Loans and ALLL

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees. A portion of loans are unsecured.

Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs. Interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization methods.

The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on the contractual term of the loan. In all cases, a loan is placed in nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $15,000. Borrowers with direct credit needs of more than $15,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.

We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers (“advances”). The mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market. We participate in the advance to the mortgage broker, which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market. As such, the average life of each participated advance is approximately 20-30 days. Funds from the sale of the loan are used to pay off our participation in the advance to the mortgage broker. We classify these advances as commercial loans and include the outstanding balance in commercial loans on our consolidated balance sheet. Under the participation agreement, we committed to a maximum outstanding aggregate amount of $50,000. The difference between our outstanding balance and the maximum outstanding aggregate amount is classified as “Unfunded commitments under lines of credit” in the “Contractual Obligations and Loan Commitments” section of the Management's Discussion and Analysis of Financial Condition and Results of Operations of this report.

We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.

Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100% of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80% unless the loan qualifies for government guarantees.

Underwriting criteria for originated residential real estate loans generally include:


•	Evaluation of the borrower’s ability to make monthly payments.


•	Evaluation of the value of the property securing the loan.


•	Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income.


•	Ensuring all debt servicing does not exceed 40% of income.


•	Verification of acceptable credit reports.


•	Verification of employment, income, and financial information.

Appraisals are performed by independent appraisers and reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $1,000 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.

Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.

The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the ALLL when we believe the uncollectability of the loan balance is probable. Subsequent recoveries, if any, are credited to the ALLL.

The ALLL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the loan’s outstanding balance and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio, with the exception of advances to mortgage brokers, over the preceding five years. With no historical losses on advances to mortgage brokers, there is no allocation in the commercial segment displayed in the following tables. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A summary of changes in the ALLL and the recorded investment in loans by segments follows:



	Allowance for Loan Losses
	Three Months Ended September 30, 2019
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
July 1, 2019	$	2,080		$	612		$	1,882		$	927		$	2,536	$	8,037
Charge-offs	(21		)	(1		)	—			(121		)	—		(143		)
Recoveries	25			1			25			31			—		82
Provision for loan losses	(24		)	(57		)	(38		)	183			129		193
September 30, 2019	$	2,060		$	555		$	1,869		$	1,020		$	2,665	$	8,169



	Allowance for Loan Losses
	Nine Months Ended September 30, 2019
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
January 1, 2019	$	2,563		$	775		$	1,992		$	857		$	2,188	$	8,375
Charge-offs	(134		)	(60		)	(96		)	(324		)	—		(614		)
Recoveries	98			2			143			117			—		360
Provision for loan losses	(467		)	(162		)	(170		)	370			477		48
September 30, 2019	$	2,060		$	555		$	1,869		$	1,020		$	2,665	$	8,169



	Allowance for Loan Losses and Recorded Investment in Loans
	September 30, 2019
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	34	$	132	$	1,167	$	—	$	—	$	1,333
Collectively evaluated for impairment	2,026		423		702		1,020		2,665		6,836
Total	$	2,060	$	555	$	1,869	$	1,020	$	2,665	$	8,169
Loans
Individually evaluated for impairment	$	8,626	$	13,766	$	5,953	$	—			$	28,345
Collectively evaluated for impairment	700,109		104,694		286,358		72,298				1,163,459
Total	$	708,735	$	118,460	$	292,311	$	72,298			$	1,191,804



	Allowance for Loan Losses
	Three Months Ended September 30, 2018
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
July 1, 2018	$	2,197		$	982		$	2,167		$	882		$	1,972	$	8,200
Charge-offs	—			(7		)	(61		)	(111		)	—		(179		)
Recoveries	79			1			37			38			—		155
Provision for loan losses	(255		)	(194		)	239			93			41		(76		)
September 30, 2018	$	2,021		$	782		$	2,382		$	902		$	2,013	$	8,100



	Allowance for Loan Losses
	Nine Months Ended September 30, 2018
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
January 1, 2018	$	1,706		$	611		$	2,563		$	900		$	1,920	$	7,700
Charge-offs	(450		)	(51		)	(100		)	(247		)	—		(848		)
Recoveries	282			2			162			166			—		612
Provision for loan losses	483			220			(243		)	83			93		636
September 30, 2018	$	2,021		$	782		$	2,382		$	902		$	2,013	$	8,100



	Allowance for Loan Losses and Recorded Investment in Loans
	December 31, 2018
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	443	$	132	$	1,363	$	—	$	—	$	1,938
Collectively evaluated for impairment	2,120		643		629		857		2,188		6,437
Total	$	2,563	$	775	$	1,992	$	857	$	2,188	$	8,375
Loans
Individually evaluated for impairment	$	9,899	$	14,298	$	6,893	$	9			$	31,099
Collectively evaluated for impairment	649,630		112,863		268,450		66,665				1,097,608
Total	$	659,529	$	127,161	$	275,343	$	66,674			$	1,128,707

The following tables display the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of:



	September 30, 2019
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	—	$	10	$	—	$	10	$	—	$	—	$	—	$	10
2 - High quality	3,342		11,829		—		15,171		2,020		405		2,425		17,596
3 - High satisfactory	122,861		47,475		46,702		217,038		17,199		5,127		22,326		239,364
4 - Low satisfactory	358,474		89,422		—		447,896		45,622		20,746		66,368		514,264
5 - Special mention	16,623		6,127		—		22,750		8,313		4,317		12,630		35,380
6 - Substandard	3,761		477		—		4,238		6,342		3,849		10,191		14,429
7 - Vulnerable	390		1,242		—		1,632		2,744		1,776		4,520		6,152
8 - Doubtful	—		—		—		—		—		—		—		—
9 - Loss	—		—		—		—		—		—		—		—
Total	$	505,451	$	156,582	$	46,702	$	708,735	$	82,240	$	36,220	$	118,460	$	827,195



	December 31, 2018
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	21	$	31	$	—	$	52	$	51	$	28	$	79	$	131
2 - High quality	4,564		13,473		—		18,037		2,729		613		3,342		21,379
3 - High satisfactory	127,573		43,199		11,793		182,565		18,325		7,039		25,364		207,929
4 - Low satisfactory	344,920		84,634		—		429,554		46,636		19,344		65,980		495,534
5 - Special mention	12,847		5,287		—		18,134		10,520		5,624		16,144		34,278
6 - Substandard	7,428		2,002		—		9,430		6,343		4,960		11,303		20,733
7 - Vulnerable	334		1,423		—		1,757		2,716		2,233		4,949		6,706
8 - Doubtful	—		—		—		—		—		—		—		—
9 - Loss	—		—		—		—		—		—		—		—
Total	$	497,687	$	150,049	$	11,793	$	659,529	$	87,320	$	39,841	$	127,161	$	786,690

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:

1. EXCELLENT – Substantially Risk Free

Credit has strong financial condition and solid earnings history, characterized by:


•	High liquidity, strong cash flow, low leverage.


•	Unquestioned ability to meet all obligations when due.


•	Experienced management, with management succession in place.


•	Secured by cash.

2. HIGH QUALITY – Limited Risk

Credit with sound financial condition and a positive trend in earnings supplemented by:


•	Favorable liquidity and leverage ratios.


•	Ability to meet all obligations when due.


•	Management with successful track record.


•	Steady and satisfactory earnings history.


•	If loan is secured, collateral is of high quality and readily marketable.


•	Access to alternative financing.


•	Well defined primary and secondary source of repayment.


•	If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.

3. HIGH SATISFACTORY – Reasonable Risk

Credit with satisfactory financial condition and further characterized by:


•	Working capital adequate to support operations.


•	Cash flow sufficient to pay debts as scheduled.


•	Management experience and depth appear favorable.


•	Loan performing according to terms.


•	If loan is secured, collateral is acceptable and loan is fully protected.

4. LOW SATISFACTORY – Acceptable Risk

Credit with bankable risks, although some signs of weaknesses are shown:


•	Would include most start-up businesses.


•	Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.


•	Management’s abilities are apparent yet unproven.


•	Weakness in primary source of repayment with adequate secondary source of repayment.


•	Loan structure generally in accordance with policy.


•	If secured, loan collateral coverage is marginal.

To be classified as less than satisfactory, only one of the following criteria must be met.

5. SPECIAL MENTION – Criticized

Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan:


•	Downward trend in sales, profit levels, and margins.


•	Impaired working capital position.


•	Cash flow is strained in order to meet debt repayment.


•	Loan delinquency (30-60 days) and overdrafts may occur.


•	Shrinking equity cushion.


•	Diminishing primary source of repayment and questionable secondary source.


•	Management abilities are questionable.


•	Weak industry conditions.


•	Litigation pending against the borrower.


•	Loan may need to be restructured to improve collateral position or reduce payments.


•	Collateral or guaranty offers limited protection.


•	Negative debt service coverage, however the credit is well collateralized and payments are current.

6. SUBSTANDARD – Classified

Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. In addition, the following characteristics may apply:


•	Sustained losses have severely eroded the equity and cash flow.


•	Deteriorating liquidity.


•	Serious management problems or internal fraud.


•	Original repayment terms liberalized.


•	Likelihood of bankruptcy.


•	Inability to access other funding sources.


•	Reliance on secondary source of repayment.


•	Litigation filed against borrower.


•	Interest non-accrual may be warranted.


•	Collateral provides little or no value.


•	Requires excessive attention of the loan officer.


•	Borrower is uncooperative with loan officer.

7. VULNERABLE – Classified

Credit is considered “Substandard” and warrants placing in nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:


•	Insufficient cash flow to service debt.


•	Minimal or no payments being received.


•	Limited options available to avoid the collection process.


•	Transition status, expect action will take place to collect loan without immediate progress being made.

8. DOUBTFUL – Workout

Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:


•	Normal operations are severely diminished or have ceased.


•	Seriously impaired cash flow.


•	Original repayment terms materially altered.


•	Secondary source of repayment is inadequate.


•	Survivability as a “going concern” is impossible.


•	Collection process has begun.


•	Bankruptcy petition has been filed.


•	Judgments have been filed.


•	Portion of the loan balance has been charged-off.

9. LOSS – Charge-off

Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:


•	Liquidation or reorganization under Bankruptcy, with poor prospects of collection.


•	Fraudulently overstated assets and/or earnings.


•	Collateral has marginal or no value.


•	Debtor cannot be located.


•	Over 120 days delinquent.

Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the past due and current loans for the entire loan portfolio as of:



	September 30, 2019
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	791	$	282	$	—	$	390	$	1,463	$	503,988	$	505,451
Commercial other	451		19		—		1,242		1,712		154,870		156,582
Advances to mortgage brokers	—		—		—		—		—		46,702		46,702
Total commercial	1,242		301		—		1,632		3,175		705,560		708,735
Agricultural
Agricultural real estate	280		—		—		2,744		3,024		79,216		82,240
Agricultural other	—		—		—		1,776		1,776		34,444		36,220
Total agricultural	280		—		—		4,520		4,800		113,660		118,460
Residential real estate
Senior liens	301		593		40		736		1,670		248,995		250,665
Junior liens	—		6		—		—		6		6,106		6,112
Home equity lines of credit	249		—		—		74		323		35,211		35,534
Total residential real estate	550		599		40		810		1,999		290,312		292,311
Consumer
Secured	136		17		—		—		153		68,258		68,411
Unsecured	4		5		—		—		9		3,878		3,887
Total consumer	140		22		—		—		162		72,136		72,298
Total	$	2,212	$	922	$	40	$	6,962	$	10,136	$	1,181,668	$	1,191,804



	December 31, 2018
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	60	$	—	$	—	$	334	$	394	$	497,293	$	497,687
Commercial other	277		628		—		1,423		2,328		147,721		150,049
Advances to mortgage brokers	—		—		—		—		—		11,793		11,793
Total commercial	337		628		—		1,757		2,722		656,807		659,529
Agricultural
Agricultural real estate	428		—		—		2,716		3,144		84,176		87,320
Agricultural other	—		—		—		2,233		2,233		37,608		39,841
Total agricultural	428		—		—		4,949		5,377		121,784		127,161
Residential real estate
Senior liens	2,254		203		113		554		3,124		233,438		236,562
Junior liens	2		6		—		—		8		6,001		6,009
Home equity lines of credit	76		—		—		—		76		32,696		32,772
Total residential real estate	2,332		209		113		554		3,208		272,135		275,343
Consumer
Secured	95		—		—		—		95		62,721		62,816
Unsecured	10		—		—		—		10		3,848		3,858
Total consumer	105		—		—		—		105		66,569		66,674
Total	$	3,202	$	837	$	113	$	7,260	$	11,412	$	1,117,295	$	1,128,707

Impaired Loans

Loans may be classified as impaired if they meet one or more of the following criteria:


1.	There has been a charge-off of its principal balance (in whole or in part);


2.	The loan has been classified as a TDR; or


3.	The loan is in nonaccrual status.

Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Large groups of smaller-balance, homogeneous residential real estate and consumer loans are collectively evaluated for impairment by comparing the loan’s unpaid principal balance to the present value of expected future cash flows discounted at the loan’s effective interest rate.

We do not recognize interest income on impaired loans in nonaccrual status. For impaired loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding. The following is a summary of information pertaining to impaired loans as of:



	September 30, 2019						December 31, 2018
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	947	$	1,190	$	29	$	3,969	$	4,211	$	437
Commercial other	11		11		5		12		12		6
Agricultural real estate	1,512		1,512		101		392		392		112
Agricultural other	1,347		1,347		31		44		44		20
Residential real estate senior liens	5,845		6,315		1,165		6,834		7,289		1,361
Residential real estate junior liens	12		12		2		12		12		2
Total impaired loans with a valuation allowance	9,674		10,387		1,333		11,263		11,960		1,938
Impaired loans without a valuation allowance
Commercial real estate	5,139		5,278				2,794		2,947
Commercial other	2,529		2,529				3,124		3,231
Agricultural real estate	7,005		7,005				7,618		7,618
Agricultural other	3,902		3,902				6,244		6,287
Home equity lines of credit	96		396				47		347
Consumer secured	—		—				9		9
Total impaired loans without a valuation allowance	18,671		19,110				19,836		20,439
Impaired loans
Commercial	8,626		9,008		34		9,899		10,401		443
Agricultural	13,766		13,766		132		14,298		14,341		132
Residential real estate	5,953		6,723		1,167		6,893		7,648		1,363
Consumer	—		—		—		9		9		—
Total impaired loans	$	28,345	$	29,497	$	1,333	$	31,099	$	32,399	$	1,938

The following is a summary of information pertaining to impaired loans for the:



	Three Months Ended September 30
	2019				2018
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	1,546	$	2	$	4,195	$	14
Commercial other	11		—		778		16
Agricultural real estate	1,513		10		673		40
Agricultural other	1,292		11		324		45
Residential real estate senior liens	6,096		14		7,512		17
Residential real estate junior liens	12		—		18		—
Total impaired loans with a valuation allowance	10,470		37		13,500		132
Impaired loans without a valuation allowance
Commercial real estate	4,664		12		3,076		8
Commercial other	2,607		7		1,396		2
Agricultural real estate	6,995		45		7,193		137
Agricultural other	3,820		45		5,786		68
Home equity lines of credit	63		—		59		—
Consumer secured	4		—		11		—
Total impaired loans without a valuation allowance	18,153		109		17,521		215
Impaired loans
Commercial	8,828		21		9,445		40
Agricultural	13,620		111		13,976		290
Residential real estate	6,171		14		7,589		17
Consumer	4		—		11		—
Total impaired loans	$	28,623	$	146	$	31,021	$	347



	Nine Months Ended September 30
	2019				2018
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	2,484	$	58	$	4,739	$	118
Commercial other	11		—		1,263		55
Agricultural real estate	951		73		584		46
Agricultural other	659		20		108		45
Residential real estate senior liens	6,406		101		7,694		107
Residential real estate junior liens	12		—		29		—
Total impaired loans with a valuation allowance	10,523		252		14,417		371
Impaired loans without a valuation allowance
Commercial real estate	3,979		86		2,763		55
Commercial other	2,776		41		1,297		21
Agricultural real estate	7,308		110		7,600		414
Agricultural other	4,913		201		4,105		219
Home equity lines of credit	47		6		68		5
Consumer secured	7		—		13		—
Total impaired loans without a valuation allowance	19,030		444		15,846		714
Impaired loans
Commercial	9,250		185		10,062		249
Agricultural	13,831		404		12,397		724
Residential real estate	6,465		107		7,791		112
Consumer	7		—		13		—
Total impaired loans	$	29,553	$	696	$	30,263	$	1,085

We had committed to advance $228 and $542 in connection with impaired loans, which includes TDRs, as of September 30, 2019 and December 31, 2018, respectively.

Troubled Debt Restructurings

A loan modification is considered to be a TDR when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.

Typical concessions granted include, but are not limited to:

•Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.

•Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics.

•Agreeing to an interest only payment structure and delaying principal payments.

•Forgiving principal.

•Forgiving accrued interest.

To determine if a borrower is experiencing financial difficulties, factors we consider include:


•	The borrower is currently in default on any of their debt.


•	The borrower would likely default on any of their debt if the concession is not granted.


•	The borrower’s cash flow is insufficient to service all of their debt if the concession is not granted.


•	The borrower has declared, or is in the process of declaring, bankruptcy.


•	The borrower is unlikely to continue as a going concern (if the entity is a business).

The following is a summary of information pertaining to TDRs granted for the:



	Three Months Ended September 30
	2019					2018
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Agricultural other	1	$	25	$	25	7	$	1,327	$	1,327
Residential real estate	—	—		—		1	99		99
Total	1	$	25	$	25	8	$	1,426	$	1,426



	Nine Months Ended September 30
	2019					2018
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	2	$	184	$	184	4	$	1,360	$	1,360
Agricultural other	4	1,859		1,859		22	5,718		5,694
Residential real estate	—	—		—		8	593		593
Total	6	$	2,043	$	2,043	34	$	7,671	$	7,647

The following is a summary of concessions we granted to borrowers in financial difficulty for the:



	Three Months Ended September 30
	2019						2018
	Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period
	Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment
Agricultural other	1	$	25	—	$	—	5	$	476	2	$	851
Residential real estate	—	—		—	—		1	99		—	—
Total	1	$	25	—	$	—	6	$	575	2	$	851



	Nine Months Ended September 30
	2019						2018
	Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period
	Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment
Commercial other	—	$	—	2	$	184	1	$	174	3	$	1,186
Agricultural other	1	25		3	1,834		12	2,345		10	3,373
Residential real estate	—	—		—	—		2	155		6	438
Total	1	$	25	5	$	2,018	15	$	2,674	19	$	4,997

We did not restructure any loans by forgiving principal or accrued interest in the three and nine month periods ended September 30, 2019 or 2018.

Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.

We had no loans that defaulted in the three and nine month periods ended September 30, 2019 and 2018 which were modified within 12 months prior to the default date.

The following is a summary of TDR loan balances as of:



	September 30 2019		December 31 2018
TDRs	$	24,699	$	26,951