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Loans and Allowance for Credit Losses

12 Months Ended

Dec. 31, 2020

LOANS AND ALLOWANCE FOR CREDIT LOSSES

Outstanding loans are summarized as follows (in thousands):


Loan Type	December 31, 2020		% of Total loans		December 31, 2019		% of Total loans
Commercial:
Commercial and industrial	$	273,994	24.9	%	$	102,541	10.9	%
Agricultural production	21,971		2.0	%	23,159		2.6	%
Total commercial	295,965		26.9	%	125,700		13.5	%
Real estate:
Owner occupied	208,843		18.9	%	197,946		21.0	%
Real estate construction and other land loans	55,419		5.0	%	73,718		7.8	%
Commercial real estate	338,886		30.7	%	329,333		34.9	%
Agricultural real estate	84,258		7.6	%	76,304		8.1	%
Other real estate	28,718		2.6	%	31,241		3.3	%
	716,124		64.8	%	708,542		75.1	%
Consumer:
Equity loans and lines of credit	55,634		5.0	%	64,841		6.9	%
Consumer and installment	37,236		3.3	%	42,782		4.5	%
Total consumer	92,870		8.3	%	107,623		11.4	%
Net deferred origination costs	(2,612)				1,515
Total gross loans	1,102,347		100.0	%	943,380		100.0	%
Allowance for credit losses	(12,915)				(9,130)
Total loans	$	1,089,432			$	934,250

At December 31, 2020 and 2019, loans originated under Small Business Administration (SBA) programs totaling $24,220,000 and $21,910,000, respectively, were included in the real estate and commercial categories. In addition, the Company participated in the SBA Paycheck Protection Program (PPP) to help provide loans to our business customers to provide them with additional working capital. At December 31, 2020, PPP loans totaling $192,916,000 were outstanding and

included in the commercial and industrial category above. Approximately $434,983,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $235,371,000 as of December 31, 2020. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.

Salaries and employee benefits totaling $2,782,000, $2,116,000, and $2,453,000 have been deferred as loan origination costs for the years ended December 31, 2020, 2019, and 2018, respectively.

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 loss data) over the most recent 48 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.

Changes in the allowance for credit losses were as follows (in thousands):


	Years Ended December 31,
	2020		2019		2018
Balance, beginning of year	$	9,130	$	9,104	$	8,778
Provision charged to operations	3,275		1,025		50
Losses charged to allowance	(229)		(1,196)		(210)
Recoveries	739		197		486
Balance, end of year	$	12,915	$	9,130	$	9,104

The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2020, 2019, and 2018 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	100		2,405		175		595		3,275
Losses charged to allowance	(121)		—		(108)		—		(229)
Recoveries	612		—		127		—		739
Ending balance, December 31, 2020	$	2,019	$	9,174	$	1,091	$	631	$	12,915

Allowance for credit losses:
Beginning balance, January 1, 2019	$	1,671	$	6,539	$	826	$	68	$	9,104
Provision (reversal) charged to operations	655		230		172		(32)		1,025
Losses charged to allowance	(1,032)		—		(164)		—		(1,196)
Recoveries	134		—		63		—		197
Ending balance, December 31, 2019	$	1,428	$	6,769	$	897	$	36	$	9,130

Allowance for credit losses:
Beginning balance, January 1, 2018	$	2,071	$	5,795	$	825	$	87	$	8,778
Provision (reversal) charged to operations	(513)		642		(60)		(19)		50
Losses charged to allowance	(94)		—		(116)		—		(210)
Recoveries	207		102		177		—		486
Ending balance, December 31, 2018	$	1,671	$	6,539	$	826	$	68	$	9,104

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


	Commercial		Real Estate		Consumer		Unallocated		Total
Allowance for credit losses:
Ending balance, December 31, 2020	$	2,019	$	9,174	$	1,091	$	631	$	12,915
Ending balance: individually evaluated for impairment	$	339	$	271	$	21	$	—	$	631
Ending balance: collectively evaluated for impairment	$	1,680	$	8,903	$	1,070	$	631	$	12,284

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 December 31, 2020 and December 31, 2019 by portfolio segment and by impairment methodology (in thousands):


	Commercial		Real Estate		Consumer		Total
Loans:
Ending balance, December 31, 2020	$	295,965	$	716,124	$	92,870	$	1,104,959
Ending balance: individually evaluated for impairment	$	7,402	$	2,616	$	1,168	$	11,186
Ending balance: collectively evaluated for impairment	$	288,563	$	713,508	$	91,702	$	1,093,773

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 December 31, 2020 (in thousands):


	Pass		Special Mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	258,587	$	5,004	$	10,403	$	—	$	273,994
Agricultural production	18,289		377		3,305		—		21,971
Real Estate:
Owner occupied	197,721		3,870		7,252		—		208,843
Real estate construction and other land loans	50,560		1,622		3,237		—		55,419
Commercial real estate	314,710		14,537		9,639		—		338,886
Agricultural real estate	72,875		10,195		1,188		—		84,258
Other real estate	28,557		161		—		—		28,718
Consumer:
Equity loans and lines of credit	54,034		640		960		—		55,634
Consumer and installment	37,084		—		152		—		37,236
Total	$	1,032,417	$	36,406	$	36,136	$	—	$	1,104,959

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		Substandard		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 December 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	$	—	$	—	$	60	$	60	$	273,934	$	273,994	$	—	$	752
Agricultural production	—		—		—		—		21,971		21,971		—		—
Real estate:	—								—		—
Owner occupied	—		—		—		—		208,843		208,843		—		370
Real estate construction and other land loans	—		—		—		—		55,419		55,419		—		1,556
Commercial real estate	—		—		—		—		338,886		338,886		—		512
Agricultural real estate	—		—		—		—		84,258		84,258		—		—
Other real estate	—		—		—		—		28,718		28,718		—		—
Consumer:									—		—
Equity loans and lines of credit	—		24		—		24		55,610		55,634		—		—
Consumer and installment	5		—		—		5		37,231		37,236		—		88
Total	$	5	$	24	$	60	$	89	$	1,104,870	$	1,104,959	$	—	$	3,278

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 December 31, 2020 (in thousands):


	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	60	$	61	$	—


Real estate:
Owner occupied	370		409		—
Real estate construction and other land loans	28		28		—
Commercial real estate	512		561		—


Total real estate	910		998		—
Consumer:
Equity loans and lines of credit	144		180		—


Total with no related allowance recorded	1,114		1,239		—

With an allowance recorded:
Commercial:
Commercial and industrial	7,342		7,373		339


Real estate:

Real estate construction and other land loans	1,528		1,552		268
Commercial real estate	148		149		3
Agricultural real estate	30		29		—

Total real estate	1,706		1,730		271
Consumer:
Equity loans and lines of credit	936		936		9
Consumer and installment	88		93		12
Total consumer	1,024		1,029		21
Total with an allowance recorded	10,072		10,132		631
Total	$	11,186	$	11,371	$	631

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		—

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 presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2020, 2019, and 2018 (in thousands):


	Year Ended December 31, 2020				Year Ended December 31, 2019				Year Ended December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,322	$	—	$	214	$	—	$	311	$	—
Agricultural production	104		—		—		—		—		—
Total commercial	1,426		—		214		—		311		—
Real estate:
Owner occupied	394		—		223		—		17		—
Real estate construction and other land loans	8		—		1,174		45		2,857		85
Commercial real estate	779		—		1,306		50		1,542		51
Agricultural real estate	146		—		25		—		1,173		159
Other real estate	—		—		—		—		702		—
Total real estate	1,327		—		2,728		95		6,291		295
Consumer:
Equity loans and lines of credit	216		12		593		13		217		—


Total with no related allowance recorded	2,969		12		3,535		108		6,819		295
	—
With an allowance recorded:	—
Commercial:											—
Commercial and industrial	6,139		582		57		1		55		4
Agricultural production	430		—		—		—		—		—
Total commercial	6,569		582		57		1		55		4
Real estate:			—				—				—

Real estate construction and other land loans	586		—		—		—		—		—
Commercial real estate	206		11		325		12		200		12
Agricultural real estate	27		2		42		2		49		3
Other real estate	—		—		—		—		86		—
Total real estate	819		13		367		14		335		15
Consumer:
Equity loans and lines of credit	1,001		55		1,139		56		1,054		57
Consumer and installment	64		—		20		—		3		—
Total consumer	1,065		55		1,159		56		1,057		57
Total with an allowance recorded	8,453		650		1,583		71		1,447		76
Total	$	11,422	$	662	$	5,118	$	179	$	8,266	$	371

Foregone interest on nonaccrual loans totaled $177,000, $85,000, and $267,000 for the years ended December 31, 2020, 2019, and 2018, respectively. Interest income recognized on cash basis during the years presented above was not considered significant for financial reporting purposes.

Troubled Debt Restructurings:

As of December 31, 2020 and 2019, the Company has a recorded investment in troubled debt restructurings of $7,908,000 and, $2,362,000, respectively. The Company has allocated $20,000 and $38,000 of specific reserves for those loans at December 31, 2020 and 2019, respectively. The Company has committed to lend no additional amounts as of December 31, 2020 to customers with outstanding loans that are classified as troubled debt restructurings.

For the years ended December 31, 2020, 2019, and 2018 the terms of certain 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 periods, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower were forgiven.

As discussed in Note 1 to these financial statements, Section 4013 of the CARES Act and the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 or at the time of modification program implementation, respectively, and the borrowers meet other applicable criteria. The remaining TDRs disclosed below were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $25 million resulting from the COVID-19 pandemic that were not classified as a TDRs at December 31, 2020.

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


Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification		Post Modification Outstanding Recorded Investment (2)		Outstanding Recorded Investment
Commercial:
Commercial and industrial	1	$	12,925	$	—	$	12,925	$	6,650

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

(2)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 year ended December 31, 2019 (dollars in thousands):


Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification		Post Modification Outstanding Recorded Investment (2)		Outstanding Recorded Investment











Consumer
Equity loans and line of credit	3	$	532	$	—	$	532	$	446

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

(2)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 year ended December 31, 2018 (dollars in thousands):


Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification		Post Modification Outstanding Recorded Investment (2)		Outstanding Recorded Investment
Commercial:
Commercial and Industrial	1	$	38	$	—	$	38	$	30


Real Estate:


Commercial real estate	1	166		—		166		161







Total	2	$	204	$	—	$	204	$	191

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

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

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 12 months following the modification during the years ended December 31, 2020, 2019, and 2018.