Loans and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2023

Loans and Allowance for Credit Losses [Abstract]

Note 6:

Loans and Allowance for Credit Losses

A summary of loans at September 30, 2023 and December 31, 2022, are as follows (dollars in thousands):

	September 30, 2023			December 31, 2022

Construction & development	$	139,053		$	163,203
1 - 4 family real estate		91,540			76,928
Commercial real estate - other		516,975			439,001
Total commercial real estate	$	747,568		$	679,132

Commercial & industrial		568,684			513,011
Agricultural		64,688			66,145
Consumer		14,993			14,949

Gross loans		1,395,933			1,273,237

Less allowance for credit losses		(20,649	)		(14,734	)
Less deferred loan fees		(3,156	)		(2,781	)

Net loans	$	1,372,128		$	1,255,722

Included in the commercial & industrial loan balances are $2.0 million and $2.6 million of loans that were originated under the SBA PPP program as of September 30, 2023 and December 31, 2022, respectively.

Allowance for Credit Losses Methodology

On January 1, 2023, the Company adopted ASU 2016-13, which replaces the incurred loss methodology for determining its provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. See Note (1) for additional information regarding the factors that influenced the Company’s current estimate of expected credit losses. Upon adoption, the allowance for credit losses was increased by $250,000 and $500,000 for loans and unfunded commitments, respectively, with no impact to the consolidated statement of income. Subsequent to the adoption of ASU 2016-13, the Company recorded a $5.7 million and ($36,000) provision for credit losses related to loans and unfunded commitments, respectively, for the first nine months of 2023 utilizing the newly adopted CECL methodology.

The following table presents, by portfolio segment, the activity in the allowance for credit losses for the three months ended September 30, 2023 and 2022 (dollars in thousands):

	Construction & Development			1 - 4 Family Real Estate		Commercial Real Estate - Other			Commercial & Industrial			Agricultural			Consumer			Total

September 30, 2023
Loans
Balance, beginning of period	$	1,592		$	1,116	$	6,089		$	6,712		$	601		$	267		$	16,377
Charge-offs		-			-		-			-			-			-			-
Recoveries		-			-		-			-			-			1			1
Net (charge-offs) recoveries		-			-		-			-			-			1			1

Provision (credit) for credit losses		(111	)		30		640			3,718			8			(14	)		4,271
Balance, end of period	$	1,481		$	1,146	$	6,729		$	10,430		$	609		$	254		$	20,649

Unfunded Commitments
Balance, beginning of period	$	227		$	4	$	14		$	305		$	24		$	2		$	576
Provision (credit) for credit losses		(69	)		-		(6	)		(25	)		(13	)		1			(112	)
Balance, end of period	$	158		$	4	$	8		$	280		$	11		$	3		$	464

Total Allowance for Credit Losses	$	1,639		$	1,150	$	6,737		$	10,710		$	620		$	257		$	21,113

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer			Total

September 30, 2022
Balance, beginning of period	$	1,792	$	649	$	3,216	$	4,449	$	558	$	155		$	10,819

Charge-offs		-		-		-		-		-		(19	)		(19	)
Recoveries		-		-		-		-		-		5			5

Net (charge-offs) recoveries		-		-		-		-		-		(14	)		(14	)

Provision (credit) for credit losses		466		150		746		829		137		20			2,348

Balance, end of period	$	2,258	$	799	$	3,962	$	5,278	$	695	$	161		$	13,153

The following table presents, by portfolio segment, the activity in the allowance for credit losses for the nine months ended September 30, 2023 and 2022 (dollars in thousands):

	Construction & Development			1 - 4 Family Real Estate			Commercial Real Estate - Other			Commercial & Industrial		Agricultural			Consumer			Total

September 30, 2023
Loans
Balance, beginning of period	$	1,889		$	890		$	5,080		$	5,937	$	765		$	173		$	14,734
Impact of CECL adoption		44			(138	)		(168	)		716		(149	)		(55	)		250
Charge-offs		-			-			-			-		(7	)		(16	)		(23	)
Recoveries		-			-			-			-		2			5			7
Net (charge-offs) recoveries		-			-			-			-		(5	)		(11	)		(16	)

Provision (credit) for credit losses		(452	)		394			1,817			3,777		(2	)		147			5,681
Balance, end of period	$	1,481		$	1,146		$	6,729		$	10,430	$	609		$	254		$	20,649

Unfunded Commitments
Balance, beginning of period	$	-		$	-		$	-		$	-	$	-		$	-		$	-
Impact of CECL adoption		171			4			24			274		25			2			500
Provision (credit) for credit losses		(13	)		-			(16	)		6		(14	)		1			(36	)
Balance, end of period	$	158		$	4		$	8		$	280	$	11		$	3		$	464

Total Allowance for Credit Losses	$	1,639		$	1,150		$	6,737		$	10,710	$	620		$	257		$	21,113

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural			Consumer			Total

September 30, 2022
Balance, beginning of period	$	1,695	$	630	$	3,399	$	3,621	$	730		$	241		$	10,316

Charge-offs		-		-		-		-		-			(20	)		(20	)
Recoveries		-		-		-		-		-			14			14

Net (charge-offs) recoveries		-		-		-		-		-			(6	)		(6	)

Provision (credit) for credit losses		563		169		563		1,657		(35	)		(74	)		2,843

Balance, end of period	$	2,258	$	799	$	3,962	$	5,278	$	695		$	161		$	13,153

Internal Risk Categories

Each loan segment is made up of loan categories possessing similar risk characteristics.

Risk characteristics applicable to each segment of the loan portfolio are described as follows:

Real Estate – The real estate loan portfolio consists of loans made to finance both residential and commercial properties. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s ability to repay. Commercial real estate loans typically involve larger principal amounts and are repaid primarily from the cash flow of a borrower’s principal business operation, the sale of the real estate, and in some cases from income that is independent from the real estate asset itself.

Commercial & Industrial – The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Agricultural – Loans secured by agricultural assets are generally made for the purpose of acquiring land devoted to crop production, and various animals that are eventually harvested and sold, and typically housed on the underlying secured property. Credit risk in these loans may be impacted by crop and commodity prices, the creditworthiness of a borrower, and changes in economic conditions which might affect underlying property values and the local economies in the Company’s market areas.

Consumer – The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Residential loans in this category are generally secured by owner occupied 1–4 family residences. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors, such as unemployment and general economic conditions in the Company’s market area and the creditworthiness of a borrower.

Loan grades are numbered 1 through 4. Grade 1 is considered satisfactory. The grades of 2 and 3, or Watch and Special Mention, respectively, represent loans of lower quality and are considered criticized. Grade of 4, or Substandard, refers to loans that are classified.

•

Grade 1 (Pass) – These loans generally conform to Bank policies, and are characterized by policy conforming advance rates on collateral, and have well-defined repayment sources. In addition, these credits are extended to borrowers and/or guarantors with a strong balance sheet and either substantial liquidity or a reliable income history.

•

Grade 2 (Watch) – These loans are still considered “Pass” credits; however, various factors such as industry stress, material changes in cash flow or financial conditions, or deficiencies in loan documentation, or other risk issues determined by the Lending Officer, Commercial Loan Committee (CLC), or Credit Quality Committee (CQC) warrant a heightened sense and frequency of monitoring.

•

Grade 3 (Special Mention) – These loans must have observable weaknesses or evidence of imprudent handling or structural issues. The weaknesses require close attention and the remediation of those weaknesses is necessary. No risk of probable loss exists. Credits in this category are expected to quickly migrate to a “2” or a “4” as this is viewed as a transitory loan grade.

•

Grade 4 (Substandard) – These loans are not adequately protected by the sound worth and debt service capacity of the borrower, but may be well secured. They have defined weaknesses relative to cash flow, collateral, financial condition, or other factors that might jeopardize repayment of all of the principal and interest on a timely basis. There is the possibility that a future loss will occur if weaknesses are not remediated.

The Company evaluates the definitions of loan grades and the allowance for credit losses methodology on an ongoing basis. No changes were made to either during the period ended September 30, 2023.

The following table presents the amortized cost of the Company’s loan portfolio with the gross charge-offs for the nine months ended by year of origination based on internal rating category as of September 30, 2023 (dollars in thousands):

As of September 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total

Construction & development
Grade
1 (Pass)	$	26,403	$	10,300	$	4,857	$	214	$	104	$	46	$	96,336	$	138,260
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		563		-		-		-		-		-		230		793
4 (Substandard)		-		-		-		-		-		-		-		-
Total construction & development		26,966		10,300		4,857		214		104		46		96,566		139,053
Current-period gross charge-offs		-		-		-		-		-		-		-		-
1 - 4 family real estate
Grade
1 (Pass)		31,511		27,605		14,110		4,540		1,847		1,141		10,786		91,540
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		-		-		-		-		-		-		-		-
4 (Substandard)		-		-		-		-		-		-		-		-
Total 1 - 4 family real estate		31,511		27,605		14,110		4,540		1,847		1,141		10,786		91,540
Current-period gross charge-offs		-		-		-		-		-		-		-		-
Commercial real estate - other
Grade
1 (Pass)		147,441		159,184		36,185		42,601		3,657		4,139		107,802		501,009
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		14,738		-		-		-		-		1,094		-		15,832
4 (Substandard)		-		-		-		-		-		134		-		134
Total commercial real estate - other		162,179		159,184		36,185		42,601		3,657		5,367		107,802		516,975
Current-period gross charge-offs		-		-		-		-		-		-		-		-
Commercial and industrial
Grade
1 (Pass)		142,077		68,443		41,428		3,129		1,849		4,130		242,714		503,770
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		10,452		-		-		-		-		-		1,333		11,785
4 (Substandard)		42,744		7,963		112		12		-		-		2,298		53,129
Total commercial and industrial		195,273		76,406		41,540		3,141		1,849		4,130		246,345		568,684
Current-period gross charge-offs		-		-		-		-		-		-		-		-
Agriculural
Grade
1 (Pass)		5,993		6,291		24,893		4,535		1,109		1,300		20,460		64,581
2 (Watch)		56		51		-		-		-		-		-		107
3 (Special Mention)		-		-		-		-		-		-		-		-
4 (Substandard)		-		-		-		-		-		-		-		-
Total agriculural		6,049		6,342		24,893		4,535		1,109		1,300		20,460		64,688
Current-period gross charge-offs		-		7		-		-		-		-		-		7
Consumer
Grade
1 (Pass)		3,649		1,988		2,799		2,900		705		1,934		938		14,913
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		-		-		-		-		-		-		-		-
4 (Substandard)		-		-		-		-		-		80		-		80
Total consumer		3,649		1,988		2,799		2,900		705		2,014		938		14,993
Current-period gross charge-offs		11		-		-		-		5		-		-		16
Total loans held for investment	$	425,627	$	281,825	$	124,384	$	57,931	$	9,271	$	13,998	$	482,897	$	1,395,933
Total current-period gross charge-offs	$	11	$	7	$	-	$	-	$	5	$	-	$	-	$	23

The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category, prior to the adoption of ASU 2016-13, as of December 31, 2022 (dollars in thousands):

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total

December 31, 2022
Grade
1 (Pass)	$	163,203	$	76,928	$	397,295	$	493,412	$	65,857	$	14,927	$	1,211,622
2 (Watch)		-		-		14,976		-		288		-		15,264
3 (Special Mention)		-		-		24,747		584		-		-		25,331
4 (Substandard)		-		-		1,983		19,015		-		22		21,020
Total	$	163,203	$	76,928	$	439,001	$	513,011	$	66,145	$	14,949	$	1,273,237

Aged Analysis of Past Due Loans Receivable

The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2023 and December 31, 2022 (dollars in thousands):

	Past Due												Total Loans
	30–59 Days		60–89 Days		Greater than 90 Days		Total		Current		Total Loans		> 90 Days & Accruing

September 30, 2023
Construction & development	$	-	$	-	$	-	$	-	$	139,053	$	139,053	$	-
1 - 4 family real estate		-		-		-		-		91,540		91,540		-
Commercial real estate - other		134		-		-		134		516,841		516,975		-
Commercial & industrial⁽¹⁾		58		-		9,776		9,834		558,850		568,684		9,776
Agricultural		-		-		-		-		64,688		64,688		-
Consumer		123		-		80		203		14,790		14,993		80
Total	$	315	$	-	$	9,856	$	10,171	$	1,385,762	$	1,395,933	$	9,856

December 31, 2022
Construction & development	$	-	$	-	$	-	$	-	$	163,203	$	163,203	$	-
1 - 4 family real estate		-		-		-		-		76,928		76,928		-
Commercial real estate - other		-		617		-		617		438,384		439,001		-
Commercial & industrial⁽¹⁾		21		-		9,923		9,944		503,067		513,011		9,923
Agricultural		4		-		-		4		66,141		66,145		-
Consumer		291		82		22		395		14,554		14,949		18
Total	$	316	$	699	$	9,945	$	10,960	$	1,262,277	$	1,273,237	$	9,941

⁽¹⁾ The $9.78 million and $9.92 million that is greater than 90 days past due as of September 30, 2023 and December 31, 2022, respectively, consists of a single borrower that is well collateralized and for which collection is being diligently pursued.

Nonaccrual Loans

The following table presents information regarding nonaccrual loans as of September 30, 2023 (dollars in thousands):

			Recorded			Recorded
	Amortized		Investment			Investment			Total						Interest
	Cost		with No			with an			Recorded			Related			Income
	Basis		Allowance			Allowance			Investment			Allowance			Recognized
September 30, 2023
Construction & development	$	-		$	-		$	-		$	-		$	-		$	-
1 - 4 Family Real Estate		-			-			-			-			-			-
Commercial Real Estate - other		134			134			-			134			-			16
Commercial & industrial		41,109			14,378			26,731			41,109			3,115			2,609
Agricultural		-			-			-			-			-			-
Consumer		-			-			-			-			-			-
Total	$	41,243		$	14,512		$	26,731		$	41,243		$	3,115		$	2,625

The following table presents impaired loans, prior to the adoption of ASU 2016-13, as of December 31, 2022 (dollars in thousands):

			Recorded			Recorded
	Unpaid		Investment			Investment			Total						Average			Interest
	Principal		with No			with an			Recorded			Related			Recorded			Income
	Balance		Allowance			Allowance			Investment			Allowance			Investment			Recognized
December 31, 2022
Construction & development	$	-		$	-		$	-		$	-		$	-		$	21		$	-
1 - 4 Family Real Estate		-			-			-			-			-			-			-
Commercial Real Estate - other		2,808			1,983			-			1,983			-			11,749			141
Commercial & industrial		19,882			18,882			133			19,015			133			11,773			1,214
Agricultural		-			-			-			-			-			14			-
Consumer		31			22			-			22			-			27			-
Total	$	22,721		$	20,887		$	133		$	21,020		$	133		$	23,584		$	1,355

Collateral Dependent Loans

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. During the nine months ended September 30, 2023, no material amount of interest income was recognized on collateral-dependent loans subsequent to their classification as collateral-dependent. At a minimum, the estimated value of the collateral for loan equals the current book value.

The following table summarizes collateral-dependent gross loans held for investment by collateral type and the related specific allocation as follows (dollars in thousands):

	Collateral Type
			Business									Specific
	Real Estate		Assets			Other Assets			Total			Allocation
September 30, 2023
Construction & development	$	-		$	-		$	-		$	-		$	-
1 - 4 Family Real Estate		-			-			-			-			-
Commercial Real Estate - other		134			-			-			134			-
Commercial & industrial		-			43,237			9,776			53,013			3,000
Agricultural		-			-			-			-			-
Consumer		-			-			80			80			-
Total	$	134		$	43,237		$	9,856		$	53,227		$	3,000

Loan Modifications to Troubled Borrowers

As part of the Company’s ongoing risk management practices, the Company attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Modifications could include extension of the maturity date, reductions of the interest rate, reduction or forgiveness of accrued interest, or principal forgiveness. Combinations of these modifications may also be made for individual loans. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Principal reductions may be made in limited circumstances, typically for specific commercial loan workouts, and in the event of borrower bankruptcy. Each occurrence is unique to the borrower and is evaluated separately.

Troubled loans are considered those in which the borrower is experiencing financial difficulty. The assessment of whether a borrower is experiencing financial difficulty can be subjective in nature and management’s judgment may be required in making this determination. The Company may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future absent a modification. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty.

Modifications to Borrowers Experiencing Financial Difficulty

The following tables present the amortized cost basis at the end of the reporting period of loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of modification made, as well as the financial effect of the modifications made as of September 30, 2023:

	Term Extension and Payment Deferral
	Amortized Cost Basis		% of Total Class			Financial Effect

September 30, 2023
Construction & development	$	-		-	%
1 - 4 Family Real Estate		-		-
Commercial Real Estate - other		-		-
Commercial & industrial		26,615		4.6		Extended the maturity of loan by four months, and payment of principal and interest deferred until the sale of collateral
Agricultural		-		-
Consumer		-		-

Total	$	26,615		4.6	%

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The following table depicts the performance of loans that have been modified in the last 12 months:

	Current		30-89 Days Past Due		90+ Days Past Due		Non-Accruing

September 30, 2023
Construction & development	$	-	$	-	$	-	$	-
1 - 4 Family Real Estate		-		-		-		-
Commercial Real Estate - other		-		-		-		-
Commercial & industrial		-		-		-		26,615
Agricultural		-		-		-		-
Consumer		-		-		-		-

Total	$	-	$	-	$	-	$	26,615

Troubled Debt Restructurings (Prior to the adoption of ASU 2022-02)

Impaired loans included nonperforming loans and also included loans modified in troubled-debt restructurings where concessions had been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Included in certain loan categories in the impaired loans were troubled debt restructurings that were classified as impaired. At December 31, 2022, the Company had $1.2 million of commercial real estate loans. There were no newly modified troubled-debt restructurings during the year ended December 31, 2022.

As of December 31, 2022, there were no troubled-debt restructurings modified and subsequently defaulted for the year ended December 31, 2022.

The following table represents information regarding nonperforming assets at December 31, 2022 (dollars in thousands):

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total

December 31, 2022
Nonaccrual loans	$	-	$	-	$	1,348	$	6,686	$	-	$	5	$	8,039
Troubled-debt restructurings ⁽¹⁾		-		-		-		-		-		-		-
Accruing loans 90 or more days past due		-		-		-		9,923		-		18		9,941

Total nonperforming loans	$	-	$	-	$	1,348	$	16,609	$	-	$	23	$	17,980

(1)

$1.2 million of TDRs as of December 31, 2022, are included in the nonaccrual loans balance.