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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2021

Note 5: Loans and Allowance for Loan Losses

The following tables present the categories of loans at December 31, 2021 and 2020:

	Total Loans						Nonaccrual Loans
($ in thousands)	December 2021			December 2020			December 2021		December 2020
Commercial & industrial	$	122,250		$	204,767		$	143	$	902
Commercial real estate - owner occupied		118,891			113,169			88		1,450
Commercial real estate - nonowner occupied		262,277			257,651			466		962
Agricultural		57,403			55,235			-		-
Residential real estate		206,424			182,165			2,484		2,704
Home equity line of credit (HELOC)		41,682			46,310			464		390
Consumer		13,474			14,847			7		18
Total loans	$	822,401		$	874,144		$	3,652	$	6,426

Net deferred costs (fees)	$	313		$	(1,421	)
Total loans, net deferred costs (fees)	$	822,714		$	872,723
Allowance for loan losses	$	(13,805	)	$	(12,574	)

The Company makes commercial, agri-business, consumer and residential loans to customers throughout its defined market area. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

Forward sale commitments are commitments to sell groups of residential mortgage loans that the Company originates or purchases as part of its mortgage banking activities. The Company commits to sell the loans at specified prices in a future period, typically within forty-five days. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held-for-sales since the Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market.

Listed below is a summary of loan commitments, unused lines of credit and standby letters of credit as of December 31, 2021 and 2020.

($ in thousands)	2021		2020
Loan commitments and unused lines of credit	$	219,618	$	215,616
Standby letters of credit		2,060		3,161
Totals	$	221,678	$	218,777

There are various contingent liabilities that are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Company’s consolidated financial condition or results of operations.

The risk characteristics of each loan portfolio segment are as follows:

Commercial & Industrial and Agricultural

Commercial & industrial and agricultural loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate (Owner and Nonowner Occupied)

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial 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. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. 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, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential Real Estate, Home Equity Line of Credit (“HELOC”) and Consumer

Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. HELOCs are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers.

The following tables present the balance of the allowance for loan and lease losses (“ALLL”) and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2021 and 2020:

($ in thousands) For the Twelve Months Ended December 31, 2021	Commercial & industrial			Commercial real estate		Agricultural		Residential real estate			Consumer			Total
Beginning balance	$	3,074		$	5,451	$	496	$	2,534		$	1,019		$	12,574
Charge offs		-			-		-		(43	)		(93	)		(136	)
Recoveries		227			-		-		49			41			317
Provision		(1,411	)		1,330		103		975			53			1,050
Ending balance	$	1,890		$	6,781	$	599	$	3,515		$	1,020		$	13,805

December 31, 2021	Commercial & industrial		Commercial real estate		Agricultural		Residential real estate		Consumer		Total
Allowance:
Ending balance: individually evaluated for impairment	$	-	$	10	$	-	$	120	$	3	$	133
Ending balance: collectively evaluated for impairment	$	1,890	$	6,771	$	599	$	3,395	$	1,017	$	13,672
Totals	$	1,890	$	6,781	$	599	$	3,515	$	1,020	$	13,805

Loans:
Ending balance: individually evaluated for impairment	$	118	$	354	$	-	$	2,307	$	135	$	2,914
Ending balance: collectively evaluated for impairment	$	122,132	$	380,814	$	57,403	$	204,117	$	55,021	$	819,487
Totals	$	122,250	$	381,168	$	57,403	$	206,424	$	55,156	$	822,401

($ in thousands) For the Twelve Months Ended December 31, 2020	Commercial & industrial			Commercial real estate		Agricultural		Residential real estate			Consumer			Total
Beginning balance	$	1,883		$	3,602	$	434	$	2,203		$	633		$	8,755
Charge offs		(582	)		-		-		(82	)		(79	)		(743	)
Recoveries		16			-		-		40			6			62
Provision (credit)		1,757			1,849		62		373			459			4,500
Ending balance	$	3,074		$	5,451	$	496	$	2,534		$	1,019		$	12,574

December 31, 2020	Commercial & industrial		Commercial real estate		Agricultural		Residential real estate		Consumer		Total
Allowance:
Ending balance: individually evaluated for impairment	$	-	$	174	$	-	$	160	$	3	$	337
Ending balance: collectively evaluated for impairment	$	3,074	$	5,277	$	496	$	2,374	$	1,016	$	12,237

Totals	$	3,074	$	5,451	$	496	$	2,534	$	1,019	$	12,574

Loans:
Ending balance: individually evaluated for impairment	$	849	$	2,202	$	-	$	2,746	$	162	$	5,959
Ending balance: collectively evaluated for impairment	$	203,918	$	368,618	$	55,235	$	179,419	$	60,995	$	868,185

Totals	$	204,767	$	370,820	$	55,235	$	182,165	$	61,157	$	874,144

Credit Risk Profile

The Company categorizes loans into risk categories (loan grades) based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination.

Special Mention (grade 5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.

Substandard (grade 6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardized the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful (grade 7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.

Loss (grade 8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not feasible. Loans will be classified as loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of December 31, 2021 and 2020:

($ in thousands) December 31, 2021	Commercial & industrial		Commercial real estate - owner occupied		Commercial real estate - nonowner occupied		Agricultural		Residential real estate		HELOC		Consumer		Total
Pass (1 - 4)	$	121,285	$	111,232	$	253,269	$	57,403	$	203,295	$	41,218	$	13,467	$	801,169
Special Mention (5)		659		7,571		5,694		-		-		-		-		13,924
Substandard (6)		188		-		2,848		-		3,102		464		7		6,609
Doubtful (7)		118		88		466		-		27		-		-		699
Loss (8)		-		-		-		-		-		-		-		-
Total Loans	$	122,250	$	118,891	$	262,277	$	57,403	$	206,424	$	41,682	$	13,474	$	822,401

December 31, 2020	Commercial & industrial		Commercial real estate - owner occupied		Commercial real estate - nonowner occupied		Agricultural		Residential real estate		HELOC		Consumer		Total
Pass (1 - 4)	$	202,543	$	108,726	$	250,405	$	55,227	$	178,575	$	45,866	$	14,807	$	856,149
Special Mention (5)		1,485		2,993		3,338		-		-		-		14		7,830
Substandard (6)		151		-		3,026		8		3,560		444		26		7,215
Doubtful (7)		588		1,450		882		-		30		-		-		2,950
Loss (8)		-		-		-		-		-		-		-		-
Total Loans	$	204,767	$	113,169	$	257,651	$	55,235	$	182,165	$	46,310	$	14,847	$	874,144

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. The Company uses a five-year average of historical losses for the general component of the allowance for loan loss calculation. No significant changes were made to the loan risk grading system definitions and allowance for loan loss methodology during the periods presented.

The following tables present the Company’s loan portfolio aging analysis as of December 31, 2021 and 2020:

($ in thousands) December 31, 2021	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans Receivable
Commercial & industrial	$	166	$	25	$	118	$	309	$	121,941	$	122,250
Commercial real estate - owner occupied		-		-		88		88		118,803		118,891
Commercial real estate - nonowner occupied		221		233		246		700		261,577		262,277
Agricultural		-		-		-		-		57,403		57,403
Residential real estate		265		716		1,344		2,325		204,099		206,424
HELOC		53		80		248		381		41,301		41,682
Consumer		20		14		7		41		13,433		13,474
Total Loans	$	725	$	1,068	$	2,051	$	3,844	$	818,557	$	822,401

December 31, 2020	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans Receivable
Commercial & industrial	$	380	$	-	$	618	$	998	$	203,769	$	204,767
Commercial real estate - owner occupied		-		-		1,450		1,450		111,719		113,169
Commercial real estate - nonowner occupied		-		141		699		840		256,811		257,651
Agricultural		8		-		-		8		55,227		55,235
Residential real estate		12		1,393		1,212		2,617		179,548		182,165
HELOC		190		74		198		462		45,848		46,310
Consumer		123		42		20		185		14,662		14,847
Total Loans	$	713	$	1,650	$	4,197	$	6,560	$	867,584	$	874,144

All loans past due 90 days are systematically placed on nonaccrual status.

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in a Troubled Debt Restructure (“TDR”) where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following tables present impaired loan activity for the twelve months ended December 31, 2021 and 2020:

($ in thousands)	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
Twelve Months Ended December 31, 2021	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	118	$	204	$	-	$	217	$	2
Commercial real estate - owner occupied		88		88		-		88		-
Commercial real estate - nonowner occupied		223		223		-		357		28
Agricultural		-		-		-		-		-
Residential real estate		1,391		1,458		-		1,663		60
HELOC		33		33				41		2
Consumer		-		-		-		-		-
With a specific allowance recorded:
Commercial & industrial		-		-		-		-		-
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		43		173		10		173		-
Agricultural		-		-		-		-		-
Residential real estate		916		916		120		933		20
HELOC		102		102		3		124		5
Consumer		-		-		-		-		-
Totals:
Commercial & industrial	$	118	$	204	$	-	$	217	$	2
Commercial real estate - owner occupied	$	88	$	88	$	-	$	88	$	-
Commercial real estate - nonowner occupied	$	266	$	396	$	10	$	530	$	28
Agricultural	$	-	$	-	$	-	$	-	$	-
Residential real estate	$	2,307	$	2,374	$	120	$	2,596	$	80
HELOC	$	135	$	135	$	3	$	165	$	7
Consumer	$	-	$	-	$	-	$	-	$	-

($ in thousands)	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
Twelve Months Ended December 31, 2020	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	849	$	1,645	$	-	$	1,878	$	50
Commercial real estate - owner occupied		1,441		1,441		-		1,573		11
Commercial real estate - nonowner occupied		182		182		-		258		14
Agricultural		-		-		-		-		-
Residential real estate		1,017		1,084		-		1,243		64
HELOC		89		89				98		4
Consumer		7		7		-		12		1
With a specific allowance recorded:
Commercial & industrial		-		-		-		-		-
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		579		579		174		579		3
Agricultural		-		-		-		-		-
Residential real estate		1,729		1,774		160		1,785		14
HELOC		66		66		3		83		6
Consumer		-		-		-		-		-
Totals:
Commercial & industrial	$	849	$	1,645	$	-	$	1,878	$	50
Commercial real estate - owner occupied	$	1,441	$	1,441	$	-	$	1,573	$	11
Commercial real estate - nonowner occupied	$	761	$	761	$	174	$	837	$	17
Agricultural	$	-	$	-	$	-	$	-	$	-
Residential real estate	$	2,746	$	2,858	$	160	$	3,028	$	78
HELOC	$	155	$	155	$	3	$	181	$	10
Consumer	$	7	$	7	$	-	$	12	$	1

Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status.

Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.

Troubled Debt Restructured Loans

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

TDR Concession Types

The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved. The types of concessions provided to borrowers include:

●

Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis.

●

Amortization or maturity date change beyond what the collateral supports, including a change that does any of the following:

(1)

Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

(2)

Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

(3)

Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs.

●

Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type.

The following table represents new TDR activity for the twelve months ended December 31, 2021:

($ in thousands)	Number of Loans	Pre- Modification Recorded Balance		Post Modification Recorded Balance
HELOC	2	$	42	$	42
Total modifications	2	$	42	$	42

	Interest Only		Term		Combination		Total Modification
HELOC	$	-	$	-	$	42	$	42
Total modifications	$	-	$	-	$	42	$	42

There were no new TDRs during the period ended December 31, 2020.

There were no TDRs modified during the past twelve months that have subsequently defaulted.

On March 22, 2020, a statement was issued by the Company’s bank regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encouraged financial institutions to work prudently with borrowers unable to meet the contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provided that a qualified loan modification is exempt by law from classification as a troubled debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2021 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. As of December 31, 2021, all loans previously modified under Section 4013 of the CARES Act had returned to normal payment terms.

The Company was an active participant in the PPP initiative as detailed in the discussion of financial results for 2021 and 2020. The Company originated approximately 1,100 loans with a total balance of $111.4 million. As of December 31, 2021, $2.0 million in balances remained outstanding. Fees for the originations totaled $4.9 million of which $3.4 million and $1.4 million were taken into income during 2021 and 2020, respectively.