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LOANS AND THE ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2022

LOANS AND THE ALLOWANCE FOR LOAN LOSSES

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Major categories of loans are summarized as follows:


	September 30, 2022		December 31, 2021

	(dollars in thousands)
Commercial and industrial	$	240,671	$	286,946
Agricultural and farmland		245,234		247,796
Commercial real estate - owner occupied		226,524		234,544
Commercial real estate - non-owner occupied		718,089		684,023
Multi-family		260,630		263,911
Construction and land development		364,290		298,048
One-to-four family residential		328,667		327,837
Municipal, consumer, and other		195,823		156,584
Loans, before allowance for loan losses		2,579,928		2,499,689
Allowance for loan losses		(25,060)		(23,936)
Loans, net of allowance for loan losses	$	2,554,868	$	2,475,753

Paycheck Protection Program (PPP) loans (included above)
Commercial and industrial	$	65	$	28,404
Agricultural and farmland		—		913
Municipal, consumer, and other		—		171
Total PPP loans	$	65	$	29,488

The following tables detail activity in the allowance for loan losses for the three and nine months ended September 30:


					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
Three Months Ended September 30, 2022	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total

Allowance for loan losses:	(dollars in thousands)
Balance, June 30, 2022	$	2,981	$	924	$	1,224	$	6,611	$	1,375	$	4,059	$	1,696	$	5,864	$	24,734
Provision for loan losses		14		(83)		(65)		268		(52)		316		(78)		66		386
Charge-offs		(17)		—		—		—		—		—		(18)		(187)		(222)
Recoveries		6		—		1		3		—		1		60		91		162
Balance, September 30, 2022	$	2,984	$	841	$	1,160	$	6,882	$	1,323	$	4,376	$	1,660	$	5,834	$	25,060

					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
Three Months Ended September 30, 2021	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total

Allowance for loan losses:	(dollars in thousands)
Balance, June 30, 2021	$	2,717	$	781	$	1,946	$	9,825	$	2,009	$	3,924	$	1,520	$	3,785	$	26,507
Provision for loan losses		162		(26)		(395)		(710)		(228)		413		(499)		(384)		(1,667)
Charge-offs		(135)		—		—		—		—		—		(48)		(95)		(278)
Recoveries		114		—		—		6		—		1		135		43		299
Balance, September 30, 2021	$	2,858	$	755	$	1,551	$	9,121	$	1,781	$	4,338	$	1,108	$	3,349	$	24,861


					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
Nine Months Ended September 30, 2022	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total

Allowance for loan losses:	(dollars in thousands)
Balance, December 31, 2021	$	2,440	$	845	$	1,840	$	8,145	$	1,263	$	4,914	$	1,311	$	3,178	$	23,936
Provision for loan losses		(189)		(4)		(781)		(1,536)		60		(539)		93		2,843		(53)
Charge-offs		(22)		—		—		—		—		—		(67)		(426)		(515)
Recoveries		755		—		101		273		—		1		323		239		1,692
Balance, September 30, 2022	$	2,984	$	841	$	1,160	$	6,882	$	1,323	$	4,376	$	1,660	$	5,834	$	25,060

					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate								Consumer
	and		and		Owner		Non-owner				Construction		Residential		and
Nine Months Ended September 30, 2021	Industrial		Farmland		Occupied		Occupied		Multi-Family		and Land		Real Estate		Other		Total

Allowance for loan losses:	(dollars in thousands)
Balance, December 31, 2020	$	3,929	$	793	$	3,141	$	11,251	$	1,957	$	4,232	$	1,801	$	4,734	$	31,838
Provision for loan losses		(1,062)		(38)		(1,590)		(2,149)		(176)		(164)		(742)		(1,313)		(7,234)
Charge-offs		(430)		—		—		—		—		—		(161)		(284)		(875)
Recoveries		421		—		—		19		—		270		210		212		1,132
Balance, September 30, 2021	$	2,858	$	755	$	1,551	$	9,121	$	1,781	$	4,338	$	1,108	$	3,349	$	24,861

The following tables present the recorded investments in loans and the allowance for loan losses by category:


					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
September 30, 2022	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total

Loan balances:	(dollars in thousands)
Collectively evaluated for impairment	$	237,839	$	244,236	$	210,461	$	675,121	$	260,060	$	361,305	$	315,209	$	183,181	$	2,487,412
Individually evaluated for impairment		2,702		385		11,607		31,553		—		2,007		8,427		12,622		69,303
Acquired with deteriorated credit quality		130		613		4,456		11,415		570		978		5,031		20		23,213
Total	$	240,671	$	245,234	$	226,524	$	718,089	$	260,630	$	364,290	$	328,667	$	195,823	$	2,579,928

Allowance for loan losses:
Collectively evaluated for impairment	$	2,826	$	841	$	930	$	4,416	$	1,320	$	4,374	$	1,619	$	2,342	$	18,668
Individually evaluated for impairment		158		—		208		2,465		—		—		39		3,492		6,362
Acquired with deteriorated credit quality		—		—		22		1		3		2		2		—		30
Total	$	2,984	$	841	$	1,160	$	6,882	$	1,323	$	4,376	$	1,660	$	5,834	$	25,060

					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
December 31, 2021	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total

Loan balances:	(dollars in thousands)
Collectively evaluated for impairment	$	272,064	$	247,021	$	216,794	$	641,555	$	262,701	$	293,548	$	314,807	$	143,510	$	2,392,000
Individually evaluated for impairment		14,744		12		12,332		29,575		—		2,018		6,897		13,041		78,619
Acquired with deteriorated credit quality		138		763		5,418		12,893		1,210		2,482		6,133		33		29,070
Total	$	286,946	$	247,796	$	234,544	$	684,023	$	263,911	$	298,048	$	327,837	$	156,584	$	2,499,689

Allowance for loan losses:
Collectively evaluated for impairment	$	2,253	$	845	$	1,480	$	5,138	$	1,259	$	4,895	$	1,099	$	1,302	$	18,271
Individually evaluated for impairment		187		—		327		2,999		—		—		210		1,875		5,598
Acquired with deteriorated credit quality		—		—		33		8		4		19		2		1		67
Total	$	2,440	$	845	$	1,840	$	8,145	$	1,263	$	4,914	$	1,311	$	3,178	$	23,936

The following tables present loans individually evaluated for impairment by category of loans:


	Unpaid
	Principal		Recorded		Related
September 30, 2022	Balance		Investment		Allowance

With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	256	$	256	$	158
Agricultural and farmland		—		—		—
Commercial real estate - owner occupied		734		734		208
Commercial real estate - non-owner occupied		14,359		14,348		2,465
Multi-family		—		—		—
Construction and land development		—		—		—
One-to-four family residential		350		340		39
Municipal, consumer, and other		8,223		8,201		3,492
Total	$	23,922	$	23,879	$	6,362

With no related allowance:
Commercial and industrial	$	2,460	$	2,446	$	—
Agricultural and farmland		385		385		—
Commercial real estate - owner occupied		11,030		10,873		—
Commercial real estate - non-owner occupied		17,284		17,205		—
Multi-family		—		—		—
Construction and land development		2,107		2,007		—
One-to-four family residential		9,403		8,087		—
Municipal, consumer, and other		4,455		4,421		—
Total	$	47,124	$	45,424	$	—

Total loans individually evaluated for impairment:
Commercial and industrial	$	2,716	$	2,702	$	158
Agricultural and farmland		385		385		—
Commercial real estate - owner occupied		11,764		11,607		208
Commercial real estate - non-owner occupied		31,643		31,553		2,465
Multi-family		—		—		—
Construction and land development		2,107		2,007		—
One-to-four family residential		9,753		8,427		39
Municipal, consumer, and other		12,678		12,622		3,492
Total	$	71,046	$	69,303	$	6,362


	Unpaid
	Principal		Recorded		Related
December 31, 2021	Balance		Investment		Allowance

With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	303	$	303	$	187
Agricultural and farmland		—		—		—
Commercial real estate - owner occupied		3,013		3,013		327
Commercial real estate - non-owner occupied		14,912		14,893		2,999
Multi-family		—		—		—
Construction and land development		—		—		—
One-to-four family residential		1,421		1,314		210
Municipal, consumer, and other		8,523		8,498		1,875
Total	$	28,172	$	28,021	$	5,598

With no related allowance:
Commercial and industrial	$	14,452	$	14,441	$	—
Agricultural and farmland		12		12		—
Commercial real estate - owner occupied		9,534		9,319		—
Commercial real estate - non-owner occupied		14,755		14,682		—
Multi-family		—		—		—
Construction and land development		2,112		2,018		—
One-to-four family residential		7,129		5,583		—
Municipal, consumer, and other		4,603		4,543		—
Total	$	52,597	$	50,598	$	—

Total loans individually evaluated for impairment:
Commercial and industrial	$	14,755	$	14,744	$	187
Agricultural and farmland		12		12		—
Commercial real estate - owner occupied		12,547		12,332		327
Commercial real estate - non-owner occupied		29,667		29,575		2,999
Multi-family		—		—		—
Construction and land development		2,112		2,018		—
One-to-four family residential		8,550		6,897		210
Municipal, consumer, and other		13,126		13,041		1,875
Total	$	80,769	$	78,619	$	5,598

The following tables present the average recorded investment and interest income recognized for loans individually evaluated for impairment by category of loans:


	Three Months Ended September 30,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized

With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	258	$	5	$	1,925	$	26
Agricultural and farmland		—		—		—		—
Commercial real estate - owner occupied		739		11		3,192		45
Commercial real estate - non-owner occupied		14,441		185		15,136		194
Multi-family		—		—		—		—
Construction and land development		—		—		—		—
One-to-four family residential		349		2		1,827		18
Municipal, consumer, and other		8,254		66		8,641		40
Total	$	24,041	$	269	$	30,721	$	323

With no related allowance:
Commercial and industrial	$	3,894	$	41	$	7,137	$	115
Agricultural and farmland		425		5		385		6
Commercial real estate - owner occupied		11,651		141		6,551		81
Commercial real estate - non-owner occupied		17,220		369		15,283		101
Multi-family		—		—		—		—
Construction and land development		2,010		57		2,439		1
One-to-four family residential		8,119		99		5,713		45
Municipal, consumer, and other		4,457		44		4,635		21
Total	$	47,776	$	756	$	42,143	$	370

Total loans individually evaluated for impairment:
Commercial and industrial	$	4,152	$	46	$	9,062	$	141
Agricultural and farmland		425		5		385		6
Commercial real estate - owner occupied		12,390		152		9,743		126
Commercial real estate - non-owner occupied		31,661		554		30,419		295
Multi-family		—		—		—		—
Construction and land development		2,010		57		2,439		1
One-to-four family residential		8,468		101		7,540		63
Municipal, consumer, and other		12,711		110		13,276		61
Total	$	71,817	$	1,025	$	72,864	$	693


	Nine Months Ended September 30,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized

With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	272	$	13	$	2,025	$	84
Agricultural and farmland		—		—		110		4
Commercial real estate - owner occupied		1,297		55		3,060		132
Commercial real estate - non-owner occupied		14,631		556		17,001		599
Multi-family		—		—		—		—
Construction and land development		—		—		741		27
One-to-four family residential		513		11		2,209		64
Municipal, consumer, and other		8,368		151		8,722		119
Total	$	25,081	$	786	$	33,868	$	1,029

With no related allowance:
Commercial and industrial	$	12,793	$	397	$	5,222	$	205
Agricultural and farmland		305		8		384		17
Commercial real estate - owner occupied		11,524		388		7,216		273
Commercial real estate - non-owner occupied		16,894		907		8,880		239
Multi-family		—		—		580		10
Construction and land development		2,012		105		2,060		27
One-to-four family residential		8,341		240		6,427		142
Municipal, consumer, and other		4,493		98		4,695		65
Total	$	56,362	$	2,143	$	35,464	$	978

Total loans individually evaluated for impairment:
Commercial and industrial	$	13,065	$	410	$	7,247	$	289
Agricultural and farmland		305		8		494		21
Commercial real estate - owner occupied		12,821		443		10,276		405
Commercial real estate - non-owner occupied		31,525		1,463		25,881		838
Multi-family		—		—		580		10
Construction and land development		2,012		105		2,801		54
One-to-four family residential		8,854		251		8,636		206
Municipal, consumer, and other		12,861		249		13,417		184
Total	$	81,443	$	2,929	$	69,332	$	2,007

The following tables present the recorded investment in loans by category based on current payment and accrual status:


	Accruing Interest
			30 - 89 Days		90+ Days				Total
September 30, 2022	Current		Past Due		Past Due		Nonaccrual		Loans

	(dollars in thousands)
Commercial and industrial	$	240,391	$	191	$	—	$	89	$	240,671
Agricultural and farmland		245,234		—		—		—		245,234
Commercial real estate - owner occupied		226,424		100		—		—		226,524
Commercial real estate - non-owner occupied		717,085		—		—		1,004		718,089
Multi-family		260,630		—		—		—		260,630
Construction and land development		362,367		1,429		—		494		364,290
One-to-four family residential		325,926		1,159		22		1,560		328,667
Municipal, consumer, and other		195,651		113		—		59		195,823
Total	$	2,573,708	$	2,992	$	22	$	3,206	$	2,579,928


	Accruing Interest
			30 - 89 Days		90+ Days				Total
December 31, 2021	Current		Past Due		Past Due		Nonaccrual		Loans

	(dollars in thousands)
Commercial and industrial	$	286,563	$	9	$	—	$	374	$	286,946
Agricultural and farmland		247,772		24		—		—		247,796
Commercial real estate - owner occupied		234,441		103		—		—		234,544
Commercial real estate - non-owner occupied		683,029		823		—		171		684,023
Multi-family		263,911		—		—		—		263,911
Construction and land development		297,465		64		—		519		298,048
One-to-four family residential		325,780		383		32		1,642		327,837
Municipal, consumer, and other		156,297		214		16		57		156,584
Total	$	2,495,258	$	1,620	$	48	$	2,763	$	2,499,689

The following tables present total loans by category based on their assigned risk ratings determined by management:


September 30, 2022	Pass		Pass-Watch		Substandard		Doubtful		Total

	(dollars in thousands)
Commercial and industrial	$	229,239	$	8,730	$	2,702	$	—	$	240,671
Agricultural and farmland		230,636		13,601		997		—		245,234
Commercial real estate - owner occupied		202,250		13,465		10,809		—		226,524
Commercial real estate - non-owner occupied		673,481		10,336		34,272		—		718,089
Multi-family		255,665		4,965		—		—		260,630
Construction and land development		361,954		329		2,007		—		364,290
One-to-four family residential		313,608		6,074		8,985		—		328,667
Municipal, consumer, and other		182,902		298		12,623		—		195,823
Total	$	2,449,735	$	57,798	$	72,395	$	—	$	2,579,928


December 31, 2021	Pass		Pass-Watch		Substandard		Doubtful		Total

	(dollars in thousands)
Commercial and industrial	$	267,088	$	5,114	$	14,744	$	—	$	286,946
Agricultural and farmland		221,898		25,213		685		—		247,796
Commercial real estate - owner occupied		198,862		24,098		11,584		—		234,544
Commercial real estate - non-owner occupied		619,212		32,372		32,439		—		684,023
Multi-family		241,362		22,549		—		—		263,911
Construction and land development		268,556		27,474		2,018		—		298,048
One-to-four family residential		308,951		11,221		7,665		—		327,837
Municipal, consumer, and other		143,299		244		13,041		—		156,584
Total	$	2,269,228	$	148,285	$	82,176	$	—	$	2,499,689

There were no new troubled debt restructurings during the three and nine months ended September 30, 2022 or 2021.

Of the troubled debt restructurings entered into during the last 12 months, there were none which had subsequent payment defaults during the three and nine months ended September 30, 2022 or 2021. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due as to interest or principal or were on nonaccrual status subsequent to restructuring.

As of September 30, 2022 and December 31, 2021, the Company had $3.1 million and $3.5 million of troubled debt restructurings, respectively. Restructured loans are evaluated for impairment quarterly as part of the Company’s determination of the allowance for loan losses. There were no material commitments to lend additional funds to debtors owing loans whose terms have been modified in troubled debt restructurings.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), along with a joint statement issued by banking regulatory agencies, provided that short-term loan payment modifications made prior to December 31, 2021 to borrowers experiencing financial hardship due to the COVID-19 pandemic generally do not need to be accounted for as a troubled debt restructuring. As of September 30, 2022, the Company had no loans that were granted a payment modification due to a COVID-19 related financial hardship which had not returned to regular payments. As of December 31, 2021, the Company had $0.2 million of loans that were granted a payment modification due to a COVID-19 related financial hardship and had not returned to regular payments. Substantially all modifications were in the form of a three-month interest-only period or a one-month payment deferral. Some borrowers received more than one loan payment modification.

As of September 30, 2022 and December 31, 2021, the Company pledged loans totaling $824.9 million and $567.0 million, respectively, to the Federal Home Loan Bank of Chicago (“FHLB”) to secure available FHLB advance borrowing capacity.

Changes in the accretable yield for loans acquired with deteriorated credit quality were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(dollars in thousands)
Beginning balance	$	537	$	1,350	$	413	$	1,397
Reclassification from non-accretable difference		283		280		500		433
Accretion income		(58)		(86)		(151)		(286)
Ending balance	$	762	$	1,544	$	762	$	1,544