Loans

12 Months Ended

Dec. 31, 2022

Loans [Abstract]

Loans

(4) Loans

The composition of the Company’s loan portfolio, by loan class, at December 31, is as follows:

	2022			2021
Commercial	$	106,771		$	135,894
Commercial Real Estate		645,166			526,924
Agriculture		114,040			107,183
Residential Mortgage		92,669			76,160
Residential Construction		10,167			4,482
Consumer		15,287			17,258
		984,100			867,901
Allowance for loan losses		(14,792	)		(13,952	)
Net deferred origination fees and costs		830			(1,232	)
Loans, net	$	970,138		$	852,717

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit risk rating standards and criteria similar to those employed by state and federal banking regulatory agencies.

Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses.  These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above.  Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.  Paycheck Protection Program (“PPP”) loans outstanding included in Commercial loans totaled $0.5 million and $37.3 million as of December 31, 2022 and December 31, 2021, respectively.

Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied.  Loans secured by owner-occupied real estate are primarily susceptible to changes in the market conditions of the related business.  This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles. These same risks apply to commercial loans whether secured by equipment, receivables or other personal property or unsecured.  Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral.  When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default.  Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space.  Losses are dependent on the value of underlying collateral at the time of default.  Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means.

Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock.  Repayment is primarily from the sale of an agricultural product or service.  Agricultural loans are generally secured by inventory, receivables, equipment, and other real property.  Agricultural loans primarily are susceptible to changes in market demand for specific commodities.  This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions such as drought, fire, or floods.  Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfalls in collateral value. In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts.

Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the related risks described above but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion. Losses are primarily related to underlying collateral value and changes therein as described above. Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfall in collateral value. In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment rate, loss of collateral value, inflation and demand shifts.

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Collateral valuations are obtained at origination of the credit. Once repayment is questionable, and the loan has been deemed classified, collateral valuations are obtained periodically (generally annually but may be more frequent depending on the collateral type).

At December 31, 2022, approximately 11% in principal amount of the Company’s loans were for general commercial uses, including professional, retail and small businesses. Approximately 65% in principal amount of the Company’s loans were secured by commercial real estate, which consists primarily of loans secured by commercial properties and construction and land development loans. Approximately 12% in principal amount of the Company’s loans were for agriculture, approximately 9% in principal amount of the Company’s loans were residential mortgage loans, approximately 1% in principal amount of the Company’s loans were residential construction loans and approximately 2% in principal amount of the Company’s loans were consumer loans.

Once a loan becomes delinquent or repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral or a principal payment. If this is not forthcoming and payment of principal and interest in accordance with the contractual terms of the loan agreement becomes unlikely, the Company will consider the loan to be impaired and will estimate its probable loss, using the present value of future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. For collateral dependent loans, the Company will utilize a recent valuation of the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount. Depending on the length of time until final collection, the Company may periodically revalue the estimated loss and take additional charge-offs or specific reserves as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when the collateral is liquidated and the actual loss is confirmed. Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or judgment liens on the borrower’s other assets.

At December 31, 2022 and 2021, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank.

Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of December 31, 2022 and 2021, was as follows:

	Current & Accruing		30-59 Days Past Due & Accruing		60-89 Days Past Due & Accruing		90 Days or more Past Due & Accruing		Nonaccrual		Total Loans
December 31, 2022
Commercial	$	106,327	$	41	$	—	$	403	$	—	$	106,771
Commercial Real Estate		645,166		—		—		—		—		645,166
Agriculture		106,624		—		—		—		7,416		114,040
Residential Mortgage		92,546		—		—		—		123		92,669
Residential Construction		10,167		—		—		—		—		10,167
Consumer		14,650		—		—		—		637		15,287
Total	$	975,480	$	41	$	—	$	403	$	8,176	$	984,100
December 31, 2021
Commercial	$	134,890	$	394	$	477	$	—	$	133	$	135,894
Commercial Real Estate		526,337		32		—		—		555		526,924
Agriculture		98,471		—		—		—		8,712		107,183
Residential Mortgage		75,861		161		—		—		138		76,160
Residential Construction		4,482		—		—		—		—		4,482
Consumer		16,523		—		76		—		659		17,258
Total	$	856,564	$	587	$	553	$	—	$	10,197	$	867,901

Non-accrual loans amounted to $8,176 at December 31, 2022, and were comprised of three agriculture loans totaling $7,416, one residential mortgage loan totaling $123, and four consumer loans totaling $637. Non-accrual loans amounted to $10,197 at December 31, 2021, and were comprised of two commercial loans totaling $133, one commercial real estate loan totaling $555, three agriculture loans totaling $8,712, one residential mortgage loan totaling $138, and four consumer loans totaling $659.

Impaired Loans

A loan is considered 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 contractual terms of the loan agreement, including scheduled interest payments. Loans to be considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or worse and an aggregate exposure of $500 or more. Once identified, impaired loans are measured individually for impairment using one of three methods:  present value of expected cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or fair value of collateral if the loan is collateral dependent.  If the measurement of a non-accrual loan is less than the recorded investment in the loan, an impairment is recognized through the establishment of a specific reserve sufficient to cover expected losses and/or a charge-off against the allowance for loan losses.  In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, is promptly charged-off against the allowance for loan losses.

Impaired loans, segregated by loan class, as of December 31, 2022 and 2021, were as follows:

	Unpaid Contractual Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance
December 31, 2022
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		—		—		—		—		—
Agriculture		10,032		7,416		—		7,416		—
Residential Mortgage		673		123		499		622		75
Residential Construction		—		—		—		—		—
Consumer		822		637		64		701		2
Total	$	11,527	$	8,176	$	563	$	8,739	$	77
December 31, 2021
Commercial	$	142	$	133	$	—	$	133	$	—
Commercial Real Estate		555		555		—		555		—
Agriculture		10,680		8,712		—		8,712		—
Residential Mortgage		701		138		517		655		81
Residential Construction		241		—		241		241		10
Consumer		815		659		64		723		2
Total	$	13,134	$	10,197	$	822	$	11,019	$	93

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the years ended December 31, 2022 and  2021, was as follows:

	December 31, 2022				December 31, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial	$	40	$	3	$	300	$	7
Commercial Real Estate		384		32		4,165		509
Agriculture		8,047		—		9,046		—
Residential Mortgage		639		19		809		23
Residential Construction		48		—		329		15
Consumer		737		21		745		7
Total	$	9,895	$	75	$	15,394	$	561

None of the interest on impaired loans was recognized using a cash basis of accounting for the years ended December 31, 2022 and 2021.

Troubled Debt Restructurings

The Company’s loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), which are loans on which concessions in terms have been granted because of the borrowers’ financial difficulties and, as a result, the Company receives less than the current market-based compensation for the loan. These concessions may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are placed on non-accrual status at the time of restructure and may be returned to accruing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

When a loan is modified, it is measured based upon the present value of future cash flows discounted at the contractual interest rate of the original loan agreement, or the fair value of collateral less selling costs if the loan is collateral dependent. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan.

The Company had $8,399 and $10,103 in TDR loans as of December 31, 2022 and 2021, respectively. Specific reserves for TDR loans totaled $77 and $93 as of December 31, 2022 and 2021, respectively. TDR loans performing in compliance with modified terms totaled $8,399 and $10,006 as of December 31, 2022 and 2021, respectively. There were no commitments to advance additional funds on existing TDR loans as of December 31, 2022.

Loans modified as troubled debt restructurings during the years ended December 31, 2022 and 2021,  were as follows:

	Year Ended December 31, 2022
	Number of Contracts		Pre-modification outstanding recorded investment		Post- modification outstanding recorded investment
Consumer		1	$	75	$	75
Total		1	$	75	$	75

	Year Ended December 31, 2021
	Number of Contracts		Pre-modification outstanding recorded investment		Post- modification outstanding recorded investment
Agriculture		3	$	9,130	$	9,130
Consumer		2		593		593
Total		5	$	9,723	$	9,723

Loan modifications generally involve reductions in the interest rate, payment extensions, forgiveness of principal, or forbearance. No loans were modified as a TDR within the previous 12 months that subsequently defaulted during the years ended December 31, 2022 and 2021. The Company considers a loan to be in payment default when it is 90 days or more past due.

Credit Quality Indicators

All new loans are rated using the credit risk ratings and criteria adopted by the Company. Risk ratings are adjusted as future circumstances warrant. All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss. General definitions for each risk rating are as follows:

Risk Rating “1” – Pass (High Quality):  This category is reserved for loans fully secured by Company CDs or savings accounts and properly margined (as defined in the Company’s Credit Policy) and actively traded securities (including stocks, as well as corporate, municipal and U.S. Government bonds).

Risk Rating “2” – Pass (Above Average Quality): This category is reserved for borrowers with strong balance sheets that are well structured with manageable levels of debt and good liquidity. Cash flow is sufficient to service all debt, including the Company’s, as agreed. Historical earnings, cash flow, and payment performance have all been strong and trends are positive and consistent.  Collateral protection is better than the Company’s Credit Policy guidelines.

Risk Rating “3” – Pass (Average Quality): Credits within this category are considered to be of average, but acceptable, quality.  Loan characteristics, including term and collateral advance rates, meet the Company’s Credit Policy guidelines; unsecured lines to borrowers with above average liquidity and cash flow may be considered for this category; the borrower’s financial strength is well documented, with adequate, but consistent, cash flow to meet all obligations. Liquidity should be sufficient and leverage should be moderate. Monitoring of collateral may be required, including a borrowing base or construction budget. Alternative financing is typically available.

Risk Rating “4” – Pass (Below Average Quality): Credits within this category are considered sound, but merit additional attention due to industry concentrations within the borrower’s customer base, problems within their industry, deteriorating financial or earnings trends, declining collateral values, increased frequency of past due payments and/or overdrafts, discovery of documentation deficiencies which may impair our borrower’s ability to repay, or the Company’s ability to liquidate collateral. Financial performance is average but inconsistent. There also may be changes of ownership, management or professional advisors, which could be detrimental to the borrower’s future performance.

Risk Rating “5” – Special Mention (Criticized): Loans in this category are currently protected by their collateral value and have no loss potential identified, but have potential weaknesses which may, if not monitored or corrected, weaken our ability to collect payments from the borrower or satisfactorily liquidate our collateral position. Loans where terms have been modified due to their failure to perform as agreed may be included in this category. Adverse trends in the borrower’s operation, such as reporting losses or inadequate cash flow, increasing and unsatisfactory leverage, or an adverse change in economic or market conditions may have weakened the borrower’s business and impaired their ability to repay based on original terms. The condition or value of the collateral has deteriorated to the point where adequate protection for our loan may be jeopardized in the future. Loans in this category are in transition and, generally, do not remain in this category beyond 12 months. During this time, efforts are focused on strategies aimed at upgrading the credit or locating alternative financing.

Risk Rating “6” – Substandard (Classified): Loans in this category are inadequately protected by the borrower’s net worth, capacity to repay or collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. There exists a strong possibility of loss if the deficiencies are not corrected. Loans that are dependent on the liquidation of collateral to repay are included in this category, as well as borrowers in bankruptcy or where legal action is required to effect collection of our debt.

Risk Rating “7” – Doubtful (Classified): Loans in this category indicate all of the weaknesses of a Substandard classification, however, collection of loan principal, in full, is highly questionable and improbable; possibility of loss is very high, but there is still a possibility that certain collection strategies may, yet, be successful, rendering a definitive loss difficult to estimate, at this time. Loans in this category are in transition and, generally, do not remain in this category more than 6 months.

Risk Rating “8” – Loss (Classified):

Active Charge-Off. Loans in this category are considered uncollectible and of such little value that their removal from the Company’s books is required. The charge-off is pending or already processed. Collateral positions have been or are in the process of being liquidated and the borrower/guarantor may or may not be cooperative in repayment of the debt. Recovery prospects are unknown, but the Company is actively engaged in the collection of the loan.

Inactive Charge-Off. Loans in this category are considered uncollectible and of such little value that their removal from the Company’s books is required. The charge-off is pending or already processed. Collateral positions have been liquidated and the borrower/guarantor has nothing of any value remaining to apply to the repayment of our loan. Any further collection activities would be of little value.

The following table presents the risk ratings by loan class as of December 31, 2022 and 2021.

	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2022
Commercial	$	106,643	$	—	$	128	$	—	$	—	$	106,771
Commercial Real Estate		631,693		6,748		6,725		—		—		645,166
Agriculture		105,560		1,064		7,416		—		—		114,040
Residential Mortgage		92,299		207		163		—		—		92,669
Residential Construction		10,167		—		—		—		—		10,167
Consumer		14,650		—		637		—		—		15,287
Total	$	961,012	$	8,019	$	15,069	$	—	$	—	$	984,100
December 31, 2021
Commercial	$	132,425	$	2,376	$	1,093	$	—	$	—	$	135,894
Commercial Real Estate		516,120		6,524		4,280		—		—		526,924
Agriculture		98,471		—		8,712		—		—		107,183
Residential Mortgage		76,020		—		140		—		—		76,160
Residential Construction		4,482		—		—		—		—		4,482
Consumer		16,599		—		659		—		—		17,258
Total	$	844,117	$	8,900	$	14,884	$	—	$	—	$	867,901

Allowance for Loan Losses

The following table details activity in the allowance for loan losses by loan category for the years ended December 31, 2022 and  2021.

	Commercial			Commercial Real Estate		Agriculture		Residential Mortgage		Residential Construction		Consumer			Unallocated			Total
Balance as of December 31, 2021	$	1,604		$	8,808	$	1,482	$	742	$	74	$	167		$	1,075		$	13,952
Provision for loan losses		(119	)		1,265		275		138		104		44			(807	)		900
Charge-offs		(297	)		—		—		—		—		(48	)		—			(345	)
Recoveries		275			—		—		—		—		10			—			285
Net charge-offs		(22	)		—		—		—		—		(38	)		—			(60	)
Ending Balance		1,463			10,073		1,757		880		178		173			268			14,792
Period-end amount allocated to:
Loans individually evaluated for impairment		—			—		—		75		—		2			—			77
Loans collectively evaluated for impairment		1,463			10,073		1,757		805		178		171			268			14,715
Balance as of December 31, 2022	$	1,463		$	10,073	$	1,757	$	880	$	178	$	173		$	268		$	14,792

	Commercial			Commercial Real Estate		Agriculture			Residential Mortgage			Residential Construction			Consumer			Unallocated		Total
Balance as of December 31, 2020	$	2,252		$	7,915	$	3,834		$	635		$	128		$	214		$	438	$	15,416
Reversal of provision for loan losses		(575	)		879		(2,352	)		112			(54	)		(147	)		637		(1,500	)
Charge-offs		(502	)		—		—			(5	)		—			(12	)		—		(519	)
Recoveries		429			14		—			—			—			112			—		555
Net (charge-offs)/ recoveries		(73	)		14		—			(5	)		—			100			—		36
Ending Balance		1,604			8,808		1,482			742			74			167			1,075		13,952
Period-end amount allocated to:
Loans individually evaluated for impairment		—			—		—			81			10			2			—		93
Loans collectively evaluated for impairment		1,604			8,808		1,482			661			64			165			1,075		13,859
Balance as of December 31, 2021	$	1,604		$	8,808	$	1,482		$	742		$	74		$	167		$	1,075	$	13,952

The Company’s investment in loans as of December 31, 2022 and 2021 related to each balance in the allowance for loan losses by loan category and disaggregated on the basis of the Company’s impairment methodology was as follows:

	Commercial		Commercial Real Estate		Agriculture		Residential Mortgage		Residential Construction		Consumer		Total
December 31, 2022
Loans individually evaluated for impairment	$	—	$	—	$	7,416	$	622	$	—	$	701	$	8,739
Loans collectively evaluated for impairment		106,771		645,166		106,624		92,047		10,167		14,586		975,361
Ending Balance	$	106,771	$	645,166	$	114,040	$	92,669	$	10,167	$	15,287	$	984,100
December 31, 2021
Loans individually evaluated for impairment	$	133	$	555	$	8,712	$	655	$	241	$	723	$	11,019
Loans collectively evaluated for impairment		135,761		526,369		98,471		75,505		4,241		16,535		856,882
Ending Balance	$	135,894	$	526,924	$	107,183	$	76,160	$	4,482	$	17,258	$	867,901