ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

12 Months Ended

Dec. 31, 2023

ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The Company adopted ASC 326 using the modified retrospective for all financial assets measured at amortized cost. Results for reporting periods after January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The following table presents the activity in the allowance for credit losses by portfolio segment for the year ended December 31, 2023, 2022 and 2021:


(dollars in thousands)	Commercial and Industrial		Commercial Real Estate and Multi-family Residential		Agri-business and Agricultural		Other Commercial		Consumer 1-4 Family Mortgage		Other Consumer		Unallocated		Total
2023
Beginning balance	$	35,290	$	27,394	$	4,429	$	917	$	3,001	$	1,021	$	554	$	72,606
Provision for credit losses	1,209		3,619		(279)		212		598		673		(182)		5,850
Loans charged-off	(6,341)		0		0		0		(163)		(828)		0		(7,332)
Recoveries	180		322		0		0		38		308		0		848
Net loans (charged-off) recovered	(6,161)		322		0		0		(125)		(520)		0		(6,484)
Ending balance	$	30,338	$	31,335	$	4,150	$	1,129	$	3,474	$	1,174	$	372	$	71,972


(dollars in thousands)	Commercial and Industrial		Commercial Real Estate and Multi-family Residential		Agri-business and Agricultural		Other Commercial		Consumer 1-4 Family Mortgage		Other Consumer		Unallocated		Total
2022
Beginning balance	$	30,595	$	26,535	$	5,034	$	1,146	$	2,866	$	1,147	$	450	$	67,773
Provision for credit losses	8,646		1,179		(605)		(229)		125		155		104		9,375
Loans charged-off	(4,022)		(597)		0		0		(42)		(473)		0		(5,134)
Recoveries	71		277		0		0		52		192		0		592
Net loans (charged-off) recovered	(3,951)		(320)		0		0		10		(281)		0		(4,542)
Ending balance	$	35,290	$	27,394	$	4,429	$	917	$	3,001	$	1,021	$	554	$	72,606


(dollars in thousands)	Commercial and Industrial		Commercial Real Estate and Multi-family Residential		Agri-business and Agricultural		Other Commercial		Consumer 1-4 Family Mortgage		Other Consumer		Unallocated		Total
2021
Beginning balance	$	28,333	$	22,907	$	3,043	$	416	$	2,619	$	951	$	3,139	$	61,408
Impact of adopting ASC 326	4,312		4,316		1,060		941		953		349		(2,881)		9,050
Provision for credit losses	1,966		(632)		611		(211)		(777)		(72)		192		1,077
Loans charged-off	(5,575)		(70)		0		0		(51)		(287)		0		(5,983)
Recoveries	1,559		14		320		0		122		206		0		2,221
Net loans (charged-off) recovered	(4,016)		(56)		320		0		71		(81)		0		(3,762)
Ending balance	$	30,595	$	26,535	$	5,034	$	1,146	$	2,866	$	1,147	$	450	$	67,773

NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $250,000.

The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized as the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans are considered to be "Pass" rated when they are reviewed as part of the previously described process and do not meet the criteria above with the exception of consumer troubled debt restructurings, which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with “Not Rated” loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status.

NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)

The following tables summarize the risk category of loans by loan segment and origination date as of December 31, 2023 and 2022. Balances presented are at the amortized cost basis by origination year.


(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Term Total		Revolving		Total
Commercial and industrial loans:
Working capital lines of credit loans:
Pass	$	193	$	1,876	$	2,214	$	1,132	$	0	$	50	$	5,465	$	532,086	$	537,551
Special Mention	0		0		0		0		0		0		0		46,498		46,498
Substandard	0		200		0		0		125		0		325		20,516		20,841


Total	193		2,076		2,214		1,132		125		50		5,790		599,100		604,890
Working capital lines of credit loans:
Current period gross write offs	0		0		75		0		139		0		214		327		541
Non-working capital loans:
Pass	199,071		224,333		85,273		49,999		28,773		10,501		597,950		171,264		769,214
Special Mention	4,038		9,577		1,051		2,498		2,306		4,298		23,768		5,477		29,245
Substandard	3,754		1,612		683		3,892		51		218		10,210		397		10,607

Not Rated	2,585		1,999		881		707		162		18		6,352		0		6,352
Total	209,448		237,521		87,888		57,096		31,292		15,035		638,280		177,138		815,418
Non-working capital loans:
Current period gross write offs	0		5,445		0		178		129		0		5,752		48		5,800
Commercial real estate and multi-family residential loans:
Construction and land development loans:
Pass	50,693		15,558		17,655		0		177		0		84,083		547,570		631,653




Total	50,693		15,558		17,655		0		177		0		84,083		547,570		631,653
Construction and land development loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Owner occupied loans:
Pass	144,411		132,850		156,680		132,407		61,415		118,406		746,169		40,288		786,457
Special Mention	7,597		686		4,913		0		1,394		2,245		16,835		14,739		31,574
Substandard	362		250		3,325		1,474		345		1,161		6,917		0		6,917


Total	152,370		133,786		164,918		133,881		63,154		121,812		769,921		55,027		824,948
Owner occupied loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Nonowner occupied loans:
Pass	123,633		158,415		112,582		134,050		87,288		66,755		682,723		27,860		710,583
Special Mention	4,503		0		6,257		0		0		2,246		13,006		0		13,006



Total	128,136		158,415		118,839		134,050		87,288		69,001		695,729		27,860		723,589
Nonowner occupied loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Multi-family loans:
Pass	90,954		23,315		9,042		35,648		13,971		14,609		187,539		45,987		233,526
Special Mention	19,671		0		0		0		0		0		19,671		0		19,671



Total	110,625		23,315		9,042		35,648		13,971		14,609		207,210		45,987		253,197
Multi-family loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Agri-business and agricultural loans:
Loans secured by farmland:
Pass	24,503		32,060		25,308		27,924		9,104		19,160		138,059		24,724		162,783

Substandard	0		0		0		0		0		100		100		0		100


Total	24,503		32,060		25,308		27,924		9,104		19,260		138,159		24,724		162,883
Loans secured by farmland:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Loans for agricultural production:
Pass	28,657		13,589		27,175		25,504		3,533		10,429		108,887		116,406		225,293
Special Mention	0		0		187		0		0		0		187		500		687



Total	28,657		13,589		27,362		25,504		3,533		10,429		109,074		116,906		225,980
Loans for agricultural production:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Other commercial loans:
Pass	7,058		26,918		33,247		13,684		90		7,332		88,329		29,819		118,148
Special Mention	0		0		0		0		0		2,419		2,419		0		2,419



Total	7,058		26,918		33,247		13,684		90		9,751		90,748		29,819		120,567
Other commercial loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans
Pass	9,910		10,541		12,486		8,614		3,924		4,625		50,100		8,330		58,430
Special Mention	0		0		0		519		0		0		519		0		519
Substandard	87		0		96		123		0		253		559		0		559

Not Rated	64,233		51,018		38,014		17,432		4,314		23,225		198,236		0		198,236
Total	74,230		61,559		50,596		26,688		8,238		28,103		249,414		8,330		257,744
Closed end first mortgage loans
Current period gross write offs	0		0		0		0		0		0		0		0		0


NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
Open end and junior lien loans
Pass	557		137		491		335		0		6		1,526		8,689		10,215

Substandard	108		0		23		0		26		48		205		68		273

Not Rated	24,792		29,648		8,471		1,554		2,286		1,962		68,713		112,371		181,084
Total	25,457		29,785		8,985		1,889		2,312		2,016		70,444		121,128		191,572
Open end and junior lien loans
Current period gross write offs	0		50		14		0		0		0		64		99		163
Residential construction loans




Not Rated	1,525		2,982		1,515		839		263		1,220		8,344		0		8,344
Total	1,525		2,982		1,515		839		263		1,220		8,344		0		8,344
Residential construction loans
Current period gross write offs	0		0		0		0		0		0		0		0		0
Other consumer loans
Pass	1,082		789		1,391		301		0		0		3,563		11,894		15,457

Substandard	40		34		35		0		2		0		111		0		111

Not Rated	32,481		17,585		9,994		6,008		1,611		1,957		69,636		10,545		80,181
Total	33,603		18,408		11,420		6,309		1,613		1,957		73,310		22,439		95,749
Other consumer loans
Current period gross write offs	16		258		90		8		212		1		585		243		828

Total Loans	$	846,498	$	755,972	$	558,989	$	464,644	$	221,160	$	293,243	$	3,140,506	$	1,776,028	$	4,916,534

Total current period gross write offs	$	16	$	5,753	$	179	$	186	$	480	$	1	$	6,615	$	717	$	7,332

When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant year over year changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value.

NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)

The following tables present the amortized cost basis of collateral dependent loans by class of loan as of December 31, 2023 and 2022:


(dollars in thousands)	Real Estate		General Business Assets		Other		Total
2023
Commercial and industrial loans:
Working capital lines of credit loans	$	50	$	2,454	$	0	$	2,504
Non-working capital loans	40		8,202		400		8,642
Commercial real estate and multi-family residential loans:
Owner occupied loans	595		1,474		1,161		3,230
Nonowner occupied loans	0		0		0		0
Agri-business and agricultural loans:
Loans secured by farmland	0		100		0		100
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	559		0		0		559
Open end and junior lien loans	164		0		0		164
Other consumer loans	0		0		112		112
Total	$	1,408	$	12,230	$	1,673	$	15,311


(dollars in thousands)	Real Estate		General Business Assets		Other		Total
2022
Commercial and industrial loans:
Working capital lines of credit loans	$	50	$	5,402	$	0	$	5,452
Non-working capital loans	544		18,109		229		18,882
Commercial real estate and multi-family residential loans:
Owner occupied loans	413		1,491		1,161		3,065
Nonowner occupied loans	0		0		0		0
Agri-business and agricultural loans:
Loans secured by farmland	0		145		0		145
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	2,030		0		0		2,030
Open end and junior lien loans	188		0		0		188
Other consumer loans	0		0		7		7
Total	$	3,225	$	25,147	$	1,397	$	29,769

NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)

Modifications Made to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point to estimate such credit losses is historical loss information. The Company uses a probability of default/loss given default model to determine the allowance for credit losses recorded at origination. Occasionally, the Company subsequently modifies loans for borrowers experiencing financial distress by providing the following forms of relief: forgiveness of loan principal, extension of repayment terms, reduction of interest rate or an other than insignificant payment delay. In some instances, the Company provides multiple types of concessions for such modifications. Because the effect of most modifications to borrowers experiencing financial difficulty is already included in the allowance for credit losses, no change to the allowance for credit losses is generally recorded for these modifications.

The following tables present the amortized cost basis at the end of the reporting period of loans that were experiencing financial difficulty and received a modification of terms during the twelve months ended December 31, 2023, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivables at the end of the reporting period is also presented below:


(dollars in thousands)	Interest Rate Reduction		Combination Interest Rate Reduction and Term Extension		Combination Principal Forgiveness, Interest Rate Reduction, Term Extension and Payment Delay		Total Modifications		Total Class of Financing Receivable
Twelve Months Ended December 31, 2023
Commercial and industrial loans:
Working capital lines of credit loans	$	1,912	$	944	$	0	$	2,856	0.47	%
Non-working capital loans	0		0		1,572		1,572		0.19
Total commercial and industrial loans	1,912		944		1,572		4,428		0.31























Total loan modifications made to borrowers experiencing financial difficulty	$	1,912	$	944	$	1,572	$	4,428	0.09	%

The Company has no material commitments to lend additional funds to borrowers included in the previous table.

NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)

The following table presents the financial effect of the loan modifications presented above for borrowers experiencing financial difficulty for the twelve months ended December 31, 2023:

(dollars in thousands)

Principal Forgiveness

Interest Rate Reduction

Term Extension

Payment Delay

Total Class of Financing Receivable

Twelve Months Ended December 31, 2023

Commercial and industrial loans:

Working capital lines of credit loans

Reduction of two variable Prime Rate lines of credit to 1.00% Fixed

Reduction of one variable line of credit from Prime plus 1.00% to 1.00% Fixed

Term extension for one variable rate line of credit from 12 months to 120 months

None

0.47

Non-working capital loans (1)

9,380

Reduction of one term loan from Prime plus 0.75% to 1.00% Fixed

Term extension from 40 months to 60 months

Extension of amortization period from 40 months to 480 months with excess cash flow recapture provisions for earlier repayment

0.19

(1) Represents one $11.0 million non-working capital loan that received principal forgiveness of $9.4 million, of which $3.7 million and $5.6 million was charged off during the twelve months ended December 31, 2023 and 2022, respectively.

During the twelve months ended December 31, 2022, no modifications were made to loans for borrowers experiencing financial difficulty.

The company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. At December 31, 2023, no loans receiving such a modification within the last twelve months were 30 days or greater past due.

At December 31, 2023, no loans receiving a modification due to borrower financial difficulty within the last twelve months has experienced a payment default.

Upon the Company's determination that a modified loan (or portion thereof) has subsequently been deemed uncollectible, the loan (or a portion thereof) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.