Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2023

Loans and Allowance for Loan Losses [Abstract]

Note 6:

Loans and Allowance for Loan Losses

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

	December 31,
	2023			2022

Construction & development	$	137,206		$	163,203
1 - 4 family real estate		100,576			76,928
Commercial real estate - other		518,622			439,001
Total commercial real estate	$	756,404		$	679,132

Commercial & industrial		526,185			513,011
Agricultural		66,495			66,145
Consumer		14,517			14,949

Gross loans		1,363,601			1,273,237

Less allowance for credit losses		(19,691	)		(14,734	)
Less deferred loan fees		(2,762	)		(2,781	)

Net loans	$	1,341,148		$	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 December 31, 2023 and December 31, 2022, respectively.

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 $21.2 million and ($36,000) provision for credit losses related to loans and unfunded commitments, respectively, for the twelve 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 years ended December 31, 2023 and 2022 (dollars in thousands):

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

December 31, 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		-			-			-			(16,500	)		(7	)		(17	)		(16,524	)
Recoveries		-			-			-			40			2			8			50
Net (charge-offs) recoveries		-			-			-			(16,460	)		(5	)		(9	)		(16,474	)

Provision (credit) for credit losses		(516	)		519			1,977			19,044			17			140			21,181
Balance, end of period	$	1,417		$	1,271		$	6,889		$	9,237		$	628		$	249		$	19,691

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	$	1,575		$	1,275		$	6,897		$	9,517		$	639		$	252		$	20,155
Total Provision for Credit Losses	$	(529	)	$	519		$	1,961		$	19,050		$	3		$	141		$	21,145

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

December 31, 2022
Balance, beginning of period	$	1,695	$	630	$	3,399	$	3,621		$	730		$	241		$	10,316

Charge-offs		-		-		-		(2	)		(50	)		(22	)		(74	)
Recoveries		-		-		-		10			4			10			24
Net (charge-offs) recoveries		-		-		-		8			(46	)		(12	)		(50	)

Provision (credit) for credit losses		194		260		1,681		2,308			81			(56	)		4,468

Balance, end of period	$	1,889	$	890	$	5,080	$	5,937		$	765		$	173		$	14,734

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 portfolio consists of residential and commercial properties. Residential loans are generally secured by owner occupied 1–4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. 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 personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Commercial real estate loans in this category 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 or income independent of the loan purpose. Credit risk in these loans is driven by the creditworthiness of a borrower, property values, the local economy and other economic conditions impacting a borrower’s business or personal income.

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, cattle or poultry or the operation of a similar type of business on the secured property. Sources of repayment for these loans generally include income generated from operations of a business on the property, rental income or sales of the 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. 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 loan losses methodology on an ongoing basis. No changes were made to either during the period ended December 31, 2023.

The following table presents the amortized cost of the Company’s loan portfolio with the gross charge-offs for the twelve months ended by year of origination based on internal rating category as of December 31, 2023 (dollars in thousands):

As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total

Construction & development
Grade
1 (Pass)	$	26,915	$	2,266	$	3,182	$	201	$	98	$	44	$	103,711	$	136,417
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		563		-		-		-		-		-		226		789
4 (Substandard)		-		-		-		-		-		-		-		-
Total construction & development		27,478		2,266		3,182		201		98		44		103,937		137,206
Current-period gross charge-offs		-		-		-		-		-		-		-		-
1 - 4 family real estate
Grade
1 (Pass)		48,275		22,573		13,305		3,928		1,808		1,069		9,618		100,576
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		-		-		-		-		-		-		-		-
4 (Substandard)		-		-		-		-		-		-		-		-
Total 1 - 4 family real estate		48,275		22,573		13,305		3,928		1,808		1,069		9,618		100,576
Current-period gross charge-offs		-		-		-		-		-		-		-		-
Commercial real estate - other
Grade
1 (Pass)		187,086		153,764		32,641		36,278		2,613		4,043		86,370		502,795
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		14,612		-		-		-		-		1,089		-		15,701
4 (Substandard)		-		-		-		-		-		126		-		126
Total Commercial real estate - other		201,698		153,764		32,641		36,278		2,613		5,258		86,370		518,622
Current-period gross charge-offs		-		-		-		-		-		-		-		-
Commercial and industrial
Grade
1 (Pass)		158,062		59,265		38,093		2,777		1,706		4,059		221,471		485,433
2 (Watch)		-		-		-		-		-		-		4,094		4,094
3 (Special Mention)		4,151		-		-		-		-		-		1,616		5,767
4 (Substandard)		20,660		7,937		98		8		-		-		2,188		30,891
Total Commercial and industrial		186,967		67,202		38,191		2,785		1,706		4,059		225,275		526,185
Current-period gross charge-offs		16,500		-		-		-		-		-		-		16,500
Agriculural
Grade
1 (Pass)		9,283		5,789		23,205		4,283		927		1,104		21,904		66,495
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		-		-		-		-		-		-		-		-
4 (Substandard)		-		-		-		-		-		-		-		-
Total agriculural		9,283		5,789		23,205		4,283		927		1,104		21,904		66,495
Current-period gross charge-offs		-		7		-		-		-		-		-		7
Consumer
Grade
1 (Pass)		4,415		1,545		2,171		2,554		663		1,819		1,270		14,437
2 (Watch)		-		-		-		-		-		-		-		-
3 (Special Mention)		-		-		-		-		-		-		-		-
4 (Substandard)		-		-		-		-		-		80		-		80
Total consumer		4,415		1,545		2,171		2,554		663		1,899		1,270		14,517
Current-period gross charge-offs		17		-		-		-		-		-		-		17
Total loans held for investment	$	478,116	$	253,139	$	112,695	$	50,029	$	7,815	$	13,433	$	448,374	$	1,363,601
Total current-period gross charge-offs	$	16,517	$	7	$	-	$	-	$	-	$	-	$	-	$	16,524

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 December 31, 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

December 31, 2023
Construction & development	$	-	$	-	$	-	$	-	$	137,206	$	137,206	$	-
1 - 4 family real estate		-		-		-		-		100,576		100,576		-
Commercial real estate - other		-		-		-		-		518,622		518,622		-
Commercial & industrial⁽¹⁾		472		10,969		9,946		21,387		504,798		526,185		9,946
Agricultural		-		-		-		-		66,495		66,495		-
Consumer⁽²⁾		-		27		80		107		14,410		14,517		80

Total	$	472	$	10,996	$	10,026	$	21,494	$	1,342,107	$	1,363,601	$	10,026

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 $9.95 million and $9.92 million that is greater than 90 days past due as of December 31, 2023 and December 31, 2022, respectively, primarily consists of a single borrower that is well collateralized and for which collection is being diligently pursued.

⁽²⁾	The $80,000 that is greater than 90 days past due as of December 31, 2023, consists of a single borrower that is well secured and for which collection is being diligently pursued.

Nonaccrual Loans

The following table presents information regarding nonaccrual loans as of December 31, 2023 (dollars in thousands):

	With an Allowance		No Allowance		Total Non- Accrual Loans		Related Allowance		Interest Income Recognized

December 31, 2023
Construction & development	$	-	$	-	$	-	$	-	$	-
1 - 4 Family Real Estate		-		-		-		-		-
Commercial Real Estate - other		-		126		126		-		24
Commercial & industrial		10,255		8,560		18,815		2,147		3,625
Agricultural		-		-		-		-		-
Consumer		-		-		-		-		-

Total	$	10,255	$	8,686	$	18,941	$	2,147	$	3,649

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

	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with an Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income 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 December 31, 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
December 31, 2023
Construction & development	$	-	$	-	$	-	$	-	$	-
1 - 4 Family Real Estate		-		-		-		-		-
Commercial Real Estate - other		126		-		-		126		-
Commercial & industrial		-		20,848		9,932		30,780		2,038
Agricultural		-		-		-		-		-
Consumer		27		-		80		107		-

Total	$	153	$	20,848	$	10,012	$	31,013	$	2,038

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 December 31, 2023:

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

December 31, 2023
Construction & development	$	-		-	%
1 - 4 Family Real Estate		-		-
Commercial Real Estate - other		-		-
Commercial & industrial		10,108		1.9		Extended the maturity of loan by four months, and payment of principal and interest deferred until the sale of collateral
Agricultural		-		-
Consumer		-		-

Total	$	10,108		1.9	%

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

December 31, 2023
Construction & development	$	-	$	-	$	-	$	-
1 - 4 Family Real Estate		-		-		-		-
Commercial Real Estate - other		-		-		-		-
Commercial & industrial		-		-		-		10,108
Agricultural		-		-		-		-
Consumer		-		-		-		-

Total	$	-	$	-	$	-	$	10,108

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.