4. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

Outstanding loans are summarized below, in thousands:

Salaries and employee benefits totaling $619,000 and $763,000 have been deferred as loan origination costs during the three months ended June 30, 2025 and 2024, respectively. Salaries and employee benefits totaling $1,222,000 and $1,463,000 have been deferred as loan origination costs during the six months ended June 30, 2025, and 2024, respectively.

The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.

The risk ratings can be grouped into three major categories, defined as follows:

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 – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

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

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans.

For other loans, which are primarily consumer loans and automobile loans the Company evaluates credit quality based on the aging status of the loan and by payment activity. Non-performing loans consist of nonaccrual loans and loans past due 90 days or more and still accruing. 

Other Real Estate Owned

Other real estate owned relates to real estate acquired in full or partial settlement of loan obligations. At June 30, 2025, and December 31, 2024, other real estate owned totaled $91,000, consisting of one single family residential real estate (SFR) property.  There were two commercial real estate loans totaling $302,000 secured by commercial property, one commercial real estate loan totaling $25,000 secured by a SFR and three equity lines of credit totaling $269,000 secured by SFR property for which formal foreclosure proceedings were in process at June 30, 2025 . There was one commercial loan with a balance of $53,000 secured by a SFR property for which formal foreclosure proceedings were in process at December 31, 2024.

The following table presents the amortized cost basis of the loan portfolio allocated by management's internal risk ratings or payment activity at the dates indicated, in thousands:

The following table shows the ending balance of nonaccrual loans by loan category as of the date indicated:

The Company places loans 90 days or more past due on nonaccrual status unless the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a loan is placed on nonaccrual status the Company's general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received, and future collection of principal is deemed by management to be probable. Where the collectability of the principal or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status prior to becoming 90 days delinquent.

The following tables show interest reversed against interest income for loans placed on nonaccrual status during the three and six months ended June 30, 2025 and 2024.

Allowance for credit losses on nonaccrual loans at June 30, 2025 and December 31, 2024 were as follows:

The following table presents the amortized cost basis of loans at June 30, 2025, that were both experiencing financial difficulty and modified during the six months ended June 30, 2025, by class and by 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 receivable is also presented below.  There were no loans modified during the three months ended June 30, 2025, to borrowers experiencing financial difficulty.

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty as of June 30, 2025:

The following table presents the amortized cost basis of loans at June 30, 2024, that were both experiencing financial difficulty and modified during the six months ended June 30, 2024, by class and by 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 receivable is also presented below.  There were no loans modified during the three months ended June 30, 2024, to borrowers experiencing financial difficulty.

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty as of June 30, 2024:

Loans with payment defaults by borrowers experiencing financial difficulty during the six months ended June 30, 2025, which had material modifications in rate, term or principal forgiveness during the twelve months prior to default totaled $7.0 million in agricultural loans. Loans with payment defaults by borrowers experiencing financial difficulty during the six months ended June 30, 2024, which had material modifications in rate, term or principal forgiveness during the twelve months prior to default totaled $6.2 million in agricultural loans.

The following tables show the allocation of the allowance for credit losses at the dates indicated, in thousands:

Six Months Ended June 30, 2025:

The following tables summarize the activity in the reserve for unfunded commitments, which is recorded on the balance sheet within other liabilities, for the three and six months ended June 30, 2025 and 2024.