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LOANS AND RELATED ALLOWANCE FOR CREDIT LOSSES

3 Months Ended

Mar. 31, 2023

NOTE 4 – LOANS AND RELATED ALLOWANCE FOR CREDIT LOSSES

Major categories of loans are summarized as follows:


	March 31, 2023		December 31, 2022

	(dollars in thousands)
Commercial and industrial	$	333,013	$	266,757
Commercial real estate - owner occupied		317,103		218,503
Commercial real estate - non-owner occupied		854,024		713,202
Construction and land development		389,142		360,824
Multi-family		362,672		287,865
One-to-four family residential		482,732		338,253
Agricultural and farmland		243,357		237,746
Municipal, consumer, and other		213,497		197,103
Loans, before allowance for credit losses		3,195,540		2,620,253
Allowance for credit losses		(38,776)		(25,333)
Loans, net of allowance for credit losses	$	3,156,764	$	2,594,920

As of March 31, 2023 and December 31, 2022, commercial and industrial loans include $25 thousand and $28 thousand Paycheck Protection Program (“PPP”) loans, respectively.

Allowance for Credit Losses

Management estimates the allowance for credit losses using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The discounted cash flow method is used to estimate expected credit losses for all loan categories, except for the consumer loans where the weighted average remaining maturity method is utilized.

At March 31, 2023, the economic forecasts used by management anticipates a mild recession starting in the second half of 2023, with the unemployment rate increasing and GDP growth slowing and then shrinking over the next 4 quarters considered in the forecast period. After the forecast period, the Company reverts to long-term averages over a 4-quarter reversion period. Additionally, management may make qualitative adjustments to the loss estimates as necessary to reflect other factors that may influence affect credit losses.

The following tables detail activity in the allowance for credit losses for the three months ended March 31:


	Three Months Ended March 31, 2023
			Commercial		Commercial										Municipal,
	Commercial		Real Estate		Real Estate		Construction				One-to-four		Agricultural		Consumer,
	and		Owner		Non-owner		and Land				Family		and		and
	Industrial		Occupied		Occupied		Development		Multi-Family		Residential		Farmland		Other		Total

	(dollars in thousands)
Beginning balance	$	3,279	$	1,193	$	6,721	$	4,223	$	1,472	$	1,759	$	796	$	5,890	$	25,333
Adoption of ASC 326		(822)		587		501		1,969		85		797		1,567		2,299		6,983
PCD allowance established in acquisition		69		127		239		240		68		492		5		7		1,247
Provision for credit losses		387		619		305		1,139		526		1,081		305		739		5,101
Charge-offs		—		(3)		—		—		—		(22)		—		(117)		(142)
Recoveries		19		12		74		3		—		58		1		87		254
Ending balance	$	2,932	$	2,535	$	7,840	$	7,574	$	2,151	$	4,165	$	2,674	$	8,905	$	38,776

	Three Months Ended March 31, 2022
			Commercial		Commercial										Municipal,
	Commercial		Real Estate		Real Estate		Construction				One-to-four		Agricultural		Consumer,
	and		Owner		Non-owner		and Land				Family		and		and
	Industrial		Occupied		Occupied		Development		Multi-Family		Residential		Farmland		Other		Total

	(dollars in thousands)
Beginning balance	$	2,440	$	1,840	$	8,145	$	4,914	$	1,263	$	1,311	$	845	$	3,178	$	23,936
Provision for loan losses		(653)		(429)		(1,396)		(421)		91		120		(3)		2,107		(584)
Charge-offs		(5)		—		—		—		—		(2)		—		(127)		(134)
Recoveries		709		100		265		—		—		154		—		62		1,290
Ending balance	$	2,491	$	1,511	$	7,014	$	4,493	$	1,354	$	1,583	$	842	$	5,220	$	24,508

Gross charge-offs, further sorted by origination year, were as follows during the three months ended March 31, 2023:


	Gross Charge-Offs for the Three Months Ended March 31, 2023
															Revolving
															Loans
	Term Loans by Origination Year												Revolving		Converted
	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total

	(dollars in thousands)
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate - owner occupied		—		3		—		—		—		—		—		—		3
Commercial real estate - non-owner occupied		—		—		—		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—		—		—		—
Multi-family		—		—		—		—		—		—		—		—		—
One-to-four family residential		—		—		—		—		1		21		—		—		22
Agricultural and farmland		—		—		—		—		—		—		—		—		—
Municipal, consumer, and other		35		53		—		9		—		—		20		—		117
Total	$	35	$	56	$	—	$	9	$	1	$	21	$	20	$	—	$	142

The following tables present loans and the related allowance for credit losses by category:


			Commercial		Commercial										Municipal,
	Commercial		Real Estate		Real Estate		Construction				One-to-four		Agricultural		Consumer,
	and		Owner		Non-owner		and Land				Family		and		and
March 31, 2023	Industrial		Occupied		Occupied		Development		Multi-Family		Residential		Farmland		Other		Total

Loan balances:	(dollars in thousands)
Collectively evaluated for impairment	$	332,878	$	316,652	$	827,220	$	388,904	$	361,636	$	477,893	$	243,357	$	196,739	$	3,145,279
Individually evaluated for impairment		135		451		26,804		238		1,036		4,839		—		16,758		50,261
Total	$	333,013	$	317,103	$	854,024	$	389,142	$	362,672	$	482,732	$	243,357	$	213,497	$	3,195,540

Allowance for credit losses:
Collectively evaluated for impairment	$	2,932	$	2,524	$	5,747	$	7,574	$	2,151	$	3,718	$	2,674	$	5,333	$	32,653
Individually evaluated for impairment		—		11		2,093		—		—		447		—		3,572		6,123
Total	$	2,932	$	2,535	$	7,840	$	7,574	$	2,151	$	4,165	$	2,674	$	8,905	$	38,776

			Commercial		Commercial										Municipal,
	Commercial		Real Estate		Real Estate		Construction				One-to-four		Agricultural		Consumer,
	and		Owner		Non-owner		and Land				Family		and		and
December 31, 2022	Industrial		Occupied		Occupied		Development		Multi-Family		Residential		Farmland		Other		Total

Loan balances:	(dollars in thousands)
Collectively evaluated for impairment	$	261,833	$	203,558	$	671,663	$	359,892	$	287,298	$	325,621	$	233,118	$	184,579	$	2,527,562
Individually evaluated for impairment		4,818		11,366		30,509		82		—		8,399		4,033		12,508		71,715
Acquired with deteriorated credit quality		106		3,579		11,030		850		567		4,233		595		16		20,976
Total	$	266,757	$	218,503	$	713,202	$	360,824	$	287,865	$	338,253	$	237,746	$	197,103	$	2,620,253

Allowance for loan losses:
Collectively evaluated for impairment	$	3,121	$	1,008	$	4,332	$	4,221	$	1,470	$	1,709	$	796	$	2,327	$	18,984
Individually evaluated for impairment		158		168		2,388		—		—		44		—		3,562		6,320
Acquired with deteriorated credit quality		—		17		1		2		2		6		—		1		29
Total	$	3,279	$	1,193	$	6,721	$	4,223	$	1,472	$	1,759	$	796	$	5,890	$	25,333

The following table presents collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to these loans:


	Amortized Cost								Allowance
	Primary Collateral Type								for Credit
March 31, 2023	Real Estate		Vehicles		Other		Total		Losses

	(dollars in thousands)
Commercial and industrial	$	—	$	—	$	135	$	135	$	—
Commercial real estate - owner occupied		451		—		—		451		11
Commercial real estate - non-owner occupied		26,804		—		—		26,804		2,093
Construction and land development		238		—		—		238		—
Multi-family		1,036		—		—		1,036		—
One-to-four family residential		4,839		—		—		4,839		447
Agricultural and farmland		—		—		—		—		—
Municipal, consumer, and other		16,671		52		35		16,758		3,572
Total	$	50,039	$	52	$	170	$	50,261	$	6,123

Accrued interest on loans totaled $13.8 million as of March 31, 2023 and is excluded from the estimate of credit losses.

Pre-ASC 326 Adoption Impaired Loan Disclosures

The following table presents loans individually evaluated for impairment by category of loans:


	Unpaid
	Principal		Recorded		Related
December 31, 2022	Balance		Investment		Allowance

With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	268	$	254	$	158
Commercial real estate - owner occupied		635		610		168
Commercial real estate - non-owner occupied		14,269		14,261		2,388
Construction and land development		—		—		—
Multi-family		—		—		—
One-to-four family residential		569		524		44
Agricultural and farmland		—		—		—
Municipal, consumer, and other		8,152		8,131		3,562
Total	$	23,893	$	23,780	$	6,320

With no related allowance:
Commercial and industrial	$	4,564	$	4,564	$	—
Commercial real estate - owner occupied		10,912		10,756		—
Commercial real estate - non-owner occupied		16,327		16,248		—
Construction and land development		92		82		—
Multi-family		—		—		—
One-to-four family residential		9,181		7,875		—
Agricultural and farmland		4,440		4,033		—
Municipal, consumer, and other		4,410		4,377		—
Total	$	49,926	$	47,935	$	—

Total loans individually evaluated for impairment:
Commercial and industrial	$	4,832	$	4,818	$	158
Commercial real estate - owner occupied		11,547		11,366		168
Commercial real estate - non-owner occupied		30,596		30,509		2,388
Construction and land development		92		82		—
Multi-family		—		—		—
One-to-four family residential		9,750		8,399		44
Agricultural and farmland		4,440		4,033		—
Municipal, consumer, and other		12,562		12,508		3,562
Total	$	73,819	$	71,715	$	6,320

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


	Three Months Ended March 31, 2022
	Average		Interest
	Recorded		Income
	Investment		Recognized

With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	292	$	4
Commercial real estate - owner occupied		2,425		33
Commercial real estate - non-owner occupied		14,854		186
Construction and land development		—		—
Multi-family		—		—
One-to-four family residential		647		5
Agricultural and farmland		—		—
Municipal, consumer, and other		8,509		39
Total	$	26,727	$	267

With no related allowance:
Commercial and industrial	$	19,498	$	200
Commercial real estate - owner occupied		11,028		106
Commercial real estate - non-owner occupied		15,495		198
Construction and land development		2,016		22
Multi-family		—		—
One-to-four family residential		8,728		57
Agricultural and farmland		236		—
Municipal, consumer, and other		4,544		21
Total	$	61,545	$	604

Total loans individually evaluated for impairment:
Commercial and industrial	$	19,790	$	204
Commercial real estate - owner occupied		13,453		139
Commercial real estate - non-owner occupied		30,349		384
Construction and land development		2,016		22
Multi-family		—		—
One-to-four family residential		9,375		62
Agricultural and farmland		236		—
Municipal, consumer, and other		13,053		60
Total	$	88,272	$	871

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


	Three Months Ended March 31, 2022
	(dollars in thousands)
Beginning balance	$	413
Reclassification from non-accretable difference		117
Accretion income		(46)
Ending balance	$	484

Past Due and Nonaccrual Status

Past due status is based on the contractual terms of the loan. Typically, loans are placed on nonaccrual when they reach 90 days past due, or when, in management’s opinion, there is reasonable doubt regarding the collection of the amounts due through the normal means of the borrower. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance and we must believe that all remaining principal and interest is fully collectible, before the loan is eligible to return to accrual status.

The following tables present loans by category based on current payment and accrual status:


	Accruing Interest
			30 - 89 Days		90+ Days				Total
March 31, 2023	Current		Past Due		Past Due		Nonaccrual		Loans

	(dollars in thousands)
Commercial and industrial	$	332,741	$	137	$	—	$	135	$	333,013
Commercial real estate - owner occupied		316,651		—		—		452		317,103
Commercial real estate - non-owner occupied		853,634		—		—		390		854,024
Construction and land development		388,777		127		—		238		389,142
Multi-family		361,636		—		—		1,036		362,672
One-to-four family residential		475,504		3,059		—		4,169		482,732
Agricultural and farmland		243,357		—		—		—		243,357
Municipal, consumer, and other		213,251		148		10		88		213,497
Total	$	3,185,551	$	3,471	$	10	$	6,508	$	3,195,540


	Accruing Interest
			30 - 89 Days		90+ Days				Total
December 31, 2022	Current		Past Due		Past Due		Nonaccrual		Loans

	(dollars in thousands)
Commercial and industrial	$	266,521	$	17	$	—	$	219	$	266,757
Commercial real estate - owner occupied		218,242		187		—		74		218,503
Commercial real estate - non-owner occupied		713,031		—		—		171		713,202
Construction and land development		360,763		61		—		—		360,824
Multi-family		287,854		11		—		—		287,865
One-to-four family residential		335,576		894		145		1,638		338,253
Agricultural and farmland		237,727		19		—		—		237,746
Municipal, consumer, and other		196,892		157		1		53		197,103
Total	$	2,616,606	$	1,346	$	146	$	2,155	$	2,620,253

The following table presents nonaccrual loans with and without a related allowance for credit losses:


	Nonaccrual		Nonaccrual
	With		With No
	Allowance for		Allowance for		Total
March 31, 2023	Credit Losses		Credit Losses		Nonaccrual

	(dollars in thousands)
Commercial and industrial	$	—	$	135	$	135
Commercial real estate - owner occupied		75		377		452
Commercial real estate - non-owner occupied		219		171		390
Construction and land development		—		238		238
Multi-family		—		1,036		1,036
One-to-four family residential		386		3,783		4,169
Agricultural and farmland		—		—		—
Municipal, consumer, and other		52		36		88
Total	$	732	$	5,776	$	6,508

Credit Quality Indicators

The Company assigns a risk rating to all loans and periodically performs detailed internal reviews of all such loans that are part of relationships with over $750,000 in total exposure to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to review by the Company’s regulators, external loan review, and internal loan review. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the fair values of collateral securing the loans. The risk rating is reviewed annually, at a minimum, and on an as needed basis depending on the specific circumstances of the loan. These credit quality indicators are used to assign a risk rating to each individual loan. Risk ratings are grouped into four major categories, defined as follows:

Pass – a pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.

Pass-Watch – a pass-watch loan is still considered a "pass" credit and is not a classified or criticized asset, but is a reflection of a borrower who exhibits credit weaknesses or downward trends warranting close attention and increased monitoring. These potential weaknesses may result in deterioration of the repayment prospects for the loan. No loss of principal or interest is expected, and the borrower does not pose sufficient risk to warrant classification.

Substandard – a substandard loan is 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 a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized as probable that the borrower will not pay principal and interest in accordance with the contractual terms.

Doubtful – a doubtful loan has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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


March 31, 2023	Pass		Pass-Watch		Substandard		Doubtful		Total

	(dollars in thousands)
Commercial and industrial	$	315,892	$	4,793	$	12,328	$	—	$	333,013
Commercial real estate - owner occupied		289,875		16,520		10,708		—		317,103
Commercial real estate - non-owner occupied		788,300		29,253		36,471		—		854,024
Construction and land development		387,057		1,759		326		—		389,142
Multi-family		358,538		3,098		1,036		—		362,672
One-to-four family residential		464,444		7,544		10,744		—		482,732
Agricultural and farmland		231,171		8,000		4,186		—		243,357
Municipal, consumer, and other		195,514		1,080		16,903		—		213,497
Total	$	3,030,791	$	72,047	$	92,702	$	—	$	3,195,540


December 31, 2022	Pass		Pass-Watch		Substandard		Doubtful		Total

	(dollars in thousands)
Commercial and industrial	$	255,309	$	6,630	$	4,818	$	—	$	266,757
Commercial real estate - owner occupied		198,546		10,105		9,852		—		218,503
Commercial real estate - non-owner occupied		652,691		27,282		33,229		—		713,202
Construction and land development		358,215		2,527		82		—		360,824
Multi-family		283,682		4,183		—		—		287,865
One-to-four family residential		323,632		5,907		8,714		—		338,253
Agricultural and farmland		223,114		10,004		4,628		—		237,746
Municipal, consumer, and other		184,299		296		12,508		—		197,103
Total	$	2,479,488	$	66,934	$	73,831	$	—	$	2,620,253

Risk ratings of loans, further sorted by origination year, are as follows as of March 31, 2023:


															Revolving
															Loans
	Term Loans by Origination Year												Revolving		Converted
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total
Commercial and industrial
Pass	$	9,832	$	65,070	$	30,388	$	34,196	$	8,452	$	15,757	$	150,357	$	1,840	$	315,892
Pass-Watch		123		523		288		366		861		218		1,807		607		4,793
Substandard		12		107		—		50		—		54		7,522		4,583		12,328
Total	$	9,967	$	65,700	$	30,676	$	34,612	$	9,313	$	16,029	$	159,686	$	7,030	$	333,013

Commercial real estate - owner occupied
Pass	$	8,384	$	66,985	$	63,754	$	61,743	$	35,222	$	39,497	$	14,290	$	—	$	289,875
Pass-Watch		684		2,401		2,804		373		5,089		2,795		2,374		—		16,520
Substandard		—		1,841		3,483		270		—		3,620		1,494		—		10,708
Total	$	9,068	$	71,227	$	70,041	$	62,386	$	40,311	$	45,912	$	18,158	$	—	$	317,103

Commercial real estate - non-owner occupied
Pass	$	29,617	$	225,057	$	268,322	$	105,503	$	92,546	$	53,639	$	9,772	$	3,844	$	788,300
Pass-Watch		289		1,186		6,823		155		2,872		4,396		13,532		—		29,253
Substandard		12,429		128		—		248		9,511		13,984		—		171		36,471
Total	$	42,335	$	226,371	$	275,145	$	105,906	$	104,929	$	72,019	$	23,304	$	4,015	$	854,024

Construction and land development
Pass	$	28,833	$	250,925	$	73,087	$	5,311	$	3,159	$	1,872	$	23,359	$	511	$	387,057
Pass-Watch		—		—		—		—		—		312		1,447		—		1,759
Substandard		—		—		—		—		—		318		8		—		326
Total	$	28,833	$	250,925	$	73,087	$	5,311	$	3,159	$	2,502	$	24,814	$	511	$	389,142

Multi-family
Pass	$	26,271	$	76,239	$	111,750	$	73,568	$	32,623	$	31,406	$	6,435	$	246	$	358,538
Pass-Watch		—		867		317		—		62		1,843		—		9		3,098
Substandard		—		—		—		—		556		480		—		—		1,036
Total	$	26,271	$	77,106	$	112,067	$	73,568	$	33,241	$	33,729	$	6,435	$	255	$	362,672

One-to-four family residential
Pass	$	40,422	$	92,760	$	96,041	$	73,385	$	26,003	$	71,976	$	59,510	$	4,347	$	464,444
Pass-Watch		103		802		573		487		894		4,204		224		257		7,544
Substandard		75		2,447		697		815		474		3,169		36		3,031		10,744
Total	$	40,600	$	96,009	$	97,311	$	74,687	$	27,371	$	79,349	$	59,770	$	7,635	$	482,732

Agricultural and farmland
Pass	$	12,841	$	41,470	$	39,924	$	41,320	$	9,494	$	10,545	$	66,379	$	9,198	$	231,171
Pass-Watch		2,307		2,371		97		1,062		211		382		1,570		—		8,000
Substandard		—		—		17		3,312		265		592		—		—		4,186
Total	$	15,148	$	43,841	$	40,038	$	45,694	$	9,970	$	11,519	$	67,949	$	9,198	$	243,357

Municipal, Consumer, and other
Pass	$	9,428	$	71,121	$	34,055	$	15,304	$	5,335	$	45,153	$	15,116	$	2	$	195,514
Pass-Watch		—		112		27		21		—		920		—		—		1,080
Substandard		14		114		9		—		51		16,711		4		—		16,903
Total	$	9,442	$	71,347	$	34,091	$	15,325	$	5,386	$	62,784	$	15,120	$	2	$	213,497

Total by Risk Rating
Pass	$	165,628	$	889,627	$	717,321	$	410,330	$	212,834	$	269,845	$	345,218	$	19,988	$	3,030,791
Pass-Watch		3,506		8,262		10,929		2,464		9,989		15,070		20,954		873		72,047
Substandard		12,530		4,637		4,206		4,695		10,857		38,928		9,064		7,785		92,702
Total	$	181,664	$	902,526	$	732,456	$	417,489	$	233,680	$	323,843	$	375,236	$	28,646	$	3,195,540

Modifications and Troubled Debt Restructurings

There were no loan modifications to borrowers in financial distress during the three months ended March 31, 2023.

There were no new troubled debt restructurings during the three months ended March 31, 2022. As of December 31, 2022, the Company had $3.0 million of troubled debt restructurings.

Pledged Loans

As of March 31, 2023 and December 31, 2022, the Company pledged loans totaling $996.3 million and $892.1 million, respectively, to the Federal Home Loan Bank of Chicago (“FHLB”) to secure available FHLB advance borrowing capacity.