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Note 4 - Allowance for Credit Losses | 9 Months Ended
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Sep. 30, 2023
Notes to Financial Statements |
Allowance for Credit Losses [Text Block] | Note 4. Allowance for Credit Losses The following tables present, as of and during the periods ended September 30, 2023, December 31, 2022 and September 30, 2022, the activity in the Allowance for Credit Losses on Loans (ACLL) (previously Allowance for Loan Losses) by portfolio, and information about individually evaluated and collectively evaluated loans (in thousands):
|  | September 30, 2023 |
|  | Construction and Land Development |  |  | Secured by 1-4 Family Residential |  |  | Other Real Estate |  |  | Commercial and Industrial |  |  | Consumer and Other Loans |  |  | Total |
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning Balance, December 31, 2022 |  | $ | 546 |  |  | $ | 1,108 |  |  | $ | 3,609 |  |  | $ | 1,874 |  |  | $ | 309 |  |  | $ | 7,446 |
Adjustment to allowance for adoption of ASU 2016-13 |  |  | (313 | ) |  |  | 1,409 |  |  |  | 1,702 |  |  |  | (387 | ) |  |  | (225 | ) |  |  | 2,186 |
Charge-offs |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (877 | ) |  |  | (351 | ) |  |  | (1,228 | )
Recoveries |  |  | 1 |  |  |  | 13 |  |  |  | 13 |  |  |  | 145 |  |  |  | 154 |  |  |  | 326 |
Provision for (recovery of) credit losses |  |  | 68 |  |  |  | (97 | ) |  |  | (179 | ) |  |  | 165 |  |  |  | 209 |  |  |  | 166 |
Ending Balance, September 30, 2023 |  | $ | 302 |  |  | $ | 2,433 |  |  | $ | 5,145 |  |  | $ | 920 |  |  | $ | 96 |  |  | $ | 8,896 |
Ending Balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 307 |  |  |  | — |  |  |  | 307 |
Collectively evaluated |  |  | 302 |  |  |  | 2,433 |  |  |  | 5,145 |  |  |  | 613 |  |  |  | 96 |  |  |  | 8,589 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending Balance |  | $ | 50,405 |  |  | $ | 340,773 |  |  | $ | 433,177 |  |  | $ | 117,130 |  |  | $ | 11,014 |  |  | $ | 952,499 |
Individually evaluated |  |  | 39 |  |  |  | 546 |  |  |  | 67 |  |  |  | 2,464 |  |  |  | — |  |  |  | 3,116 |
Collectively evaluated |  |  | 50,366 |  |  |  | 340,227 |  |  |  | 433,110 |  |  |  | 114,666 |  |  |  | 11,014 |  |  |  | 949,383 |
|  | December 31, 2022 |
|  | Construction and Land Development |  |  | Secured by 1-4 Family Residential |  |  | Other Real Estate |  |  | Commercial and Industrial |  |  | Consumer and Other Loans |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning Balance, December 31, 2021 |  | $ | 345 |  |  | $ | 1,077 |  |  | $ | 3,230 |  |  | $ | 718 |  |  | $ | 340 |  |  | $ | 5,710 |
Charge-offs |  |  | — |  |  |  | (6 | ) |  |  | — |  |  |  | (32 | ) |  |  | (491 | ) |  |  | (529 | )
Recoveries |  |  | 10 |  |  |  | 19 |  |  |  | 15 |  |  |  | 145 |  |  |  | 226 |  |  |  | 415 |
Provision for (recovery of) loan losses |  |  | 191 |  |  |  | 18 |  |  |  | 364 |  |  |  | 1,043 |  |  |  | 234 |  |  |  | 1,850 |
Ending Balance, December 31, 2022 |  | $ | 546 |  |  | $ | 1,108 |  |  | $ | 3,609 |  |  | $ | 1,874 |  |  | $ | 309 |  |  | $ | 7,446 |
Ending Balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 888 |  |  |  | — |  |  |  | 888 |
Collectively evaluated for impairment |  |  | 546 |  |  |  | 1,108 |  |  |  | 3,609 |  |  |  | 986 |  |  |  | 309 |  |  |  | 6,558 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending Balance |  | $ | 51,840 |  |  | $ | 331,421 |  |  | $ | 418,456 |  |  | $ | 111,225 |  |  | $ | 7,581 |  |  | $ | 920,523 |
Individually evaluated for impairment |  |  | 1,045 |  |  |  | 530 |  |  |  | 13 |  |  |  | 1,085 |  |  |  | — |  |  |  | 2,673 |
Collectively evaluated for impairment |  |  | 50,795 |  |  |  | 330,891 |  |  |  | 418,443 |  |  |  | 110,140 |  |  |  | 7,581 |  |  |  | 917,850 |
|  | September 30, 2022 |
|  | Construction and Land Development |  |  | Secured by 1-4 Family Residential |  |  | Other Real Estate |  |  | Commercial and Industrial |  |  | Consumer and Other Loans |  |  | Total |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning Balance, December 31, 2021 |  | $ | 345 |  |  | $ | 1,077 |  |  | $ | 3,230 |  |  | $ | 718 |  |  | $ | 340 |  |  | $ | 5,710 |
Charge-offs |  |  | — |  |  |  | (6 | ) |  |  | — |  |  |  | — |  |  |  | (387 | ) |  |  | (393 | )
Recoveries |  |  | 10 |  |  |  | 15 |  |  |  | 12 |  |  |  | 144 |  |  |  | 194 |  |  |  | 375 |
Provision for (recovery of) loan losses |  |  | 99 |  |  |  | (22 | ) |  |  | 331 |  |  |  | 69 |  |  |  | 123 |  |  |  | 600 |
Ending Balance, September 30, 2022 |  | $ | 454 |  |  | $ | 1,064 |  |  | $ | 3,573 |  |  | $ | 931 |  |  | $ | 270 |  |  | $ | 6,292 |
Ending Balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Collectively evaluated for impairment |  |  | 454 |  |  |  | 1,064 |  |  |  | 3,573 |  |  |  | 931 |  |  |  | 270 |  |  |  | 6,292 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending Balance |  | $ | 51,352 |  |  | $ | 317,414 |  |  | $ | 417,504 |  |  | $ | 112,145 |  |  | $ | 8,099 |  |  | $ | 906,514 |
Individually evaluated for impairment |  |  | — |  |  |  | 549 |  |  |  | 17 |  |  |  | — |  |  |  | — |  |  |  | 566 |
Collectively evaluated for impairment |  |  | 51,352 |  |  |  | 316,865 |  |  |  | 417,487 |  |  |  | 112,145 |  |  |  | 8,099 |  |  |  | 905,948 |
Nonaccrual loans The following is a summary of the Company's nonaccrual loans by major categories for the periods indicated (in thousands):
|  | CECL |  |  | Incurred Loss |
|  | September 30, 2023 |  |  | December 31, 2022 |
|  | Nonaccrual Loans with No Allowance |  |  | Nonaccrual loans with an Allowance |  |  | Total Nonaccrual Loans |  |  | Nonaccrual Loans |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 39 |  |  | $ | — |  |  | $ | 39 |  |  | $ | 1,045 |
Secured by 1-4 family residential |  |  | 546 |  |  |  | — |  |  |  | 546 |  |  |  | 530 |
Other real estate loans |  |  | 67 |  |  |  | — |  |  |  | 67 |  |  |  | 13 |
Commercial and industrial |  |  | — |  |  |  | 2,464 |  |  |  | 2,464 |  |  |  | 1,085 |
Total |  | $ | 652 |  |  | $ | 2,464 |  |  | $ | 3,116 |  |  | $ | 2,673 |
Prior to the adoption of ASU 2016-13, 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 included loans on nonaccrual status and accruing troubled debt restructurings. 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 Company individually assessed for impairment all nonaccrual loans and troubled debt restructurings. The tables below include information on all loans deemed impaired. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis. Impaired loans and the related allowance as of and for the periods ended December 31, 2022 and September 30, 2022, were as follows (in thousands):
|  | December 31, 2022 |
|  | Unpaid Principal Balance |  |  | Recorded Investment with No Allowance |  |  | Recorded Investment with Allowance |  |  | Total Recorded Investment |  |  | Related Allowance |  |  | Average Recorded Investment |  |  | Interest Income Recognized |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 2,412 |  |  | $ | 1,045 |  |  | $ | — |  |  | $ | 1,045 |  |  | $ | — |  |  | $ | 30 |  |  | $ | 75 |
Secured by 1-4 family residential |  |  | 680 |  |  |  | 530 |  |  |  | — |  |  |  | 530 |  |  |  | — |  |  |  | 580 |  |  |  | 11 |
Other real estate loans |  |  | 26 |  |  |  | 13 |  |  |  | — |  |  |  | 13 |  |  |  | — |  |  |  | 22 |  |  |  | — |
Commercial and industrial |  |  | 1,084 |  |  |  | — |  |  |  | 1,085 |  |  |  | 1,085 |  |  |  | 888 |  |  |  | 650 |  |  |  | 40 |
Total |  | $ | 4,202 |  |  | $ | 1,588 |  |  | $ | 1,085 |  |  | $ | 2,673 |  |  | $ | 888 |  |  | $ | 1,282 |  |  | $ | 126 |
|  | September 30, 2022 |
|  | Unpaid Principal Balance |  |  | Recorded Investment with No Allowance |  |  | Recorded Investment with Allowance |  |  | Total Recorded Investment |  |  | Related Allowance |  |  | Average Recorded Investment |  |  | Interest Income Recognized |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured by 1-4 family residential |  | $ | 560 |  |  | $ | 549 |  |  | $ | — |  |  | $ | 549 |  |  | $ | — |  |  | $ | 593 |  |  | $ | 11 |
Other real estate loans |  |  | 29 |  |  |  | 17 |  |  |  | — |  |  |  | 17 |  |  |  | — |  |  |  | 24 |  |  |  | — |
Commercial and industrial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 823 |  |  |  | — |
Total |  | $ | 589 |  |  | $ | 566 |  |  | $ | — |  |  | $ | 566 |  |  | $ | — |  |  | $ | 1,440 |  |  | $ | 11 |
The “Recorded Investment” amounts in the table above represent the outstanding principal balance on each loan represented in the table. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the table plus any amounts that have been charged off on each loan and/or payments that have been applied towards principal on non-accrual loans. Only loan classes with balances are included in the tables above. As of December 31, 2022, loans classified as TDRs and included in impaired loans in the disclosure above totaled $101 thousand. At December 31, 2022, none of the loans classified as TDRs were performing under the restructured terms and all were considered non-performing assets. Modified terms under TDRs included rate reductions, extension of terms that are considered to be below market, conversion to interest only, and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. For the nine months ended September 30, 2023 and 2022, there were no TDRs that subsequently defaulted within twelve months of the loan modification. Management defines default as over ninety days past due or the foreclosure and repossession of the collateral or charge-off of the loan during the twelve month period subsequent to the modification. Collateral-Dependent Loans The Company may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The Company reevaluates the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:
| • | Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.
| • | Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.
| • | Home equity lines of credit are generally secured by second mortgages on residential real estate property.
| • | Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.
The following table presents the amortized cost of collateral-dependent loans (in thousands):
|  | September 30, 2023 |
(Dollars in thousands) |  | Real Estate Secured |  |  | Non-Real Estate Secured |  |  | Total Collateral-Dependent Loans |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 39 |  |  | $ | — |  |  | $ | 39 |
Secured by 1-4 family residential |  |  | 546 |  |  |  | — |  |  |  | 546 |
Other real estate loans |  |  | 67 |  |  |  | — |  |  |  | 67 |
Commercial and industrial |  |  | — |  |  |  | 2,464 |  |  |  | 2,464 |
Total |  | $ | 652 |  |  | $ | 2,464 |  |  | $ | 3,116 |
At September 30, 2023, there was an allowance for credit losses of $307 thousand on collateral-dependent loans. Modifications Made to Borrowers Experiencing Financial Difficulty The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the real estate loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction. The following table shows the amortized cost basis as of September 30, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of loans and type of concession granted and describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
|  | Term Extension
(Dollars in thousands) |  | Amortized Cost Basis |  |  | % of Total Loan Type |  | Financial Effect
Real estate loans: |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  |  | 0.00 | % |
Secured by 1-4 family residential |  |  | 64 |  |  |  | 0.02 | % | Converted HELOC to 15 year term loan.
Other real estate loans |  |  | — |  |  |  | 0.00 | % |
Commercial and industrial |  |  | 2,464 |  |  |  | 2.10 | % | Decrease in loan payment
Total |  | $ | 2,528 |  |  |  | 2.12 | % |
|  | Principal Forgiveness
(Dollars in thousands) |  | Amortized Cost Basis |  |  | % of Total Loan Type |  | Financial Effect
Real estate loans: |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  |  | 0.00 | % |
Secured by 1-4 family residential |  |  | 17 |  |  |  | 0.01 | % | Reduced the amortized cost basis of the loan by $29 thousand.
Other real estate loans |  |  | — |  |  |  | 0.00 | % |
Commercial and industrial |  |  | — |  |  |  | 0.00 | % |
Total |  | $ | 17 |  |  |  | 0.01 | % |
Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. For the nine months ended September 30, 2023 and 2022, there were no payment defaults of modified loans that were modified during the previous twelve months. At September 30, 2023, there was an allowance for credit losses of $307 thousand on modified loans. Unfunded Commitments The Company maintains a separate reserve for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the consolidated balance sheet. The reserve for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models and approaches for the Company's other loan portfolio segments described in Note 1, as these unfunded commitments share similar risk characteristics as its loan portfolio segments. The Company has identified the unfunded portion of certain lines of credit as unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement. On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $153 thousand for the adoption of ASC Topic 326. For the three months ended September 30, 2023, the Company recorded a recovery of credit losses for unfunded commitments of $8 thousand. At September 30, 2023, the liability for credit losses on off-balance-sheet exposures included in other liabilities was $189 thousand.

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