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Mortgage Loans on Real Estate | 9 Months Ended
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Sep. 30, 2023
Loans Payable [Abstract] |
Mortgage Loans on Real Estate | Mortgage Loans on Real Estate Our financing receivables consist of the following three portfolio segments: commercial mortgage loans, agricultural mortgage loans and residential mortgage loans. Our mortgage loan portfolios are summarized in the following table. There were commitments outstanding of $750.5 million at September 30, 2023.
| September 30, 2023 |  | December 31, 2022
| (Dollars in thousands)
Commercial mortgage loans: |  |  |
Principal outstanding | $ | 3,534,502 |  |  | $ | 3,560,903 |
Deferred fees and costs, net | (3,903) |  |  | (6,345) |
Unamortized discounts and premiums, net | (1,593) |  |  | — |
Amortized cost | 3,529,006 |  |  | 3,554,558 |
Valuation allowance | (21,802) |  |  | (22,428) |
Commercial mortgage loans, carrying value | 3,507,204 |  |  | 3,532,130 |
Agricultural mortgage loans: |  |  |
Principal outstanding | 585,020 |  |  | 567,630 |
Deferred fees and costs, net | (1,707) |  |  | (1,667) |
Amortized cost | 583,313 |  |  | 565,963 |
Valuation allowance | (1,105) |  |  | (1,021) |
Agricultural mortgage loans, carrying value | 582,208 |  |  | 564,942 |
Residential mortgage loans: |  |  |
Principal outstanding | 3,359,939 |  |  | 2,807,652 |
Deferred fees and costs, net | 669 |  |  | 1,909 |
Unamortized discounts and premiums, net | 67,138 |  |  | 55,917 |
Amortized cost | 3,427,746 |  |  | 2,865,478 |
Valuation allowance | (22,175) |  |  | (13,523) |
Residential mortgage loans, carrying value | 3,405,571 |  |  | 2,851,955 |
Mortgage loans, carrying value | $ | 7,494,983 |  |  | $ | 6,949,027 |
Our commercial mortgage loan portfolio consists of loans collateralized by the related properties and diversified as to property type, location and loan size. Our lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. The commercial mortgage loan portfolio is summarized by geographic region and property type as follows:
| September 30, 2023 |  | December 31, 2022
| Principal |  | Percent |  | Principal |  | Percent
| (Dollars in thousands)
Geographic distribution |  |  |  |  |  |  |
East | $ | 490,286 |  |  | 13.9 | % |  | $ | 502,659 |  |  | 14.1 | %
Middle Atlantic | 276,679 |  |  | 7.8 | % |  | 280,993 |  |  | 7.9 | %
Mountain | 395,301 |  |  | 11.2 | % |  | 416,307 |  |  | 11.7 | %
New England | 82,566 |  |  | 2.3 | % |  | 73,631 |  |  | 2.1 | %
Pacific | 840,127 |  |  | 23.8 | % |  | 858,812 |  |  | 24.1 | %
South Atlantic | 939,397 |  |  | 26.6 | % |  | 934,007 |  |  | 26.2 | %
West North Central | 185,743 |  |  | 5.2 | % |  | 205,568 |  |  | 5.8 | %
West South Central | 324,403 |  |  | 9.2 | % |  | 288,926 |  |  | 8.1 | %
| $ | 3,534,502 |  |  | 100.0 | % |  | $ | 3,560,903 |  |  | 100.0 | %
Property type distribution |  |  |  |  |  |  |
Office | $ | 366,874 |  |  | 10.4 | % |  | $ | 388,978 |  |  | 10.9 | %
Retail | 824,708 |  |  | 23.3 | % |  | 896,351 |  |  | 25.2 | %
Industrial/Warehouse | 925,806 |  |  | 26.2 | % |  | 866,623 |  |  | 24.3 | %
Apartment | 1,015,703 |  |  | 28.7 | % |  | 912,984 |  |  | 25.6 | %
Hotel | 324,271 |  |  | 9.2 | % |  | 285,271 |  |  | 8.0 | %
Mixed Use/Other | 77,140 |  |  | 2.2 | % |  | 210,696 |  |  | 6.0 | %
| $ | 3,534,502 |  |  | 100.0 | % |  | $ | 3,560,903 |  |  | 100.0 | %
Our agricultural mortgage loan portfolio consists of loans with an outstanding principal balance of $585.0 million and $567.6 million as of September 30, 2023 and December 31, 2022, respectively. These loans are collateralized by agricultural land and are diversified as to location within the United States. Our residential mortgage loan portfolio consists of loans with an outstanding principal balance of $3.4 billion and $2.8 billion as of September 30, 2023 and December 31, 2022, respectively. These loans are collateralized by the related properties and diversified as to location within the United States. Mortgage loans on real estate are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Interest income is included in Net investment income on our Consolidated Statements of Operations. Accrued interest receivable, which was $66.3 million and $58.2 million as of September 30, 2023 and December 31, 2022, respectively, is included in Accrued investment income on our Consolidated Balance Sheets. Loan Valuation Allowance We establish a valuation allowance to provide for the risk of credit losses inherent in our mortgage loan portfolios. The valuation allowance is maintained at a level believed adequate by management to absorb estimated expected credit losses. The valuation allowance is based on amortized cost, which excludes accrued interest receivable. We do not measure a credit loss allowance on accrued interest receivable as we write off any uncollectible accrued interest receivable balances to net investment income in a timely manner. We did not charge off any uncollectible accrued interest receivable on our commercial, agricultural or residential mortgage loan portfolios for the three and nine month periods ended September 30, 2023 or 2022, respectively. The valuation allowances for each of our mortgage loan portfolios are estimated by deriving probability of default and recovery rate assumptions based on the characteristics of the loans in each portfolio, historical economic data and loss information, and current and forecasted economic conditions. Key loan characteristics impacting the estimate for our commercial mortgage loan portfolio include the current state of the borrower’s credit quality, which considers factors such as loan-to-value (“LTV”) and debt service coverage (“DSC”) ratios, loan performance, underlying collateral type, delinquency status, time to maturity, and original credit scores. Key loan characteristics impacting the estimate for our agricultural and residential mortgage loan portfolios include the current state of the borrowers' credit quality, delinquency status, time to maturity and original credit scores. The following table represents a rollforward of the valuation allowance on our mortgage loan portfolios:
| Three Months Ended September 30, 2023
| Commercial |  | Agricultural |  | Residential |  | Total
| (Dollars in thousands)
Beginning allowance balance | $ | (21,330) |  |  | $ | (895) |  |  | $ | (18,170) |  |  | $ | (40,395) |
Charge-offs | — |  |  | — |  |  | — |  |  | — |
Recoveries | — |  |  | — |  |  | — |  |  | — |
Change in provision for credit losses | (472) |  |  | (210) |  |  | (4,005) |  |  | (4,687) |
Ending allowance balance | $ | (21,802) |  |  | $ | (1,105) |  |  | $ | (22,175) |  |  | $ | (45,082) |
| Three Months Ended September 30, 2022
| Commercial |  | Agricultural |  | Residential |  | Total
| (Dollars in thousands)
Beginning allowance balance | $ | (24,244) |  |  | $ | (664) |  |  | $ | (7,480) |  |  | $ | (32,388) |
Charge-offs | 414 |  |  | — |  |  | — |  |  | 414 |
Recoveries | 1,086 |  |  | — |  |  | — |  |  | 1,086 |
Change in provision for credit losses | (869) |  |  | (146) |  |  | (3,701) |  |  | (4,716) |
Ending allowance balance | $ | (23,613) |  |  | $ | (810) |  |  | $ | (11,181) |  |  | $ | (35,604) |
| Nine Months Ended September 30, 2023
| Commercial |  | Agricultural |  | Residential |  | Total
| (Dollars in thousands)
Beginning allowance balance | $ | (22,428) |  |  | $ | (1,021) |  |  | $ | (13,523) |  |  | $ | (36,972) |
Charge-offs | — |  |  | — |  |  | — |  |  | — |
Recoveries | — |  |  | — |  |  | — |  |  | — |
Change in provision for credit losses | 626 |  |  | (84) |  |  | (8,652) |  |  | (8,110) |
Ending allowance balance | $ | (21,802) |  |  | $ | (1,105) |  |  | $ | (22,175) |  |  | $ | (45,082) |
| Nine Months Ended September 30, 2022
| Commercial |  | Agricultural |  | Residential |  | Total
| (Dollars in thousands)
Beginning allowance balance | $ | (17,926) |  |  | $ | (519) |  |  | $ | (5,579) |  |  | $ | (24,024) |
Charge-offs | 414 |  |  | — |  |  | — |  |  | 414 |
Recoveries | 1,315 |  |  | — |  |  | — |  |  | 1,315 |
Change in provision for credit losses | (7,416) |  |  | (291) |  |  | (5,602) |  |  | (13,309) |
Ending allowance balance | $ | (23,613) |  |  | $ | (810) |  |  | $ | (11,181) |  |  | $ | (35,604) |
Charge-offs include allowances that have been established on loans that were satisfied either by taking ownership of the collateral or by some other means such as discounted pay-off or loan sale. When ownership of the property is taken it is recorded at the lower of the loan's carrying value or the property's fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component of Other investments and the loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. There were three real estate properties totaling $876 thousand at September 30, 2023. There were no real estate properties in which ownership of the property was taken to satisfy an outstanding loan at December 31, 2022. Recoveries are situations where we have received a payment from the borrower in an amount greater than the carrying value of the loan (principal outstanding less specific allowance). Credit Quality Indicators We evaluate the credit quality of our commercial and agricultural mortgage loans by analyzing LTV and DSC ratios and loan performance. We evaluate the credit quality of our residential mortgage loans by analyzing loan performance. LTV and DSC ratios for our commercial mortgage loans are originally calculated at the time of loan origination and are updated annually for each loan using information such as rent rolls, assessment of lease maturity dates and property operating statements, which are reviewed in the context of current leasing and in place rents compared to market leasing and market rents. A DSC ratio of less than 1.0 indicates that a property's operations do not generate sufficient income to cover debt payments. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. All of our commercial mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at September 30, 2023 and December 31, 2022. The amortized cost of our commercial mortgage loan portfolio by LTV and DSC ratios based on the most recent information collected was as follows at September 30, 2023 and December 31, 2022 (by year of origination):
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total
As of September 30, 2023: | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV
Debt Service Coverage Ratio: | (Dollars in thousands)
Greater than or equal to 1.5 | $ | — |  | — | % | $ | 285,725 |  | 62 | % | $ | 273,012 |  | 57 | % | $ | 380,956 |  | 53 | % | $ | 461,587 |  | 55 | % | $ | 1,098,330 |  | 44 | % | $ | 2,499,610 |  | 51 | %
Greater than or equal to 1.2 and less than 1.5 | — |  | — | % | — |  | — | % | 4,547 |  | 56 | % | 55,321 |  | 54 | % | 94,038 |  | 68 | % | 178,773 |  | 58 | % | 332,679 |  | 60 | %
Greater than or equal to 1.0 and less than 1.2 | 34,618 |  | 32 | % | 214,899 |  | 42 | % | 321,776 |  | 45 | % | 39,223 |  | 62 | % | — |  | — | % | 29,780 |  | 69 | % | 640,296 |  | 46 | %
Less than 1.0 | — |  | — | % | — |  | — | % | — |  | — | % | — |  | — | % | 2,557 |  | 80 | % | 53,864 |  | 53 | % | 56,421 |  | 54 | %
Total | $ | 34,618 |  | 32 | % | $ | 500,624 |  | 53 | % | $ | 599,335 |  | 51 | % | $ | 475,500 |  | 53 | % | $ | 558,182 |  | 57 | % | $ | 1,360,747 |  | 47 | % | $ | 3,529,006 |  | 51 | %
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total
As of December 31, 2022: | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV
Debt Service Coverage Ratio: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Greater than or equal to 1.5 | $ | 249,328 |  | 63 | % | $ | 257,746 |  | 61 | % | $ | 421,391 |  | 57 | % | $ | 429,596 |  | 58 | % | $ | 325,117 |  | 53 | % | $ | 813,319 |  | 44 | % | $ | 2,496,497 |  | 53 | %
Greater than or equal to 1.2 and less than 1.5 | 6,488 |  | 70 | % | 123,038 |  | 55 | % | 46,804 |  | 58 | % | 115,977 |  | 66 | % | 67,642 |  | 67 | % | 145,703 |  | 60 | % | 505,652 |  | 62 | %
Greater than or equal to 1.0 and less than 1.2 | 170,059 |  | 52 | % | 211,684 |  | 43 | % | 18,144 |  | 79 | % | 39,396 |  | 73 | % | 10,348 |  | 76 | % | 58,021 |  | 47 | % | 507,652 |  | 51 | %
Less than 1.0 | — |  | — | % | — |  | — | % | — |  | — | % | 6,107 |  | 64 | % | 13,025 |  | 70 | % | 25,625 |  | 65 | % | 44,757 |  | 66 | %
Total | $ | 425,875 |  | 59 | % | $ | 592,468 |  | 53 | % | $ | 486,339 |  | 58 | % | $ | 591,076 |  | 61 | % | $ | 416,132 |  | 57 | % | $ | 1,042,668 |  | 47 | % | $ | 3,554,558 |  | 54 | %
LTV and DSC ratios for our agricultural mortgage loans are calculated at the time of loan origination and are evaluated annually for each loan using land value averages. A DSC ratio of less than 1.0 indicates that a property's operations do not generate sufficient income to cover debt payments. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. All of our agricultural mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at September 30, 2023 and December 31, 2022. The amortized cost of our agricultural mortgage loan portfolio by LTV and DSC ratios based on the most recent information collected was as follows at September 30, 2023 and December 31, 2022 (by year of origination):
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total
As of September 30, 2023: | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV
Debt Service Coverage Ratio: | (Dollars in thousands)
Greater than or equal to 1.5 | $ | 27,014 |  | 59 | % | $ | 86,511 |  | 46 | % | $ | 61,672 |  | 57 | % | $ | 100,768 |  | 45 | % | $ | — |  | — | % | $ | — |  | — | % | $ | 275,965 |  | 49 | %
Greater than or equal to 1.2 and less than 1.5 | 17,824 |  | 59 | % | 103,934 |  | 54 | % | 65,543 |  | 53 | % | 60,068 |  | 45 | % | — |  | — | % | — |  | — | % | 247,369 |  | 52 | %
Greater than or equal to 1.0 and less than 1.2 | 3,988 |  | 43 | % | 3,080 |  | 55 | % | 8,673 |  | 39 | % | — |  | — | % | — |  | — | % | — |  | — | % | 15,741 |  | 43 | %
Less than 1.0 | — |  | — | % | — |  | — | % | — |  | — | % | 7,975 |  | 40 | % | 2,263 |  | 33 | % | 34,000 |  | 42 | % | 44,238 |  | 41 | %
Total | $ | 48,826 |  | 58 | % | $ | 193,525 |  | 51 | % | $ | 135,888 |  | 54 | % | $ | 168,811 |  | 45 | % | $ | 2,263 |  | 33 | % | $ | 34,000 |  | 42 | % | $ | 583,313 |  | 50 | %
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total
As of December 31, 2022: | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV
Debt Service Coverage Ratio: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Greater than or equal to 1.5 | $ | 85,367 |  | 47 | % | $ | 84,186 |  | 46 | % | $ | 97,143 |  | 41 | % | $ | — |  | — | % | $ | — |  | — | % | $ | — |  | — | % | $ | 266,696 |  | 45 | %
Greater than or equal to 1.2 and less than 1.5 | 107,856 |  | 54 | % | 67,630 |  | 52 | % | 61,103 |  | 32 | % | — |  | — | % | — |  | — | % | — |  | — | % | 236,589 |  | 48 | %
Greater than or equal to 1.0 and less than 1.2 | 3,124 |  | 56 | % | 8,825 |  | 38 | % | 3,125 |  | 25 | % | — |  | — | % | — |  | — | % | — |  | — | % | 15,074 |  | 39 | %
Less than 1.0 | — |  | — | % | — |  | — | % | 7,975 |  | 35 | % | 5,629 |  | 41 | % | 34,000 |  | 31 | % | — |  | — | % | 47,604 |  | 33 | %
Total | $ | 196,347 |  | 51 | % | $ | 160,641 |  | 48 | % | $ | 169,346 |  | 37 | % | $ | 5,629 |  | 41 | % | $ | 34,000 |  | 31 | % | $ | — |  | — | % | $ | 565,963 |  | 45 | %
We closely monitor loan performance for our commercial, agricultural and residential mortgage loan portfolios. Aging of financing receivables is summarized in the following table (by year of origination):
| 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  | Total
As of September 30, 2023: | (Dollars in thousands)
Commercial mortgage loans |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 34,618 |  |  | $ | 500,624 |  |  | $ | 599,335 |  |  | $ | 475,500 |  |  | $ | 558,182 |  |  | $ | 1,360,747 |  |  | $ | 3,529,006 |
30 - 59 days past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
60 - 89 days past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
90 days or more past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total commercial mortgage loans | $ | 34,618 |  |  | $ | 500,624 |  |  | $ | 599,335 |  |  | $ | 475,500 |  |  | $ | 558,182 |  |  | $ | 1,360,747 |  |  | $ | 3,529,006 |
Agricultural mortgage loans |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 48,826 |  |  | $ | 193,525 |  |  | $ | 135,888 |  |  | $ | 168,811 |  |  | $ | 2,263 |  |  | $ | 34,000 |  |  | $ | 583,313 |
30 - 59 days past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
60 - 89 days past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
90 days or more past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total agricultural mortgage loans | $ | 48,826 |  |  | $ | 193,525 |  |  | $ | 135,888 |  |  | $ | 168,811 |  |  | $ | 2,263 |  |  | $ | 34,000 |  |  | $ | 583,313 |
Residential mortgage loans |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 975,966 |  |  | $ | 1,639,242 |  |  | $ | 411,035 |  |  | $ | 167,678 |  |  | $ | 27,309 |  |  | $ | 893 |  |  | $ | 3,222,123 |
30 - 59 days past due | 30,963 |  |  | 36,240 |  |  | 15,604 |  |  | 6,560 |  |  | 99 |  |  | — |  |  | 89,466 |
60 - 89 days past due | 3,007 |  |  | 21,436 |  |  | 4,233 |  |  | 888 |  |  | — |  |  | — |  |  | 29,564 |
90 days or more past due | 8,171 |  |  | 39,138 |  |  | 27,114 |  |  | 5,369 |  |  | 3,398 |  |  | 3,403 |  |  | 86,593 |
Total residential mortgage loans | $ | 1,018,107 |  |  | $ | 1,736,056 |  |  | $ | 457,986 |  |  | $ | 180,495 |  |  | $ | 30,806 |  |  | $ | 4,296 |  |  | $ | 3,427,746 |
| 2022 |  | 2021 |  | 2020 |  | 2019 |  | 2018 |  | Prior |  | Total
As of December 31, 2022: | (Dollars in thousands)
Commercial mortgage loans |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 425,875 |  |  | $ | 592,468 |  |  | $ | 486,339 |  |  | $ | 591,076 |  |  | $ | 416,132 |  |  | $ | 1,042,668 |  |  | $ | 3,554,558 |
30 - 59 days past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
60 - 89 days past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
90 days or more past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total commercial mortgage loans | $ | 425,875 |  |  | $ | 592,468 |  |  | $ | 486,339 |  |  | $ | 591,076 |  |  | $ | 416,132 |  |  | $ | 1,042,668 |  |  | $ | 3,554,558 |
Agricultural mortgage loans |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 196,347 |  |  | $ | 160,641 |  |  | $ | 166,211 |  |  | $ | 5,629 |  |  | $ | 34,000 |  |  | $ | — |  |  | $ | 562,828 |
30 - 59 days past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
60 - 89 days past due | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
90 days or more past due | — |  |  | — |  |  | 3,135 |  |  | — |  |  | — |  |  | — |  |  | 3,135 |
Total agricultural mortgage loans | $ | 196,347 |  |  | $ | 160,641 |  |  | $ | 169,346 |  |  | $ | 5,629 |  |  | $ | 34,000 |  |  | $ | — |  |  | $ | 565,963 |
Residential mortgage loans |  |  |  |  |  |  |  |  |  |  |  |  |
Current | $ | 1,915,169 |  |  | $ | 595,363 |  |  | $ | 211,119 |  |  | $ | 27,483 |  |  | $ | 1,710 |  |  | $ | 417 |  |  | $ | 2,751,261 |
30 - 59 days past due | 39,179 |  |  | 8,238 |  |  | 13,073 |  |  | 1,960 |  |  | — |  |  | — |  |  | 62,450 |
60 - 89 days past due | 6,668 |  |  | 7,165 |  |  | 3,034 |  |  | 57 |  |  | — |  |  | — |  |  | 16,924 |
90 days or more past due | 9,702 |  |  | 14,068 |  |  | 6,515 |  |  | 1,762 |  |  | 2,796 |  |  | — |  |  | 34,843 |
Total residential mortgage loans | $ | 1,970,718 |  |  | $ | 624,834 |  |  | $ | 233,741 |  |  | $ | 31,262 |  |  | $ | 4,506 |  |  | $ | 417 |  |  | $ | 2,865,478 |
Commercial, agricultural and residential mortgage loans are considered nonperforming when they become 90 days or more past due. When loans become nonperforming, we place them on non-accrual status and discontinue recognizing interest income. If payments are received on a nonperforming loan, interest income is recognized to the extent it would have been recognized if normal principal and interest would have been received timely. If payments are received to bring a nonperforming loan back to less than 90 days past due, we will resume accruing interest income on that loan. There were 164 loans in non-accrual status at September 30, 2023 and 59 loans in non-accrual status at December 31, 2022. During the three and nine months ended September 30, 2023 we recognized $156 thousand and $2,156 thousand in interest income on loans which were in non-accrual status at the respective period end. During the three and nine months ended September 30, 2022, we recognized $0 thousand and $546 thousand interest income on loans which were in non-accrual status at the respective period end. Loan Modifications Our commercial, agricultural and residential mortgage loans may be subject to loan modifications. Loan modifications may be granted to borrowers experiencing financial difficulty and could include principal forgiveness, interest rate reduction, an other-than-significant delay or a term extension. We consider the following factors in determining whether or not a borrower is experiencing financial difficulty: •borrower is in default, •borrower has declared bankruptcy, •there is growing concern about the borrower's ability to continue as a going concern, •borrower has insufficient cash flows to service debt, •borrower's inability to obtain funds from other sources, and •there is a breach of financial covenants by the borrower. A loan modification typically does not result in a change in valuation allowance as it is already incorporated into our allowance methodology. However, if we grant a borrower experiencing financial difficulty principal forgiveness, the amount of principal forgiven would be written off, which would reduce the amortized cost of the loan and result in an adjustment to the valuation allowance. There were no significant mortgage loan modifications for the three and nine months ended September 30, 2023. Prior to adoption of authoritative guidance on January 1, 2023, we evaluated whether a TDR had occurred on our commercial, agricultural or residential mortgage loans. We did not have any significant loan modifications that resulted in a TDR for the three and nine months ended September 30, 2022.

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- Definition The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses. + References Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef -Topic 310 -SubTopic 10 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//310-10/tableOfContent + Details
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