Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2021

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

Note 6: Loans and Allowance for Loan Losses

A summary of loans at December 31, 2021 and December 31, 2020, are as follows (dollars in thousands):

	December 31, 2021			December 31, 2020
Construction & development	$	169,322		$	107,855
1 - 4 family real estate		62,971			29,079
Commercial real estate - other		339,655			290,489
Total commercial real estate		571,948			427,423
Commercial & industrial		361,974			351,248
Agricultural		73,010			50,519
Consumer		24,046			9,898
Gross loans		1,030,978			839,088
Less allowance for loan losses		(10,316	)		(9,639	)
Less deferred loan fees		(2,577	)		(2,475	)
Net loans	$	1,018,085		$	826,974

Included in the commercial & industrial loan balance at December 31, 2021 and December 31, 2020, are $18.7 million  and $44.9 million of loans that were originated under the SBA PPP program, respectively.

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the years ended December 31, 2021, 2020, and 2019 (dollars in thousands):

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer			Total
December 31, 2021
Balance, beginning of period	$	1,239	$	334	$	3,337	$	4,035		$	580		$	114		$	9,639
Charge-offs		-		-		-		(3,750	)		-			(68	)		(3,818	)
Recoveries		-		-		-		16			300			4			320
Net (charge-offs) recoveries		-		-		-		(3,734	)		300			(64	)		(3,498	)
Provision (credit) for loan losses		456		296		62		3,320			(150	)		191			4,175
Balance, end of period	$	1,695	$	630	$	3,399	$	3,621		$	730		$	241		$	10,316

	Construction & Development		1 - 4 Family Real Estate			Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer			Total
December 31, 2020
Balance, beginning of period	$	782	$	378		$	3,025	$	2,887		$	642		$	132		$	7,846
Charge-offs		-		-			-		(3,289	)		(300	)		(1	)		(3,590	)
Recoveries		-		2			-		18			10			3			33
Net (charge-offs) recoveries		-		2			-		(3,271	)		(290	)		2			(3,557	)
Provision (credit) for loan losses		457		(46	)		312		4,419			228			(20	)		5,350
Balance, end of period	$	1,239	$	334		$	3,337	$	4,035		$	580		$	114		$	9,639

	Construction & Development			1 - 4 Family Real Estate			Commercial Real Estate - Other		Commercial & Industrial			Agricultural			Consumer			Total
December 31, 2019
Balance, beginning of period	$	1,136		$	433		$	2,035	$	3,231		$	818		$	179		$	7,832
Charge-offs		-			(2	)		-		(4	)		(11	)		(1	)		(18	)
Recoveries		-			5			-		24			3			-			32
Net (charge-offs) recoveries		-			3			-		20			(8	)		(1	)		14
Provision (credit) for loan losses		(354	)		(58	)		990		(364	)		(168	)		(46	)		-
Balance, end of period	$	782		$	378		$	3,025	$	2,887		$	642		$	132		$	7,846

The following table presents, by portfolio segment, the balance in allowance for loan losses and the gross loans based upon portfolio segment and impairment method as of December 31, 2021 and December 31, 2020 (dollars in thousands):

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total
December 31, 2021
Allowance Balance
Ending balance
Individually evaluated for impairment	$	-	$	-	$	-	$	253	$	-	$	-	$	253
Collectively evaluated for
impairment		1,695		630		3,399		3,368		730		241		10,063
Total	$	1,695	$	630	$	3,399	$	3,621	$	730	$	241	$	10,316

Gross Loans
Ending balance
Individually evaluated for impairment	$	-	$	-	$	14,481	$	9,354	$	-	$	19	$	23,854
Collectively evaluated for
impairment		169,322		62,971		325,174		352,620		73,010		24,027		1,007,124
Total	$	169,322	$	62,971	$	339,655	$	361,974	$	73,010	$	24,046	$	1,030,978

December 31, 2020
Allowance Balance
Ending balance
Individually evaluated for impairment	$	-	$	-	$	-	$	177	$	-	$	-	$	177
Collectively evaluated for
impairment		1,239		334		3,337		3,858		580		114		9,462
Total	$	1,239	$	334	$	3,337	$	4,035	$	580	$	114	$	9,639

Gross Loans
Ending balance
Individually evaluated for impairment	$	-	$	-	$	8,054	$	14,601	$	468	$	-	$	23,123
Collectively evaluated for
impairment		107,855		29,079		282,435		336,647		50,051		9,898		815,965
Total	$	107,855	$	29,079	$	290,489	$	351,248	$	50,519	$	9,898	$	839,088

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, 2021.

The following table presents the credit risk profile of the Company’s loan portfolio based on internal rating category as of December 31, 2021 and December 31, 2020 (dollars in thousands):

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total
December 31, 2021
Grade
1 (Pass)	$	169,322	$	62,971	$	282,268	$	341,661	$	72,295	$	24,000	$	952,517
2 (Watch)		-		-		14,976		4,658		255		-		19,889
3 (Special Mention)		-		-		27,112		6,300		460		-		33,872
4 (Substandard)		-		-		15,299		9,355		-		46		24,700
Total	$	169,322	$	62,971	$	339,655	$	361,974	$	73,010	$	24,046	$	1,030,978

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total
December 31, 2020
Grade
1 (Pass)	$	107,855	$	28,711	$	248,194	$	328,656	$	50,051	$	9,898	$	773,365
2 (Watch)		-		368		24,155		7,691		-		-		32,214
3 (Special Mention)		-		-		10,086		300		-		-		10,386
4 (Substandard)		-		-		8,054		14,601		468		-		23,123
Total	$	107,855	$	29,079	$	290,489	$	351,248	$	50,519	$	9,898	$	839,088

The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2021 and December 31, 2020 (dollars in thousands):

	Past Due
	30–59 Days		60–89 Days		Greater than 90 Days		Total		Current		Total Loans		Total Loans > 90 Days & Accruing
December 31, 2021
Construction & development	$	-	$	-	$	-	$	-	$	169,322	$	169,322	$	-
1 - 4 Family Real Estate		-		-		-		-		62,971		62,971		-
Commercial Real Estate - other		-		174		-		174		339,481		339,655		-
Commercial & industrial		-		19		501		520		361,454		361,974		401
Agricultural		-		-		77		77		72,933		73,010		77
Consumer		48		15		18		81		23,965		24,046		18
Total	$	48	$	208	$	596	$	852	$	1,030,126	$	1,030,978	$	496

December 31, 2020
Construction & development	$	714	$	-	$	-	$	714	$	107,141	$	107,855	$	-
1 - 4 Family Real Estate		-		-		-		-		29,079		29,079		-
Commercial Real Estate - other		1,444		-		1,960		3,404		287,085		290,489		1,960
Commercial & industrial		-		-		-		-		351,248		351,248		-
Agricultural		-		-		-		-		50,519		50,519		-
Consumer		193		-		-		193		9,705		9,898		-
Total	$	2,351	$	-	$	1,960	$	4,311	$	834,777	$	839,088	$	1,960

The following table presents impaired loans as of December 31, 2021 and December 31, 2020 (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, 2021
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-
1 - 4 Family Real Estate		-		-		-		-		-		-		-
Commercial Real Estate - other		15,412		14,481		-		14,481		-		11,879		902
Commercial & industrial		9,476		9,101		253		9,354		253		12,584		275
Agricultural		-		-		-		-		-		161		-
Consumer		18		19		-		19		-		33		1
Total	$	24,906	$	23,601	$	253	$	23,854	$	253	$	24,657	$	1,178

December 31, 2020
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-
1 - 4 Family Real Estate		-		-		-		-		-		570		-
Commercial Real Estate - other		8,353		8,054		-		8,054		-		5,209		554
Commercial & industrial		18,082		14,424		177		14,601		177		15,668		1,049
Agricultural		768		468		-		468		-		2,318		(13	)
Consumer		-		-		-		-		-		-		-
Total	$	27,203	$	22,946	$	177	$	23,123	$	177	$	23,765	$	1,590

Impaired loans include nonperforming loans and also include loans modified in troubled-debt restructurings where concessions have 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 are troubled debt restructurings that were classified as impaired.  At December 31, 2021, the Company had $1.4 million of commercial real estate loans that were classified as troubled-debt restructurings and impaired and $1.6 million of commercial real estate, $10.9 million of commercial and industrial, and $469,000 of agricultural loan modifications as of December 31, 2020.  There were no newly modified troubled-debt restructurings during the year ended December 31, 2021. The modification of the terms of the TDR loan included a reduction of the stated interest rate of the loan to a stated rate of interest lower than the current market rate for new debt with similar risk.

There were no troubled-debt restructurings modified in the past twelve months that subsequently defaulted for the year ended December 31, 2021.

The following table represents information regarding nonperforming assets at December 31, 2021 and December 31, 2020 (dollars in thousands):

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total
December 31, 2021
Nonaccrual loans	$	-	$	-	$	2,708	$	7,163	$	-	$	14	$	9,885
Troubled-debt restructurings (1)		-		-		-		-		-		-		-
Accruing loans 90 or more days past due		-		-		-		401		77		18		496
Total nonperforming loans	$	-	$	-	$	2,708	$	7,564	$	77	$	32	$	10,381

	Construction & Development		1 - 4 Family Real Estate		Commercial Real Estate - Other		Commercial & Industrial		Agricultural		Consumer		Total
December 31, 2020
Nonaccrual loans	$	-	$	-	$	3,043	$	11,063	$	469	$	-	$	14,575
Troubled-debt restructurings (1)		-		-		-		-		-		-		-
Accruing loans 90 or more days past due		-		-		1,960		-		-		-		1,960
Total nonperforming loans	$	-	$	-	$	5,003	$	11,063	$	469	$	-	$	16,535

(1) $1.4 million and $12.98 million of TDRs as of December 31, 2021 and December 31, 2020, respectively, are included in the nonaccrual loans balance in the line above.

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) January 1, 2022. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of December 31, 2021, one loan totaling $3.1 million was modified, related to COVID-19, which was not considered a troubled debt restructuring.