111	$	—	$	17,507

ACL at December 31, 2023	$	1,296	$	419	$	296	$	10,657	$	3,290	$	94	$	—	$	16,052
Charge-offs		—		—		—		(2)		(151)		(71)		—		(224)
Recoveries		—		—		11		3		112		29		—		155
Provision		169		36		24		998		238		59		—		1,524
ACL at September 30, 2024	$	1,465	$	455	$	331	$	11,656	$	3,489	$	111	$	—	$	17,507

ACL at June 30, 2023	$	1,720	$	683	$	177	$	9,083	$	2,854	$	98	$	—	$	14,615
Charge-offs		—		—		—		—		(2)		(21)		—		(23)
Recoveries		—		—		4		—		15		51		—		70
Provision		(519)		(265)		61		1,124		503		(38)		—		866
ACL at September 30, 2023	$	1,201	$	418	$	242	$	10,207	$	3,370	$	90	$	—	$	15,528

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		—		—		—		—		(89)		(97)		—		(186)
Recoveries		2		—		46		—		94		76		—		218
Provision		(356)		(309)		(52)		2,130		426		18		—		1,857
ACL at September 30, 2023	$	1,201	$	418	$	242	$	10,207	$	3,370	$	90	$	—	$	15,528

The ACL as of September 30, 2024 was comprised of $17.3 million pooled reserve and $205 thousand specific reserve.

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 September 30, 2024 and December 31, 2023 there were no modifications made to borrowers experiencing financial difficulty.