ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
(1) Effective January 1, 2023, Citizens adopted FASB ASU 2016-13 using the modified restrospective approach. Therefore prior period balances are presented under legacy GAAP and may not be comparable to current period presentation.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three months ended March 31, 2023
(Unaudited)
Note 1. Nature of Business and Summary of Significant Accounting Policies
(in thousands, except share and per share data)
Nature of Business
Citizens Holding Company (referred to herein as the “Company”) owns and operates The Citizens Bank of Philadelphia (the “Bank”). As a state bank, the Bank is subject to regulations of the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Company. The Company is also subject to the regulations of the Federal Reserve. The area served by the Bank is east central Mississippi, along with southern and northern counties of Mississippi and their surrounding areas. Services are provided at multiple branch offices.
Basis of Presentation
These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended March 31, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.
The interim consolidated financial statements of the Company include the accounts of its wholly owned subsidiary, The Citizens Bank of Philadelphia. All significant intercompany transactions have been eliminated in consolidation.
For further information and significant accounting policies of the Company, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 16, 2023.
Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses (“ACL”) and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, or other real estate owned (“OREO”). In connection with the determination of the ACL and valuation of foreclosed real estate, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and to value foreclosed real estate, future additions to the allowance or adjustments to the valuation may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL and valuations of foreclosed real estate. Such agencies may require the Company to recognize additions to the allowance or to make adjustments to the valuation based on their judgments about information available to them at the time of their examination. Due to these factors, it is reasonably possible that the ACL and valuation of foreclosed real estate may change materially in the near term.
Impact of Recently-Issued Accounting Standards and Pronouncements:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This update to Accounting Standards Codification Topic (“ASC”) 326, Financial Instruments - Credit Losses (“ASC 326”), significantly changed the way entities recognize impairment on many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset’s remaining life. FASB describes this impairment recognition model as the current expected credit loss (“CECL”) model and believes the CECL model will result in more timely recognition of credit losses since the CECL model incorporates expected credit losses versus incurred credit losses. The scope of FASB’s CECL model includes loans, held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees that are not accounted for at fair value. Additionally, ASU 2016-13 amended the accounting for credit losses on available-for-sale securities and purchased financial assets with credit deterioration (“PCD”). In the remainder of these Notes to Consolidated Financial Statements, references to “CECL” or to “FASB ASU 2016-13” shall mean the accounting standards and principles set forth in ASC 326 after giving effect to ASU 2016-13 and the clarifications thereto discussed in the next paragraph.
The Company adopted ASU 2016-13 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. To implement CECL, entities are required to apply a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company recorded a one-time cumulative-effect adjustment as disclosed in the table below.
| |
|
December 31, 2022
|
|
|
Impact of FASB ASU
|
|
|
January 1, 2023
|
|
| |
|
(as reported)
|
|
|
2016-13 Adoption |
|
|
(adjusted)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL
|
|
$ |
(5,264 |
) |
|
$ |
(634 |
) |
|
$ |
(5,898 |
) |
|
Deferred tax assets, net
|
|
|
29,574 |
|
|
|
327 |
|
|
|
29,901 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL on off-balance sheet exposures
|
|
|
- |
|
|
|
677 |
|
|
|
677 |
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$ |
102,525 |
|
|
$ |
(984 |
) |
|
$ |
101,541 |
|
Additionally, the Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans and thus the measurement of the ACL in the Company’s loan portfolio. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Consolidated Balance Sheets and totaled $1,935 and $1,981 at March 31, 2023 and December 31, 2022, respectively, and is excluded from estimated credit losses.
Note 2. Commitments and Contingent Liabilities
(in thousands)
In the ordinary course of business, the Company enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of March 31, 2023, the Company had entered into loan commitments with certain customers with an aggregate unused balance of $71,563 compared to an aggregate unused balance of $75,602 at December 31, 2022. There were $3,488 of letters of credit outstanding at March 31, 2023 and $5,438 at December 31, 2022. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Company does incorporate expectations about the utilization under its credit-related commitments into its asset and liability management program.
The Company is a party to lawsuits and other claims that arise in the ordinary course of business, all of which are being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provisions are made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. At the present time, management believes, based on the advice of legal counsel, that the final resolution of pending legal proceedings will not likely have a material impact on the Company’s consolidated financial condition or results of operations.
Note 3. Net Income per Share
(in thousands, except share and per share data)
Net income per share - basic has been computed based on the weighted average number of shares outstanding during each period. Net income per share - diluted has been computed based on the weighted average number of shares outstanding during each period plus the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. Net income per share was computed as follows:
| |
|
For the Three Months
|
|
| |
|
Ended March 31,
|
|
| |
|
2023
|
|
|
2022
|
|
|
Basic weighted average shares outstanding
|
|
|
5,595,320 |
|
|
|
5,587,070 |
|
|
Dilutive effect of granted options
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
5,595,320 |
|
|
|
5,587,070 |
|
| |
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,140 |
|
|
$ |
2,036 |
|
|
Net income per share-basic
|
|
$ |
0.20 |
|
|
$ |
0.36 |
|
|
Net income per share-diluted
|
|
$ |
0.20 |
|
|
$ |
0.36 |
|
Note 4. Equity Compensation Plans
(in thousands, except per share data)
The Company has adopted the 2013 Incentive Compensation Plan (the “2013 Plan”), which the Company intends to use for future equity grants to employees, directors or consultants until the termination or expiration of the 2013 Plan.
No options were outstanding under the 2013 Plan as of March 31, 2023.
During 2022, the Company’s directors received restricted stock grants totaling 8,250 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 27, 2023 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $157 and is expensed ratably over the one-year vesting period.
During 2023, the Company’s Chief Executive Officer (“CEO”) received restricted stock grants totaling 3,868 shares of common stock under the 2013 Plan. These grants vest over a four-year period ending March 1, 2027 during which time the CEO has rights to vote the shares and to receive dividends. The grant date fair value of these shares was $60 and is expensed ratably over the four-year vesting period.
Note 5. Income Taxes
(in thousands)
For the three months ended March 31, 2023 and 2022, the Company recorded a provision for income taxes totaling $154 and $390, respectively. The effective tax rate was 11.90% and 16.08% for the three months ended March 31, 2023 and 2022, respectively.
The provision for income taxes includes both federal and state income taxes and differs from the statutory rate due to favorable permanent differences primarily related to tax free municipal investments.
Note 6. Securities Available-for-Sale and Held-to-Maturity
(in thousands)
The amortized cost and estimated fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized were as follows:
| |
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
March 31, 2023
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
| |
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
| Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$ |
104,478 |
|
|
$ |
6 |
|
|
$ |
8,948 |
|
|
$ |
95,536 |
|
|
State, County, Municipals
|
|
|
134,667 |
|
|
|
24 |
|
|
|
28,930 |
|
|
|
105,761 |
|
|
Other securities
|
|
|
500 |
|
|
$ |
- |
|
|
$ |
57 |
|
|
$ |
443 |
|
|
Total
|
|
$ |
239,645 |
|
|
$ |
30 |
|
|
$ |
37,935 |
|
|
$ |
201,740 |
|
| |
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
December 31, 2022
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
| |
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
| Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$ |
107,055 |
|
|
$ |
- |
|
|
$ |
10,083 |
|
|
$ |
96,972 |
|
|
State, County, Municipals
|
|
|
134,906 |
|
|
|
- |
|
|
|
30,993 |
|
|
|
103,913 |
|
|
Other securities
|
|
|
500 |
|
|
|
- |
|
|
|
63 |
|
|
|
437 |
|
|
Total
|
|
$ |
242,461 |
|
|
$ |
- |
|
|
$ |
41,139 |
|
|
$ |
201,322 |
|
The amortized cost and estimated fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses recognized were as follows:
| |
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
March 31, 2023
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
| |
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
| Securities held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$ |
4,018 |
|
|
$ |
- |
|
|
$ |
364 |
|
|
$ |
3,654 |
|
|
Mortgage backed securities
|
|
|
305,356 |
|
|
|
- |
|
|
|
21,219 |
|
|
|
284,137 |
|
|
State, County, Municipals
|
|
|
92,863 |
|
|
|
- |
|
|
|
4,702 |
|
|
|
88,161 |
|
|
Total
|
|
$ |
402,237 |
|
|
$ |
- |
|
|
$ |
26,285 |
|
|
$ |
375,952 |
|
| |
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
December 31, 2022
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
| |
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$ |
4,002 |
|
|
$ |
- |
|
|
$ |
367 |
|
|
$ |
3,635 |
|
|
Mortgage backed securities
|
|
|
309,748 |
|
|
|
- |
|
|
|
24,654 |
|
|
|
285,094 |
|
|
State, County, Municipals
|
|
|
92,840 |
|
|
|
- |
|
|
|
6,277 |
|
|
|
86,563 |
|
|
Total
|
|
$ |
406,590 |
|
|
$ |
- |
|
|
$ |
31,298 |
|
|
$ |
375,292 |
|
During the third quarter of 2022, the Company reclassified $413,921 of securities available-for-sale to securities held-to-maturity. At the date of this transfer, the net unrealized holding loss on the transferred securities totaled approximately $71,319 ($53,525 net of tax).
The securities were transferred at fair value, which became the cost basis for the securities held-to-maturity. The net unrealized holding loss is amortized over the remaining life of the securities in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. At March 31, 2023, the net unamortized, unrealized loss on transferred securities included in accumulated other comprehensive income (loss) in the accompanying balance sheet totaled approximately $68,511 ($51,417, net of tax) compared to $69,612 ($52,244, net of tax) at December 31, 2022.
ACL on Securities
ASU 2016-13 applies to all financial instruments carried at amortized cost, including securities held-to-maturity, and makes targeted improvements to the accounting for credit losses on securities available-for-sale.
Under ASU 2016-13, the allowance for credit losses is an estimate measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.
In order to comply with ASU 2016-13, the Company conducted a review of its investment portfolio and determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero. This zero-credit loss assumption applies to debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. The reasons behind the adoption of the zero-credit loss assumption are as follows:
| |
●
|
Long history with no credit losses
|
| |
●
|
Guaranteed by a sovereign entity
|
| |
●
|
Widely recognized as “risk-free rate”
|
| |
●
|
Can print its own currency
|
The Company will continuously monitor any changes in economic conditions, credit downgrades, changes to explicit or implicit guarantees granted to certain debt issuers, and any other relevant information that would indicate potential credit deterioration and prompt the Company to reconsider its zero-credit loss assumption.
At the date of adoption, the Company’s estimated allowance for credit losses on securities available-for-sale and held-to-maturity under ASU 2016-13 was deemed immaterial due to the composition of these portfolios. Both portfolios consist primarily of U.S. government agency guaranteed mortgage-backed securities for which the risk of loss is minimal. Therefore, the Company did not recognize a cumulative effect adjustment through retained earnings related to the available-for-sale or held-to-maturity securities.
Securities Available-for-Sale
ASU 2016-13 makes targeted improvements to the accounting for credit losses on securities available-for-sale. The concept of other-than-temporarily impaired has been replaced with the allowance for credit losses. Unlike securities held-to-maturity, securities available-for-sale are evaluated on an individual level and pooling of securities is not allowed.
Quarterly, the Company evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, the Company performs further analysis to ensure that the changes in unrealized losses are, in fact, temporary in nature by correlating the changes to the yield curve movement.
Should it be determined that a credit loss exists, the credit portion of the allowance will be measured using a discounted cash flow (“DCF”) analysis using the effective interest rate as of the security’s purchase date. The amount of credit loss the Company records will be limited to the amount by which the amortized cost exceeds the fair value.
The DCF analysis utilizes contractual maturities, as well as third-party credit ratings and cumulative default rates published annually by Moody’s Investor Service.
At March 31, 2023, the results of the analysis did not identify any available-for-sale securities that violate the credit loss triggers; therefore, no DCF analysis was performed and no credit loss was recognized on any of the securities available-for-sale.
Securities Held-to-Maturity
ASU 2016-13 requires institutions to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risks exist. The Company uses several levels of segmentation in order to measure expected credit losses:
| |
●
|
The portfolio is segmented into agency and non-agency securities.
|
| |
●
|
The non-agency securities consists primarily of municipal securities.
|
Each individual segment is categorized by third-party credit ratings.
As discussed above, the Company has determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero, which include debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. This assumption will be reviewed and attested to quarterly. The Company is using an internally built model to verify the accuracy of third-party provided calculations.
At March 31, 2023, the Company’s securities held-to-maturity totaled $402,237. The potential credit loss exposure was $92,863 and consisted of municipal securities. After applying appropriate probability of default and loss given default assumptions, the total amount of current expected credit losses was deemed immaterial. Therefore, no reserve was recorded at March 31, 2023.
At March 31, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held-to-maturity classified as nonaccrual at March 31, 2023.
The Company monitors the credit quality of municipal securities held-to-maturity on a quarterly basis through credit ratings. The following table presents the amortized cost of the Company’s securities held-to-maturity by credit rating, as determined by Moody’s Investor Services, at March 31, 2023 and December 31, 2022:
| |
|
March 31, 2023
|
|
|
December 31, 2022
|
|
|
Aaa
|
|
$ |
16,791 |
|
|
$ |
18,096 |
|
|
Aa1 to Aa3
|
|
|
41,492 |
|
|
|
40,174 |
|
|
Not Rated (1)
|
|
|
34,580 |
|
|
|
34,570 |
|
| |
|
$ |
92,863 |
|
|
$ |
92,840 |
|
(1) Not rated securities were municipals that did not have a current Moody’s rating as of the dates reported above. However, all not rated securities are investment grade and are rated between AAA and AA- by Standard and Poor’s rating agency.
The tables below show the Company’s gross unrealized losses and fair value of available-for-sale and held-to-maturity investments for which an ACL has not been recorded, aggregated by investment category and length of impairment at March 31, 2023 and December 31, 2022.
|
March 31, 2023
|
|
|
Available-for-sale
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
| |
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Description of Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$ |
55,492 |
|
|
$ |
1,878 |
|
|
$ |
36,256 |
|
|
$ |
7,070 |
|
|
$ |
91,748 |
|
|
$ |
8,948 |
|
|
State, County, Municipal
|
|
|
16,842 |
|
|
|
466 |
|
|
|
87,008 |
|
|
|
28,464 |
|
|
|
103,850 |
|
|
|
28,930 |
|
|
Other securities
|
|
|
- |
|
|
|
- |
|
|
|
443 |
|
|
|
57 |
|
|
|
443 |
|
|
|
57 |
|
|
Total
|
|
$ |
72,334 |
|
|
$ |
2,344 |
|
|
$ |
123,707 |
|
|
$ |
35,591 |
|
|
$ |
196,041 |
|
|
$ |
37,935 |
|
|
Held-to-maturity
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
| |
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Description of Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,654 |
|
|
$ |
364 |
|
|
$ |
3,654 |
|
|
$ |
364 |
|
|
Mortgage backed securities
|
|
|
- |
|
|
|
- |
|
|
|
284,137 |
|
|
|
21,219 |
|
|
|
284,137 |
|
|
|
21,219 |
|
|
State, County, Municipal
|
|
|
- |
|
|
|
- |
|
|
|
88,161 |
|
|
|
4,702 |
|
|
|
88,161 |
|
|
|
4,702 |
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
375,952 |
|
|
$ |
26,285 |
|
|
$ |
375,952 |
|
|
$ |
26,285 |
|
|
December 31, 2022
|
|
|
Available-for-sale
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
| |
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Description of Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$ |
70,652 |
|
|
$ |
3,838 |
|
|
$ |
26,320 |
|
|
$ |
6,245 |
|
|
$ |
96,972 |
|
|
$ |
10,083 |
|
|
State, County, Municipal
|
|
|
45,200 |
|
|
|
9,027 |
|
|
|
58,713 |
|
|
|
21,966 |
|
|
|
103,913 |
|
|
|
30,993 |
|
|
Other securities
|
|
|
- |
|
|
|
- |
|
|
|
437 |
|
|
|
63 |
|
|
|
437 |
|
|
|
63 |
|
|
Total
|
|
$ |
115,852 |
|
|
$ |
12,865 |
|
|
$ |
85,470 |
|
|
$ |
28,274 |
|
|
$ |
201,322 |
|
|
$ |
41,139 |
|
|
Held-to-maturity
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
| |
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Description of Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,635 |
|
|
$ |
367 |
|
|
$ |
3,635 |
|
|
$ |
367 |
|
|
Mortgage backed securities
|
|
|
17,882 |
|
|
|
1,332 |
|
|
|
267,212 |
|
|
|
23,322 |
|
|
|
285,094 |
|
|
|
24,654 |
|
|
State, County, Municipal
|
|
|
15,059 |
|
|
|
781 |
|
|
|
71,504 |
|
|
|
5,496 |
|
|
|
86,563 |
|
|
|
6,277 |
|
|
Total
|
|
$ |
32,941 |
|
|
$ |
2,113 |
|
|
$ |
342,351 |
|
|
$ |
29,185 |
|
|
$ |
375,292 |
|
|
$ |
31,298 |
|
The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.
Contractual Maturities
The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2023 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.
| |
|
Available-for-sale
|
|
|
Held-to-maturity
|
|
| |
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
| |
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$ |
720 |
|
|
$ |
663 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Due after one year through five years
|
|
|
3,155 |
|
|
|
3,076 |
|
|
|
- |
|
|
|
- |
|
|
Due after five years through ten years
|
|
|
5,275 |
|
|
|
5,008 |
|
|
|
- |
|
|
|
- |
|
|
Due after ten years
|
|
|
126,017 |
|
|
|
97,457 |
|
|
|
96,881 |
|
|
|
91,815 |
|
|
Residential mortgage backed securities
|
|
|
91,827 |
|
|
|
83,144 |
|
|
|
246,433 |
|
|
|
229,613 |
|
|
Commercial mortgage backed securities
|
|
|
12,651 |
|
|
|
12,392 |
|
|
|
58,923 |
|
|
|
54,524 |
|
|
Total
|
|
$ |
239,645 |
|
|
$ |
201,740 |
|
|
$ |
402,237 |
|
|
$ |
375,952 |
|
Securities Pledged
At March 31, 2023 and December 31, 2022, securities with a carrying value of $462,291 and $462,954, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.
Note 7. LHFI and ACL
(in thousands, except number of loans)
The composition of LHFI at March 31, 2023 and December 31, 2022 was as follows:
| |
|
March 31, 2023 |
|
|
December 31, 2022
|
|
| Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
Land Development and Construction
|
|
$ |
53,528 |
|
|
$ |
52,731 |
|
|
Farmland
|
|
|
11,423 |
|
|
|
11,437 |
|
|
1-4 Family Mortgages
|
|
|
93,480 |
|
|
|
92,148 |
|
|
Commercial Real Estate
|
|
|
312,276 |
|
|
|
316,541 |
|
|
Total Real Estate Loans
|
|
|
470,707 |
|
|
|
472,857 |
|
| Business Loans: |
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
80,207 |
|
|
|
96,500 |
|
|
Farm Production and Other Farm Loans
|
|
|
474 |
|
|
|
504 |
|
|
Total Business Loans
|
|
|
80,681 |
|
|
|
97,004 |
|
| Consumer Loans: |
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
13,072 |
|
|
|
12,992 |
|
|
Credit Cards
|
|
|
2,780 |
|
|
|
2,738 |
|
|
Total Consumer Loans
|
|
|
15,852 |
|
|
|
15,730 |
|
|
Gross LHFI
|
|
|
567,240 |
|
|
|
585,591 |
|
| |
|
|
|
|
|
|
|
|
|
Less Allowance for credit losses
|
|
|
(6,017 |
) |
|
|
(5,264 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Net LHFI
|
|
$ |
561,223 |
|
|
$ |
580,327 |
|
Nonaccrual and Past Due LHFI
The amortized cost basis of period-end, nonaccrual and past due LHFI, segregated by class, were as follows:
| |
|
Nonaccrual With No Allowance for Credit Loss
|
|
|
Nonaccrual
|
|
|
Loans Past Due 90 Days or More Still Accruing
|
|
|
March 31, 2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development and Construction
|
|
$ |
- |
|
|
$ |
2 |
|
|
$ |
- |
|
|
Farmland
|
|
|
28 |
|
|
|
108 |
|
|
|
- |
|
|
1-4 Family Mortgages
|
|
|
184 |
|
|
|
1,712 |
|
|
|
- |
|
|
Commercial Real Estate
|
|
|
691 |
|
|
|
825 |
|
|
|
- |
|
|
Total Real Estate Loansg
|
|
|
903 |
|
|
|
2,647 |
|
|
|
- |
|
|
Business Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
196 |
|
|
|
307 |
|
|
|
- |
|
|
Farm Production and Other Farm Loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total Business Loans
|
|
|
196 |
|
|
|
307 |
|
|
|
- |
|
|
Consumer Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
- |
|
|
|
39 |
|
|
|
- |
|
|
Credit Cards
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
Total Consumer Loans
|
|
|
- |
|
|
|
39 |
|
|
|
5 |
|
|
Total
|
|
$ |
1,099 |
|
|
$ |
2,993 |
|
|
$ |
5 |
|
The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior period.
| |
|
Nonaccrual
|
|
|
Loans Past Due 90 Days or More Still Accruing
|
|
|
December 31, 2022
|
|
|
|
|
|
|
|
|
| Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
Land Development and Construction
|
|
$ |
- |
|
|
$ |
4 |
|
|
Farmland
|
|
|
117 |
|
|
|
- |
|
|
1-4 Family Mortgages
|
|
|
1,720 |
|
|
|
- |
|
|
Commercial Real Estate
|
|
|
846 |
|
|
|
95 |
|
|
Total Real Estate Loans
|
|
|
2,683 |
|
|
|
99 |
|
| Business Loans: |
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
281 |
|
|
|
- |
|
|
Farm Production and Other Farm Loans
|
|
|
- |
|
|
|
- |
|
|
Total Business Loans
|
|
|
281 |
|
|
|
- |
|
| Consumer Loans: |
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
24 |
|
|
|
- |
|
|
Credit Cards
|
|
|
- |
|
|
|
12 |
|
|
Total Consumer Loans
|
|
|
24 |
|
|
|
12 |
|
|
Total
|
|
$ |
2,988 |
|
|
$ |
111 |
|
No material interest income was recognized in the income statement on nonaccrual LHFI for each of the periods ended March 31, 2023 and 2022.
An aging analysis of the amortized cost basis of LHFI (including nonaccrual LHFI), segregated by class, was as follows:
|
March 31, 2023
|
|
30 - 89 Days Past Due
|
|
|
Greater Than 89 Days
Past Due
|
|
|
Total Past Due
|
|
|
Current Loans
|
|
|
Total
|
|
| Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development and Construction
|
|
$ |
250 |
|
|
$ |
- |
|
|
$ |
250 |
|
|
$ |
53,278 |
|
|
$ |
53,528 |
|
|
Farmland
|
|
|
233 |
|
|
|
- |
|
|
|
233 |
|
|
|
11,190 |
|
|
|
11,423 |
|
|
1-4 Family Mortgages
|
|
|
1,527 |
|
|
|
216 |
|
|
|
1,743 |
|
|
|
91,737 |
|
|
|
93,480 |
|
|
Commercial Real Estate
|
|
|
640 |
|
|
|
504 |
|
|
|
1,144 |
|
|
|
311,132 |
|
|
|
312,276 |
|
|
Total Real Estate Loans
|
|
|
2,650 |
|
|
|
720 |
|
|
|
3,370 |
|
|
|
467,337 |
|
|
|
470,707 |
|
| Business Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
271 |
|
|
|
266 |
|
|
|
537 |
|
|
|
79,670 |
|
|
|
80,207 |
|
|
Farm Production and Other Farm Loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
474 |
|
|
|
474 |
|
|
Total Business Loans
|
|
|
271 |
|
|
|
266 |
|
|
|
537 |
|
|
|
80,144 |
|
|
|
80,681 |
|
| Consumer Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
126 |
|
|
|
- |
|
|
|
126 |
|
|
|
12,946 |
|
|
|
13,072 |
|
|
Credit Cards
|
|
|
60 |
|
|
|
5 |
|
|
|
65 |
|
|
|
2,715 |
|
|
|
2,780 |
|
|
Total Consumer Loans
|
|
|
186 |
|
|
|
5 |
|
|
|
191 |
|
|
|
15,661 |
|
|
|
15,852 |
|
|
Total
|
|
$ |
3,107 |
|
|
$ |
991 |
|
|
$ |
4,098 |
|
|
$ |
563,142 |
|
|
$ |
567,240 |
|
|
December 31, 2022
|
|
30 - 89 Days Past Due
|
|
|
Greater Than 89 Days
Past Due
|
|
|
Total Past Due
|
|
|
Current Loans
|
|
|
Total
|
|
| Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development and Construction
|
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
52,727 |
|
|
$ |
52,731 |
|
|
Farmland
|
|
|
38 |
|
|
|
30 |
|
|
|
68 |
|
|
|
11,369 |
|
|
|
11,437 |
|
|
1-4 Family Mortgages
|
|
|
1,799 |
|
|
|
439 |
|
|
|
2,238 |
|
|
|
89,910 |
|
|
|
92,148 |
|
|
Commercial Real Estate
|
|
|
933 |
|
|
|
486 |
|
|
|
1,419 |
|
|
|
315,122 |
|
|
|
316,541 |
|
|
Total Real Estate Loans
|
|
|
2,770 |
|
|
|
959 |
|
|
|
3,729 |
|
|
|
469,128 |
|
|
|
472,857 |
|
| Business Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
109 |
|
|
|
277 |
|
|
|
386 |
|
|
|
96,114 |
|
|
|
96,500 |
|
|
Farm Production and Other Farm Loans
|
|
|
4 |
|
|
|
- |
|
|
|
4 |
|
|
|
500 |
|
|
|
504 |
|
|
Total Business Loans
|
|
|
113 |
|
|
|
277 |
|
|
|
390 |
|
|
|
96,614 |
|
|
|
97,004 |
|
| Consumer Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
66 |
|
|
|
23 |
|
|
|
89 |
|
|
|
12,903 |
|
|
|
12,992 |
|
|
Credit Cards
|
|
|
56 |
|
|
|
12 |
|
|
|
68 |
|
|
|
2,670 |
|
|
|
2,738 |
|
|
Total Consumer Loans
|
|
|
122 |
|
|
|
35 |
|
|
|
157 |
|
|
|
15,573 |
|
|
|
15,730 |
|
|
Total
|
|
$ |
3,005 |
|
|
$ |
1,271 |
|
|
$ |
4,276 |
|
|
$ |
581,315 |
|
|
$ |
585,591 |
|
Impaired LHFI
Prior to the adoption of FASB ASC Topic 326, the Company’s individually evaluated impaired LHFI included all commercial substandard relationships of $100 or more, which were specifically reviewed for impairment and deemed impaired, and all LHFI classified as troubled-debt restructurings (“TDRs”) in accordance with FASB ASC Subtopic 310-10-50-20 “Impaired Loans.” Once a LHFI was deemed to be impaired, the full difference between book value and the most likely estimate of the collateral’s net realizable value was charged off or a specific reserve was established.
No material interest income was recognized in the income statement on impaired LHFI for the period ended March 31, 2022.
The following disclosures are presented under GAAP in effect prior to the adoption of CECL that are no longer applicable or required. The Company has included these disclosures to address the applicable prior periods.
Loans formerly accounted for under FASB ASC 310-20, “Nonrefundable Fees and Other Cost” (“ASC 310-20”), and which are impaired loans recognized in conformity with ASC 310, “Receivables” (“ASC 310”), segregated by class, were as follows as of December 31, 2022:
| |
|
|
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Unpaid
|
|
|
Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
|
|
|
Average
|
|
| |
|
Principal
|
|
|
With No
|
|
|
With
|
|
|
Recorded
|
|
|
Related
|
|
|
Recorded
|
|
| |
|
Balance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Allowance
|
|
|
Investment
|
|
| Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development and Construction
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
86 |
|
|
Farmland
|
|
|
30 |
|
|
|
30 |
|
|
|
- |
|
|
|
30 |
|
|
|
- |
|
|
|
32 |
|
|
1-4 Family Mortgages
|
|
|
190 |
|
|
|
190 |
|
|
|
- |
|
|
|
190 |
|
|
|
- |
|
|
|
479 |
|
|
Commercial Real Estate
|
|
|
3,023 |
|
|
|
795 |
|
|
|
2,066 |
|
|
|
2,861 |
|
|
|
116 |
|
|
|
1,996 |
|
|
Total Real Estate Loans
|
|
|
3,243 |
|
|
|
1,015 |
|
|
|
2,066 |
|
|
|
3,081 |
|
|
|
116 |
|
|
$ |
2,593 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Business Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
304 |
|
|
|
196 |
|
|
|
- |
|
|
|
196 |
|
|
|
- |
|
|
$ |
214 |
|
|
Total Business Loans
|
|
|
304 |
|
|
|
196 |
|
|
|
- |
|
|
|
196 |
|
|
|
- |
|
|
$ |
214 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$ |
3,547 |
|
|
$ |
1,211 |
|
|
$ |
2,066 |
|
|
$ |
3,277 |
|
|
$ |
116 |
|
|
$ |
2,807 |
|
Loan Modifications
The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023. The amendments in this ASU were applied prospectively, and therefore, loan modification and charge off information is provided only for those items occurring after the January 1, 2023 adoption date.
Based on the guidance in ASU 2022-02, a loan modification or refinancing results in a new loan if the terms of the new loan are at least as favorable to the lender as the terms with customers with similar collection risks that are not refinancing or restructuring their loans and the modification to the terms of the loans are more than minor. If a loan modification or refinancing does not result in a new loan, it is classified as a loan modification. There are additional disclosures for the modification of loans with borrowers experiencing financial difficulty that results in a direct change in the timing or amount of contractual cash flows. The disclosures are applicable to situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions or a combination of any of these terms. If the Company modifies any loans to borrowers in financial distress that involves principal forgiveness, the amount of principal forgiven is charged off against the ACL.
The Company had no loan modifications to borrowers experiencing financial difficulties in the first quarter of 2023.
At March 31, 2023, LHFI classified as modified loans totaled $2,050. At March 31, 2023, modified loans were primarily comprised of interest rate concessions. The Company had $-0- thousand in unused commitments on modified loans at March 31, 2023.
The allocated ACL attributable to modified loans was $100 at March 31, 2023. The Company had no commitments to lend additional funds on this troubled debt restructuring as of March 31, 2023.
There were no loans modified within the last twelve months for which there was a payment default during the three months ended March 31, 2023.
At March 31, 2023 and December 31, 2022, the amortized cost of loans secured by Real Estate – 1-4 Family Mortgage in the process of foreclosure was $-0- and $-0-, respectively.
Collateral-Dependent Loans
The following tables present the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of March 31, 2023:
|
March 31, 2023
|
|
Inventory |
|
|
Real Estate |
|
|
Receivables |
|
|
Total
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development and Construction
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
Farmland
|
|
|
- |
|
|
|
28 |
|
|
|
- |
|
|
|
28 |
|
|
1-4 Family Mortgages
|
|
|
- |
|
|
|
184 |
|
|
|
- |
|
|
|
184 |
|
|
Commercial Real Estate
|
|
|
- |
|
|
|
2,741 |
|
|
|
- |
|
|
|
2,741 |
|
|
Total Real Estate Loans
|
|
|
- |
|
|
|
2,953 |
|
|
|
- |
|
|
|
2,953 |
|
|
Business Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
92 |
|
|
|
- |
|
|
|
104 |
|
|
|
196 |
|
|
Farm Production and Other Farm Loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total Business Loans
|
|
|
92 |
|
|
|
- |
|
|
|
104 |
|
|
|
196 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
92 |
|
|
$ |
2,953 |
|
|
$ |
104 |
|
|
$ |
3,149 |
|
A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale of the collateral. The following provides a qualitative description by class of loan of the collateral that secures the Company’s collateral-dependent LHFI:
| |
●
|
Loans secured by real estate – Loans within these loan classes are secured by liens on real estate properties. There have been no significant changes to the collateral that secures these financial assets during the period.
|
| |
●
|
Business loans – Loans within this loan class are primarily secured by inventory, accounts receivables, equipment and other non-real estate collateral. There have been no significant changes to the collateral that secures these financial assets during the period.
|
Credit Quality Indicators
The Company utilizes a risk grading matrix to assign a risk grade to each of its loans when originated and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows.
Grade 1. MINIMAL RISK - These loans are without loss exposure to the Company. This classification is reserved for only the best, well secured loans to borrowers with significant capital strength, low leverage, stable earnings and growth and other readily available financing alternatives. This type of loan would also include loans secured by a program of the government.
Grade 2. MODEST RISK - These loans include borrowers with solid credit quality and moderate risk of loss. These loans may be fully secured by certificates of deposit with another reputable financial institution or secured by readily marketable securities with acceptable margins.
Grade 3. AVERAGE RISK - This is the rating assigned to most of the loans held by the Company. This includes loans with average loss exposure and average overall quality. These loans should liquidate through possessing adequate collateral and adequate earnings of the borrower. In addition, these loans are properly documented and are in accordance with all aspects of the current loan policy.
Grade 4. ACCEPTABLE RISK - Borrower generates sufficient cash flow to fund debt service but most working asset and capital expansion needs are provided from external sources. Profitability and key balance sheet ratios are usually close to peers but one or more may not align with peers.
Grade 5. MANAGEMENT ATTENTION - Borrower has potential weaknesses resulting from performance trends or management concerns. The financial condition of the borrower has taken a negative turn and may be temporarily strained. Cash flow is weak but cash reserves remain adequate to meet debt service. Management weakness is evident.
Grade 6. OTHER LOANS ESPECIALLY MENTIONED (“OLEM”) - Loans in this category are fundamentally sound but possess some weaknesses. OLEM loans have weaknesses, which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss.
Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss.
Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. A doubtful classification could reflect the fact that the primary source of repayment is gone and serious doubt exists as to the quality of a secondary source of repayment.
Grade 9. LOSS - Loans classified 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 occur in the future. Also included in this classification is the defined loss portion of loans rated substandard assets and doubtful assets.
These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at March 31, 2023.
The following table details the amortized cost basis of LHFI, segregated by loan origination year, grade and class, as of March 31, 2023:
Term Loans Amortized Cost Basis by Origination Year
| March 31, 2023 |
|
2023
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
Prior
|
|
|
Revolving
Loans
|
|
|
Total Loans
|
|
| Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Land Development and Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfactory - Categories 1-4
|
|
$ |
2,496 |
|
|
$ |
7,876 |
|
|
$ |
6,566 |
|
|
$ |
7,982 |
|
|
$ |
950 |
|
|
$ |
1,167 |
|
|
$ |
24,425 |
|
|
$ |
51,462 |
|
|
Special Mention - Category 5 & 6
|
|
|
- |
|
|
|
1,104 |
|
|
|
679 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,783 |
|
|
Substandard - Category 7
|
|
|
- |
|
|
|
279 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
|
|
283 |
|
| Doubtful - Category 8 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss 9
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total Land Development and Construction
|
|
|
2,496 |
|
|
|
9,259 |
|
|
|
7,245 |
|
|
|
7,982 |
|
|
|
950 |
|
|
|
1,171 |
|
|
|
24,425 |
|
|
|
53,528 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Satisfactory - Categories 1-4 |
|
|
315 |
|
|
|
1,830 |
|
|
|
1,443 |
|
|
|
2,066 |
|
|
|
3,253 |
|
|
|
1,222 |
|
|
|
885 |
|
|
|
11,014 |
|
|
Special Mention - Category 5 & 6
|
|
|
- |
|
|
|
- |
|
|
|
88 |
|
|
|
- |
|
|
|
138 |
|
|
|
38 |
|
|
|
- |
|
|
|
264 |
|
|
Substandard - Category 7
|
|
|
- |
|
|
|
37 |
|
|
|
17 |
|
|
|
11 |
|
|
|
29 |
|
|
|
51 |
|
|
|
- |
|
|
|
145 |
|
|
Doubtful - Category 8
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss 9
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total Farmland
|
|
|
315 |
|
|
|
1,867 |
|
|
|
1,548 |
|
|
|
2,077 |
|
|
|
3,420 |
|
|
|
1,311 |
|
|
|
885 |
|
|
|
11,423 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1-4 Family Mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfactory - Categories 1-4
|
|
|
4,356 |
|
|
|
20,671 |
|
|
|
12,882 |
|
|
|
12,645 |
|
|
|
11,051 |
|
|
|
9,529 |
|
|
|
16,911 |
|
|
|
88,045 |
|
|
Special Mention - Category 5 & 6
|
|
|
- |
|
|
|
198 |
|
|
|
46 |
|
|
|
135 |
|
|
|
305 |
|
|
|
984 |
|
|
|
176 |
|
|
|
1,844 |
|
|
Substandard - Category 7
|
|
|
- |
|
|
|
37 |
|
|
|
288 |
|
|
|
378 |
|
|
|
137 |
|
|
|
2,340 |
|
|
|
411 |
|
|
|
3,591 |
|
|
Doubtful - Category 8
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss 9
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total 1-4 Family Mortgages
|
|
|
4,356 |
|
|
|
20,906 |
|
|
|
13,216 |
|
|
|
13,158 |
|
|
|
11,493 |
|
|
|
12,853 |
|
|
|
17,498 |
|
|
|
93,480 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfactory - Categories 1-4
|
|
|
4,719 |
|
|
|
53,935 |
|
|
|
61,039 |
|
|
|
56,352 |
|
|
|
42,180 |
|
|
|
36,853 |
|
|
|
16,612 |
|
|
|
271,690 |
|
|
Special Mention - Category 5 & 6
|
|
|
66 |
|
|
|
2,493 |
|
|
|
2,285 |
|
|
|
1,073 |
|
|
|
1,487 |
|
|
|
463 |
|
|
|
- |
|
|
|
7,867 |
|
|
Substandard - Category 7
|
|
|
- |
|
|
|
187 |
|
|
|
3,758 |
|
|
|
2,805 |
|
|
|
269 |
|
|
|
25,700 |
|
|
|
- |
|
|
|
32,719 |
|
|
Doubtful - Category 8
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss 9
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total Commercial Real Estate
|
|
|
4,785 |
|
|
|
56,615 |
|
|
|
67,082 |
|
|
|
60,230 |
|
|
|
43,936 |
|
|
|
63,016 |
|
|
|
16,612 |
|
|
|
312,276 |
|
|
Total Real Estate Loans
|
|
|
11,952 |
|
|
|
88,647 |
|
|
|
89,091 |
|
|
|
83,447 |
|
|
|
59,799 |
|
|
|
78,351 |
|
|
|
59,420 |
|
|
|
470,707 |
|
| Business Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and Industrial Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfactory - Categories 1-4
|
|
|
1,706 |
|
|
|
24,185 |
|
|
|
5,629 |
|
|
|
14,380 |
|
|
|
6,906 |
|
|
|
11,748 |
|
|
|
10,546 |
|
|
|
75,100 |
|
|
Special Mention - Category 5 & 6
|
|
|
- |
|
|
|
133 |
|
|
|
- |
|
|
|
337 |
|
|
|
8 |
|
|
|
1,368 |
|
|
|
2,811 |
|
|
|
4,657 |
|
|
Substandard - Category 7
|
|
|
- |
|
|
|
3 |
|
|
|
55 |
|
|
|
- |
|
|
|
59 |
|
|
|
261 |
|
|
|
72 |
|
|
|
450 |
|
|
Doubtful - Category 8
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss 9
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total Commercial & Industrial Loans
|
|
|
1,706 |
|
|
|
24,321 |
|
|
|
5,684 |
|
|
|
14,717 |
|
|
|
6,973 |
|
|
|
13,377 |
|
|
|
13,429 |
|
|
|
80,207 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Farm Production and Other Farm Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfactory - Categories 1-4
|
|
|
- |
|
|
|
272 |
|
|
|
- |
|
|
|
9 |
|
|
|
- |
|
|
|
92 |
|
|
|
91 |
|
|
|
464 |
|
|
Special Mention - Category 5 & 6
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Substandard - Category 7
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
10 |
|
|
Doubtful - Category 8
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss 9
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total Farm Production & Other Farm Loans
|
|
|
- |
|
|
|
272 |
|
|
|
7 |
|
|
|
9 |
|
|
|
- |
|
|
|
95 |
|
|
|
91 |
|
|
|
474 |
|
|
Total Business Loans
|
|
|
1,706 |
|
|
|
24,593 |
|
|
|
5,691 |
|
|
|
14,726 |
|
|
|
6,973 |
|
|
|
13,472 |
|
|
|
13,520 |
|
|
|
80,681 |
|
| Consumer Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfactory - Categories 1-4
|
|
|
2,158 |
|
|
|
5,697 |
|
|
|
2,454 |
|
|
|
946 |
|
|
|
962 |
|
|
|
317 |
|
|
|
240 |
|
|
|
12,774 |
|
|
Special Mention - Category 5 & 6
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
|
|
4 |
|
|
Substandard - Category 7
|
|
|
238 |
|
|
|
24 |
|
|
|
27 |
|
|
|
3 |
|
|
|
1 |
|
|
|
1 |
|
|
|
- |
|
|
|
294 |
|
|
Doubtful - Category 8
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss 9
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total Consumer Loans
|
|
|
2,396 |
|
|
|
5,721 |
|
|
|
2,481 |
|
|
|
949 |
|
|
|
963 |
|
|
|
322 |
|
|
|
240 |
|
|
|
13,072 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Credit Cards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,775 |
|
|
|
2,775 |
|
|
Nonperforming
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
5 |
|
|
Total Credit Card
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,780 |
|
|
|
2,780 |
|
|
Gross LHFI
|
|
$ |
16,054 |
|
|
$ |
118,961 |
|
|
$ |
97,263 |
|
|
$ |
99,122 |
|
|
$ |
67,735 |
|
|
$ |
92,145 |
|
|
$ |
75,960 |
|
|
$ |
567,240 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less ACL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,017 |
) |
|
Net LHFI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
561,223 |
|
There were no revolving loans converted to term loans during the three months ended March 31, 2023.
The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior period.
A discussion of the Company’s policies regarding internal risk-rating of loans is discussed above and is applicable to these tables. The following table presents the Company’s loan portfolio by internal risk-rating grades as of December 31, 2022:
| |
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Satisfactory
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
| |
|
1,2,3,4
|
|
|
5,6
|
|
|
7
|
|
|
8
|
|
|
9
|
|
|
Loans
|
|
| Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development and Construction
|
|
$ |
50,015 |
|
|
$ |
2,427 |
|
|
$ |
289 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
52,731 |
|
|
Farmland
|
|
|
10,832 |
|
|
|
269 |
|
|
|
336 |
|
|
|
- |
|
|
|
- |
|
|
|
11,437 |
|
|
1-4 Family Mortgages
|
|
|
85,861 |
|
|
|
1,816 |
|
|
|
4,471 |
|
|
|
- |
|
|
|
- |
|
|
|
92,148 |
|
|
Commercial Real Estate
|
|
|
274,901 |
|
|
|
7,975 |
|
|
|
33,665 |
|
|
|
- |
|
|
|
- |
|
|
|
316,541 |
|
|
Total Real Estate Loans
|
|
|
421,609 |
|
|
|
12,487 |
|
|
|
38,761 |
|
|
|
- |
|
|
|
- |
|
|
|
472,857 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Business Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Loans
|
|
|
91,016 |
|
|
|
4,902 |
|
|
|
577 |
|
|
|
- |
|
|
|
5 |
|
|
|
96,500 |
|
|
Farm Production and Other Farm Loans
|
|
|
491 |
|
|
|
- |
|
|
|
13 |
|
|
|
- |
|
|
|
- |
|
|
|
504 |
|
|
Total Business Loans
|
|
|
91,507 |
|
|
|
4,902 |
|
|
|
590 |
|
|
|
- |
|
|
|
5 |
|
|
|
97,004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Cards
|
|
|
2,670 |
|
|
|
- |
|
|
|
68 |
|
|
|
- |
|
|
|
- |
|
|
|
2,738 |
|
|
Other Consumer Loans
|
|
|
12,934 |
|
|
|
7 |
|
|
|
51 |
|
|
|
- |
|
|
|
- |
|
|
|
12,992 |
|
|
Total Consumer Loans
|
|
|
15,604 |
|
|
|
7 |
|
|
|
119 |
|
|
|
- |
|
|
|
- |
|
|
|
15,730 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$ |
528,720 |
|
|
$ |
17,396 |
|
|
$ |
39,470 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
585,591 |
|
Note 8. ACL on LHFI
The Company’s ACL methodology for LHFI is based upon guidance within ASC Subtopic 326-20 as well as applicable regulatory guidance. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the LHFI portfolio is continuously monitored by Management and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within the Company’s existing LHFI portfolio. The ACL for LHFI is adjusted through the PCL, LHFI and reduced by the charge off of loan amounts, net of recoveries.
The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a collective, or pooled, component for estimated expected credit losses for pools of loans that share similar risk characteristics, and an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. In estimating the ACL for the collective component, loans are segregated into loan pools based on loan product types and similar risk characteristics.
The loans secured by real estate segment includes loans for both commercial and residential properties. The underwriting process for these loans includes analysis of the financial position and strength of both the borrower and guarantor, experience with similar projects in the past, market demand and prospects for successful completion of the proposed project within the established budget and schedule, values of underlying collateral, availability of permanent financing, maximum loan-to-value ratios, minimum equity requirements, acceptable amortization periods and minimum debt service coverage requirements, based on property type. The borrower’s financial strength and capacity to repay their obligations remain the primary focus of underwriting. Financial strength is evaluated based upon analytical tools that consider historical and projected cash flows and performance in addition to a financial analysis of any proposed project. Additional support offered by guarantors is also considered. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.
The business loan segment includes loans within the Company’s geographic markets made to many types of businesses for various purposes, such as short term working capital loans that are usually secured by accounts receivable and inventory and term financing for equipment and fixed asset purchases that are secured by those assets. The Company’s credit underwriting process for commercial and industrial loans includes analysis of historical and projected cash flows and performance, evaluation of financial strength of both borrowers and guarantors as reflected in current and detailed financial information and evaluation of underlying collateral to support the credit.
The consumer LHFI portfolio segment is comprised of loans that are centrally underwritten based on a credit scoring system as well as an evaluation of the borrower’s repayment capacity, credit, and collateral. Property appraisals are obtained to assist in evaluating collateral. Loan-to-value and debt-to-income ratios, loan amount, and lien position are also considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices and demand and levels of unemployment.
The following table provides a description of each of the Company’s portfolio segments, loan classes, loan pools and the ACL methodology and loss drivers:
|
Portfolio Segment
|
Loan Class
|
Methodology
|
Loss Drivers
|
|
Loans secured by real estate
|
|
|
|
| |
Land Development and Construction
|
Loss Rate
|
CRE Price Index, Real GDP, US Unemployment
|
| |
Farmland
|
Loss Rate
|
CRE Price Index, Real GDP, US Unemployment
|
| |
1-4 Family Mortgages
|
Loss Rate
|
CRE Price Index, Real GDP, US Unemployment
|
| |
Commercial Real Estate
|
Loss Rate
|
CRE Price Index, Real GDP, US Unemployment
|
| |
|
|
|
|
Business loans
|
|
|
|
| |
Commercial and Industrial Loans
|
Loss Rate
|
US Unemployment, Nominal GDP
|
| |
Farm Production and Other Farm Loans
|
Loss Rate
|
US Unemployment, Nominal GDP
|
| |
|
|
|
|
Consumer loans
|
|
|
|
| |
Consumer Loans
|
Loss Rate
|
Moody's Expected Consumer Credit Loss Model
|
| |
Credit Cards
|
WARM
|
Company loss history
|
| |
Overdrafts
|
WARM
|
Company loss history
|
The Loss Rate model is designed to operate at the portfolio segment level. These segments are relatively homogenous groups of loans with similar characteristics. Based on the average inputs of each segment, the model then calculates both quarterly and lifetime loss rates for the entire segment by loan. The lifetime loss rate is then multiplied by the amortized cost of each loan within a class to get a quantitative reserve.
The Company chose the Weighted Average Remaining Maturity (“WARM”) method for two loan classes that are relatively non-complex. The WARM methodology factors in the remaining life of each applicable loan class that must be calculated to be used within the quantitative model.
The Company determined that reasonable and supportable forecasts could be made for a twelve-month period for all of its loan pools. To the extent the lives of the loans in the LHFI portfolio extend beyond this forecast period, the Company uses a reversion period of four quarters and reverts to the historical mean on a straight-line basis over the remaining life of the loans. The econometric models currently in production reflect segment or pool level sensitivities of probability of default to changes in macroeconomic variables. By measuring the relationship between defaults and changes in the economy, the quantitative reserve incorporates reasonable and supportable forecasts of future conditions that will affect the value of its assets, as required by FASB ASC Topic 326.
In addition to the items mentioned above, the Company incorporates qualitative factors into the ACL methodology, including the following:
| |
●
|
Lending expertise
|
| |
●
|
Risk tolerance measured through lending policy requirements
|
| |
●
|
Quality of the loan review system
|
| |
●
|
Changes in collateral valuations
|
| |
●
|
External factors within the Company’s operating region, including economic conditions
|
| |
●
|
Impact of competition
|
The qualitative reserve is calculated by taking the quantitative reserve rate and multiplying this rate by the qualitative factor (“Q-factor”) scalar. The Q-factor scalar takes the average of all the Q-factors selected for a specific loan class. Each Q-factor is given a rating between 0 to 100 basis points (“bps”), with the 0 being no risk to 100 bps being the highest risk impact. Each Q-factor is evaluated and adjusted quarterly using both internal and external reports and data.
The following table details activity in the ACL by portfolio segment for the three months ended:
| |
|
Real
|
|
|
Business
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023
|
|
Estate
|
|
|
Loans
|
|
|
Consumer
|
|
|
Total
|
|
|
Beginning Balance, January 1, 2023
|
|
$ |
4,154 |
|
|
$ |
713 |
|
|
$ |
397 |
|
|
$ |
5,264 |
|
|
FASB ASU 2016-13 adoption adjustment
|
|
|
665 |
|
|
|
56 |
|
|
|
(86 |
) |
|
|
635 |
|
|
Provision for credit losses ("PCL")
|
|
|
(46 |
) |
|
|
112 |
|
|
|
(19 |
) |
|
|
47 |
|
|
Chargeoffs
|
|
|
1 |
|
|
|
- |
|
|
|
32 |
|
|
|
33 |
|
|
Recoveries
|
|
|
26 |
|
|
|
7 |
|
|
|
71 |
|
|
|
104 |
|
|
Net recoveries
|
|
|
(25 |
) |
|
|
(7 |
) |
|
|
(39 |
) |
|
|
(71 |
) |
|
Ending Balance
|
|
$ |
4,798 |
|
|
$ |
888 |
|
|
$ |
331 |
|
|
$ |
6,017 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Period end allowance allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$ |
100 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
100 |
|
|
Loans collectively evaluated for impairment
|
|
|
4,698 |
|
|
|
888 |
|
|
|
331 |
|
|
|
5,917 |
|
|
Ending Balance, March 31, 2023
|
|
$ |
4,798 |
|
|
$ |
888 |
|
|
$ |
331 |
|
|
$ |
6,017 |
|
The following table details activity in the ACL by portfolio segment, based on the Company’s former allowance methodology prior to the adoption of ASC 326, for the three months ended:
| |
|
Real
|
|
|
Business
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022
|
|
Estate
|
|
|
Loans
|
|
|
Consumer
|
|
|
Total
|
|
|
Beginning Balance, January 1, 2022
|
|
$ |
3,622 |
|
|
$ |
645 |
|
|
$ |
246 |
|
|
$ |
4,513 |
|
|
PCL
|
|
|
170 |
|
|
|
57 |
|
|
|
(134 |
) |
|
|
93 |
|
|
Chargeoffs
|
|
|
- |
|
|
|
56 |
|
|
|
26 |
|
|
|
82 |
|
|
Recoveries
|
|
|
50 |
|
|
|
5 |
|
|
|
197 |
|
|
|
252 |
|
|
Net chargeoffs (recoveries)
|
|
|
(50 |
) |
|
|
51 |
|
|
|
(171 |
) |
|
|
(170 |
) |
|
Ending Balance
|
|
$ |
3,842 |
|
|
$ |
651 |
|
|
$ |
283 |
|
|
$ |
4,776 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Period end allowance allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
Loans collectively evaluated for impairment
|
|
|
3,842 |
|
|
|
651 |
|
|
|
283 |
|
|
|
4,776 |
|
|
Ending Balance, March 31, 2022
|
|
$ |
3,842 |
|
|
$ |
651 |
|
|
$ |
283 |
|
|
$ |
4,776 |
|
The Company recorded a provision for credit losses of $47 during the first quarter of 2023, as compared to a provision for credit losses of $93 recorded in the first quarter of 2022. The Company’s allowance for credit losses model considers economic projections, primarily the national unemployment rate, recessionary risks, GDP and CRE price fluctuations. The provision activity during the current quarter was primarily driven by increased recessionary risks due to inflationary pressures partially offset by a decline in loans.
The following table represents gross charge-offs by year of origination for the date presented:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
|
|
|
Total Charge-
|
|
| |
|
2023
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
Prior
|
|
|
Loans
|
|
|
Offs
|
|
| Gross Charge-Offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
1 |
|
|
Total Real Estate Loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Loans
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Credit Card
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26 |
|
|
|
26 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net LHFI
|
|
$ |
- |
|
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
26 |
|
|
$ |
33 |
|
ACL for Off-Balance Sheet Credit Exposure
The Company maintains a separate ACL for Off-Balance Sheet Credit Exposure, which is included in the “Other liabilities” line item on the Consolidated Balance Sheets. The Company estimates the amount of expected losses on off-balance sheet credit exposure by calculating a likelihood of funding over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the ACL on loans methodology described above to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company.
The following table provides a roll-forward of the ACL for off-balance sheet credit exposure for the period presented:
|
For the three months ended March 31, 2023
|
|
|
|
|
|
ACL for off-balance sheet credit exposure:
|
|
|
|
|
|
Beginning balance
|
|
$ |
- |
|
|
FASB ASU 2016-13 adoption adjustment
|
|
|
677 |
|
|
PCL for off-balance sheet credit exposure
|
|
|
(41 |
) |
|
Ending Balance
|
|
$ |
636 |
|
The Company recorded a negative PCL for off-balance sheet credit exposure of ($41) during the first quarter of 2023, The Company’s allowance for credit losses model considers economic projections, primarily the national unemployment rate, recessionary risks, GDP and CRE price fluctuations. The negative provision during the current quarter was primarily driven by a decrease in unfunded loan commitments partially offset by increased recessionary risks due to inflationary pressures.
Note 9. Secured Line of Credit
(in thousands)
On June 9, 2021, the Company obtained a secured revolving line of credit (“Line”) in the amount of $20,000 with First Horizon Bank. The proceeds of the Line were used to enhance the Bank’s capital structure. The Line bears interest at a floating interest rate linked to WSJ Prime Rate with an initial interest rate of 3.25%, which is payable quarterly on the first day of each calendar quarter, commencing on July 1, 2021, with the final installment of interest being due and payable concurrently on the same date that the principal balance is due. As of March 31, 2023, the interest rate was 8%. The Line also bears an unused line fee at a rate equal to 0.25%, applied to the unused balance of the Line. The Line is fully secured by the common stock of the Bank. The Line matures on June 9, 2023, at which time all unpaid interest and principal is due and payable.
| |
|
March 31, 2023
|
|
|
December 31, 2022
|
|
|
Funded balance
|
|
$ |
18,000 |
|
|
$ |
18,000 |
|
|
Unfunded balance
|
|
|
2,000 |
|
|
|
2,000 |
|
|
Total credit facility
|
|
$ |
20,000 |
|
|
$ |
20,000 |
|
Note 10. Shareholders’ Equity
(in thousands, except share data)
The following summarizes the activity in the capital structure of the Company:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
| |
|
Number
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
| |
|
of Shares
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
| |
|
Issued
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss) Income
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance, January 1, 2023
|
|
|
5,603,570 |
|
|
$ |
1,122 |
|
|
$ |
18,448 |
|
|
$ |
(83,070 |
) |
|
$ |
102,525 |
|
|
$ |
39,025 |
|
|
FASB ASU 2016-13 adoption adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(984 |
) |
|
|
(984 |
) |
|
Net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,140 |
|
|
|
1,140 |
|
|
Dividends paid ($0.24 per share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,346 |
) |
|
|
(1,346 |
) |
|
Restricted stock granted
|
|
|
3,868 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Stock compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
|
Other comprehensive loss, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,248 |
|
|
|
- |
|
|
|
3,248 |
|
|
Balance, March 31, 2023
|
|
|
5,607,438 |
|
|
$ |
1,122 |
|
|
$ |
18,488 |
|
|
$ |
(79,822 |
) |
|
$ |
101,335 |
|
|
$ |
41,123 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
| |
|
Number
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
| |
|
of Shares
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
| |
|
Issued
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance, January 1, 2022
|
|
|
5,595,320 |
|
|
$ |
1,120 |
|
|
$ |
18,293 |
|
|
$ |
(11,795 |
) |
|
$ |
98,282 |
|
|
$ |
105,900 |
|
|
Net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,036 |
|
|
|
2,036 |
|
|
Dividends paid ($0.24 per share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,343 |
) |
|
|
(1,343 |
) |
|
Stock compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
39 |
|
|
|
- |
|
|
|
- |
|
|
|
39 |
|
|
Other comprehensive loss, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(43,682 |
) |
|
|
- |
|
|
|
(43,682 |
) |
|
Balance, March 31, 2022
|
|
|
5,595,320 |
|
|
$ |
1,120 |
|
|
$ |
18,332 |
|
|
$ |
(55,477 |
) |
|
$ |
98,975 |
|
|
$ |
62,950 |
|
Note 11. Fair Value of Financial Instruments
(in thousands)
The fair value topic of the ASC establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. This topic clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also requires disclosure about how fair value was determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:
| |
Level 1
|
Quoted prices (unadjusted) in active markets for identical assets or liabilities;
|
| |
|
|
| |
Level 2
|
Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or
|
| |
|
|
| |
Level 3
|
Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.
|
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table presents assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2023:
| |
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
| |
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
| |
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
| |
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
| |
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
| Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$ |
- |
|
|
$ |
95,536 |
|
|
$ |
- |
|
|
$ |
95,536 |
|
|
State, county and municipal
|
|
|
- |
|
|
|
105,761 |
|
|
|
- |
|
|
|
105,761 |
|
|
Other securities
|
|
|
- |
|
|
|
443 |
|
|
|
- |
|
|
|
443 |
|
| Total |
|
$ |
- |
|
|
$ |
201,740 |
|
|
$ |
- |
|
|
$ |
201,740 |
|
The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2022:
| |
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
| |
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
| |
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
| |
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
| |
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
| Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$ |
- |
|
|
$ |
96,972 |
|
|
$ |
- |
|
|
$ |
96,972 |
|
|
State, county and municipal
|
|
|
- |
|
|
|
103,913 |
|
|
|
- |
|
|
|
103,913 |
|
|
Other securities
|
|
|
- |
|
|
|
437 |
|
|
|
- |
|
|
|
437 |
|
| Total |
|
$ |
- |
|
|
$ |
201,322 |
|
|
$ |
- |
|
|
$ |
201,322 |
|
The Company recorded no gains or losses in earnings for the period ended March 31, 2023 or December 31, 2022 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.
Impaired Loans
Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified Level 3. The unobservable inputs may vary depending on the individual assets with the fair value of real estate based on appraised value being the predominant approach. The Company reviews the certified appraisals for appropriateness and adjusts the value downward to consider selling, closing and liquidation costs, which typically approximates 25% of the appraised value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.
Other real estate owned
OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ACL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically approximate 25% of the appraised value.
The following tables provide the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the balance sheets as of the dates presented and the level within the fair value hierarchy each is classified:
| |
|
March 31, 2023
|
|
| |
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
| |
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
| |
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
| |
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
| |
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,950 |
|
|
$ |
1,950 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,950 |
|
|
$ |
1,950 |
|
| |
|
December 31, 2022
|
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Quoted Prices
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in Active
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Significant
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Markets for
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Other
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Significant
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Identical
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Observable
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Unobservable
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Assets
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Inputs
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Inputs
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(Level 1)
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(Level 2)
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(Level 3)
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Totals
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Impaired loans
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$ |
- |
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$ |
- |
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$ |
2,074 |
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$ |
2,074 |
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| Total |
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$ |
- |
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$ |
- |
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$ |
2,074 |
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$ |
2,074 |
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Impaired loans, whose fair value was remeasured during the period, with a carrying value of $2,050 and $2,190, had an allocated ACL of $100 and $116 at March 31, 2023 and December 31, 2022, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.
After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that no fair value adjustment to OREO was necessary during the three-month period ended March 31, 2023 and the year ended December 31, 2022, respectively.
The financial instruments topic of the ASC requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. The following represents the carrying value and estimated fair value of the Company’s financial instruments at March 31, 2023:
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Fair Value Measurements Using:
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Quoted Prices
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in Active
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Significant
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Markets for
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Other
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Significant
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Total
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Carrying
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Identical
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Observable
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Unobservable
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Fair
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March 31, 2023
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Value
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Assets
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Inputs
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Inputs
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Value
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(Level 1)
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(Level 2)
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(Level 3)
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| Financial assets |
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Cash and due from banks
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$ |
15,600 |
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$ |
15,600 |
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$ |
- |
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$ |
- |
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$ |
15,600 |
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Interest bearing deposits with banks
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606 |
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606 |
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- |
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- |
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|
606 |
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Securities held-to-maturity
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402,237 |
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- |
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375,952 |
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- |
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375,952 |
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Securities available-for-sale
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201,740 |
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- |
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201,740 |
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- |
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201,740 |
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Net LHFI
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561,223 |
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- |
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- |
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521,259 |
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521,259 |
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| Financial liabilities |
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Deposits
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$ |
1,115,826 |
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$ |
929,637 |
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$ |
187,335 |
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$ |
- |
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$ |
1,116,972 |
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Securities sold under agreement to repurchase
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98,532 |
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98,532 |
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- |
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- |
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98,532 |
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Short-term borrowings
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1,725 |
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1,725 |
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- |
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- |
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1,725 |
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Borrowings on secured line of credit
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18,000 |
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18,000 |
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- |
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- |
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18,000 |
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The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2022:
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Fair Value Measurements Using:
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Quoted Prices
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in Active
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Significant
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Markets for
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Other
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Significant
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Total
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Carrying
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Identical
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Observable
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Unobservable
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Fair
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December 31, 2022
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Value
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Assets
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Inputs
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Inputs
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Value
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(Level 1)
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(Level 2)
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(Level 3)
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| Financial assets |
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Cash and due from banks
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$ |
26,948 |
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$ |
26,948 |
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$ |
- |
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$ |
- |
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$ |
26,948 |
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Interest bearing deposits with banks
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1,646 |
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1,646 |
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- |
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- |
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1,646 |
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Securities held-to-maturity
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406,590 |
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- |
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375,292 |
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- |
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375,292 |
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Securities available-for-sale
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201,322 |
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- |
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201,322 |
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- |
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201,322 |
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Net LHFI
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580,327 |
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- |
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- |
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541,173 |
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541,173 |
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| Financial liabilities |
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Deposits
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$ |
1,126,402 |
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$ |
947,479 |
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$ |
178,902 |
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$ |
- |
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$ |
1,126,381 |
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Securities sold under agreement to repurchase
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127,574 |
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127,574 |
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- |
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- |
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127,574 |
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Borrowings on secured line of credit
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18,000 |
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18,000 |
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- |
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- |
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18,000 |
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