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Note 4 - Loans Receivable and Credit Disclosures

12 Months Ended

Dec. 31, 2021

Note 4. Loans Receivable and Credit Disclosures

The composition of loans receivable is as follows (in thousands):

	2021			2020

Real estate - construction	$	42,638		$	45,497
Real estate - 1 to 4 family residential		246,745			213,562
Real estate - commercial		515,367			496,357
Real estate - agricultural		153,457			151,992
Commercial ¹		75,482			122,535
Agricultural		111,881			102,586
Consumer and other		15,097			15,048
		1,160,667			1,147,577
Less:
Allowance for loan losses		(16,621	)		(17,215	)
Deferred loan fees and costs, net²		62			(857	)
Total loans receivable, net	$	1,144,108		$	1,129,505

¹ Commercial loan portfolio includes $6.0 million and $50.9 million of Paycheck Protection Program ("PPP") loans as of December 31, 2021 and 2020, respectively

²Deferred loan (fees) and costs, net includes $214 thousand and $864 thousand of fees, net of costs, related to the PPP loans as of December 31, 2021 and 2020, respectively

Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption, vacancy and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may prove to be inaccurate primarily due to unforeseen circumstances beyond the control of the borrower or lender. Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. The Company may require guarantees on these loans. The Company’s construction loans are secured primarily by properties located in its primary market area.

The Company originates 1-4 family real estate, consumer and other loans utilizing credit reports to supplement the underwriting process. The Company’s underwriting standards for 1-4 family loans are generally in accordance with FHLMC and FNMA manual underwriting guidelines. Properties securing 1-4 four-family real estate loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function and have been approved by the Board of Directors. The loan-to-value ratios normally do not exceed 90% without credit enhancements such as mortgage insurance. The Company will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1-4 family real estate loans, provided private mortgage insurance is obtained. The Company’s 1-4 family real estate loans are secured primarily by properties located in its primary market area. The underwriting standards for consumer and other loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis.

Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and, secondarily, as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan-to-value generally does not exceed 80% of the cost or value of the assets. Appraisals on properties securing these loans are generally performed by fee appraisers approved by the Board of Directors. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans based on collateral and risk rating criteria. The Company may require guarantees on these loans. The Company’s commercial and agricultural real estate loans are secured primarily by properties located in its primary market areas.

Commercial and agricultural operating loans are underwritten based on the Company’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable, and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans. Loan-to-value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans are generally guaranteed by the principal(s). The Company’s commercial and agricultural operating lending is primarily in its primary market area.

The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in response to the Coronavirus Disease 2019 (COVID-19) pandemic. Funding was extended into 2021. The PPP is administered by the Small Business Administration (SBA). PPP loans are forgivable by the SBA in qualifying circumstances and are 100 percent guaranteed by the SBA.

The Company maintains an internal audit department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the audit committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Summary changes in the allowance for loan losses for the years ended December 31, 2021 and 2020 are as follows (in thousands):

	2021			2020

Balance, beginning	$	17,215		$	12,619
Provision for loan losses		(757	)		5,681
Recoveries of loans charged-off		339			325
Loans charged-off		(176	)		(1,410	)
Balance, ending	$	16,621		$	17,215

Activity in the allowance for loan losses, on a disaggregated basis, for the years ended December 31, 2021 and 2020 is as follows (in thousands):

2021:				1-4 Family
	Construction			Residential			Commercial			Agricultural								Consumer
	Real Estate			Real Estate			Real Estate			Real Estate			Commercial			Agricultural		and Other			Total

Balance, beginning	$	725		$	2,581		$	8,930		$	1,595		$	1,453		$	1,696	$	235		$	17,215
Provision (credit) for loan losses		(50	)		(63	)		(528	)		(11	)		(175	)		92		(22	)		(757	)
Recoveries of loans charged-off		-			268			4			-			5			48		14			339
Loans charged-off		-			(34	)		-			-			(113	)		-		(29	)		(176	)
Balance, ending	$	675		$	2,752		$	8,406		$	1,584		$	1,170		$	1,836	$	198		$	16,621

2020:			1-4 Family
	Construction		Residential			Commercial			Agricultural								Consumer
	Real Estate		Real Estate			Real Estate			Real Estate		Commercial			Agricultural			and Other			Total

Balance, beginning	$	672	$	2,122		$	5,362		$	1,326	$	1,458		$	1,478		$	201		$	12,619
Provision (credit) for loan losses		52		471			3,986			269		609			266			28			5,681
Recoveries of loans charged-off		1		6			26			-		14			-			278			325
Loans charged-off		-		(18	)		(444	)		-		(628	)		(48	)		(272	)		(1,410	)
Balance, ending	$	725	$	2,581		$	8,930		$	1,595	$	1,453		$	1,696		$	235		$	17,215

Allowance for loan losses disaggregated based on the impairment analysis method as of December 31, 2021 and 2020 is as follows (in thousands):

2021:			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Ending balance: Individually evaluated for impairment	$	-	$	40	$	1,139	$	-	$	60	$	132	$	21	$	1,392
Ending balance: Collectively evaluated for impairment		675		2,712		7,267		1,584		1,110		1,704		177		15,229
Ending balance	$	675	$	2,752	$	8,406	$	1,584	$	1,170	$	1,836	$	198	$	16,621

2020:			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Ending balance: Individually evaluated for impairment	$	-	$	150	$	1,486	$	-	$	115	$	40	$	28	$	1,819
Ending balance: Collectively evaluated for impairment		725		2,431		7,444		1,595		1,338		1,656		207		15,396
Ending balance	$	725	$	2,581	$	8,930	$	1,595	$	1,453	$	1,696	$	235	$	17,215

Loans receivable disaggregated on the basis of the impairment analysis method as of December 31, 2021 and 2020 is as follows (in thousands):

2021:			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total

Ending balance: Individually evaluated for impairment	$	-	$	980	$	9,792	$	546	$	330	$	637	$	27	$	12,312
Ending balance: Collectively evaluated for impairment		42,638		245,765		505,575		152,911		75,152		111,244		15,070		1,148,355

Ending balance	$	42,638	$	246,745	$	515,367	$	153,457	$	75,482	$	111,881	$	15,097	$	1,160,667

2020:			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total

Ending balance: Individually evaluated for impairment	$	167	$	1,340	$	10,258	$	1,664	$	940	$	859	$	45	$	15,273
Ending balance: Collectively evaluated for impairment		45,330		212,222		486,099		150,328		121,595		101,727		15,003		1,132,304

Ending balance	$	45,497	$	213,562	$	496,357	$	151,992	$	122,535	$	102,586	$	15,048	$	1,147,577

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk ratings of construction, commercial and agricultural real estate loans and commercial and agricultural operating loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) non-performing loans and (v) the general economic conditions in our market areas.

The Company utilizes a risk rating matrix to assign risk ratings to each of its construction, commercial and agricultural loans. Loans are rated on a scale of 1 to 7. A description of the general characteristics of the 7 risk ratings is as follows:

Ratings 1, 2 and 3 - These ratings include loans of average to excellent credit quality borrowers. These borrowers generally have significant capital strength, moderate leverage and stable earnings and growth commensurate to their relative risk rating. These ratings are reviewed at least annually. These ratings also include performing loans less than $100,000.

Rating 4 - This rating includes loans on management’s “watch list” and is intended to be utilized for pass rated borrowers where credit quality has begun to show signs of financial weakness that now requires management’s heightened attention. This rating is reviewed at least quarterly.

Rating 5 - This rating is for “Special Mention” loans in accordance with regulatory guidelines. This rating is intended to be temporary and includes loans to borrowers whose credit quality has clearly deteriorated and are at risk of further decline unless active measures are taken to correct the situation. This rating is reviewed at least quarterly.

Rating 6 - This rating includes “Substandard” loans in accordance with regulatory guidelines, for which the accrual of interest has not been stopped. Under regulatory guideline definitions, a “Substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. This rating is reviewed at least quarterly.

Rating 7 - This rating includes “Substandard-Impaired” loans in accordance with regulatory guidelines, for which the accrual of interest has generally been stopped. This rating includes loans: (i) where interest is more than 90 days past due, (ii) not fully secured, (iii) where a specific valuation allowance may be necessary, or (iv) where the borrower is unable to make contractual principal and interest payments. This rating is reviewed at least quarterly.

The credit risk profile by internally assigned grade, on a disaggregated basis, at December 31, 2021 and 2020 is as follows (in thousands):

2021:	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	38,753	$	381,346	$	126,157	$	63,141	$	95,289	$	704,686
Watch		239		99,127		17,853		8,132		7,421		132,772
Special Mention		-		3,085		3,519		762		7,664		15,030
Substandard		3,646		22,017		5,382		3,117		870		35,032
Substandard-Impaired		-		9,792		546		330		637		11,305

Total	$	42,638	$	515,367	$	153,457	$	75,482	$	111,881	$	898,825

2020:	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	39,980	$	346,591	$	110,925	$	101,858	$	80,075	$	679,429
Watch		5,350		88,113		33,144		15,897		20,793		163,297
Special Mention		-		23,753		175		52		-		23,980
Substandard		-		27,642		6,084		3,788		859		38,373
Substandard-Impaired		167		10,258		1,664		940		859		13,888

Total	$	45,497	$	496,357	$	151,992	$	122,535	$	102,586	$	918,967

The credit risk profile based on payment activity, on a disaggregated basis, at December 31, 2021 and 2020 is as follows (in thousands):

2021:	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	245,598	$	15,067	$	260,665
Non-performing		1,147		30		1,177

Total	$	246,745	$	15,097	$	261,842

2020:	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	212,282	$	15,003	$	227,285
Non-performing		1,280		45		1,325

Total	$	213,562	$	15,048	$	228,610

Consumer and 1-4 family loans are considered non-performing when the loan is greater than 90 days past due or it is determined that the borrower is unable to make contractual principal and interest payments.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company will apply its normal loan review procedures to identify loans that should be evaluated for impairment.

The following is a recap of impaired loans, on a disaggregated basis, at December 31, 2021 and 2020 and the average recorded investment and interest income recognized on these loans for the years ended December 31, 2021 and 2020 (in thousands):

2021:			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	67	$	-
Real estate - 1 to 4 family residential		677		739		-		605		19
Real estate - commercial		124		142		-		154		297
Real estate - agricultural		546		1,001		-		901		25
Commercial		233		269		-		367		-
Agricultural		322		521		-		335		15
Consumer and other		6		8		-		6		-
Total loans with no specific reserve:		1,908		2,680		-		2,435		356

With an allowance recorded:
Real estate - construction		-		-		-		-		-
Real estate - 1 to 4 family residential		303		314		40		329		-
Real estate - commercial		9,668		10,001		1,139		9,909		-
Real estate - agricultural		-		-		-		-		-
Commercial		97		98		60		164		-
Agricultural		315		315		132		371		-
Consumer and other		21		23		21		32		-
Total loans with specific reserve:		10,404		10,751		1,392		10,805		-

Total
Real estate - construction		-		-		-		67		-
Real estate - 1 to 4 family residential		980		1,053		40		934		19
Real estate - commercial		9,792		10,143		1,139		10,063		297
Real estate - agricultural		546		1,001		-		901		25
Commercial		330		367		60		531		-
Agricultural		637		836		132		706		15
Consumer and other		27		31		21		38		-

Total	$	12,312	$	13,431	$	1,392	$	13,240	$	356

2020:			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With no specific reserve recorded:
Real estate - construction	$	167	$	167	$	-	$	66	$	-
Real estate - 1 to 4 family residential		416		475		-		318		-
Real estate - commercial		242		578		-		6,625		16
Real estate - agricultural		1,664		1,698		-		1,295		6
Commercial		274		318		-		524		23
Agricultural		377		542		-		1,592		344
Consumer and other		8		10		-		22		128
Total loans with no specific reserve:		3,148		3,788		-		10,442		517

With an allowance recorded:
Real estate - construction		-		-		-		-		-
Real estate - 1 to 4 family residential		924		1,278		150		935		66
Real estate - commercial		10,016		10,157		1,486		2,198		-
Real estate - agricultural		-		-		-		-		-
Commercial		666		1,247		115		418		-
Agricultural		482		484		40		400		-
Consumer and other		37		39		28		19		92
Total loans with specific reserve:		12,125		13,205		1,819		3,970		158

Total
Real estate - construction		167		167		-		66		-
Real estate - 1 to 4 family residential		1,340		1,753		150		1,253		66
Real estate - commercial		10,258		10,735		1,486		8,823		16
Real estate - agricultural		1,664		1,698		-		1,295		6
Commercial		940		1,565		115		942		23
Agricultural		859		1,026		40		1,992		344
Consumer and other		45		49		28		41		220

Total	$	15,273	$	16,993	$	1,819	$	14,412	$	675

The interest foregone on nonaccrual loans for the years ended December 31, 2021 and 2020 was approximately $650 thousand and $975 thousand, respectively.

Nonaccrual loans as of December 31, 2021 and 2020 were $12.3 million and $15.3 million, respectively.

Troubled Debt Restructurings. The restructuring of a loan is considered a TDR if both the borrower is experiencing financial difficulties and the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, extension of payments terms beyond the original maturity date, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

Certain troubled debt restructurings are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months and management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status. If the TDR loan has a below market interest rate at the time of restructuring, it will be considered impaired until fully collected.

For TDR loans that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all troubled debt restructurings for possible impairment and, as necessary, recognizes impairment through the allowance. The Company had $262 thousand of net recoveries and $31 thousand of net charge offs for the years ended December 31, 2021 and 2020, respectively.

The Company had loans meeting the definition of TDR of $11.3 million as of December 31, 2021 and 2020, all of which were included as impaired and nonaccrual loans.

The Company’s TDRs, on a disaggregated basis, occurring in the years ended December 31 is as follows (dollars in thousands):

	2021						2020
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment

Real estate - construction		-	$	-	$	-		-	$	-	$	-
Real estate - 1 to 4 family residential		3		578		578		-		-		-
Real estate - commercial		-		-		-		2		10,192		10,192
Real estate - agricultural		2		534		534		-		-		-
Commercial		2		64		64		-		-		-
Agricultural		2		294		294		3		54		54
Consumer and other		-		-		-		1		27		27

Total		9	$	1,470	$	1,470		6	$	10,273	$	10,273

During the year ended December 31, 2021, the Company granted concessions to five borrowers, with nine contracts, experiencing financial difficulties. The loans were restructured with lower interest rates or amortization periods longer than a typical loan.

During the year ended December 31, 2020, the Company granted concessions to four borrowers, with six contracts, experiencing financial difficulties. One loan was restructured with interest rates less than a market interest rate and the remaining loans were restructured with payment deferrals.

There were no TDR loans that were modified during the year ended December 31, 2021 and 2020 with a payment default. A TDR loan is considered to have payment default when it is past due 60 days or more.

There was no significant financial impact from specific reserves for the TDR loans.

Section 4013 of the CARES Act, “Temporary Relief From TDRs,” allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID-19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, extended to January 1, 2022 under the Coronavirus Response and Relief Supplemental Appropriations Act, or 60 days after the termination of the COVID-19 national emergency. In March 2020, federal banking regulators in consultation with the FASB issued interagency statements that include similar guidance on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.

As of December 31, 2020, the Company had 24 COVID-19 related loan modifications still in the modification period with a total outstanding principal balance of $45.9 million. As of December 31, 2021, substantially all of the COVID-19 related loan modifications have returned to normal payment status.

An aging analysis of the recorded investment in loans, on a disaggregated basis, as of December 31, 2021 and 2020, are as follows (in thousands):

2021:	30-89		90 Days								90 Days
	Days		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	-	$	-	$	-	$	42,638	$	42,638	$	-
Real estate - 1 to 4 family residential		1,198		482		1,680		245,065		246,745		169
Real estate - commercial		24		-		24		515,343		515,367		-
Real estate - agricultural		30		-		30		153,427		153,457		-
Commercial		251		15		266		75,216		75,482		-
Agricultural		172		-		172		111,709		111,881		-
Consumer and other		49		-		49		15,048		15,097		-

Total	$	1,724	$	497	$	2,221	$	1,158,446	$	1,160,667	$	169

2020:	30-89		90 Days								90 Days
	Days		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	169	$	167	$	336	$	45,161	$	45,497	$	-
Real estate - 1 to 4 family residential		1,523		176		1,699		211,863		213,562		6
Real estate - commercial		152		56		208		496,149		496,357		-
Real estate - agricultural		574		1,618		2,192		149,800		151,992		-
Commercial		283		3		286		122,249		122,535		3
Agricultural		79		458		537		102,049		102,586		30
Consumer and other		18		16		34		15,014		15,048		-

Total	$	2,798	$	2,494	$	5,292	$	1,142,285	$	1,147,577	$	39

There are no other known problem loans that cause management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.

As of December 31, 2021, there were no material commitments to lend additional funds to customers whose loans were classified as impaired.

Loans are made in the normal course of business to certain directors and executive officers of the Company and to their affiliates. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with others and do not involve more than a normal risk of collectability. Loan transactions with related parties as of December 31, 2021 and 2020 were as follows (in thousands):

	2021			2020

Balance, beginning of year	$	13,017		$	10,235
New loans		17,682			15,750
Repayments		(14,932	)		(13,407	)
Change in status		1,502			439
Balance, end of year	$	17,269		$	13,017