Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income and the allowance for credit losses. Interest on loans is recognized as income over the term of each loan, generally, by the accrual method. Loan origination fees and certain direct loan origination costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual life of the related loans as an interest yield adjustment.

The loans receivable portfolio is segmented into the following segments: Real Estate (including both commercial and residential loans), Agricultrual, Commercial and Industrial, Consumer, and State and Political Subdivisions.

The Company engages in real estate lending to commercial borrowers in its primary market area and surrounding areas. The commercial component of the Company’s Real Estate portfolio is secured primarily by commercial retail space, commercial office buildings, residential housing and hotels. Generally, these loans have terms that do not exceed twenty years, have loan-to-value ratios of up to eighty percent of the value of the collateral property, and are typically supported by personal guarantees of the borrowers.

In underwriting these loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The value of the property is determined by either independent appraisers or internal evaluations performed by Bank officers.

Real estate loans secured by commercial properties generally present a higher level of risk than loans secured by residential real estate. Repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.

The residential component of the Company’s Real Estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit. These loans are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. These loans are originated primarily with customers from the Company’s market area.

The Company’s one-to-four family residential mortgage originations are secured principally by properties located in its primary market area and surrounding areas. The Company offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and those under construction. Loans with terms of thirty years are normally held for sale and sold without recourse; most of the residential mortgages held in the Company’s residential real estate portfolio have maximum terms of twenty years. Generally, the majority of the Company’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with private mortgage insurance at ninety-five percent or less. Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years. In general, home equity

lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

In underwriting one-to-four family residential mortgage loans, the Company evaluates the borrower’s ability to make monthly payments, the borrower’s prior loan repayment history and the value of the property securing the loan. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial conditions and credit background. A majority of the properties securing residential real estate loans made by the Company are appraised by independent appraisers. The Company generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.

Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the Company is in a subordinate position, especially to another lender, for the loan collateral.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors. These loans are sold without recourse. Loans held for sale amounted to $115,000 and $71,000 at March 31, 2023 and December 31, 2022, respectively.

The Company originates agricultural loans to individuals in the farming industry for funding the production of crops or to purchase or refinance capital assets such as farmland, livestock, machinery, equipment, and farm real estate improvements. Agricultural loans are typical secured by collateral related to the farming activities. These loans originate from customers within our primary market area or the surrounding areas.

In underwriting agricultural loans, an analysis is performed regarding the borrower’s ability to repay the loan, the borrower’s capital and collateral, and the past, present, and future cash flows of the borrower, as well as the agricultural industry as a whole. In general, these loans would be secured by cropland, pastureland, orchardland, or timberland that is committed to ongoing management and agricultural production, with a maximum loan-to-value ratio of 70% and a maximum term of ten years.

The Company originates commercial and industrial loans principally to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and are reviewed annually.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum thresholds have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements, collateral appraisals or internal evaluations, etc. Commercial and industrial loans are typically supported by personal guarantees of the borrower.

In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Company’s analysis of the borrower’s ability to repay.

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions. Commercial and industrial loans are typically made on the basis of the

borrower’s ability to make repayment from cash flows from the borrower’s primary business activities. As a result, the availability of funds for the repayment of commercial and industrial loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.

SBA Paycheck Protection Program (“PPP”) loans that have been issued by the Company as a result of the enactment of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) in response to the economic impact of the COVID-19 pandemic are included in the Company’s Commercial and Industrial portfolio and are underwritten according to all terms and conditions pursuant to the PPP as administered by the SBA under the CARES Act. The PPP loans have 1.00% interest rates, lender fees, two or five-year terms (depending on date of origination), and may qualify for forgiveness. These loans funded by the Company are subject to the terms and conditions applicable to all loans made pursuant to the PPP, as administered by the SBA under the CARES Act. The PPP calls for these loans to be fully guaranteed by the SBA. PPP loan origination fees and certain loan origination costs have been deferred with the net amount accreted using the straight line method over the contractual life of the related loans as an interest yield adjustment. If a loan is forgiven pursuant to the terms and conditions applicable to the PPP, the remaining origination fees and costs are recognized at the time of forgiveness. As of March 31, 2023, the Company held 2 PPP loans in its Commercial and Industrial portfolio carrying an aggregate balance of $101,000 which were granted during the first round of PPP issuance and did not qualify for forgiveness. At December 31, 2022, the Company held 2 PPP loans in its Commercial and Industrial portfolio carrying an aggregate balance of $113,000 which were granted during the first round of PPP issuance and did not qualify for forgiveness.

As an addition to the commercial loans receivable portfolio, the Company may purchase the guaranteed portion of loans secured by the U.S. Government. The originating bank retains the unguaranteed portion of the loan. The loans are sponsored by one of the various government agencies including the SBA, United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”). Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S. Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan. As of March 31, 2023, the Company's balance of GGLs was $4,595,000, compared to $4,631,000 at December 31, 2022.

The Company offers a variety of secured and unsecured consumer loans, including vehicle loans, stock secured loans and loans secured by financial institution deposits. These loans originate primarily with customers from the Company’s market area.

Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability to repay the loan as agreed. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial condition and credit background.

Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

The Company, from time to time, may originate loans to state and political subdivisions that are within the Bank’s primary market area or surrounding areas. These loans may be either taxable or tax-free. These loans may be issued for the purpose of land improvement, infrastructure changes, bond refinances, or the purchase of equipment. State and political loans are typically secured by the taxing power of the borrowing entity. In some cases, the loans may also

be secured by the property/item being purchased. Audited financial statements are required as part of the underwriting for all state and political loans and a full analysis of all components of the audited statements is performed. If the loan is to be classified as tax-free, a letter from the entity’s solicitor stating such is required, as well.

The risk associated with these types of loans is considerably less than commercial loan transactions. Repayment is based on the full faith, credit, and ability of the borrowing entity to tax and then collect the payments. Delinquency or loss on these types of loans is de minimus.

Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 10 days or more. Delinquent notices are generated automatically when a loan is 10 or 15 days past-due, depending on loan type. Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and industrial loans and real estate loans issued for commercial purpose are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Company estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. Should a GGL default, demand is made to the originating bank for repurchase of the loan. If the originating bank does not repurchase the loan, demand for repurchase is then made to the appropriate government agency which has provided the guarantee for the loan.

Real estate loans issued for residential purposes and consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected. At that time, the amount of estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in full. Loans with collateral are written down to the estimated fair value of the collateral less cost to sell.

Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (e.g. reaffirmation by the borrower with demonstrated repayment ability). Otherwise, loans are charged off in full or written down to the estimated fair value of collateral less cost to sell.

Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest. A loan may remain on accrual status if it is well secured (or supported by a strong guarantee) and in the process of collection. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against interest income. Certain non-accrual loans may continue to perform; that is, payments are still being received. Generally, the payments are applied to principal. These loans remain under constant scrutiny, and if performance continues, interest income may be recorded on a cash basis based on management's judgment regarding the collectability of principal.

The allowance for credit losses (“ACL”) is an estimate of losses arising from borrowers’ inability to make loan payments as required, which is calculated via a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. The Company completed a one-time adjustment to decrease the ACL at the adoption of ASU 2016-13 through retained earnings, but all subsequent adjustments will be established through provisions for credit losses charged against income. Loans deemed to be uncollectible are charged against the ACL and subsequent recoveries, if any, are credited to the allowance.

The ACL is maintained at a level estimated by management to be adequate to absorb potential loan losses. Management’s periodic evaluation of the adequacy of the ACL is based on specific expectations for the future economic

environment that are incorporated in the projection, with loss expectations to revert to the long-run historical mean after such time as management can make or obtain a reasonable and supportable forecast. Management also considers the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may impact the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral (if the loan is collateral dependent), composition of the loan portfolio, and other relevant factors. This evaluation is inherently subjective as it requires material estimates based on management’s judgment regarding the projection of expected credit losses over the contractual lifetime of the loans.

Modeling of the ACL uses sophisticated statistical techniques to arrive at reasonable and supportable forecasts of expected losses. The Company has contracted with a third-party vendor to assist in developing models for the ACL related to the Company’s loan portfolio under ASU 2016-13. The Company has opted to utilize the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL which uses an average annual charge-off rate. This average annual charge-off rate contains loss content over several vintages and is used as a foundation for estimating the credit loss content for loans by segmented pools at the balance sheet date and is used to determine a historical charge-off rate. When estimating expected credit losses, the Company considers forward-looking information that is both reasonable, supportable, and relevant to assessing the collectability of cash flows. Reasonable and supportable forecasts may extend over the entire contractual term of a loan or a period shorter than the contractual term. Reasonable and supportable forecasts may vary by portfolio segment or individual forecast input. These forecasts may include data from internal sources, external sources, or a combination of both.

When the contractual term of a loan extends beyond the reasonable and supportable period, ASC Topic 326 requires reverting to historical loss information, or an appropriate proxy, for those periods beyond the reasonable and supportable forecast period (often referred to as the reversion period). The Company may revert to historical loss information for each individual forecast input or based on the entire estimate of loss. Reversion to historical loss information may be immediate, occur on a straight-line basis, or use any systematic/rational method. Management may apply different reversion techniques depending on the economic environment or applicable loan portfolio.

The methodology used to determine the ACL also includes a qualitative component in which the Company adjusts expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Changes in the level of the Company’s ACL may not always be directionally consistent with changes in the level of qualitative factor adjustments due to the incorporation of reasonable and supportable forecasts in estimating expected losses. Management considers qualitative factors that are relevant to the Company as of the reporting date, which may include but are not limited to: 1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere; 2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments; 3) changes in the nature and volume of the loan portfolio; 4) changes in the experience, ability, and depth of management and other relevant staff; 5) changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; 6) changes in the quality of the Company’s loan review system; 7) changes in the value of underlying collateral for collateral dependent loans; 8) the existence and effect of any concentrations of credit and changes in the level of such concentrations; and 9) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s existing loan portfolio.

The Company’s ACL is calculated by collectively evaluating and individually evaluating loans. The Company collectively evaluates applicable loans based on segments according to their homogeneous characteristics, aligned with the segmentation of the FDIC Bank Call Report. The Company collectively evaluates loans and determines applicable loss rates based on the following segments/classes:

Agricultural

◾

Loans to finance agricultural production and other loans for farmers

Commercial and Industrial

◾

Commercial and industrial loans

Consumer

◾

Other revolving credit plans

◾

Automobile loans

◾

Other consumer loans

State and Political Subdivisions

◾

Obligations (other than securities or leases) of states and political subdivisions in the U.S.

In accordance with ASC 326-20-30-2, the Company will evaluate individual loans for expected credit losses when the loans do not share similar risk characteristics with loans evaluated using the collective method. Management may evaluate loans on an individual basis even when no specific expectation of collectability is in place. Loans deemed to be impaired are specifically identified and measured for impairment. A loan is deemed to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the loan agreement. Loans to be considered for impairment include all non-accrual loans or any other selected loans where full collection is unlikely. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Once identified as impaired, the loans are measured individually for impairment based on one of the following methods:

•

The present value of expected cash flows, discounted at the loan’s effective interest rate (i.e. the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan)

•

The loan’s observable market price

•

The fair value of the collateral if the loan is deemed to be collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the liquidation of the underlying collateral and there are no other available and reliable sources of repayment. Management will consider estimated costs to sell, on a discounted basis, in the measurement of impairment if these costs are expected to reduce the cash flows available to repay the loan. Any portion of the recorded investment for a collateral dependent loan (including any capitalized accrued interest, net deferred loan fees or costs, and unamortized premium or discount) exceeding the fair value of the collateral that can be identified as uncollectible is deemed a confirmed loss and will be charged off against the ACL

Loans that have been individually measured for impairment may have a portion of the allowance allocated to cover the calculated amount of impairment as determined by the methods listed above, referred to as a specific allocation. Loans individually evaluated for impairment may also have a zero specific allocation if the loans are deemed to have no impairment, or if the amount of the impairment will be charged off.

From time to time, the Company may agree to modify or restructure the contractual terms of loans to borrowers experiencing financial difficulties. The most common types of concessions granted upon modification of a loan to a borrower experiencing financial difficulties include: (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or for the remaining term of the loan. A less common concession would be forgiveness of a portion of the loan’s principal. Loans so modified remain collectively evaluated for determination of expected credit losses, unless, during the process of evaluation, it is determined that the loan should be placed on non-accrual status until the Company determines that future collection of principal and interest is reasonably assured or the loan is otherwise deemed to be collateral dependent. Any modifications of loans to borrowers experiencing financial difficulty that are classified as non-accrual or are otherwise designated as collateral dependent are individually evaluated for determination of expected credit losses.

There may be certain types of loans for which the expectation of credit loss is zero after evaluating historical loss information, making necessary adjustments for current conditions and reasonable and supportable forecasts, and considering any collateral or guarantee arrangements that are not free-standing contracts. Factors considered by management when evaluating whether expectations of zero credit loss are appropriate may include, but are not limited to: 1) a long history of zero credit loss; 2) full securitization by cash or cash equivalents; 3) high credit ratings from rating agencies with no expected future downgrade; 4) principal and interest payments that are guaranteed by the U.S. government; 5) the issuer, guarantor, or sponsor can print its own currency and the currency is held by other central banks as reserve currency; and 6) the interest rate on the security is recognized as a risk-free rate.

A loan that is fully secured by cash or cash equivalents, such as a certificate of deposit issued by the lending institution, would likely have zero credit loss expectations. Similarly, the guaranteed portion of an SBA loan purchased on the secondary market through the SBA’s fiscal and transfer agent would likely have zero credit loss expectations because these financial assets are unconditionally guaranteed by the U.S. government.

ASC Topic 326 introduces the concept of purchased credit deteriorated (“PCD”) assets. PCD assets are acquired financial assets that, at acquisition, have experienced more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The Company does not possess loans classified as purchased credit deterioration at this time. Should the Company acquire purchased loans, these loans will be evaluated to determine if they are PCD.

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. Off-balance sheet credit exposures primarily include undrawn portions of revolving lines of credit and standby letters of credit. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets. As of March 31, 2023 and December 31, 2022, the amount of the reserve for unfunded lending commitments was $237,000 and $68,000, respectively.

The Company made a policy election to exclude accrued interest receivable from the amortized cost basis of loans. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Company’s consolidated balance sheet and totaled $1,762,000 as of March 31, 2023. Accrued interest receivable on loans is excluded from the estimate of credit losses.

The Company is subject to periodic examination by its federal and state examiners, and may be required by such regulators to recognize additions to the ACL based on their assessment of credit information available to them at the time of their examinations.

The Company utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all loans. An asset quality rating is assigned using the guidance provided in the Company’s loan policy. Primary responsibility for assigning the asset quality rating rests with the credit department. The asset quality rating is validated periodically by both an internal and external loan review process.

The commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry. Primary emphasis is placed on financial condition and trends. The grade also reflects current economic and industry conditions; as well as other variables such as liquidity, cash flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.

The loan grading system for residential real estate secured and consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio.

Risk grade characteristics are as follows:

Risk Grade 1 – MINIMAL RISK through Risk Grade 6 – MANAGEMENT ATTENTION (Pass Grade Categories)

Risk is evaluated via examination of several attributes including but not limited to financial trends, strengths and weaknesses, likelihood of repayment when considering both cash flow and collateral, sources of repayment, leverage position, management expertise, and repayment history.

At the low-risk end of the rating scale, a risk grade of 1 – Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of default or loss. Loan grades then progress through escalating ratings of 2 through 6 based upon risk. Risk Grade 2 – Modest Risk are loans with sufficient cash flows; Risk Grade 3 – Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers; Risk Grade 4 – Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher; and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets. Risk Grade 6 – Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained. Loans in this category are performing according to terms, but present some type of potential concern.

Risk Grade 7 − SPECIAL MENTION (Non-Pass Category)

Assets in this category are adequately collateralized but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. The loans may constitute increased credit risk, but not to the point of justifying a classification of substandard. No loss of principal or interest is envisioned, but risk is increasing beyond that at which the loan originally would have been granted. Historically, cash flows are inconsistent; financial trends show some deterioration. Liquidity and leverage are above industry averages. Financial information could be incomplete or inadequate. A Special Mention asset has potential weaknesses that deserve management’s close attention.

Risk Grade 8 − SUBSTANDARD (Non-Pass Category)

Generally, these assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.

These loans are characterized by the distinct possibility that the Company will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security. Substandard loans have a high probability of payment default and require more intensive supervision by Company management.

Risk Grade 9 − DOUBTFUL (Non-Pass Category)

Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens

on additional collateral and/or refinancing plan is completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

The following table presents the classes of the loan portfolio summarized by risk rating and year of origination and gross charge offs by loan portfolio summarized by year of origination as of March 31, 2023:


(Dollars in thousands)
		2023		2022		2021		2020		2019		Prior		Total
Real Estate:
1-6 Pass	$	16,448		190,287		147,558		122,136		60,136		209,865	$	746,430
7 Special Mention		—		—		—		—		—		634		634
8 Substandard		—		17		822		—		9,357		9,132		19,328
9 Doubtful		—		—		—		—		—		—		—
Unearned discount		—		—		—		—		—		—		—
Net deferred loan fees and costs		88		271		189		131		(12)		1		668
Total Real Estate Loans	$	16,536	$	190,575	$	148,569	$	122,267	$	69,481	$	219,632	$	767,060

Agricultural:
1-6 Pass	$	—		73		2		—		—		706	$	781
7 Special Mention		—		—		—		—		—		—		—
8 Substandard		—		—		—		—		—		—		—
9 Doubtful		—		—		—		—		—		—		—
Unearned discount		—		—		—		—		—		—		—
Net deferred loan fees and costs		—		1		—		—		—		1		2
Total Agricultural Loans	$	—	$	74	$	2	$	—	$	—	$	707	$	783

Commercial and Industrial:
1-6 Pass	$	4,088		11,004		6,183		7,358		5,983		22,532	$	57,148
7 Special Mention		—		—		—		—		—		—		—
8 Substandard		—		—		—		—		—		716		716
9 Doubtful		—		—		—		—		—		—		—
Unearned discount		—		—		—		—		—		—		—
Net deferred loan fees and costs		22		116		35		21		221		1		416
Total Commercial and Industrial Loans	$	4,110	$	11,120	$	6,218	$	7,379	$	6,204	$	23,249	$	58,280

Consumer:
1-6 Pass	$	922		1,750		1,424		361		293		1,028	$	5,778
7 Special Mention		—		—		—		—		—		—		—
8 Substandard		—		—		—		—		—		—		—
9 Doubtful		—		—		—		—		—		—		—
Unearned discount		—		—		—		—		—		—		—
Net deferred loan fees and costs		12		31		13		5		4		1		66
Total Consumer Loans	$	934	$	1,781	$	1,437	$	366	$	297	$	1,029	$	5,844

State and Political Subdivisions:
1-6 Pass	$	—		5,442		15,098		1,977		—		7,692	$	30,209
7 Special Mention		—		—		—		—		—		—		—
8 Substandard		—		—		—		—		—		—		—
9 Doubtful		—		—		—		—		—		—		—

Unearned discount		—		—		—		—		—		—		—
Net deferred loan fees and costs		—		2		4		1		—		—		7
Total State and Political Subdivision Loans	$	—	$	5,444	$	15,102	$	1,978	$	—	$	7,692	$	30,216

Total Loans:
1-6 Pass	$	21,458	$	208,556	$	170,265	$	131,832	$	66,412	$	241,823	$	840,346
7 Special Mention		—		—		—		—		—		634		634
8 Substandard		—		17		822		—		9,357		9,848		20,044
9 Doubtful		—		—		—		—		—		—		—
Unearned discount		—		—		—		—		—		—		—
Net deferred loan fees and costs		122		421		241		158		213		4		1,159
Total Loans	$	21,580	$	208,994	$	171,328	$	131,990	$	75,982	$	252,309	$	862,183

		2023		2022		2021		2020		2019		Prior		Total
Gross Charge Offs:
Real Estate	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural		—		—		—		—		—		—		—
Commercial and Industrial		—		—		—		—		—		—		—
Consumer		—		4		8		—		4		1		17
State and Political Subdivisions		—		—		—		—		—		—		—
Total Gross Charge Offs	$	—	$	4	$	8	$	—	$	4	$	1	$	17

Commercial and Industrial Loans include loans categorized as tax-free in the amount of $10,000 and State and Political Subdivision Loans include loans categorized as tax-free in the amount of $29,454,000 as of March 31, 2023. Commercial and Industrial Loans also include $4,595,000 of GGLs and $101,000 of PPP loans as of March 31, 2023. Loans held for sale amounted to $115,000 at March 31, 2023 and are included in the Real Estate Loans category.

The activity in the allowance for credit losses by loan class (post adoption of ASU No. 2016-13), is summarized below for the three months ended March 31, 2023.


(Dollars in thousands)									State and
	Real				Commercial				Political
	Estate		Agricultural		and Industrial		Consumer		Subdivisions		Total
As of and for the three months ended March 31, 2023:
Allowance for Credit Losses:
Balance at December 31, 2022	$	7,483	$	6	$	504	$	84	$	197	$	8,274
CECL adoption adjustment		(717)		(4)		(261)		11		(148)		(1,119)
Beginning balance January 1, 2023		6,766		2		243		95		49		7,155
Charge-offs		—		—		—		(17)		—		(17)
Recoveries		1		—		1		2		—		4
(Credit) Provision		(32)		(1)		21		13		(1)		—
Ending Balance	$	6,735	$	1	$	265	$	93	$	48	$	7,142
Ending balance: individually
evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively
evaluated for impairment	$	6,735	$	1	$	265	$	93	$	48	$	7,142

Reserve for Unfunded Lending Commitments	$	215	$	—	$	22	$	—	$	—	$	237

Loans Receivable:
Ending Balance	$	767,060	$	783	$	58,280	$	5,844	$	30,216	$	862,183
Ending balance: individually
evaluated for impairment	$	4,376	$	309	$	661	$	—	$	—	$	5,346
Ending balance: collectively
evaluated for impairment	$	762,684	$	474	$	57,619	$	5,844	$	30,216	$	856,837

The Company's activity in the allowance for credit losses on unfunded commitments for the period ended March 31, 2023 was as follows:


(Dollars in thousands)
	2023
Balance at December 31, 2022	$	68
CECL adoption adjustment		147
Provision for credit losses		22
Balance at March 31, 2023	$	237

The recorded investment, unpaid principal balance, and the related allowance of the Company’s individually evaluated loans are summarized below at March 31, 2023:


(Dollars in thousands)	March 31, 2023
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Real Estate	$	4,376	$	6,398	$	—
Agricultural		309		309		—
Commercial and Industrial		661		661		—

With an allowance recorded:
Real Estate		—		—		—
Agricultural		—		—		—
Commercial and Industrial		—		—		—
Total	$	5,346	$	7,368	$	—

Total consists of:
Real Estate	$	4,376	$	6,398	$	—
Agricultural	$	309	$	309	$	—
Commercial and Industrial	$	661	$	661	$	—

The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs. The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Company’s individually evaluated loans are summarized below for the three months ended March 31, 2023:


(Dollars in thousands)	For the Three Months Ended
	March 31, 2023
	Average		Interest
	Recorded		Income
	Investment		Recognized
With no related allowance recorded:
Real Estate	$	4,381	$	—
Agricultural		309		6
Commercial and Industrial		664		—

With an allowance recorded:
Real Estate		—		—
Agricultural		—		—
Commercial and Industrial		—		—
Total	$	5,354	$	6

Total consists of:
Real Estate	$	4,381	$	—
Agricultural	$	309	$	6
Commercial and Industrial	$	664	$	—

Of the $6,000 in interest income recognized on individually evaluated loans for the three months ended March 31, 2023, $0 in interest income was recognized with respect to non-accrual loans.

The following table presents collateral-dependent loans by segment for the period ended March 31, 2023.


(Dollars in thousands)	March 31, 2023
	Real Estate		Other
Real Estate	$	4,376	$	—
Agricultural		—		309
Commercial and Industrial		—		661
Total	$	4,376	$	970

At March 31, 2023, there were no commitments to lend additional funds with respect to individually evaluated loans.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of March 31, 2023 and December 31, 2022 were as follows:


(Dollars in thousands)	March 31,		December 31,
	2023		2022
Real Estate	$	4,376	$	4,387
Agricultural		—		—
Commercial and Industrial		661		664
Consumer		—		—
State and Political Subdivisions		—		—
Total non-accrual loans		5,037		5,051
Foreclosed assets held for resale		—		—
Loans past-due 90 days or more and still accruing interest		132		308
Total non-performing assets	$	5,169	$	5,359

There were no foreclosed assets held for resale at March 31, 2023 or December 31, 2022. Consumer mortgage loans secured by residential real estate for which the Company has entered into formal foreclosure proceedings but for which physical possession has yet to be obtained amounted to $41,000 at both March 31, 2023 and December 31, 2022. These balances were not included in foreclosed assets held for resale at March 31, 2023 or December 31, 2022.

The following tables present the classes of the loan portfolio, including individually evaluated loans, summarized by past-due status at March 31, 2023 and December 31, 2022:

(Dollars in thousands)

90 Days

Or Greater

Past Due

90 Days

Current-

and Still

30-59 Days

60-89 Days

or Greater

Total

29 Days

Total

Accruing

Past Due

Loans

Interest

March 31, 2023:

Real Estate

1,368

903

4,508

6,779

760,281

767,060

132

Agricultural

—

783

—

Commercial and Industrial

—

638

672

57,608

58,280

—

Consumer

—

5,828

5,844

—

State and Political Subdivisions

—

30,216

—

Total

1,407

914

5,146

7,467

854,716

862,183

132


(Dollars in thousands)													90 Days
													Or Greater
													Past Due
					90 Days					Current-			and Still
	30-59 Days		60-89 Days		or Greater		Total			29 Days	Total		Accruing
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
December 31, 2022:
Real Estate	$	2,682	$	59	$	4,694	$	7,435	$	757,445	$	764,880	$	308
Agricultural		—		—		—		—		860		860		—
Commercial and Industrial		62		63		639		764		55,313		56,077		—
Consumer		11		2		—		13		5,694		5,707		—
State and Political Subdivisions		—		—		—		—		30,945		30,945		—
Total	$	2,755	$	124	$	5,333	$	8,212	$	850,257	$	858,469	$	308

Pre-ASU No. 2016-13 Disclosures:

For periods prior to the adoption of ASU No. 2016-13, when management deemed the collection of contractual cashlows was unlikely for a specific instrument (mainly non-accrual loans and TDRs, then referred to as impaired loans), a specific reserve was calculated under ASC 310-10. Management further calculated a general reserve for performing assets under its previous methodology, following ASC 450-20 which utilized historical loss experience and qualitative factor adjustments to arrive at a calculated allowance for credit losses.

Upon adoption of ASU No. 2016-13, the classes of the loan portfolio were updated to match the segmentation used under the CECL model and have been updated from Commercial and Industrial, Commercial Real Estate, Residential Real Estate, and Consumer to Real Estate, Agricultural, Commercial and Industrial, Consumer, and State and Political Subdivisions. Comparative, pre-ASU No. 2016-13 adoption data has not been updated to reflect the new loan classes/segmentation utilized under the CECL model.

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


	Commercial and
(Dollars in thousands)	Industrial		Commercial Real Estate
	December 31,		December 31,
	2022		2022
Grade:
1-6 Pass	$	85,845	$	591,309
7 Special Mention		—		634
8 Substandard		725		18,781
9 Doubtful		—		—
Add (deduct): Unearned discount		—		—
Net deferred loan fees and costs		429		825
Total loans	$	86,999	$	611,549


	Residential Real Estate
	Including Home Equity		Consumer
	December 31,		December 31,
	2022		2022
Grade:
1-6 Pass	$	153,902	$	5,349
7 Special Mention		—		—
8 Substandard		795		—
9 Doubtful		—		—
Add (deduct): Unearned discount		—		—
Net deferred loan fees and costs		(191)		66
Total loans	$	154,506	$	5,415


	Total Loans
	December 31,
	2022
Grade:
1-6 Pass	$	836,405
7 Special Mention		634
8 Substandard		20,301
9 Doubtful		—
Add (deduct): Unearned discount		—
Net deferred loan fees and costs		1,129
Total loans	$	858,469

The activity in the allowance for credit losses by loan class (prior to adoption of ASU No. 2016-13), is summarized below for the three months ended March 31, 2022 and the year ended December 31, 2022.


(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three months ended March 31, 2022:
Allowance for Credit Losses:
Beginning balance	$	681	$	5,408	$	1,539	$	84	$	968	$	8,680
Charge-offs		—		—		—		(2)		—		(2)
Recoveries		1		38		1		—		—		40
(Credit) provision		(17)		313		(2)		(4)		(71)		219
Ending Balance	$	665	$	5,759	$	1,538	$	78	$	897	$	8,937
Ending balance: individually
evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively
evaluated for impairment	$	665	$	5,759	$	1,538	$	78	$	897	$	8,937

Loans Receivable:
Ending Balance	$	81,831	$	549,921	$	141,990	$	5,286	$	—	$	779,028
Ending balance: individually
evaluated for impairment	$	1,005	$	11,519	$	849	$	—	$	—	$	13,373
Ending balance: collectively
evaluated for impairment	$	80,826	$	538,402	$	141,141	$	5,286	$	—	$	765,655


(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the year ended December 31, 2022:
Allowance for Credit Losses:
Beginning balance	$	681	$	5,408	$	1,539	$	84	$	968	$	8,680
Charge-offs		(158)		(3)		(12)		(33)		—		(206)
Recoveries		3		40		16		5		—		64
(Credit) provision		178		487		14		25		(968)		(264)
Ending Balance	$	704	$	5,932	$	1,557	$	81	$	—	$	8,274
Ending balance: individually
evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively
evaluated for impairment	$	704	$	5,932	$	1,557	$	81	$	—	$	8,274

Loans Receivable:
Ending Balance	$	86,999	$	611,549	$	154,506	$	5,415	$	—	$	858,469
Ending balance: individually
evaluated for impairment	$	973	$	9,495	$	739	$	—	$	—	$	11,207
Ending balance: collectively
evaluated for impairment	$	86,026	$	602,054	$	153,767	$	5,415	$	—	$	847,262

The outstanding recorded investment of TDRs as of December 31, 2022 $7,480,000. There were no unfunded commitments on TDRs at December 31, 2022.

The following table presents the outstanding recorded investment of TDRs at the dates indicated:


(Dollars in thousands)	December 31,
	2022
Non-accrual TDRs	$	1,324
Accruing TDRs		6,156
Total	$	7,480

At March 31, 2022, three commercial and industrial loans classified as TDRs with a combined recorded investment of $696,000, six commercial real estate loans classified as TDRs with a combined recorded investment of $431,000, and one residential real estate loan classified as a TDR with a recorded investment of $13,000 were not in compliance with the terms of their restructure.

Of the loans that were modified as TDRs during the twelve months preceding March 31, 2022, one commercial real estate loan experienced a payment default during the three months ended March 31, 2022, but the loan was subsequently paid off prior to the end of the quarter.

No loans were modified as TDRs during the three months ended March 31, 2022.

The recorded investment, unpaid principal balance, and the related allowance of the Company’s impaired loans are summarized below at December 31, 2022.


(Dollars in thousands)		December 31, 2022
				Unpaid
		Recorded		Principal		Related
		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	973	$	973	$	—
Commercial Real Estate		9,495		12,430		—
Residential Real Estate		739		771		—

With an allowance recorded:
Commercial and Industrial		—		—		—
Commercial Real Estate		—		—		—
Residential Real Estate		—		—		—
Total	$	11,207	$	14,174	$	—

Total consists of:
Commercial and Industrial	$	973	$	973	$	—
Commercial Real Estate	$	9,495	$	12,430	$	—
Residential Real Estate	$	739	$	771	$	—

At December 31, 2022, $7,480,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $0 at December 31, 2022. The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs. The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Company’s impaired loans are summarized below for the three months ended March 31, 2022.


(Dollars in thousands)	For the Three Months Ended
	March 31, 2022
	Average		Interest
	Recorded		Income
	Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,010	$	2
Commercial Real Estate		11,699		72
Residential Real Estate		851		—

With an allowance recorded:
Commercial and Industrial		—		—
Commercial Real Estate		—		—
Residential Real Estate		—		—
Total	$	13,560	$	74

Total consists of:
Commercial and Industrial	$	1,010	$	2
Commercial Real Estate	$	11,699	$	72
Residential Real Estate	$	851	$	—

Of the $74,000 in interest income recognized on impaired loans for the three months ended March 31, 2022, $0 in interest income was recognized with respect to non-accrual loans.