Note 5: Loans and Allowance for Credit Losses

A summary of loans at March 31, 2026 and December 31, 2025, are as follows (dollars in thousands):

The following table presents, by portfolio segment, the activity in the allowance for credit losses for the three months ended March 31, 2026 and 2025 (dollars in thousands):

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 (CRE) 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. Construction and development loans introduce additional risks, as repayment is generally dependent on the successful completion of the project and the subsequent sale or permanent financing of the property. Credit risk in these loans is primarily driven by potential construction delays, cost overruns, and shifts in market conditions or interest rates that could impact the ultimate value of the project or the borrower’s ability to secure permanent financing.

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.

The Company evaluates the definitions of loan grades and the allowance for credit losses methodology on an ongoing basis. No changes were made to either during the period ended March 31, 2026.

The following tables presents the amortized cost of the Company’s loan portfolio by year of origination based on internal rating category as of March 31, 2026 and December 31, 2025, respectively (dollars in thousands).

There were no charge-offs for the three months ended March 31, 2026.

The following tables presents the gross charge-offs of the Company’s loan portfolio by year of origination based on internal rating category for the three months ended March 31, 2025 (dollars in thousands).

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 March 31, 2026 and December 31, 2025 (dollars in thousands):

Nonaccrual Loans

The following table presents information regarding nonaccrual loans as of March 31, 2026 and December 31, 2025 (dollars in thousands):

Interest income recognized on the nonaccrual loans for the three months ended March 31, 2026, and 2025 was considered immaterial.

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 three months ended March 31, 2026 and March 31, 2025, 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):

Loan Modifications to Borrowers Experiencing Financial Difficulty

As part of the Company’s ongoing risk management practices, the Company attempts to work with borrowers experiencing financial difficulty and 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. A change to the allowance for credit losses is generally not recorded upon modification because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance methodology.

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.

During the three months ended March 31, 2026, the Company modified four loans for borrowers experiencing financial difficulty. Two of these modifications were related to a single borrower relationship and consisted of one construction and development loan and one commercial and industrial loan, both of which received a term extension. The remaining two modifications involved one commercial real estate loan and one commercial and industrial loan, both of which received a term extension. As of March 31, 2026, the period-end amortized cost basis of these modified loans was as follows:

During the three months ended March 31, 2025, the Company modified seven loans for borrowers experiencing financial difficulty. Six of these modifications were related to a single borrower relationship and consisted of one construction and development loan and five commercial and industrial loans, all of which received term extensions. The remaining modification involved a commercial and industrial loan, which received a term extension. As of March 31, 2025, the period-end amortized cost basis of these modified loans was as follows:

The Company closely monitors the performance of loans modified for borrowers experiencing financial difficulty. There were no loans modified for borrowers experiencing financial difficulty that subsequently defaulted during the 12-month period ended March 31, 2026.