Loans and Allowance for Credit Losses

Outstanding loans are summarized as follows:



Loan Type (Dollars in thousands)	March 31, 2020			% of Total Loans		December 31, 2019			% of Total Loans
Commercial:
Commercial and industrial	$	102,606		11.0	%	$	102,541		10.9	%
Agricultural production	17,162			1.9	%	23,159			2.6	%
Total commercial	119,768			12.9	%	125,700			13.5	%
Real estate:
Owner occupied	198,551			21.4	%	197,946			21.0	%
Real estate construction and other land loans	79,794			8.6	%	73,718			7.8	%
Commercial real estate	326,044			35.2	%	329,333			34.9	%
Agricultural real estate	67,935			7.3	%	76,304			8.1	%
Other real estate	33,184			3.6	%	31,241			3.3	%
Total real estate	705,508			76.1	%	708,542			75.1	%
Consumer:
Equity loans and lines of credit	61,601			6.6	%	64,841			6.9	%
Consumer and installment	41,341			4.4	%	42,782			4.5	%
Total consumer	102,942			11.0	%	107,623			11.4	%
Net deferred origination costs	1,551					1,515
Total gross loans	929,769			100.0	%	943,380			100.0	%
Allowance for credit losses	(10,546		)			(9,130		)
Total loans	$	919,223				$	934,250

At March 31, 2020 and December 31, 2019, loans originated under Small Business Administration (SBA) programs totaling $21,044,000 and $21,910,000, respectively, were included in the real estate and commercial categories, of which, $15,747,000 or 75% and $16,372,000 or 75%, respectively, are secured by government guarantees.

Allowance for Credit Losses

The allowance for credit losses (the “Allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The Allowance is established through a provision for credit losses which is charged to expense. Additions to the Allowance are expected to maintain the adequacy of the total Allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the Allowance. Cash received on previously charged-off credits is recorded as a recovery to the Allowance. The overall Allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.

For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The following table shows the summary of activities for the Allowance as of and for the three months ended March 31, 2020 and 2019 by portfolio segment (in thousands):



	Commercial			Real Estate		Consumer			Unallocated			Total
Allowance for credit losses:
Beginning balance, January 1, 2020	$	1,428		$	6,769	$	897		$	36		$	9,130
Provision charged to operations	225			786		302			62			1,375
Losses charged to allowance	(28		)	—		(15		)	—			(43		)
Recoveries	32			—		52			—			84
Ending balance, March 31, 2020	$	1,657		$	7,555	$	1,236		$	98		$	10,546

Allowance for credit losses:
Beginning balance, January 1, 2019	$	1,671		$	6,539	$	826		$	68		$	9,104
(Reversal) provision charged to operations	(252		)	170		61			(4		)	(25		)
Losses charged to allowance	—			—		(9		)	—			(9		)
Recoveries	31			—		17			—			48
Ending balance, March 31, 2019	$	1,450		$	6,709	$	895		$	64		$	9,118

The following is a summary of the Allowance by impairment methodology and portfolio segment as of March 31, 2020 and December 31, 2019 (in thousands):



	Commercial		Real Estate		Consumer		Unallocated		Total
Allowance for credit losses:
Ending balance, March 31, 2020	$	1,657	$	7,555	$	1,236	$	98	$	10,546
Ending balance: individually evaluated for impairment	$	175	$	3	$	16	$	—	$	194
Ending balance: collectively evaluated for impairment	$	1,482	$	7,552	$	1,220	$	98	$	10,352

Ending balance, December 31, 2019	$	1,428	$	6,769	$	897	$	36	$	9,130
Ending balance: individually evaluated for impairment	$	2	$	3	$	35	$	—	$	40
Ending balance: collectively evaluated for impairment	$	1,426	$	6,766	$	862	$	36	$	9,090

The following table shows the ending balances of loans as of March 31, 2020 and December 31, 2019 by portfolio segment and by impairment methodology (in thousands):



	Commercial		Real Estate		Consumer		Total
Loans:
Ending balance, March 31, 2020	$	119,768	$	705,508	$	102,942	$	928,218
Ending balance: individually evaluated for impairment	$	12,995	$	1,876	$	1,242	$	16,113
Ending balance: collectively evaluated for impairment	$	106,773	$	703,632	$	101,700	$	912,105

Loans:
Ending balance, December 31, 2019	$	125,700	$	708,542	$	107,623	$	941,865
Ending balance: individually evaluated for impairment	$	187	$	2,036	$	1,511	$	3,734
Ending balance: collectively evaluated for impairment	$	125,513	$	706,506	$	106,112	$	938,131

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at March 31, 2020 (in thousands):



	Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	87,749	$	2,364	$	12,493	$	—	$	102,606
Agricultural production	11,284		—		5,878		—		17,162
Real Estate:
Owner occupied	187,015		6,870		4,666		—		198,551
Real estate construction and other land loans	77,411		333		2,050		—		79,794
Commercial real estate	324,088		854		1,102		—		326,044
Agricultural real estate	60,058		1,000		6,877		—		67,935
Other real estate	33,184		—		—		—		33,184
Consumer:
Equity loans and lines of credit	59,732		515		1,354		—		61,601
Consumer and installment	41,341		—		—		—		41,341
Total	$	881,862	$	11,936	$	34,420	$	—	$	928,218

The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2019 (in thousands):



	Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	86,705	$	2,635	$	13,201	$	—	$	102,541
Agricultural production	18,814		—		4,345		—		23,159
Real Estate:
Owner occupied	186,370		6,881		4,695		—		197,946
Real estate construction and other land loans	72,142		—		1,576		—		73,718
Commercial real estate	310,982		17,202		1,149		—		329,333
Agricultural real estate	68,032		946		7,326		—		76,304
Other real estate	31,241		—		—		—		31,241
Consumer:
Equity loans and lines of credit	62,776		519		1,546		—		64,841
Consumer and installment	42,782		—		—		—		42,782
Total	$	879,844	$	28,183	$	33,838	$	—	$	941,865

The following table shows an aging analysis of the loan portfolio by class and the time past due at March 31, 2020 (in thousands):



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days Accruing		Non-accrual
Commercial:
Commercial and industrial	$	209	$	—	$	—	$	209	$	102,397	$	102,606	$	—	$	20
Agricultural production	—		—		—		—		17,162		17,162		—		—
Real estate:	—								—
Owner occupied	—		—		218		218		198,333		198,551		—		411
Real estate construction and other land loans	191		—		—		191		79,603		79,794		—		—
Commercial real estate	205		—		—		205		325,839		326,044		—		360
Agricultural real estate	324		—		—		324		67,611		67,935		—		195
Other real estate	—		—		—		—		33,184		33,184		—		—
Consumer:									—
Equity loans and lines of credit	11		—		—		11		61,590		61,601		—		129
Consumer and installment	178		—		—		178		41,163		41,341		—		—
Total	$	1,118	$	—	$	218	$	1,336	$	926,882	$	928,218	$	—	$	1,115

The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2019 (in thousands):



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days Accruing		Non- accrual
Commercial:
Commercial and industrial	$	17	$	—	$	—	$	17	$	102,524	$	102,541	$	—	$	187
Agricultural production	—		—		—		—		23,159		23,159		—		—
Real estate:	—
Owner occupied	—		218		—		218		197,728		197,946		—		416
Real estate construction and other land loans	—		—		—		—		73,718		73,718		—		—
Commercial real estate	—		381		—		381		328,952		329,333		—		381
Agricultural real estate	—		—		—		—		76,304		76,304		—		321
Other real estate	—		—		—		—		31,241		31,241		—		—
Consumer:
Equity loans and lines of credit	—		—		—		—		64,841		64,841		—		388
Consumer and installment	168		—		—		168		42,614		42,782		—		—
Total	$	185	$	599	$	—	$	784	$	941,081	$	941,865	$	—	$	1,693

The following table shows information related to impaired loans by class at March 31, 2020 (in thousands):



	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	13	$	14	$	—
Real estate:
Owner occupied	411		424		—
Commercial real estate	1,083		1,351		—
Agricultural real estate	232		237		—
Total real estate	1,726		2,012		—
Consumer:
Equity loans and lines of credit	279		325		—
Total with no related allowance recorded	2,018		2,351		—

With an allowance recorded:
Commercial:
Commercial and industrial	12,132		12,134		158
Agricultural production	850		850		17
Total commercial	12,982		12,984		175
Real estate:
Commercial real estate	150		151		3
Consumer:
Equity loans and lines of credit	963		963		16
Total with an allowance recorded	14,095		14,098		194
Total	$	16,113	$	16,449	$	194

The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

The following table shows information related to impaired loans by class at December 31, 2019 (in thousands):



	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	163	$	432	$	—
Real estate:
Owner occupied	416		426		—
Real estate construction and other land loans	—		—		—
Commercial real estate	1,110		1,361		—
Agricultural real estate	321		321		—
Total real estate	1,847		2,108		—
Consumer:
Equity loans and lines of credit	220		256		—
Total with no related allowance recorded	2,230		2,796		—

With an allowance recorded:
Commercial:
Commercial and industrial	24		27		2
Real estate:
Commercial real estate	152		153		3
Agricultural real estate	37		37		—
Total real estate	189		190		3
Consumer:
Equity loans and lines of credit	1,291		1,292		35
Total with an allowance recorded	1,504		1,509		40
Total	$	3,734	$	4,305	$	40

The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2020 and 2019 (in thousands).



	Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial	$	121	$	—	$	249	$	—
Real estate:
Owner occupied	413		—		213		—
Real estate construction and other land loans	—		—		2,217		16
Commercial real estate	1,101		12		1,171		12
Agricultural real estate	258		—		—		—
Total real estate	1,772		12		3,601		28
Consumer:
Equity loans and lines of credit	300		3		196		1
Total with no related allowance recorded	2,193		15		4,046		29

With an allowance recorded:
Commercial:
Commercial and industrial	3,048		173		84		1
Agricultural production	212		12		—		—
Total commercial	3,260		185		84		1
Real estate:
Commercial real estate	151		3		572		3
Agricultural real estate	19		—		44		1
Total real estate	170		3		616		4
Consumer:
Equity loans and lines of credit	1,124		14		1,105		14
Consumer and installment	3		—		—		—
Total consumer	1,127		14		1,105		14
Total with an allowance recorded	4,557		202		1,805		19
Total	$	6,750	$	217	$	5,851	$	48

Foregone interest on nonaccrual loans totaled $24,000 and $32,000 for the three month periods ended March 31, 2020 and 2019, respectively.

Troubled Debt Restructurings:

As of March 31, 2020 and December 31, 2019, the Company has a recorded investment in troubled debt restructurings of $15,085,000 and $2,362,000, respectively. The Company has allocated $193,000 and $38,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of March 31, 2020 and December 31, 2019, respectively. The Company has committed to lend no additional amounts as of March 31, 2020 to customers with outstanding loans that are classified as troubled debt restructurings.

During the three months ended March 31, 2020, two loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. During the same period, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the allowance for loan losses.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2020 (in thousands):



Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification (2)		Post Modification Outstanding Recorded Investment (3)		Outstanding Recorded Investment
Commercial:
Commercial and industrial	1	$	12,925	$	—	$	12,925	$	12,125
Agricultural production	1	850		—		850		850
Total	2	$	13,775	$	—	$	13,775	$	12,975


(1)	Amounts represent the recorded investment in loans before recognizing effects of the Troubled Debt Restructurings, if any.


(2)	Principal modification includes principal forgiveness at the time of modification, contingent principal forgiveness granted over the life of the loan based on borrower performance, and principal that has been legally separated and deferred to the end of the loan, with zero percent contractual interest rate.


(3)	Balance outstanding after principal modification, if any borrower reduction to recorded investment.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2019 (in thousands):



Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification (2)		Post Modification Outstanding Recorded Investment (3)		Outstanding Recorded Investment
Consumer:
Equity loans and lines of credit	1	$	13	—		$	13	$	13
Total	1	$	13	$	—	$	13	$	13

Troubled Debt Restructuring

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the three months ended and three months ended March 31, 2020 or March 31, 2019.