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Note 6 - Credit Quality Indicators
 9 Months Ended
Sep. 30, 2025
Notes to Financial Statements  
Credit Loss, Financial Instrument [Text Block]

Credit Quality Indicators

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships. For relationships over $3 million, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt and affirm their risk ratings. The Company uses the following definitions for risk ratings:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those 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.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

 

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential, consumer indirect and direct loan classes, the Company evaluates credit quality based on the aging status of the loan and by payment activity. Nonperforming loans are loans past due 90 days and still accruing interest and nonaccrual loans.

 

The following table presents total loans by risk categories and year of origination:

 

  

Term Loans Amortized Cost Basis by Origination Year

 

(In Thousands of Dollars)

                         Revolving     

As of September 30, 2025

 

2025

  

2024

  

2023

  

2022

  

2021

  

Prior

  

Loans

  

Total

 

Commercial real estate - Owner occupied:

                                

Risk Rating

                                

Pass

 $43,301  $47,313  $52,562  $41,874  $56,654  $141,067  $2,690  $385,461 

Special mention

  0   659   4,787   0   1,082   76   0   6,604 

Substandard

  0   0   1,346   434   1   1,424   0   3,205 

Total commercial real estate - Owner occupied loans

 $43,301  $47,972  $58,695  $42,308  $57,737  $142,567  $2,690  $395,270 
                                 

Commercial real estate - Owner Occupied: Current period gross write-offs

 $0  $0  $0  $0  $22  $75  $0  $97 
                                 

Commercial real estate - Non-owner occupied:

                                

Risk Rating

                                

Pass

 $67,403  $69,420  $51,091  $118,954  $76,167  $284,001  $22,107  $689,143 

Special mention

  0   0   0   519   309   1,425   200   2,453 

Substandard

  0   21   126   7,231   10,483   22,859   148   40,868 

Doubtful

  0   0   0   0   1,617   0   0   1,617 

Total commercial real estate - Non-owner occupied loans

 $67,403  $69,441  $51,217  $126,704  $88,576  $308,285  $22,455  $734,081 
                                 

Commercial real estate - Non-owner occupied: Current period gross write-offs

 $0  $0  $0  $0  $0  $0  $0  $0 
                                 

Commercial real estate - Farmland:

                                

Risk Rating

                                

Pass

 $13,920  $24,667  $21,063  $36,398  $17,073  $94,243  $4,052  $211,416 

Special mention

  0   64   0   0   0   0   0   64 

Substandard

  0   0   1,922   0   356   305   0   2,583 

Total commercial real estate - Farmland loans

 $13,920  $24,731  $22,985  $36,398  $17,429  $94,548  $4,052  $214,063 
                                 

Commercial real estate - Farmland: Current period gross write-offs

 $0  $0  $0  $0  $0  $44  $0  $44 
                                 

Commercial real estate - Other:

                                

Risk Rating

                                

Pass

 $36,804  $51,668  $80,332  $64,809  $24,177  $25,377  $1,701  $284,868 

Special mention

  0   0   0   0   0   1,386   0   1,386 

Substandard

  0   0   992   10,786   111   17   0   11,906 

Total commercial real estate - Other loans

 $36,804  $51,668  $81,324  $75,595  $24,288  $26,780  $1,701  $298,160 
                                 

Commercial real estate - Other: Current period gross write-offs

 $0  $0  $0  $0  $0  $0  $0  $0 

 

  

Term Loans Amortized Cost Basis by Origination Year (Continued)

 

(In Thousands of Dollars)

                         Revolving     

As of September 30, 2025

 

2025

  

2024

  

2023

  

2022

  

2021

  

Prior

  

Loans

  

Total

 

Commercial - Commercial and industrial:

                                

Risk Rating

                                

Pass

 $58,378  $70,334  $58,831  $42,761  $14,327  $21,765  $74,716  $341,112 

Special mention

  0   0   0   2,289   278   0   2,075   4,642 

Substandard

  8   240   48   2,688   805   1,540   1,653   6,982 

Total commercial - Commercial and industrial loans

 $58,386  $70,574  $58,879  $47,738  $15,410  $23,305  $78,444  $352,736 
                                 

Commercial - Commercial and industrial: Current period gross write-offs

 $1  $112  $217  $282  $90  $79  $28  $809 
                                 

Commercial - Agricultural:

                                

Risk Rating

                                

Pass

 $9,201  $7,697  $8,865  $9,189  $3,043  $1,351  $16,215  $55,561 

Special mention

  0   0   0   0   0   0   0   0 

Substandard

  0   2   0   39   32   91   0   164 

Total commercial - Agricultural loans

 $9,201  $7,699  $8,865  $9,228  $3,075  $1,442  $16,215  $55,725 
                                 

Commercial - Agricultural: Current period gross write-offs

 $0  $114  $16  $17  $4  $13  $0  $164 
                                 

Residential real estate - 1-4 family residential:

                                

Payment Performance

                                

Performing

 $62,564  $93,042  $61,441  $146,201  $142,915  $336,595  $4,711  $847,469 

Nonperforming

  0   0   374   333   95   2,640   0   3,442 

Total residential real estate - 1-4 family residential loans

 $62,564  $93,042  $61,815  $146,534  $143,010  $339,235  $4,711  $850,911 
                                 

Residential real estate - 1-4 family residential: Current period gross write-offs

 $0  $0  $0  $0  $141  $55  $0  $196 
                                 

Residential real estate - Home equity lines of credit:

                                

Payment Performance

                                

Performing

 $0  $0  $165  $452  $145  $4,922  $170,524  $176,208 

Nonperforming

  0   0   0   130   0   491   0   621 

Total residential real estate - Home equity lines of credit loans

 $0  $0  $165  $582  $145  $5,413  $170,524  $176,829 
                                 

Residential real estate - Home equity lines of credit: Current period gross write-offs

 $0  $0  $0  $28  $0  $7  $0  $35 

 

  

Term Loans Amortized Cost Basis by Origination Year (Continued)

 

(In Thousands of Dollars)

                         Revolving     

As of September 30, 2025

 

2025

  

2024

  

2023

  

2022

  

2021

  

Prior

  

Loans

  

Total

 

Consumer - Indirect:

                                

Payment Performance

                                

Performing

 $53,886  $61,339  $42,533  $34,396  $17,379  $23,308  $0  $232,841 

Nonperforming

  20   193   29   98   73   123   0   536 

Total consumer - Indirect loans

 $53,906  $61,532  $42,562  $34,494  $17,452  $23,431  $0  $233,377 
                                 

Consumer - Indirect: Current period gross write-offs

 $16  $191  $93  $40  $63  $381  $0  $784 
                                 

Consumer - Direct:

                                

Payment Performance

                                

Performing

 $4,418  $1,791  $1,446  $1,053  $726  $8,586  $353  $18,373 

Nonperforming

  0   0   26   2   0   7   0   35 

Total consumer - Direct loans

 $4,418  $1,791  $1,472  $1,055  $726  $8,593  $353  $18,408 
                                 

Consumer - Direct: Current period gross write-offs

 $0  $6  $16  $7  $0  $13  $0  $42 
                                 

Consumer - Other:

                                

Payment Performance

                                

Performing

 $0  $0  $0  $193  $64  $384  $7,579  $8,220 

Nonperforming

  0   0   0   0   0   0   0   0 

Total consumer - Other loans

 $0  $0  $0  $193  $64  $384  $7,579  $8,220 
                                 

Consumer - Other: Current period gross write-offs

 $0  $1  $5  $0  $1  $137  $0  $144 

 

  

Term Loans Amortized Cost Basis by Origination Year

 

(In Thousands of Dollars)

                         Revolving     

As of December 31, 2024

 

2024

  

2023

  

2022

  

2021

  

2020

  

Prior

  

Loans

  

Total

 

Commercial real estate - Owner occupied:

                                

Risk Rating

                                

Pass

 $45,588  $56,389  $46,323  $60,179  $45,428  $127,665  $1,984  $383,556 

Special mention

  0   3,228   0   1,118   0   519   0   4,865 

Substandard

  0   0   659   0   0   1,962   66   2,687 

Total commercial real estate - Owner occupied loans

 $45,588  $59,617  $46,982  $61,297  $45,428  $130,146  $2,050  $391,108 
                                 

Commercial real estate - Owner Occupied: Current period gross write-offs

 $0  $0  $72  $0  $21  $0  $0  $93 
                                 

Commercial real estate - Non-owner occupied:

                                

Risk Rating

                                

Pass

 $61,974  $44,323  $125,547  $78,933  $71,322  $251,465  $8,978  $642,542 

Special mention

  0   0   6,284   313   1,356   10,024   150   18,127 

Substandard

  7,065   407   0   11,249   7,129   7,931   0   33,781 

Doubtful

  0   0   0   834   0   0   0   834 

Total commercial real estate - Non-owner occupied loans

 $69,039  $44,730  $131,831  $91,329  $79,807  $269,420  $9,128  $695,284 
                                 

Commercial real estate - Non-owner occupied: Current period gross write-offs

 $0  $0  $0  $4,380  $146  $0  $0  $4,526 
                                 

Commercial real estate - Farmland:

                                

Risk Rating

                                

Pass

 $19,832  $20,803  $39,126  $18,734  $31,620  $71,162  $3,071  $204,348 

Substandard

  0   0   0   317   0   1,935   0   2,252 

Total commercial real estate - Farmland loans

 $19,832  $20,803  $39,126  $19,051  $31,620  $73,097  $3,071  $206,600 
                                 

Commercial real estate - Farmland: Current period gross write-offs

 $0  $0  $0  $0  $0  $0  $0  $0 
                                 

Commercial real estate - Other:

                                

Risk Rating

                                

Pass

 $40,993  $108,346  $65,724  $39,091  $8,493  $21,744  $728  $285,119 

Special mention

  0   990   7,480   112   0   1,448   0   10,030 

Substandard

  0   0   0   0   0   32   0   32 

Total commercial real estate - Other loans

 $40,993  $109,336  $73,204  $39,203  $8,493  $23,224  $728  $295,181 
                                 

Commercial real estate - Other: Current period gross write-offs

 $0  $0  $0  $0  $0  $0  $0  $0 

 

  

Term Loans Amortized Cost Basis by Origination Year (Continued)

 

(In Thousands of Dollars)

                         Revolving     

As of December 31, 2024

 

2024

  

2023

  

2022

  

2021

  

2020

  

Prior

  

Loans

  

Total

 

Commercial - Commercial and industrial:

                                

Risk Rating

                                

Pass

 $84,491  $72,388  $55,279  $26,780  $10,744  $20,223  $70,675  $340,580 

Special mention

  0   0   0   167   165   46   84   462 

Substandard

  31   118   5,653   282   244   1,682   2,481   10,491 

Total commercial - Commercial and industrial loans

 $84,522  $72,506  $60,932  $27,229  $11,153  $21,951  $73,240  $351,533 
                                 

Commercial - Commercial and industrial: Current period gross write-offs

 $48  $273  $389  $125  $228  $257  $313  $1,633 
                                 

Commercial - Agricultural:

                                

Risk Rating

                                

Pass

 $9,085  $11,703  $13,160  $5,481  $1,768  $850  $13,958  $56,005 

Special mention

  0   0   0   0   0   0   61   61 

Substandard

  0   0   35   29   162   137   0   363 

Total commercial - Agricultural loans

 $9,085  $11,703  $13,195  $5,510  $1,930  $987  $14,019  $56,429 
                                 

Commercial - Agricultural: Current period gross write-offs

 $0  $1  $49  $13  $29  $17  $0  $109 
                                 

Residential real estate - 1-4 family residential:

                                

Payment Performance

                                

Performing

 $79,820  $69,319  $157,403  $153,569  $119,770  $257,827  $3,261  $840,969 

Nonperforming

  0   0   473   278   1,626   2,193   0   4,570 

Total residential real estate - 1-4 family residential loans

 $79,820  $69,319  $157,876  $153,847  $121,396  $260,020  $3,261  $845,539 
                                 

Residential real estate - 1-4 family residential: Current period gross write-offs

 $0  $0  $0  $37  $0  $118  $0  $155 
                                 

Residential real estate - Home equity lines of credit:

                                

Payment Performance

                                

Performing

 $0  $119  $153  $127  $68  $4,118  $153,051  $157,636 

Nonperforming

  0   0   29   0   0   376   98   503 

Total residential real estate - Home equity lines of credit loans

 $0  $119  $182  $127  $68  $4,494  $153,149  $158,139 
                                 

Residential real estate - Home equity lines of credit: Current period gross write-offs

 $0  $0  $0  $0  $0  $0  $0  $0 

 

  

Term Loans Amortized Cost Basis by Origination Year (Continued)

 

(In Thousands of Dollars)

                         Revolving     

As of December 31, 2024

 

2024

  

2023

  

2022

  

2021

  

2020

  

Prior

  

Loans

  

Total

 

Consumer - Indirect:

                                

Payment Performance

                                

Performing

 $78,306  $55,525  $49,548  $23,331  $14,183  $19,962  $0  $240,855 

Nonperforming

  0   57   233   97   62   51   0   500 

Total consumer - Indirect loans

 $78,306  $55,582  $49,781  $23,428  $14,245  $20,013  $0  $241,355 
                                 

Consumer - Indirect: Current period gross write-offs

 $10  $100  $206  $192  $174  $430  $0  $1,112 
                                 

Consumer - Direct:

                                

Payment Performance

                                

Performing

 $2,735  $2,319  $2,406  $1,075  $792  $9,432  $326  $19,085 

Nonperforming

  0   0   6   15   66   13   0   100 

Total consumer - Direct loans

 $2,735  $2,319  $2,412  $1,090  $858  $9,445  $326  $19,185 
                                 

Consumer - Direct: Current period gross write-offs

 $0  $7  $38  $6  $5  $120  $0  $176 
                                 

Consumer - Other:

                                

Payment Performance

                                

Performing

 $0  $0  $0  $60  $0  $409  $7,524  $7,993 

Nonperforming

  0   0   0   0   0   0   0   0 

Total consumer - Other loans

 $0  $0  $0  $60  $0  $409  $7,524  $7,993 
                                 

Consumer - Other: Current period gross write-offs

 $0  $0  $1  $0  $0  $182  $0  $183 

 

For the period ending  September 30, 2025, the table does not include a $150,000 owner occupied commercial real estate loan that was held for sale and risk rated substandard. The previous table for the period ending  December 31, 2024 does not include a $1.52 million owner occupied commercial real estate loan and a $77,000 commercial and industrial loan that was held for sale and risk rated substandard. In the residential real estate portfolios at September 30, 2025, other real estate owned and foreclosure properties were $111,000 and $812,000, respectively.  At December 31, 2024, other real estate owned and foreclosure properties were $52,000 and $631,000, respectively.

 

The Company follows ASU 2016-13 to calculate the allowance for credit losses which requires projecting credit losses over the lifetime of the credits. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of any underlying collateral.

 

The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s loan portfolio segments. These segments are disaggregated into the loan pools for monitoring. A model of risk characteristics, such as loss history and delinquency experience, trends in past due and non-performing loans, as well as existing economic conditions and supportable forecasts are used to determine credit loss assumptions.

 

The Company uses two methodologies to analyze loan pools. The cohort method and the probability of default/loss given default (“PD/LGD”). Cohort relies on the creation of cohorts to capture loans that qualify for a particular segment, as of a point in time. Those loans are then tracked over their remaining lives to determine their loss experience. The Company aggregates financial assets on the basis of similar risk characteristics when evaluating loans on a collective basis. Those characteristics include, but are not limited to, internal or external credit score, risk ratings, financial asset, loan type, collateral type, size, effective interest rate, term, or geographical location. The Company uses cohort primarily for consumer loan portfolios.

 

The probability of default portion of PD/LGD is defined by the Company as 90 days past due, placed on non-accrual, loan restructuring for borrowers experiencing financial difficulty or is partially, or wholly, charged-off. Typically, a one-year time period is used to assess probability of default (“PD”). PD can be measured and applied using various risk criteria. Risk rating is one common way to apply PDs. Loss given default (“LGD”) is to determine the percentage of loss by facility or collateral type. LGD estimates can sometimes be driven, or influenced, by product type, industry or geography. The Company uses PD/LGD primarily for commercial loan portfolios.

 

The following table presents the loan pools and the associated methodology used during the calculation of the allowance for credit losses in 2025.

 

Portfolio Segments

 

Loan Pool

 

Methodology

 

Loss Drivers

Residential real estate

 

1-4 Family Residential Real Estate - 1st Liens

 

Cohort

 

Credit Loss History

  

1-4 Family Residential Real Estate - 2nd Liens

 

Cohort

 

Credit Loss History

Home Equity Lines of Credit

 

Home Equity Lines of Credit

 

Cohort

 

Credit Loss History

Consumer Finance

 

Cash Reserves

 

Cohort

 

Credit Loss History

  

Direct

 

Cohort

 

Credit Loss History

  

Indirect

 

Cohort

 

Credit Loss History

Commercial

 

Commercial and Industrial

 

PD/LGD

 

Credit Loss History

  

Agricultural

 

PD/LGD

 

Credit Loss History

  

Municipal

 

PD/LGD

 

Credit Loss History

Commercial real estate

 

Owner Occupied

 

PD/LGD

 

Credit Loss History

  

Non-Owner Occupied

 

PD/LGD

 

Credit Loss History

  

Multifamily

 

PD/LGD

 

Credit Loss History

  

Farmland

 

PD/LGD

 

Credit Loss History

  

Construction

 

PD/LGD

 

Credit Loss History

 

According to the accounting standard, an entity may make an accounting policy election not to measure an allowance for credit losses for accrued interest receivable if the entity writes off the applicable accrued interest receivable balance in a timely manner. The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables for all loan segments. Current policy dictates that a loan will be placed on nonaccrual status, with the current accrued interest receivable balance being written off, upon the loan being 90 days delinquent or when the loan is deemed to be collateral dependent and the collateral analysis shows insufficient collateral coverage based on a current assessment of the value of the collateral.

 

In addition, ASU Topic 326 requires the Company to establish a liability for anticipated credit losses for unfunded commitments. To accomplish this, the Company must first establish a loss expectation for extended (funded) commitments. This loss expectation, expressed as a ratio to the amortized cost basis, is then applied to the portion of unfunded commitments not considered unilaterally cancelable, and considered by the company’s management as likely to fund over the life of the instrument. At September 30, 2025, the Company had $704.4 million in unfunded commitments and set aside $1.22 million in anticipated credit losses. At December 31, 2024, the Company had $692.4 million in unfunded commitments and set aside $1.56 million in anticipated credit losses. The $12 million increase in unfunded commitments is attributed to loan growth, while the $346,000 decrease in the reserve for anticipated credit losses is due to adjustments to the Portfolio Composition and Growth qualitative factor of commercial real estate construction. This reserve is recorded in other liabilities as opposed to the ACL.

 

The determination of the ACL is complex and the Company makes decisions on the effects of factors that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgments as to the facts and circumstances related to particular situations or credits. The ACL was $39.5 million at September 30, 2025 and $35.9 million at December 31, 2024. The increase of $3.6 million was due to the individual evaluation of three commercial real estate non-owner occupied relationships and one commercial real estate multifamily relationship which increased the Company's specific reserves, increased loss ratio trends of certain commercial real estate loan pools, and loan growth. These factors were partially offset by the adjustments to the maximum loss ratio that anchors the qualitative factors and adjustments to the Portfolio Composition and Growth and Commercial Concentration qualitative factors of certain loan pools.

 

Purchased Loans

 

Under ASU Topic 326, when loans are purchased with evidence of more than insignificant deterioration of credit, they are accounted for as purchase credit deteriorated (“PCD”). PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. During 2025, the Company has not acquired any additional PCD loans. The outstanding balance at September 30, 2025 and related allowance on PCD loans is as follows:

 

  

September 30, 2025

  

December 31, 2024

 

(In Thousands of Dollars)

  Loan Balance   ACL Balance   Loan Balance   ACL Balance 

Commercial real estate

                

Owner Occupied

 $278  $10  $333  $11 

Non-owner Occupied

  26,944   1,504   26,890   420 

Farmland

  0   0   3   0 

Commercial

                

Commercial and industrial

  854   48   1,561   115 

Agricultural

  88   6   117   8 

Residential real estate

                

1-4 family residential

  909   5   1,264   7 

Home equity lines of credit

  4   0   3   0 

Total

 $29,077  $1,573  $30,171  $561