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Loans and ACL
 9 Months Ended
Sep. 30, 2023
Receivables [Abstract]  
Loans and ACL Loans and ACL
Loan Composition
The following table provides a detailed listing of our loan portfolio at:
September 30
2023		Percent of TotalDecember 31
2022		Percent of Total
Commercial and industrial
Secured$176,887 13.24 %$161,895 12.80 %
Unsecured18,927 1.42 %16,533 1.31 %
Total commercial and industrial195,814 14.66 %178,428 14.11 %
Commercial real estate
Commercial mortgage owner occupied183,497 13.75 %192,117 15.20 %
Commercial mortgage non-owner occupied216,675 16.23 %204,091 16.14 %
Commercial mortgage 1-4 family investor88,150 6.60 %85,278 6.75 %
Commercial mortgage multifamily78,317 5.87 %84,526 6.69 %
Total commercial real estate566,639 42.45 %566,012 44.78 %
Advances to mortgage brokers24,807 1.86 %— — %
Agricultural
Agricultural mortgage69,930 5.24 %73,002 5.77 %
Agricultural29,303 2.20 %31,983 2.53 %
Total agricultural99,233 7.44 %104,985 8.30 %
Residential real estate
Senior lien306,054 22.93 %300,225 23.75 %
Junior lien5,501 0.41 %3,282 0.26 %
Home equity lines of credit36,641 2.75 %33,187 2.63 %
Total residential real estate348,196 26.09 %336,694 26.64 %
Consumer
Secured - direct38,029 2.85 %37,127 2.94 %
Secured - indirect58,660 4.40 %37,814 2.98 %
Unsecured3,296 0.25 %3,113 0.25 %
Total consumer99,985 7.50 %78,054 6.17 %
Total$1,334,674 100.00 %$1,264,173 100.00 %
For a summary of the accounting policies related to loans, interest recognition, and the ACL for loans, including updates to such policies, refer to “Note 1 – Significant Accounting Policies” and our Annual Report on Form 10-K for the year ended December 31, 2022.
We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Bay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in mid-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 ACL, 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.
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 $18,000. Borrowers with direct credit needs of more than $18,000 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 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 generally 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 one or more of the following committees: Internal Loan Committee, the Executive 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.
Nonaccrual and Past Due Loans
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 ACL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.
The following table summarizes nonaccrual loan data by class of loans as of:
 September 30, 2023December 31, 2022
 Total Nonaccrual LoansNonaccrual Loans with No ACLTotal Nonaccrual LoansNonaccrual Loans with No ACL
Commercial and industrial:
Secured$17 $17 $22 $22 
Commercial real estate:
Commercial mortgage 1-4 family investor— — 7474 
Agricultural:
Agricultural mortgage41 41 67 67 
Agricultural other167 167 167 167 
Residential real estate:
Senior lien295 295 127 107 
Total$520 $520 $457 $437 
The following tables summarize the past due and current loans for the entire loan portfolio as of:
 September 30, 2023
 Past Due:  Accruing Loans 90 or More Days Past Due
30-59
Days		60-89
Days		90 Days
or More		CurrentTotal
Commercial and industrial
Secured$180 $— $17 $176,690 $176,887 $— 
Unsecured10 — — 18,917 18,927 — 
Total commercial and industrial190 — 17 195,607 195,814 — 
Commercial real estate
Commercial mortgage owner occupied— — — 183,497 183,497 — 
Commercial mortgage non-owner occupied— — — 216,675 216,675 — 
Commercial mortgage 1-4 family investor— — — 88,150 88,150 — 
Commercial mortgage multifamily— — — 78,317 78,317 — 
Total commercial real estate— — — 566,639 566,639 — 
Advances to mortgage brokers— — — 24,807 24,807 — 
Agricultural
Agricultural mortgage— — — 69,930 69,930 — 
Agricultural10 — — 29,293 29,303 — 
Total agricultural10 — — 99,223 99,233 — 
Residential real estate
Senior lien185 405 131 305,333 306,054 — 
Junior lien— — — 5,501 5,501 — 
Home equity lines of credit— — — 36,641 36,641 — 
Total residential real estate185 405 131 347,475 348,196 — 
Consumer
Secured - direct7 12 — 38,010 38,029 — 
Secured - indirect17 8 — 58,635 58,660 — 
Unsecured9 — — 3,287 3,296 — 
Total consumer33 20 — 99,932 99,985 — 
Total$418 $425 $148 $1,333,683 $1,334,674 $— 
 December 31, 2022
 Past Due:  Accruing Loans 90 or More Days Past Due
30-59
Days		60-89
Days		90 Days
or More		CurrentTotal
Commercial and industrial
Secured$536 $— $— $161,359 $161,895 $— 
Unsecured— — — 16,533 16,533 — 
Total commercial and industrial536 — — 177,892 178,428 — 
Commercial real estate
Commercial mortgage owner occupied94 — — 192,023 192,117 — 
Commercial mortgage non-owner occupied4,208 2,570 — 197,313 204,091 — 
Commercial mortgage 1-4 family investor— — 14 85,264 85,278 — 
Commercial mortgage multifamily— — — 84,526 84,526 — 
Total commercial real estate4,302 2,570 14 559,126 566,012 — 
Advances to mortgage brokers— — — — — — 
Agricultural
Agricultural mortgage— — — 73,002 73,002 — 
Agricultural— — — 31,983 31,983 — 
Total agricultural— — — 104,985 104,985 — 
Residential real estate
Senior lien3,025 225 — 296,975 300,225 — 
Junior lien— — — 3,282 3,282 — 
Home equity lines of credit38 — — 33,149 33,187 — 
Total residential real estate3,063 225 — 333,406 336,694 — 
Consumer
Secured - direct1 — — 37,126 37,127 — 
Secured - indirect45 8 — 37,761 37,814 — 
Unsecured4 — — 3,109 3,113 — 
Total consumer50 8 — 77,996 78,054 — 
Total$7,951 $2,803 $14 $1,253,405 $1,264,173 $— 
Credit Quality Indicators
The following table displays commercial and agricultural loans by credit risk ratings and year of origination as of:
 September 30, 2023
20232022202120202019PriorRevolving
Loans		Revolving Loans Converted to TermTotal
Commercial and industrial: Secured
Risk ratings 1-3$5,410 $4,336 $5,991 $7,221 $533 $972 $13,179 $— $37,642 
Risk rating 426,976 37,506 23,971 5,991 2,831 1,788 30,522 — 129,585 
Risk rating 5411 2,849 252 338 141 114 1,965 — 6,070 
Risk rating 6665 — 8 233 13 150 2,504 — 3,573 
Risk rating 7— — — 17 — — — — 17 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$33,462 $44,691 $30,222 $13,800 $3,518 $3,024 $48,170 $— $176,887 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial and industrial: Unsecured
Risk ratings 1-3$538 $259 $144 $71 $107 $910 $4,435 $— $6,464 
Risk rating 4955 3,200 636 596 — — 7,012 — 12,399 
Risk rating 5— 33 — — — — 31 — 64 
Risk rating 6— — — — — — — — — 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$1,493 $3,492 $780 $667 $107 $910 $11,478 $— $18,927 
Current year-to-date gross charge-offs$8 $— $— $— $— $— $21 $— $29 
Commercial real estate: Owner occupied
Risk ratings 1-3$3,403 $1,746 $12,878 $14,429 $926 $3,376 $73 $— $36,831 
Risk rating 410,764 34,268 39,950 14,627 13,741 20,944 1,806 — 136,100 
Risk rating 51,489 736 197 225 3,881 1,975 397 — 8,900 
Risk rating 6— — 882 236 — 548 — — 1,666 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$15,656 $36,750 $53,907 $29,517 $18,548 $26,843 $2,276 $— $183,497 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial real estate: Non-owner occupied
Risk ratings 1-3$71 $4,425 $6,554 $877 $178 $1,797 $— $— $13,902 
Risk rating 427,875 62,364 37,957 12,309 7,706 43,478 567 — 192,256 
Risk rating 5— — 5,897 — — 3,530 — — 9,427 
Risk rating 61,034 — — 56 — — — — 1,090 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$28,980 $66,789 $50,408 $13,242 $7,884 $48,805 $567 $— $216,675 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
September 30, 2023
20232022202120202019PriorRevolving
Loans		Revolving Loans Converted to TermTotal
Commercial real estate: 1-4 family investor
Risk ratings 1-3$139 $1,558 $881 $916 $675 $1,020 $1,205 $— $6,394 
Risk rating 48,844 12,417 31,029 15,404 3,157 4,215 5,413 — 80,479 
Risk rating 5154 358 77 — 56 — — — 645 
Risk rating 6559 — — — 61 12 — — 632 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$9,696 $14,333 $31,987 $16,320 $3,949 $5,247 $6,618 $— $88,150 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial real estate: Multifamily
Risk ratings 1-3$4,775 $4,774 $2,088 $573 $— $1,853 $— $— $14,063 
Risk rating 41,375 19,448 16,146 824 555 21,994 526 — 60,868 
Risk rating 5— — — 16 — — — — 16 
Risk rating 6— — 35 — — 3,335 — — 3,370 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$6,150 $24,222 $18,269 $1,413 $555 $27,182 $526 $— $78,317 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Advances to mortgage brokers
Risk ratings 1-3$24,807 $— $— $— $— $— $— $— $24,807 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Agricultural mortgage
Risk ratings 1-3$292 $2,859 $1,171 $2,816 $611 $1,250 $85 $— $9,084 
Risk rating 45,391 13,054 9,236 6,038 3,995 8,042 833 — 46,589 
Risk rating 5126 4,377 5,903 702 185 60 236 — 11,589 
Risk rating 6851 — — — — 1,776 — — 2,627 
Risk rating 7— — — — — 41 — — 41 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$6,660 $20,290 $16,310 $9,556 $4,791 $11,169 $1,154 $— $69,930 
Current year-to-date gross charge-offs$— $— $— $— $— $4 $— $— $4 
Agricultural other
Risk ratings 1-3$617 $81 $121 $40 $268 $151 $739 $— $2,017 
Risk rating 41,380 2,711 2,415 684 158 77 14,958 — 22,383 
Risk rating 5724 9 168 507 — 623 2,422 — 4,453 
Risk rating 6— — 34 — — — 249 — 283 
Risk rating 7— — — — — — 167 — 167 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$2,721 $2,801 $2,738 $1,231 $426 $851 $18,535 $— $29,303 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of:
 December 31, 2022
 CommercialAgricultural
Real EstateOtherTotalReal EstateOtherTotalTotal
Rating
1 - Excellent$— $— $— $— $— $— $— 
2 - High quality9,045 4,533 13,578 342 100 442 14,020 
3 - High satisfactory68,133 36,608 104,741 9,757 4,608 14,365 119,106 
4 - Low satisfactory462,361 126,733 589,094 44,258 21,214 65,472 654,566 
5 - Special mention20,770 7,447 28,217 12,262 4,634 16,896 45,113 
6 - Substandard5,629 3,085 8,714 6,316 1,260 7,576 16,290 
7 - Vulnerable74 22 96 67 167 234 330 
8 - Doubtful— — — — — — — 
9 - Loss— — — — — — — 
Total$566,012 $178,428 $744,440 $73,002 $31,983 $104,985 $849,425 
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 status. The following table displays residential real estate and consumer loans by payment status and year of origination as of:
September 30, 2023
 20232022202120202019PriorRevolving
Loans		Revolving Loans Converted to TermTotal
Residential real estate: Senior lien
Current$32,147 $54,084 $82,460 $53,888 $24,279 $58,440 $— $— $305,298 
Past due 30-89 days— — — — 189 272 — — 461 
Past due 90 or more days— — — — — — — — — 
Nonaccrual51 — — 31 — 213 — — 295 
Total$32,198 $54,084 $82,460 $53,919 $24,468 $58,925 $— $— $306,054 
Current year-to-date gross charge-offs$— $— $— $— $— $2 $— $— $2 
Residential real estate: Junior lien
Current$3,097 $1,406 $190 $141 $176 $491 $— $— $5,501 
Past due 30-89 days— — — — — — — — — 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$3,097 $1,406 $190 $141 $176 $491 $— $— $5,501 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential real estate: Home equity lines of credit
Current$— $— $— $— $— $— $36,641 $— $36,641 
Past due 30-89 days— — — — — — — — — 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$— $— $— $— $— $— $36,641 $— $36,641 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Consumer : Secured - direct
Current$12,632 $10,739 $7,116 $3,926 $1,966 $1,631 $— $— $38,010 
Past due 30-89 days12 — 7 — — — — — 19 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$12,644 $10,739 $7,123 $3,926 $1,966 $1,631 $— $— $38,029 
Current year-to-date gross charge-offs$31 $12 $5 $— $— $— $— $— $48 
Consumer : Secured - indirect
Current$27,842 $12,031 $7,457 $5,692 $2,210 $3,403 $— $— $58,635 
Past due 30-89 days— — 1 12 7 5 — — 25 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$27,842 $12,031 $7,458 $5,704 $2,217 $3,408 $— $— $58,660 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
September 30, 2023
20232022202120202019PriorRevolving
Loans		Revolving Loans Converted to TermTotal
Consumer: Unsecured
Current$1,385 $906 $190 $116 $12 $1 $677 $— $3,287 
Past due 30-89 days— 3 6 — — — — — 9 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$1,385 $909 $196 $116 $12 $1 $677 $— $3,296 
Current year-to-date gross charge-offs$256 $18 $11 $2 $— $1 $1 $— $289 
Loan Modifications
A loan modification includes terms outside of normal lending practices to a borrower experiencing financial difficulty.
Typical modifications granted include, but are not limited to:
•Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
•Extending the maturity date or amortization period beyond typical lending guidelines for loans with similar risk characteristics.
•Agreeing to an interest-only payment structure, delaying principal payments, or delaying payments.
•Forgiving principal.
To determine if a borrower is experiencing financial difficulty, 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 the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the nine-month period ended September 30, 2023. There were no loan modifications granted to borrowers experiencing financial difficulty for the three-month period ended September 30, 2023.
Term ExtensionInterest Rate Reduction
and Term Extension
 Amortized Cost Basis% of Total Class of Financial ReceivableAmortized Cost Basis% of Total Class of Financial Receivable
Commercial real estate
Commercial mortgage non-owner occupied$1,034 0.48 %$— — %
Agricultural
Agricultural mortgage232 0.33 %28 0.04 %
Agricultural34 0.12 %— — %
Residential real estate
Senior lien5 — %— — %
Total$1,305 $28 
We do not modify any loans by forgiving principal or accrued interest. We had committed to advance $0 in additional funds to be disbursed in connection with modified loans at September 30, 2023, as displayed in the table above, at September 30, 2023.
The following table summarizes the financial effect of the modifications granted to borrowers experiencing financial difficulty for the nine-month period ended September 30, 2023:
Weighted-Average Interest Rate ReductionWeighted-Average Term Extension (Years)
Commercial real estate
Commercial mortgage non-owner occupiedN/A3.00
Agricultural
Agricultural mortgage4.50%1.08
AgriculturalN/A1.00
Residential real estate
Senior lienN/A2.60
During the three-month period ended September 30, 2022, there was one loan restructured with a below market interest rate in the amount of $55. During the nine months ended September 30, 2022, there were two loans restructured, one with a below market interest rate of $55, and one with both a below market interest rate and extension of amortization period in the amount of $98. Total restructured loans at September 30, 2022 was $153.
We closely monitor the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts. Loans modified during the nine-month period ended September 30, 2023 were all current at September 30, 2023, with no loans in past due status.
We had no loans that defaulted in the three and nine-month periods ended September 30, 2023 and 2022 which were modified within 12 months prior to the default date.
ACL - Loans
The credit quality of our loan portfolio is continuously monitored and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within our loan portfolio. The ACL is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.
The ACL 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 ACL are specific allocations for loans individually evaluated, historical loss percentages, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.
The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a component of individual loans that do not share risk characteristics with other loans; and a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.
For a loan that does not share risk characteristics with other loans, an individual analysis is performed to measure an allowance. Loans in nonaccrual status are individually evaluated for specific allocation of the allowance using the fair value of collateral, less costs to sell if foreclosure is probable, or the discounted cash flow method. We do not recognize interest income on loans in nonaccrual status. For 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.
In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and credit risk ratings or delinquency bucket. This model calculates an expected loss percentage for each loan class by considering the probability of default, based on the migration of loans from performing to loss by credit risk ratings or delinquency buckets using life-of-loan analysis, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class.
The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio. These qualitative factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management's expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the model reverts back to the historical rates of default and severity of loss. Qualitative factors include:
•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, recovery practices not considered elsewhere in estimating credit losses;
•Changes in the experience, ability, and depth of lending management and other relevant staff;
•Changes in interest rates;
•Changes in international, national, regional, and local economic factors (international, national, regional, and local);
•Changes in the nature and volume of the portfolio and in the terms of loans;
•Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;
•Lack of current financial information;
•Competition, Legal, and Regulatory; and
•Changes in the value of underlying collateral.
Upon the adoption of ASC 326, the estimated ACL using the CECL methodology increased $2,744 compared to the ACL as of December 31, 2022 using the prior incurred loss model. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio.
A summary of activity in the ACL by portfolio segment and the recorded investment in loans by segments follows:
 Allowance for Credit Losses
Three Months Ended September 30, 2023
Commercial and IndustrialCommercial Real EstateAgriculturalResidential Real EstateConsumerUnallocatedTotal
July 1, 2023$822 $5,968 $264 $4,173 $1,606 $— $12,833 
Charge-offs(29)— — — (150)— (179)
Recoveries70 3 — 266 94 — 433 
Credit loss expense(34)(101)5 (281)91 — (320)
September 30, 2023$829 $5,870 $269 $4,158 $1,641 $— $12,767 
 Allowance for Credit Losses
Nine Months Ended September 30, 2023
Commercial and IndustrialCommercial Real EstateAgriculturalResidential Real EstateConsumerUnallocatedTotal
January 1, 2023$860 $461 $577 $617 $961 $6,374 $9,850 
Impact of the adoption of ASC 326(58)5,532 (247)3,535 356 (6,374)2,744 
Charge-offs(29)— (4)(2)(337)— (372)
Recoveries74 23 6 315 220 — 638 
Credit loss expense(18)(146)(63)(307)441 — (93)
September 30, 2023$829 $5,870 $269 $4,158 $1,641 $— $12,767 
 Allowance for Loan Losses
Three Months Ended September 30, 2022
CommercialAgriculturalResidential Real EstateConsumerUnallocatedTotal
July 1, 2022$1,758 $451 $639 $1,323 $5,529 $9,700 
Charge-offs— — — (173)— (173)
Recoveries14 1 53 64 — 132 
Credit loss expense(436)35 (70)(168)657 18 
September 30, 2022$1,336 $487 $622 $1,046 $6,186 $9,677 
 Allowance for Loan Losses
Nine Months Ended September 30, 2022
CommercialAgriculturalResidential Real EstateConsumerUnallocatedTotal
January 1, 2022$1,740 $289 $747 $908 $5,419 $9,103 
Charge-offs(3)— — (367)— (370)
Recoveries54 4 123 223 — 404 
Credit loss expense(455)194 (248)282 767 540 
September 30, 2022$1,336 $487 $622 $1,046 $6,186 $9,677 
Allowance for Loan Losses and Recorded Investment in Loans
As of December 31, 2022
CommercialAgriculturalResidential Real EstateConsumerUnallocatedTotal
Allowance
Individually evaluated for impairment$12 $— $439 $— $— $451 
Collectively evaluated for impairment1,309 577 178 961 6,374 9,399 
Total$1,321 $577 $617 $961 $6,374 $9,850 
Loans
Individually evaluated for impairment$8,342 $10,935 $2,741 $— $22,018 
Collectively evaluated for impairment736,098 94,050 333,953 78,054 1,242,155 
Total$744,440 $104,985 $336,694 $78,054 $1,264,173 
The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan segment as of:
 September 30, 2023December 31, 2022
Loan BalanceSpecific AllocationLoan BalanceSpecific Allocation
Commercial and industrial$— $— $— $— 
Commercial real estate— — 8,342 12 
Agricultural182 — 10,935 — 
Residential real estate209 — 2,741 439 
Consumer— — — — 
Total$391 $— $22,018 $451 
We have designated loans classified as collateral dependent for which we apply the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date.
Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower. Loans evaluated for expected credit losses on an individual basis with no allowance include $391 in collateral dependent loans.