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Loans and ALLL

6 Months Ended

Jun. 30, 2021

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 deferred fees or costs. Unless a loan has a nonaccrual status, 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 method.

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 at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status, 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. Government agency guarantee may be required. Personal guarantees and/or life insurance beneficiary assignments 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 sheets. Under the participation agreement, we committed to a maximum outstanding aggregate amount of $40,000. 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. The reduction in our outstanding balance during 2021 was the result of capitalization changes with the financial institution operating the mortgage purchase program. These changes, in late 2020, resulted in the reduction or elimination of broker advance participation for banks within the program.

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 are 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. Full or partial loan balances are charged against the ALLL when we believe uncollectability 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 related to this portfolio. 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.

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at June 30, 2021. The COVID-19 pandemic led to the temporary and some permanent closures of businesses throughout the communities in which we serve, which also led to increased unemployment. We increased the ALLL during 2020 as a result of increased economic and environmental related risk factors, primarily driven by COVID-19. While these risk factors remain, improvement in credit quality indicators and a reduction in loans outstanding resulted in a reduction to the ALLL during the first six months of 2021.

Summaries of the ALLL and the recorded investment in loans by segments follows:



	Allowance for Loan Losses
	Three Months Ended June 30, 2021
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
April 1, 2021	$	1,699	$	230	$	1,163	$	956	$	5,223	$	9,271
Charge-offs	—		—		—		(53)		—		(53)
Recoveries	17		3		48		43		—		111
Provision for loan losses	595		15		(257)		(8)		(314)		31
June 30, 2021	$	2,311	$	248	$	954	$	938	$	4,909	$	9,360


	Allowance for Loan Losses
	Six Months Ended June 30, 2021
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
January 1, 2021	$	2,162	$	311	$	1,363	$	798	$	5,110	$	9,744
Charge-offs	(31)		—		—		(181)		—		(212)
Recoveries	99		5		103		113		—		320
Provision for loan losses	81		(68)		(512)		208		(201)		(492)
June 30, 2021	$	2,311	$	248	$	954	$	938	$	4,909	$	9,360


	Allowance for Loan Losses and Recorded Investment in Loans
	June 30, 2021
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	541	$	3	$	657	$	—	$	—	$	1,201
Collectively evaluated for impairment	1,770		245		297		938		4,909		8,159
Total	$	2,311	$	248	$	954	$	938	$	4,909	$	9,360
Loans
Individually evaluated for impairment	$	12,004	$	14,843	$	3,688	$	—			$	30,535
Collectively evaluated for impairment	711,884		80,354		308,879		75,011				1,176,128
Total	$	723,888	$	95,197	$	312,567	$	75,011			$	1,206,663



	Allowance for Loan Losses
	Three Months Ended June 30, 2020
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
April 1, 2020	$	2,375	$	490	$	1,717	$	961	$	3,154	$	8,697
Charge-offs	(1)		(6)		—		(59)		—		(66)
Recoveries	30		2		39		70		—		141
Provision for loan losses	(283)		(130)		(563)		(147)		1,228		105
June 30, 2020	$	2,121	$	356	$	1,193	$	825	$	4,382	$	8,877


	Allowance for Loan Losses
	Six Months Ended June 30, 2020
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
January 1, 2020	$	1,914	$	634	$	2,047	$	922	$	2,422	$	7,939
Charge-offs	(5)		(22)		(15)		(182)		—		(224)
Recoveries	52		35		66		116		—		269
Provision for loan losses	160		(291)		(905)		(31)		1,960		893
June 30, 2020	$	2,121	$	356	$	1,193	$	825	$	4,382	$	8,877


	Allowance for Loan Losses and Recorded Investment in Loans
	December 31, 2020
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	84	$	56	$	771	$	—	$	—	$	911
Collectively evaluated for impairment	2,078		255		592		798		5,110		8,833
Total	$	2,162	$	311	$	1,363	$	798	$	5,110	$	9,744
Loans
Individually evaluated for impairment	$	9,821	$	13,796	$	4,319	$	—			$	27,936
Collectively evaluated for impairment	746,865		86,665		303,224		73,621				1,210,375
Total	$	756,686	$	100,461	$	307,543	$	73,621			$	1,238,311

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


	June 30, 2021
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2 - High quality	6,845		10,735		—		17,580		462		8		470		18,050
3 - High satisfactory	79,146		51,741		—		130,887		10,646		3,363		14,009		144,896
4 - Low satisfactory	407,904		131,097		—		539,001		36,299		15,369		51,668		590,669
5 - Special mention	10,528		2,350		—		12,878		13,808		3,866		17,674		30,552
6 - Substandard	15,738		7,622		—		23,360		4,554		3,808		8,362		31,722
7 - Vulnerable	45		137		—		182		2,551		275		2,826		3,008
8 - Doubtful	—		—		—		—		188		—		188		188
9 - Loss	—		—		—		—		—		—		—		—
Total	$	520,206	$	203,682	$	—	$	723,888	$	68,508	$	26,689	$	95,197	$	819,085


	December 31, 2020
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2 - High quality	2,308		13,406		—		15,714		541		11		552		16,266
3 - High satisfactory	69,327		51,093		50,258		170,678		14,411		5,312		19,723		190,401
4 - Low satisfactory	403,733		122,025		—		525,758		34,464		17,600		52,064		577,822
5 - Special mention	15,049		6,174		—		21,223		13,137		3,240		16,377		37,600
6 - Substandard	15,854		6,130		—		21,984		5,267		2,693		7,960		29,944
7 - Vulnerable	26		1,303		—		1,329		3,208		387		3,595		4,924
8 - Doubtful	—		—		—		—		190		—		190		190
9 - Loss	—		—		—		—		—		—		—		—
Total	$	506,297	$	200,131	$	50,258	$	756,686	$	71,218	$	29,243	$	100,461	$	857,147

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:


	June 30, 2021
	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	$	56	$	—	$	—	$	45	$	101	$	520,105	$	520,206
Commercial other	275		—		—		137		412		203,270		203,682
Advances to mortgage brokers	—		—		—		—		—		—		—
Total commercial	331		—		—		182		513		723,375		723,888
Agricultural
Agricultural real estate	—		—		—		2,739		2,739		65,769		68,508
Agricultural other	—		—		—		275		275		26,414		26,689
Total agricultural	—		—		—		3,014		3,014		92,183		95,197
Residential real estate
Senior liens	9		135		—		133		277		279,062		279,339
Junior liens	—		—		—		—		—		3,179		3,179
Home equity lines of credit	—		—		—		—		—		30,049		30,049
Total residential real estate	9		135		—		133		277		312,290		312,567
Consumer
Secured	71		31		—		—		102		71,976		72,078
Unsecured	7		—		—		—		7		2,926		2,933
Total consumer	78		31		—		—		109		74,902		75,011
Total	$	418	$	166	$	—	$	3,329	$	3,913	$	1,202,750	$	1,206,663


	December 31, 2020
	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	$	333	$	—	$	—	$	26	$	359	$	505,938	$	506,297
Commercial other	486		—		—		1,303		1,789		198,342		200,131
Advances to mortgage brokers	—		—		—		—		—		50,258		50,258
Total commercial	819		—		—		1,329		2,148		754,538		756,686
Agricultural
Agricultural real estate	—		—		—		3,398		3,398		67,820		71,218
Agricultural other	1		—		—		387		388		28,855		29,243
Total agricultural	1		—		—		3,785		3,786		96,675		100,461
Residential real estate
Senior liens	3,203		145		—		199		3,547		269,425		272,972
Junior liens	25		—		—		—		25		3,791		3,816
Home equity lines of credit	8		—		—		—		8		30,747		30,755
Total residential real estate	3,236		145		—		199		3,580		303,963		307,543
Consumer
Secured	93		—		—		—		93		70,349		70,442
Unsecured	3		—		—		—		3		3,176		3,179
Total consumer	96		—		—		—		96		73,525		73,621
Total	$	4,152	$	145	$	—	$	5,313	$	9,610	$	1,228,701	$	1,238,311

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 impaired loans as of:


	June 30, 2021						December 31, 2020
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	2,556	$	2,556	$	533	$	2,048	$	2,290	$	79
Commercial other	3,126		3,126		8		107		107		5
Agricultural real estate	188		238		3		1,994		1,994		54
Agricultural other	—		—		—		1,355		1,355		2
Residential real estate senior liens	3,688		3,960		657		4,319		4,661		771
Total impaired loans with a valuation allowance	9,558		9,880		1,201		9,823		10,407		911
Impaired loans without a valuation allowance
Commercial real estate	6,004		6,320				3,006		3,080
Commercial other	318		318				4,660		4,660
Agricultural real estate	9,876		9,876				8,681		8,731
Agricultural other	4,779		4,779				1,766		1,766
Total impaired loans without a valuation allowance	20,977		21,293				18,113		18,237
Impaired loans
Commercial	12,004		12,320		541		9,821		10,137		84
Agricultural	14,843		14,893		3		13,796		13,846		56
Residential real estate	3,688		3,960		657		4,319		4,661		771
Total impaired loans	$	30,535	$	31,173	$	1,201	$	27,936	$	28,644	$	911

The following is a summary of impaired loans for the:



	Three Months Ended June 30
	2021				2020
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	2,681	$	35	$	1,085	$	21
Commercial other	1,563		36		460		—
Agricultural real estate	607		—		2,224		26
Agricultural other	—		—		1,355		20
Residential real estate senior liens	3,912		35		5,050		49
Total impaired loans with a valuation allowance	8,763		106		10,174		116
Impaired loans without a valuation allowance
Commercial real estate	6,406		93		4,046		60
Commercial other	2,503		10		2,826		32
Agricultural real estate	10,016		133		7,441		87
Agricultural other	4,529		55		2,406		56
Home equity lines of credit	—		—		101		(1)
Consumer secured	—		—		2		—
Total impaired loans without a valuation allowance	23,454		291		16,822		234
Impaired loans
Commercial	13,153		174		8,417		113
Agricultural	15,152		188		13,426		189
Residential real estate	3,912		35		5,151		48
Consumer	—		—		2		—
Total impaired loans	$	32,217	$	397	$	26,996	$	350


	Six Months Ended June 30
	2021				2020
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	2,553	$	63	$	951	$	46
Commercial other	808		36		460		6
Agricultural real estate	1,058		11		2,051		50
Agricultural other	339		—		1,355		42
Residential real estate senior liens	4,070		78		5,197		104
Total impaired loans with a valuation allowance	8,828		188		10,014		248
Impaired loans without a valuation allowance
Commercial real estate	5,656		194		4,304		119
Commercial other	3,589		50		2,608		47
Agricultural real estate	9,717		265		7,612		146
Agricultural other	3,776		116		2,821		63
Home equity lines of credit	—		—		94		5
Consumer secured	—		—		2		—
Total impaired loans without a valuation allowance	22,738		625		17,441		380
Impaired loans
Commercial	12,606		343		8,323		218
Agricultural	14,890		392		13,839		301
Residential real estate	4,070		78		5,291		109
Consumer	—		—		2		—
Total impaired loans	$	31,566	$	813	$	27,455	$	628

As a result of line of credit agreements with borrowers, we had committed to advance $208 and $98 in additional funds to be disbursed in connection with impaired loans as of June 30, 2021 and December 31, 2020, 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 debt.

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

•The borrower’s cash flow is insufficient to service all 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 TDRs granted for the:



	Three Months Ended June 30
	2021					2020
	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	$	109	$	109	—	$	—	$	—
Agricultural other	—	—		—		2	1,768		1,768
Total	2	$	109	$	109	2	$	1,768	$	1,768


	Six Months Ended June 30
	2021					2020
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	5	$	4,761	$	4,761	2	$	963	$	963
Agricultural other	6	3,712		3,712		4	2,361		2,361
Residential real estate	—	—		—		2	93		93
Total	11	$	8,473	$	8,473	8	$	3,417	$	3,417

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



	Three Months Ended June 30
	2021						2020
	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	$	109	—	$	—	—	$	—
Agricultural other	—	—		—	—		—	—		2	1,768
Total	—	$	—	2	$	109	—	$	—	2	$	1,768


	Six Months Ended June 30
	2021						2020
	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	1	$	3,189	4	$	1,572	1	$	919	1	$	44
Agricultural other	6	3,712		—	—		—	—		4	2,361
Residential real estate	—	—		—	—		—	—		2	93
Total	7	$	6,901	4	$	1,572	1	$	919	7	$	2,498

We did not restructure any loans by forgiving principal or accrued interest in the three and six-month periods ended June 30, 2021 or 2020.

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 six-month periods ended June 30, 2021 and 2020 which were modified within 12 months prior to the default date.

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


	June 30 2021		December 31 2020
TDRs	$	29,347	$	24,930

Measures we have taken to assist our customers in connection with the COVID-19 pandemic include loan programs that provide short-term payment relief. Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a period not to exceed 180 days. Bank regulators issued a statement on March 22, 2020, and a revised statement on April 7, 2020, which provided confirmation that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers with a current payment status are not categorized as TDRs. Pursuant to this guidance, borrowers granted a short-term loan modification meeting this criteria were not categorized as TDR as of June 30, 2021.