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:

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

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

The following tables summarize the activity in the allowance for credit losses by loan segment for the year ended December 31, 2023.


	Beginning balance		Impact of adopting ASC 326			Allowance for credit loss on PCD acquired loans		Charge-offs			Recoveries		Provision for credit losses			Ending balance
(In Thousands)	For the Year Ended December 31, 2023
Allowance for credit losses:
Agriculture and farmland	$	279	$	(190	)	$	—	$	—		$	—	$	(77	)	$	12
Construction		274		513			39		—			—		133			959
Commercial & industrial		583		283			303		(200	)		1		1,970			2,940
Commercial real estate
Multifamily		480		340			97		—			—		566			1,483
Owner occupied		635		760			1,816		—			—		3,361			6,572
Non-owner occupied		1,116		3,195			1,937		—			—		(475	)		5,773
Residential real estate
First liens		1,029		635			42		—			54		3,018			4,778
Second liens and lines of credit		218		140			64		—			61		589			1,072
Municipal		12		(2	)		—		—			—		69			79
Consumer		40		(19	)		5		—			—		73			99
Total	$	4,666	$	5,655		$	4,303	$	(200	)	$	116	$	9,227		$	23,767

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 December 31, 2023
(In Thousands)	Nonaccrual with No Allowance for Credit Loss		Nonaccrual with a related Allowance for Credit Loss		Total Nonaccrual		Loans past due over 89 days still accruing
Agriculture and farmland	$	—	$	—	$	—	$	—
Construction		191		—		191		—
Commercial & industrial		53		8		61		58
Commercial real estate						—
Multifamily		—		—		—		—
Owner occupied		2,465		83		2,548		6
Non-owner occupied		948		281		1,229		—
Residential real estate						—
First liens		2,346		361		2,707		149
Second liens and lines of credit		294		—		294		—
Municipal		—		—		—		—
Consumer		7		—		7		—
Total	$	6,304	$	733	$	7,037	$	213

The Company recognized $124 of interest income on nonaccrual loans during the year ended December 31, 2023.

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


	December 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	$	14	$	—	$	—	$	14	$	65,847	$	65,861
Construction		10		—		191		201		178,282		178,483
Commercial & industrial		46		1		118		165		238,178		238,343
Commercial real estate
Multifamily		—		—		—		—		180,788		180,788
Owner occupied		156		2,802		137		3,095		498,637		501,732
Non-owner occupied		—		86		1,239		1,325		579,647		580,972
Residential real estate
First liens		719		419		872		2,010		400,423		402,433
Second liens and lines of credit		279		128		97		504		70,243		70,747
Municipal		—		—		—		—		16,756		16,756
Consumer		15		15		7		37		5,207		5,244
Total	$	1,239	$	3,451	$	2,661	$	7,351	$	2,234,008	$	2,241,359

The following tables represent credit exposures by internally assigned grades as of December 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.

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, 2023.


	December 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	$	1,466	$	14,372	$	9,613	$	5,147	$	2,319	$	22,627	$	5,114	$	29	$	60,687
Special mention		—		—		30		—		811		1,206		342		—		2,389
Substandard or lower		13		—		15		121		—		2,576		60		—		2,785
Total Agriculture and farmland	$	1,479	$	14,372	$	9,658	$	5,268	$	3,130	$	26,409	$	5,516	$	29	$	65,861
Agriculture and farmland
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Construction
Pass		64,460		52,888		30,993		3,057		5,244		5,816		14,424		1,317		178,199
Special mention		—		—		—		—		—		—		93		—		93
Substandard or lower		—		—		—		98		—		—		—		93		191
Total Construction		64,460		52,888		30,993		3,155		5,244		5,816		14,517		1,410		178,483
Construction
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Commercial & industrial
Pass		29,776		33,213		25,315		14,018		4,429		9,110		120,747		68		236,676
Special mention		—		113		139		—		15		4		1,071		—		1,342
Substandard or lower		—		—		47		—		194		—		43		41		325
Total Commercial & industrial		29,776		33,326		25,501		14,018		4,638		9,114		121,861		109		238,343
Commercial & industrial
Current period gross charge-offs		—		—		—		—		—		—		200		—		200
Commercial real estate - Multifamily
Pass		14,918		80,127		50,320		18,871		6,031		8,351		298		—		178,916
Special mention		—		—		—		—		—		—		—		—		—
Substandard or lower		—		—		—		—		—		1,872		—		—		1,872
Total Commercial real estate - Multifamily		14,918		80,127		50,320		18,871		6,031		10,223		298		—		180,788
Commercial real estate - Multifamily
Current period gross charge-offs		—		—		—		—		—		—		—		—		—


	December 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		61,336		135,472		98,261		51,485		39,174		91,315		8,852		6		485,901
Special mention		—		377		3,125		—		6,318		—		429		—		10,249
Substandard or lower		—		—		—		626		2,408		2,391		157		—		5,582
Total Commercial real estate - Owner occupied		61,336		135,849		101,386		52,111		47,900		93,706		9,438		6		501,732
Commercial real estate - Owner occupied
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Commercial real estate - Non-owner occupied
Pass		58,335		174,248		126,009		56,468		64,301		93,193		6,376		86		579,016
Special mention		—		—		42		—		—		—		—		—		42
Substandard or lower		—		—		325		—		56		1,284		249		—		1,914
Total Commercial real estate - Non-owner occupied		58,335		174,248		126,376		56,468		64,357		94,477		6,625		86		580,972
Commercial real estate - Non-owner occupied
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Municipal
Pass		529		—		420		1,675		—		2,526		94		—		5,244
Special mention		—		—		—		—		—		—		—		—		—
Substandard or lower		—		—		—		—		—		—		—		—		—
Total Commercial real estate - Municipal		529		—		420		1,675		—		2,526		94		—		5,244
Municipal
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Total
Pass	$	230,820	$	490,320	$	340,931	$	150,721	$	121,498	$	232,938	$	155,905	$	1,506	$	1,724,639
Special mention		—		490		3,336		—		7,144		1,210		1,935		—		14,115
Substandard or lower		13		—		387		845		2,658		8,123		509		134		12,669
Total	$	230,833	$	490,810	$	344,654	$	151,566	$	131,300	$	242,271	$	158,349	$	1,640	$	1,751,423

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.


	December 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	$	45,236	$	99,877	$	99,972	$	43,063	$	23,404	$	80,456	$	8,982	$	—	$	400,990
Nonperforming		—		—		33		101		208		1,101		—		—		1,443
Total Residential real estate - First liens	$	45,236	$	99,877	$	100,005	$	43,164	$	23,612	$	81,557	$	8,982	$	—	$	402,433
Residential real estate - First liens
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Residential real estate - Second liens and lines of credit
Performing		1,207		1,818		386		184		336		2,270		64,396		—		70,597
Nonperforming		—		—		—		—		—		—		150		—		150
Total Residential real estate - Second liens and lines of credit		1,207		1,818		386		184		336		2,270		64,546		—		70,747
Residential real estate - Second liens and lines of credit
Current period gross charge-offs		—		—		—		—		—		—		—		—		—
Consumer and other
Performing		5,007		437		223		153		73		88		10,770		—		16,751
Nonperforming		—		—		—		—		—		—		5		—		5
Total Consumer and other		5,007		437		223		153		73		88		10,775		—		16,756
Consumer and other
Current period gross charge-offs		—		—		—		—		—		—		1		—		1
Total
Performing	$	51,450	$	102,132	$	100,581	$	43,400	$	23,813	$	82,814	$	84,148	$	—	$	488,338
Nonperforming		—		—		33		101		208		1,101		155		—		1,598
Total	$	51,450	$	102,132	$	100,614	$	43,501	$	24,021	$	83,915	$	84,303	$	—	$	489,936

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 year ended December 31, 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.

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 as of and for the year ended December 31, 2022.

The following table summarizes the activity in the allowance for loan losses by loan class for the year ended 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)	For the Year Ended December 31, 2022
Allowance for loan losses:
Beginning balance	$	23	$	582		$	799	$	1,634		$	22		$	15		$	77		$	3,152
Charge-offs		—		(1	)		—		(3	)		(3	)		—			—			(7	)
Recoveries		—		32			—		197			2			—			—			231
Provision		10		(30	)		1,663		(292	)		19			(3	)		(77	)		1,290
Ending balance	$	33	$	583		$	2,462	$	1,536		$	40		$	12		$	—		$	4,666

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

The Company evaluated whether loans acquired in the Merger were within the scope of ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired loans ("PCI") are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The fair value of purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral. The carrying value of purchased loans acquired with deteriorated credit quality as a result of the Merger was $2,409 at December 31, 2022

On the acquisition date, the preliminary estimate of the unpaid principal balance for all PCI loans acquired through the Gratz Merger was $6,627 and the estimated fair value of the loans was $5,384. Total contractually required payments on these loans, including interest, at acquisition was $8,509. The Company's estimate of expected cash flows was $5,793 at the acquisition date. The Company established a credit risk related non-accretable discount of $2,716 relating to these PCI loans, reflected in the recorded net fair value. The Company further estimated the timing and amount of expected cash flows in excess of the estimated

fair value and established an accretable discount of $409 relating to these PCI loans. The remaining unamortized accretable discount at December 31, 2022 totaled $0.

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.

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

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

The following tables present an aging analysis of the recorded investment of past-due loans.


	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

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 Year Ended December 31,
	2022
(In Thousands)	Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Agriculture loans	$	200	$	9
Commercial loans		39		—
Commercial real estate loans		2,365		125
Residential real estate loans		4,772		159
Consumer loans		—		—
Municipal loans		—		—
		7,376		293
With an allowance recorded:
Agriculture loans	$	—	$	—
Commercial loans		23		1
Commercial real estate loans		—		—
Residential real estate loans		—		—
Consumer loans		—		—
Municipal loans		—		—
		23		1

Total	$	7,399	$	294

The above nonaccrual loans as of December 31, 2022 exclude PCI loans with balances 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.

Approximately $540,914 or 58.3% of the Bank’s loan portfolio was in commercial real estate loans at December 31, 2022. While the Bank does not have a concentration of credit risk with any single borrower or industry, repayments on loans in these portfolios can be negatively influenced by decreases in real estate values. The Bank mitigates this risk through conservative underwriting policies and procedures. In addition, $139,555 of real estate-commercial loans were owner occupied properties as of December 31, 2022. These types of loans are generally considered to involve less risk than nonowner-occupied mortgages.

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

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 periods that were considered TDRs.