Allowance for Credit Losses

9 Months Ended

Sep. 30, 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 September 30, 2023 and December 31, 2022.

The following tables summarize the activity in the allowance for credit losses by loan segment for the three and nine months ended September 30, 2023.

	Beginning balance		Charge-offs		Recoveries		Provision for credit losses			Ending balance
(In Thousands)	For the Three Months Ended September 30, 2023
Allowance for credit losses:
Agriculture and farmland	$	209	$	—	$	—	$	(130	)	$	79
Construction		728		—		—		(275	)		453
Commercial & industrial		729		—		—		126			855
Commercial real estate
Multifamily		673		—		—		(254	)		419
Owner occupied		1,559		—		—		197			1,756
Non-owner occupied		4,350		—		—		(220	)		4,130
Residential real estate
First liens		1,397		—		11		44			1,452
Second liens and lines of credit		383		—		1		(58	)		326
Municipal		7		—		—		—			7
Consumer		22		—		—		2			24
Unallocated		171		—		—		292			463
Total	$	10,228	$	—	$	12	$	(276	)	$	9,964

	Beginning balance		Impact of adopting ASC 326			Charge-offs		Recoveries		Provision for credit losses			Ending balance
(In Thousands)	For the Nine Months Ended September 30, 2023
Allowance for credit losses:
Agriculture and farmland	$	279	$	(190	)	$	—	$	—	$	(10	)	$	79
Construction		274		513			—		—		(334	)		453
Commercial & industrial		583		283			—		1		(12	)		855
Commercial real estate
Multifamily		480		340			—		—		(401	)		419
Owner occupied		635		760			—		—		361			1,756
Non-owner occupied		1,116		3,195			—		—		(181	)		4,130
Residential real estate
First liens		1,029		635			—		50		(262	)		1,452
Second liens and lines of credit		218		140			—		60		(92	)		326
Municipal		12		(2	)		—		—		(3	)		7
Consumer		40		(19	)		—		—		3			24
Unallocated		—		—			—		—		463			463
Total	$	4,666	$	5,655		$	—	$	111	$	(468	)	$	9,964

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 September 30, 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	$	—	$	—	$	—
Construction		—		—		192
Commercial & industrial		13		—		110
Commercial real estate
Multifamily		—		—		—
Owner occupied		—		—		—
Non-owner occupied		292		140		558
Residential real estate
First liens		1,357		—		112
Second liens and lines of credit		43		—		90
Municipal		—		—		—
Consumer		50		—		1
Total	$	1,755	$	140	$	1,063

The Company recognized $35 and $49 of interest income on nonaccrual loans during the three and nine months ended September 30, 2023.

The following table presents an aging analysis of the recorded investment of past due loans at September 30, 2023.

	September 30, 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	$	291	$	—	$	—	$	291	$	50,293	$	50,584
Construction		—		—		192		192		65,644		65,836
Commercial & industrial		202		—		122		324		115,248		115,572
Commercial real estate
Multifamily		—		—		—		—		111,853		111,853
Owner occupied		137		—		—		137		160,792		160,929
Non-owner occupied		—		—		947		947		256,397		257,344
Residential real estate
First liens		1,096		101		592		1,789		170,692		172,481
Second liens and lines of credit		97		4		96		197		27,673		27,870
Municipal		—		—		—		—		11,869		11,869
Consumer		4		—		3		7		4,130		4,137
Total	$	1,827	$	105	$	1,952	$	3,884	$	974,591	$	978,475

Credit Quality Information

The following tables represent credit exposures by internally assigned grades as of September 30, 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 September 30, 2023.

	September 30, 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	$	641	$	13,880	$	5,073	$	5,228	$	3,089	$	15,107	$	4,213	$	46	$	47,277
Special mention		—		—		—		—		45		192		242		—		479
Substandard or lower		14		—		16		129		—		2,612		57		—		2,828
Total Agriculture and farmland	$	655	$	13,880	$	5,089	$	5,357	$	3,134	$	17,911	$	4,512	$	46	$	50,584
Agriculture and farmland
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Construction
Pass		17,080		23,430		17,020		912		5,428		1,498		375		93		65,836
Special mention		—		—		—		—		—		—		—		—		—
Substandard or lower		—		—		—		—		—		—		—		—		—
Total Construction		17,080		23,430		17,020		912		5,428		1,498		375		93		65,836
Construction
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Commercial & industrial
Pass		6,765		14,505		7,258		9,606		1,657		1,045		73,096		110		114,042
Special mention		—		—		161		—		—		—		914		—		1,075
Substandard or lower		—		—		51		—		203		—		200		1		455
Total Commercial & industrial		6,765		14,505		7,470		9,606		1,860		1,045		74,210		111		115,572
Commercial & industrial
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Commercial real estate - Multifamily
Pass		5,226		44,619		42,805		11,307		5,858		—		153		—		109,968
Special mention		—		—		—		—		—		—		—		—		—
Substandard or lower		—		—		—		—		—		1,885		—		—		1,885
Total Commercial real estate - Multifamily		5,226		44,619		42,805		11,307		5,858		1,885		153		—		111,853
Commercial real estate - Multifamily
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

	September 30, 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		14,164		66,271		24,299		14,821		21,357		5,767		3,051		6		149,736
Special mention		—		—		1,490		—		6,591		—		295		—		8,376
Substandard or lower		—		—		—		—		2,423		320		74		—		2,817
Total Commercial real estate - Owner occupied		14,164		66,271		25,789		14,821		30,371		6,087		3,420		6		160,929
Commercial real estate - Owner occupied
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Commercial real estate - Non-owner occupied
Pass		20,178		113,886		59,008		18,565		25,778		13,105		5,834		—		256,354
Special mention		—		—		—		—		—		—		—		—		—
Substandard or lower		—		—		43		—		140		558		—		249		990
Total Commercial real estate - Non-owner occupied		20,178		113,886		59,051		18,565		25,918		13,663		5,834		249		257,344
Commercial real estate - Non-owner occupied
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Municipal
Pass		266		—		220		1,677		—		1,877		97		—		4,137
Special mention		—		—		—		—		—		—		—		—		—
Substandard or lower		—		—		—		—		—		—		—		—		—
Total Commercial real estate - Municipal		266		—		220		1,677		—		1,877		97		—		4,137
Municipal
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Total
Pass	$	64,320	$	276,591	$	155,683	$	62,116	$	63,167	$	38,399	$	86,819	$	255	$	747,350
Special mention		—		—		1,651		—		6,636		192		1,451		—		9,930
Substandard or lower		14		—		110		129		2,766		5,375		331		250		8,975
Total	$	64,334	$	276,591	$	157,444	$	62,245	$	72,569	$	43,966	$	88,601	$	505	$	766,255

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

	September 30, 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	$	14,757	$	40,742	$	51,889	$	20,584	$	9,512	$	27,507	$	6,021	$	—	$	171,012
Nonperforming		—		—		—		104		211		1,154		—		—		1,469
Total Residential real estate - First liens	$	14,757	$	40,742	$	51,889	$	20,688	$	9,723	$	28,661	$	6,021	$	—	$	172,481
Residential real estate - First liens
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Residential real estate - Second liens and lines of credit
Performing		75		766		440		130		194		1,256		24,876		—		27,737
Nonperforming		—		—		—		—		—		29		90		14		133
Total Residential real estate - Second liens and lines of credit		75		766		440		130		194		1,285		24,966		14		27,870
Residential real estate - Second liens and lines of credit
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Consumer and other
Performing		1,930		169		70		70		17		9		9,553		—		11,818
Nonperforming		—		2		—		—		48		—		1		—		51
Total Consumer and other		1,930		171		70		70		65		9		9,554		—		11,869
Consumer and other
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Total
Performing	$	16,762	$	41,677	$	52,399	$	20,784	$	9,723	$	28,772	$	40,450	$	—	$	210,567
Nonperforming		—		2		—		104		259		1,183		91		14		1,653
Total	$	16,762	$	41,679	$	52,399	$	20,888	$	9,982	$	29,955	$	40,541	$	14	$	212,220

The Company may modify loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, interest rate reduction or an other-than-insignificant payment delay. When principal forgiveness is provided, the amount of forgiveness is charged off against the allowance for credit losses. The Company may also provide multiple types of modifications on an individual loan. For the nine months ended September 30, 2023, the Company did not extend any modifications to borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan.

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 and nine month periods ended September 30, 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 September 30, 2022
Allowance for loan losses:
Beginning balance	$	17	$	506		$	1,786		$	1,547		$	21	$	13	$	—		$	3,890
Charge-offs		—		—			—			—			—		—		—			—
Recoveries		—		25			—			139			—		—		—			164
Provision		21		96			427			(43	)		12		2		—			515
Ending balance	$	38	$	627		$	2,213		$	1,643		$	33	$	15	$	-		$	4,569
(In Thousands)	For the Nine Months Ended September 30, 2022
Allowance for loan losses:
Beginning balance	$	23	$	582		$	799		$	1,634		$	22	$	15	$	77		$	3,152
Charge-offs		—		(1	)		(1	)		—			—		—		—			(2	)
Recoveries		—		32			—			195			2		—		—			229
Provision		15		14			1,415			(186	)		9		—		(77	)		1,190
Ending balance	$	38	$	627		$	2,213		$	1,643		$	33	$	15	$	-		$	4,569

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 September 30,				For the Nine Months Ended September 30,
	2022				2022
(In Thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Agriculture loans	$	133	$	5	$	210	$	8
Commercial loans		37		—		35		—
Commercial real estate loans		2,421		65		2,451		100
Residential real estate loans		2,986		36		3,048		57
Consumer loans		—		—		—		—
Municipal loans		—		—		—		—
		5,577		106		5,744		165
With an allowance recorded:
Agriculture loans	$	—	$	—	$	—	$	—
Commercial loans		—		—		—		—
Commercial real estate loans		—		—		—		—
Residential real estate loans		174		3		175		5
Consumer loans		2		—		2		—
Municipal loans		—		—		—		—
		176		3		177		5
Total	$	5,753	$	109	$	5,921	$	170

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.