Loans and Allowance for Loan Losses | 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) • Grade 2 (Watch) • Grade 3 (Special Mention) • Grade 4 (Substandard) 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 (dollars in s): 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 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 m illi on and $ 9.92 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, borrower secured Nonaccrual Loans The following table presents information regarding nonaccrual loans as of December 31 (dollars in s): 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. |