Allowance for Credit Losses

3 Months Ended

Mar. 31, 2023

Allowance for Credit Loss [Abstract]

Allowance for Credit Losses

4.ALLOWANCE FOR CREDIT LOSSES

The segments of the Company’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The loan segments used are consistent with the internal reports evaluated by the Company’s management and Board of Directors to monitor risk and performance within various segments of its loan portfolio and, therefore, no further disaggregation is considered necessary. The Company’s loan portfolio consists primarily of real estate loans on commercial and residential property. The portfolio also includes agricultural loans, commercial loans, municipal loans, and consumer loans.

The Company’s primary lending activity is the origination of commercial loans extended to small and mid-sized commercial and industrial entities.

Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from income. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, the Company takes as collateral a security interest in any equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.

Construction and Land loans are to finance the construction of owner-occupied and income producing properties. These loans are categorized within commercial or one-to-four family residential loans based upon the underlying collateral and intended use following the completion of the construction period. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Construction loan funds are disbursed periodically based on the percentage of construction or development completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. The Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sale information. The Company also makes loans on occasion for the purchase of

land for future development by the borrower. Land loans are extended for the future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

The Company’s commercial real estate loans consist of mortgage loans secured by nonresidential real estate, such as by apartment buildings, small office buildings, and owner-occupied properties. Commercial real estate loans are secured by the subject property and are underwritten based on loan to value limits, cash flow coverage and general creditworthiness of the obligors. These loans tend to involve larger loan balances and their repayment is typically dependent upon the successful operation and management of the underlying real estate.

Residential real estate loans are underwritten based on the borrower’s repayment capacity and source, value of the underlying property, credit history and stability. These loans are secured by a first or second mortgage on the borrower’s principal residence or their second/vacation home (excluding investment/rental property).

In addition to the main types of loans discussed above, the Company also originates agricultural loans, consumer loans, and municipal loans. The agricultural loan portfolio consists of loans to local farmers and agricultural businesses that are generally secured by farmland and equipment. The consumer loan portfolio consists of lending in the form of home equity loans secured by financed property and personal consumer loans, which may be secured or unsecured. The municipal loan portfolio consists of loans to qualified local municipalities, which are generally supported by the taxing authority of the borrowing municipality, and is frequently secured by collateral.

Management systematically monitors the loan portfolio and the appropriateness of the allowance for credit losses on a quarterly basis to provide for expected losses inherent in the portfolio. For segments determined by discounted cash flow analysis, the Company's estimate of future economic conditions utilized in its estimate is primarily dependent on the Federal Open Market Committee's forecasts related to Real Gross Domestic Product and Unemployment rate. For segments determined by the remaining life method, an average loss rate is generally calculated based on peer losses and applied to the future outstanding loan balances at quarter end.

Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed for each portfolio segment:

•Levels of and trends in delinquencies

•Trends in volume and terms

•Changes in collateral

•Changes in management and lending staff

•Economic trends

•Concentrations of credit

•Changes in lending policies

•External factors

•Changes in underwriting process

•Trends in credit quality ratings

These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio.

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the Consolidated Balance Sheet date. The Company considers the allowance for credit losses adequate to cover loan losses inherent in the loan portfolio at March 31, 2023 and December 31, 2022.

The following table summarizes the activity in the allowance for credit losses by loan segment for the three months ended March 31, 2023.

	Beginning balance, prior to adoption of ASC 326		Impact of adopting ASC 326			Charge-offs		Recoveries		Provision for credit losses			Ending balance
(In Thousands)	For the Three Months Ended March 31, 2023
Allowance for credit losses:
Agriculture and farmland	$	279	$	(190	)	$	-	$	-	$	119		$	208
Construction		274		513			-		-		26			813
Commercial & industrial		583		283			-		-		64			930
Commercial real estate											-
Multifamily		480		340			-		-		(90	)		730
Owner occupied		635		760			-		-		198			1,593
Non-owner occupied		1,116		3,195			-		-		4			4,315
Residential real estate											-
First liens		1,029		635			-		1		(157	)		1,508
Second liens and lines of credit		218		140			-		1		43			402
Municipal		12		(2	)		-		-		(3	)		7
Consumer		40		(19	)		-		-		(1	)		20
Total	$	4,666	$	5,655		$	-	$	2	$	203		$	10,526

The balances at December 31, 2022 were reclassified from those previously reported as shown in Note 1.

The following table presents the amortized cost basis of nonaccrual loans and loans past due over 89 days still accruing by segments of the loan portfolio:

	As of March 31, 2023
(In Thousands)	Nonaccrual with No Allowance for Credit Loss		Nonaccrual with a related Allowance for Credit Loss		Loans past due over 89 days still accruing
Agriculture and farmland	$	—	$	781	$	—
Construction		—		—		—
Commercial & industrial		16		—		35
Commercial real estate
Multifamily		—		—		—
Owner occupied		—		—		—
Non-owner occupied		50		140		50
Residential real estate
First liens		364		811		20
Second liens and lines of credit		39		7		105
Municipal		—		—		—
Consumer		54		—		57
Total	$	523	$	1,739	$	267

The Company recognized $14 of interest income on nonaccrual loans during the three months ended March 31, 2023.

The following table presents an aging analysis of the recorded investment of past due loans at March 31, 2023.

	March 31, 2023
(In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total   Loans
Agriculture and farmland	$	36	$	-	$	-	$	36	$	53,265	$	53,301
Construction		-		-		-		-		67,934		67,934
Commercial & industrial		221		293		35		549		98,807		99,356
Commercial real estate
Multifamily		1,013		-		-		1,013		110,448		111,461
Owner occupied		413		-		-		413		150,994		151,407
Non-owner occupied		-		88		190		278		249,360		249,638
Residential real estate
First liens		883		490		602		1,975		164,503		166,478
Second liens and lines of credit		103		-		129		232		30,488		30,720
Municipal		-		-		-		-		10,472		10,472
Consumer		9		1		57		67		4,225		4,292
Total	$	2,678	$	872	$	1,013	$	4,563	$	940,496	$	945,059

Credit Quality Information

The following tables represent credit exposures by internally assigned grades as of March 31, 2023. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all.

The Company’s internally assigned grades are as follows:

Pass – loans that are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are four sub-grades within the Pass category to further distinguish the loan.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified as Doubtful have all the weaknesses inherent in a Substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as a Loss are considered uncollectible and are immediately charged against allowances.

The following table presents the classes of the loan portfolio summarized by the internal risk rating system as of March 31, 2023.

	March 31, 2023
	Term Loans Amortized Cost Basis by Origination Year
(In Thousands)	2023		2022		2021		2020		2019		Prior		Revolving loans amortized cost basis		Revolving loans converted to term		Total
Agriculture and farmland
Pass	$	659	$	14,941	$	5,381	$	5,614	$	3,636	$	15,143	$	4,706	$	—	$	50,080
Special mention		—		—		—		—		—		—		15		—		15
Substandard or lower		—		—		—		264		65		2,876		1		—		3,206
Total Agriculture and farmland	$	659	$	14,941	$	5,381	$	5,878	$	3,701	$	18,019	$	4,722	$	—	$	53,301
Agriculture and farmland
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Construction
Pass		1,730		30,869		9,442		931		5,538		1,811		17,613		—		67,934
Special mention		—		—		—		—		—		—		—		—		—
Substandard or lower		—		—		—		—		—		—		—		—		—
Total Construction		1,730		30,869		9,442		931		5,538		1,811		17,613		—		67,934
Construction
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Commercial & industrial
Pass		3,788		14,696		8,602		10,903		2,573		770		55,785		570		97,687
Special mention		—		—		242		—		—		505		892		—		1,639
Substandard or lower		15		—		—		—		14		—		1		—		30
Total Commercial & industrial		3,803		14,696		8,844		10,903		2,587		1,275		56,678		570		99,356
Commercial & industrial
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Commercial real estate - Multifamily
Pass		2,200		44,429		44,855		11,506		6,047		432		81		—		109,550
Special mention		—		—		—		—		—		—		—		—		—
Substandard or lower		—		—		—		—		—		1,911		—		—		1,911
Total Commercial real estate - Multifamily		2,200		44,429		44,855		11,506		6,047		2,343		81		—		111,461
Commercial real estate - Multifamily
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

	March 31, 2023
	Term Loans Amortized Cost Basis by Origination Year
(In Thousands)	2023		2022		2021		2020		2019		Prior		Revolving loans amortized cost basis		Revolving loans converted to term		Total
Commercial real estate - Owner occupied
Pass		12,514		63,935		25,014		15,887		19,784		6,035		2,177		—		145,346
Special mention		—		—		—		—		1,359		304		64		—		1,727
Substandard or lower		—		—		1,527		—		2,189		339		279		—		4,334
Total Commercial real estate - Owner occupied		12,514		63,935		26,541		15,887		23,332		6,678		2,520		—		151,407
Commercial real estate - Owner occupied
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Commercial real estate - Non-owner occupied
Pass		10,101		97,256		59,740		21,160		32,957		13,571		8,382		—		243,167
Special mention		—		—		—		—		6,281		—		—		—		6,281
Substandard or lower		—		—		50		—		140		—		—		—		190
Total Commercial real estate - Non-owner occupied		10,101		97,256		59,790		21,160		39,378		13,571		8,382		—		249,638
Commercial real estate - Non-owner occupied
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Municipal
Pass		—		126		323		1,787		—		1,975		81		—		4,292
Special mention		—		—		—		—		—		—		—		—		—
Substandard or lower		—		—		—		—		—		—		—		—		—
Total Commercial real estate - Municipal		—		126		323		1,787		—		1,975		81		—		4,292
Municipal
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Total
Pass	$	30,992	$	266,252	$	153,357	$	67,788	$	70,535	$	39,737	$	88,825	$	570	$	718,056
Special mention		—		—		242		—		7,640		809		971		—		9,662
Substandard or lower		15		—		1,577		264		2,408		5,126		281		—		9,671
Total	$	31,007	$	266,252	$	155,176	$	68,052	$	80,583	$	45,672	$	90,077	$	570	$	737,389

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. As part of our adoption of CECL, the Company will monitor small balance, homogeneous loans, such as home equity, residential mortgage, and consumer loans based on delinquency status rather than the assignment of loan specific risk ratings. The Company will

evaluate credit quality based on the aging status of the loan. The following tables present the amortized cost of these loans based on payment activity, by origination year:

	March 31, 2023
	Term Loans Amortized Cost Basis by Origination Year
(In Thousands)	2023		2022		2021		2020		2019		Prior		Revolving loans amortized cost basis		Revolving loans converted to term		Total
Residential real estate - First liens
Performing	$	4,571	$	45,639	$	49,399	$	20,674	$	12,214	$	32,656	$	—	$	—	$	165,153
Nonperforming		—		—		—		—		232		1,093		—		—		1,325
Total Residential real estate - First liens	$	4,571	$	45,639	$	49,399	$	20,674	$	12,446	$	33,749	$	—	$	—	$	166,478
Residential real estate - First liens
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Residential real estate - Second liens and lines of credit
Performing		97		702		753		1,189		441		1,740		25,536		—		30,458
Nonperforming		—		—		—		—		—		149		105		8		262
Total Residential real estate - Second liens and lines of credit		97		702		753		1,189		441		1,889		25,641		8		30,720
Residential real estate - Second liens and lines of credit
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Consumer and other
Performing		1,516		2,978		98		93		29		35		5,666		—		10,415
Nonperforming		—		2		—		—		49		6		—		—		57
Total Consumer and other		1,516		2,980		98		93		78		41		5,666		—		10,472
Consumer and other
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Total
Performing	$	6,184	$	49,319	$	50,250	$	21,956	$	12,684	$	34,431	$	31,202	$	—	$	206,026
Nonperforming		—		2		—		—		281		1,248		105		8		1,644
Total	$	6,184	$	49,321	$	50,250	$	21,956	$	12,965	$	35,679	$	31,307	$	8	$	207,670

Allowance for loan losses

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses using the incurred losses methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

The following table summarizes the activity in the allowance for loan losses by loan class for the three month period ended March 31, 2022.

	Agriculture Loans			Commercial and PPP Loans		Commercial Real Estate Loans		Residential Real Estate Loan		Consumer Loans			Municipal Loans		Unallocated Loans			Total
(In Thousands)	For the Three Months Ended March 31, 2022
Allowance for loan losses:
Beginning balance	$	23		$	582	$	799	$	1,634	$	22		$	15	$	77		$	3,152
Charge-offs		—			—		—		—		—			—		—			—
Recoveries		—			2		—		7		2			—		—			11
Provision		(3	)		1		271		87		(11	)		—		(65	)		280
Ending balance	$	20		$	585	$	1,070	$	1,728	$	13		$	15	$	12		$	3,443

The following table illustrates the balance of loans individually evaluated vs. collectively evaluated for impairment at December 31, 2022.

	Agriculture Loans		Commercial and PPP Loans		Commercial Real Estate Loans		Residential Real Estate Loan		Consumer Loans		Municipal Loans		Unallocated Loans		Total
(In Thousands)	As of December 31, 2022
Allowance for loan losses:
Ending balance	$	33	$	583	$	2,462	$	1,536	$	40	$	12	$	—	$	4,666
Ending balance: individually    evaluated for impairment	$	—	$	20	$	—	$	—	$	—	$	—	$	—	$	20
Ending balance: collectively evaluated    for impairment	$	33	$	563	$	2,462	$	1,536	$	40	$	12	$	—	$	4,646
Loans:
Ending balance	$	15,591	$	104,755	$	540,914	$	250,832	$	10,057	$	5,466			$	927,615
Ending balance: individually    evaluated for impairment	$	300	$	55	$	2,306	$	4,652	$	—	$	—			$	7,313
Ending balance: loans acquired with deteriorated credit    quality	$	—	$	—	$	2,227	$	182	$	—	$	—			$	2,409
Ending balance: collectively evaluated    for impairment	$	15,291	$	104,700	$	536,381	$	245,998	$	10,057	$	5,466			$	917,893

Credit Quality Information

The following tables represent credit exposures by internally assigned grades as of December 31, 2022. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all.

The Company’s internally assigned grades are as follows:

Pass – loans that are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are four sub-grades within the Pass category to further distinguish the loan.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified as Doubtful have all the weaknesses inherent in a Substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as a Loss are considered uncollectible and are immediately charged against allowances.

The following table presents the classes of the loan portfolio summarized by the internal risk rating system as of December 31, 2022:

(In Thousands)			Special
As of December 31, 2022	Pass		Mention		Substandard		Doubtful		Total
Agriculture loans	$	15,291	$	—	$	300	$	—	$	15,591
Commercial and PPP		101,980		2,721		54		—		104,755
Commercial real estate loans		533,864		2,516		4,534		—		540,914
Residential real estate loans		246,028		207		4,597		—		250,832
Consumer loans		10,057		—		—		—		10,057
Municipal loans		5,466		—		—		—		5,466
Total	$	912,686	$	5,444	$	9,485	$	—	$	927,615

The following table presents an aging analysis of the recorded investment of past due loans at December 31, 2022.

	December 31, 2022
(In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Purchased Credit Impaired Loans		Total   Loans		Total > 90 Days and   Accruing
Agriculture loans	$	193	$	48	$	149	$	390	$	15,201	$	—	$	15,591	$	149
Commercial and PPP loans		111		21		54		186		104,569		—		104,755		54
Commercial real estate loans		863		88		190		1,141		537,546		2,227		540,914		—
Residential real estate loans		2,474		137		1,176		3,787		246,863		182		250,832		540
Consumer loans		254		58		—		312		9,745		—		10,057		—
Municipal loans		—		—		—		—		5,466		—		5,466		—
Total	$	3,895	$	352	$	1,569	$	5,816	$	919,390	$	2,409	$	927,615	$	743

Impaired Loans

The following tables present the recorded investment and unpaid principal balances for impaired loans and related allowance, if applicable. Also presented are the average recorded investments and the related amount of interest recognized during the time within the period that the impaired loans were impaired.

	As of December 31, 2022
(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Agriculture loans	$	300	$	300	$	—
Commercial loans		35		55		—
Commercial real estate loans		2,306		2,312		—
Residential real estate loans		4,652		4,683		—
Consumer loans		—		—		—
Municipal loans		—		—		—
With an allowance recorded:
Agriculture loans	$	—	$	—	$	—
Commercial loans		20		20		20
Commercial real estate loans		—		—		—
Residential real estate loans		—		—		—
Consumer loans		—		—		—
Municipal loans		—		—		—
		—		—		—
Total
Agriculture loans	$	300	$	300	$	—
Commercial loans		55		75		20
Commercial real estate loans		2,306		2,312		—
Residential real estate loans		4,652		4,683		—
Consumer loans		—		—		—
Municipal loans		—		—		—
	$	7,313	$	7,370	$	20

	For the Three Months Ended March 31,
	2022
(In Thousands)	Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Agriculture loans	$	249	$	3
Commercial loans		37		—
Commercial real estate loans		181		3
Residential real estate loans		1,902		17
Consumer loans		—		—
Municipal loans		—		—
		2,369		23
With an allowance recorded:
Agriculture loans	$	—	$	—
Commercial loans		—		—
Commercial real estate loans		—		—
Residential real estate loans		4		—
Consumer loans		—		—
Municipal loans		—		—
		4		-
Total	$	2,373	$	23

The following table presents nonaccrual loans by classes of the loan portfolio:

(In Thousands)	December 31, 2022
Commercial and PPP loans	$	35
Commercial real estate loans		231
Residential real estate loans		1,652
Consumer loans		—
Total	$	1,918

The above nonaccrual loans as of December 31, 2022 excludes PCI loans with a total balance of $2,409. Management does not consider these loans to be non-performing as they are accounted for under the accretable yield method and are performing in line with expectations as of December 31, 2022.

At December 31, 2022, the carrying amount of borrowings secured by loans pledged to the FHLB under its blanket lien was $0.

Loan Modifications and Troubled Debt Restructurings (TDRs)

A loan is considered to be a TDR loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.

The Bank may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring (TDR). The Bank may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Bank’s allowance for loan losses.

The Bank identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. As of December 31, 2022, the Company had no loans identified as TDRs. There were also no new loan modifications during the three months ended March 31, 2022 that were considered TDRs.