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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2022

Note 4: Loans and Allowance for Loan Losses

The following tables present the categories of loans at December 31, 2022 and 2021:

	Total Loans						Nonaccrual Loans
($ in thousands)	December 2022			December 2021			December 2022		December 2021

Commercial & industrial	$	128,090		$	122,250		$	114	$	143
Commercial real estate - owner occupied		110,848			118,891			-		88
Commercial real estate - nonowner occupied		301,787			262,277			210		466
Agricultural		64,388			57,403			-		-
Residential real estate		291,512			206,424			3,020		2,484
Home equity line of credit (HELOC)		45,061			41,682			310		464
Consumer		19,944			13,474			28		7

Total loans	$	961,630		$	822,401		$	3,682	$	3,652

Net deferred costs (fees)	$	445		$	313

Total loans, net deferred costs (fees)	$	962,075		$	822,714

Allowance for loan losses	$	(13,818	)	$	(13,805	)

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.

Listed below is a summary of loan commitments, unused lines of credit and standby letters of credit as of December 31, 2022 and 2021.

($ in thousands)	2022		2021
Loan commitments and unused lines of credit	$	221,668	$	219,618
Standby letters of credit		1,336		2,060
Totals	$	223,004	$	221,678

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, 2022 and 2021:

($ in thousands) For the Twelve Months Ended December 31, 2022	Commercial & industrial			Commercial real estate			Agricultural		Residential real estate		Consumer			Total

Beginning balance	$	1,890		$	6,781		$	599	$	3,515	$	1,020		$	13,805
Charge offs		-			-			-		-		(34	)		(34	)
Recoveries		-			-			-		-		47			47
Provision		(227	)		(501	)		12		923		(207	)		-
Ending balance	$	1,663		$	6,280		$	611	$	4,438	$	826		$	13,818

December 31, 2022	Commercial & industrial		Commercial real estate		Agricultural		Residential real estate		Consumer		Total
Allowance:
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	138	$	2	$	140
Ending balance: collectively evaluated for impairment	$	1,663	$	6,280	$	611	$	4,300	$	824	$	13,678

Totals	$	1,663	$	6,280	$	611	$	4,438	$	826	$	13,818

Loans:
Ending balance: individually evaluated for impairment	$	204	$	347	$	-	$	2,863	$	114	$	3,528
Ending balance: collectively evaluated for impairment	$	127,886	$	412,288	$	64,388	$	288,649	$	64,891	$	958,102

Totals	$	128,090	$	412,635	$	64,388	$	291,512	$	65,005	$	961,630

($ 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 (credit)		(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

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, 2022 and 2021:

($ in thousands) December 31, 2022	Commercial & industrial		Commercial real estate - owner occupied		Commercial real estate - nonowner occupied		Agricultural		Residential real estate		HELOC		Consumer		Total

Pass (1 - 4)	$	127,424	$	107,918	$	296,518	$	64,388	$	288,172	$	44,751	$	19,915	$	949,086
Special Mention (5)		394		2,930		4,899		-		-		-		-		8,223
Substandard (6)		158		-		160		-		3,316		310		29		3,973
Doubtful (7)		114		-		210		-		24		-		-		348
Loss (8)
Total Loans	$	128,090	$	110,848	$	301,787	$	64,388	$	291,512	$	45,061	$	19,944	$	961,630

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

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, 2022 and 2021:

($ in thousands)	30-59 Days		60-89 Days		Greater Than 90 Days		Total Past				Total Loans
December 31, 2022	Past Due		Past Due		Past Due		Due		Current		Receivable

Commercial & industrial	$	23	$	108	$	114	$	245	$	127,845	$	128,090
Commercial real estate - owner occupied		-		-		-		-		110,848		110,848
Commercial real estate - nonowner occupied		114		-		32		146		301,641		301,787
Agricultural		-		-		-		-		64,388		64,388
Residential real estate		98		411		1,287		1,796		289,716		291,512
HELOC		98		24		138		260		44,801		45,061
Consumer		61		26		22		109		19,835		19,944
Total Loans	$	394	$	569	$	1,593	$	2,556	$	959,074	$	961,630

	30-59 Days		60-89 Days		Greater Than 90 Days		Total Past				Total Loans
December 31, 2021	Past Due		Past Due		Past Due		Due		Current		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

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, 2022 and 2021:

($ in thousands) Twelve Months Ended	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
December 31, 2022	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & industrial	$	204	$	627	$	-	$	650	$	34
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		347		825		-		1,350		94
Agricultural		-		-		-		-		-
Residential real estate		1,491		1,558		-		1,793		65
HELOC		68		68				85		4
Consumer		-		-		-		-		-
With a specific allowance recorded:
Commercial & industrial		-		-		-		-		-
Commercial real estate - owner occupied		-		-		-		-		-
Commercial real estate - nonowner occupied		-		-		-		-		-
Agricultural		-		-		-		-		-
Residential real estate		1,372		1,372		138		1,424		43
HELOC		46		46		2		51		2
Consumer		-		-		-		-		-
Totals:
Commercial & industrial	$	204	$	627	$	-	$	650	$	34
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-
Commercial real estate - nonowner occupied	$	347	$	825	$	-	$	1,350	$	94
Agricultural	$	-	$	-	$	-	$	-	$	-
Residential real estate	$	2,863	$	2,930	$	138	$	3,217	$	108
HELOC	$	114	$	114	$	2	$	136	$	6
Consumer	$	-	$	-	$	-	$	-	$	-

($ in thousands) Twelve Months Ended	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
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	$	-	$	-	$	-	$	-	$	-

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)

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.

There were no new TDRs during the period ended December 31, 2022. 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
		2	$	42	$	42
Total modifications		2	$	42	$	42

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

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

The Company was an active participant in the PPP initiative as detailed in the discussion of financial results for 2021. The Company originated approximately 1,100 loans with a total balance of $111.4 million. As of December 31, 2022, only one PPP loan remained outstanding. Fees for PPP loan originations totaled $4.9 million, of which $0.1 million and $3.4 million were taken into income during 2022 and 2021, respectively.

Related Party Loans

Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers are presented in the following table at December 31:

($ in thousands)	2022			2021

Balance at beginning of period	$	521		$	1,164
Effect of change in compostioin of directors and executive officers		112			-
New Term Loans		-			-
Repayment of term loans		(53	)		(46	)
Changes in balances of revolving lines of credit		(59	)		(597	)
Balance at end of period	$	521		$	521