| LOANS | 4. The composition of the Company’s loan portfolio, by loan class, as of March 31, 2020 and December 31, 2019 was as follows: ($ in thousands) March 31, 2020 December 31, 2019 Commercial $ 113,346 $ 106,140 Commercial Real Estate 452,611 451,774 Agriculture 94,303 115,751 Residential Mortgage 66,184 64,943 Residential Construction 19,086 15,212 Consumer 25,035 26,825 770,565 780,645 Allowance for loan losses (12,869 ) (12,356 ) Net deferred origination fees and costs 562 584 Loans, net $ 758,258 $ 768,873 The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit risk rating standards and criteria similar to those employed by state and federal banking regulatory agencies. Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses. These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above. Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner-occupied real estate are primarily susceptible to changes in the market conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles. These same risks apply to Commercial loans whether secured by equipment, receivables or other personal property or unsecured. Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site inspections. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space. Losses are dependent on the value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means. Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or service. Agricultural loans are generally secured by inventory, receivables, equipment, and other real property. Agricultural loans primarily are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions such as drought or floods. Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks; non-payment due to diminished or lost income, over-extension of credit, a lack of borrower's cash flow to sustain payments, and shortfalls in collateral value. In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts. Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the related risks described above but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion. Losses are primarily related to underlying collateral value and changes therein as described above. Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower's cash flow to sustain payments, and shortfall in collateral value. In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment rate, loss of collateral value, and demand shifts. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Collateral valuations are obtained at origination of the credit and periodically thereafter (generally annually but may be more frequent depending on the collateral type), once repayment is questionable, and the loan has been deemed classified. As of March 31, 2020, approximately 15% in principal amount of the Company's loans were for general commercial uses, including professional, retail and small businesses. Approximately 59% in principal amount of the Company’s loans were secured by commercial real estate, consisting primarily of loans secured by commercial properties and construction and land development loans. Approximately 12% in principal amount of the Company's loans were for agriculture, approximately 9% in principal amount of the Company’s loans were residential mortgage loans, approximately 2% in principal amount of the Company’s loans were residential construction loans and approximately 3% in principal amount of the Company’s loans were consumer loans. Once a loan becomes delinquent or repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral or a principal payment. If this is not forthcoming and payment of principal and interest in accordance with the contractual terms of the loan agreement becomes unlikely, the Company will consider the loan to be impaired and will estimate its probable loss, using the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. For collateral dependent loans, the Company will utilize a recent valuation of the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount. Depending on the length of time until final collection, the Company may periodically revalue the estimated loss and take additional charge-offs or specific reserves as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when the collateral is liquidated and the actual loss is confirmed. Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or judgment liens on the borrower's other assets. At March 31, 2020 and December 31, 2019, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank (“FHLB”). Non-accrual and Past Due Loans The Company’s loans by delinquency and non-accrual status, as of March 31, 2020 and December 31, 2019, were as follows: ($ in thousands) Current & Accruing 30-59 Days Past Due & Accruing 60-89 Days Past Due & Accruing 90 Days or more Past Due & Accruing Nonaccrual Total Loans March 31, 2020 Commercial $ 112,774 $ 274 $ — $ 40 $ 258 $ 113,346 Commercial Real Estate 451,868 — 234 — 509 452,611 Agriculture 91,503 — 2,800 — — 94,303 Residential Mortgage 65,536 477 — — 171 66,184 Residential Construction 19,086 — — — — 19,086 Consumer 24,637 47 — 100 251 25,035 Total $ 765,404 $ 798 $ 3,034 $ 140 $ 1,189 $ 770,565 December 31, 2019 Commercial $ 105,741 $ — $ 133 $ — $ 266 $ 106,140 Commercial Real Estate 451,215 — 93 — 466 451,774 Agriculture 115,751 — — — — 115,751 Residential Mortgage 64,771 — — — 172 64,943 Residential Construction 15,212 — — — — 15,212 Consumer 26,472 100 — — 253 26,825 Total $ 779,162 $ 100 $ 226 $ — $ 1,157 $ 780,645 Non-accrual loans amounted to $1,189,000 at March 31, 2020 and were comprised of three commercial loans totaling $258,000, three commercial real estate loans totaling $509,000, one residential mortgage loan totaling $171,000 and four consumer loans totaling $251,000. The Company had one commercial loan totaling $40,000 and one consumer loan totaling $100,000 that were 90 days or more past due and still accruing at March 31, 2020. Non-accrual loans amounted to $1,157,000 at December 31, 2019 and were comprised of three commercial loans totaling $266,000, two commercial real estate loans totaling $466,000, one residential mortgage loan totaling $172,000 and four consumer loans totaling $253,000. All non-accrual loans are measured for impairment based upon the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of collateral, if the loan is collateral dependent. If the measurement of the non-accrual loan is less than the recorded investment in the loan, an impairment is recognized through the establishment of a specific reserve sufficient to cover expected losses and/or a charge-off against the allowance for loan losses. If the loan is considered to be collateral dependent, it is generally the Company's policy to charge-off the portion of any non-accrual loan that the Company does not expect to collect by writing the loan down to the estimated net realizable value of the underlying collateral. There were no commitments to lend additional funds to borrowers whose loans were on non-accrual status at March 31, 2020. Impaired Loans A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Loans to be considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or worse and an aggregate exposure of $500,000 or more. Once identified, impaired loans are measured individually for impairment using one of three methods: present value of expected cash flows discounted at the loan's effective interest rate; the loan's observable market price; or fair value of collateral if the loan is collateral dependent. In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, is promptly charged-off against the allowance for loan losses. Impaired loans, segregated by loan class, as of March 31, 2020 and December 31, 2019 were as follows: ($ in thousands) Unpaid Contractual Principal Balance Recorded Investment with no Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance March 31, 2020 Commercial $ 1,524 $ 258 $ 1,204 $ 1,462 $ 21 Commercial Real Estate 783 509 247 756 19 Agriculture – — — — — Residential Mortgage 1,144 171 904 1,075 168 Residential Construction 713 — 681 681 49 Consumer 336 251 79 330 2 Total $ 4,500 $ 1,189 $ 3,115 $ 4,304 $ 259 December 31, 2019 Commercial $ 1,694 $ 266 $ 1,385 $ 1,651 $ 26 Commercial Real Estate 715 466 250 716 19 Agriculture — — — — — Residential Mortgage 1,152 172 912 1,084 171 Residential Construction 724 — 691 691 56 Consumer 340 253 80 333 1 Total $ 4,625 $ 1,157 $ 3,318 $ 4,475 $ 273 The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the three months ended March 31, 2020 and March 31, 2019 was as follows: ($ in thousands) Three Months Ended March 31, 2020 Three Months Ended March 31, 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial $ 1,557 $ 21 $ 2,538 $ 42 Commercial Real Estate 735 4 634 4 Agriculture — — 4,804 — Residential Mortgage 1,079 9 1,451 12 Residential Construction 686 9 652 9 Consumer 332 1 386 3 Total $ 4,389 $ 44 $ 10,465 $ 70 Troubled Debt Restructurings The Company's loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), which are loans on which concessions in terms have been granted because of the borrowers' financial difficulties and, as a result, the Company receives less than the current market-based compensation for the loan. These concessions may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are placed on non-accrual status at the time of restructure and may be returned to accruing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months. When a loan is modified, it is measured based upon the present value of future cash flows discounted at the contractual interest rate of the original loan agreement, or the fair value of collateral less selling costs if the loan is collateral dependent. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan. The Company had $3,202,000 and $3,413,000 in TDR loans as of March 31, 2020 and December 31, 2019, respectively. Specific reserves for TDR loans totaled $259,000 and $273,000 as of March 31, 2020 and December 31, 2019, respectively. TDR loans performing in compliance with modified terms totaled $3,115,000 and $3,318,000 as of March 31, 2020 and December 31, 2019, respectively. There were no commitments to advance additional funds on existing TDR loans as of March 31, 2020. There were no loans modified as TDRs during the three months ended March 31, 2020. Loans modified as TDRs during the three months ended March 31, 2019 were as follows: Three Months Ended March 31, 2019 Number of Contracts Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Residential Construction 2 $ 189 $ 189 Total 2 $ 189 $ 189 Loan modifications generally involve reductions in the interest rate, payment extensions, forgiveness of principal, or forbearance. There were no loans modified as a TDR within the previous twelve months and for which there was a payment default during the three months ended March 31, 2020 and March 31, 2019. On March 22, 2020, the federal bank regulatory agencies issued joint guidance advising that the agencies have confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to relief, are not TDRs. Credit Quality Indicators All loans are rated using the credit risk ratings and criteria adopted by the Company. Risk ratings are adjusted as future circumstances warrant. All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State bank regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss. For the definitions of each risk rating, see Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. The following table presents the risk ratings by loan class as of March 31, 2020 and December 31, 2019: ($ in thousands) Pass Special Mention Substandard Doubtful Loss Total March 31, 2020 Commercial $ 109,462 $ 3,298 $ 586 $ — $ — $ 113,346 Commercial Real Estate 429,125 19,101 4,385 — — 452,611 Agriculture 82,755 — 11,548 — — 94,303 Residential Mortgage 65,847 — 337 — — 66,184 Residential Construction 19,086 — — — — 19,086 Consumer 24,147 — 888 — — 25,035 Total $ 730,422 $ 22,399 $ 17,744 $ — $ — $ 770,565 December 31, 2019 Commercial $ 104,944 $ 428 $ 768 $ — $ — $ 106,140 Commercial Real Estate 427,991 17,739 6,044 — — 451,774 Agriculture 105,573 7,823 2,355 — — 115,751 Residential Mortgage 64,596 — 347 — — 64,943 Residential Construction 15,212 — — — — 15,212 Consumer 25,933 500 392 — — 26,825 Total $ 744,249 $ 26,490 $ 9,906 $ — $ — $ 780,645 Allowance for Loan Losses The following tables detail activity in the allowance for loan losses and the amount allocated to individually and collectively evaluated for impairment by loan class for the three months ended March 31, 2020 and March 31, 2019: Three months ended March 31, 2020 ($ in thousands) Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Unallocated Total Balance as of December 31, 2019 $ 2,354 $ 6,846 $ 2,054 $ 466 $ 201 $ 236 $ 199 $ 12,356 Provision for (reversal of) loan losses 386 560 (266 ) 70 59 18 (177 ) 650 Charge-offs (145 ) — — — — (9 ) — (154 ) Recoveries 11 — — — — 6 — 17 Net charge-offs (134 ) — — — — (3 ) — (137 ) Balance as of March 31, 2020 $ 2,606 $ 7,406 $ 1,788 $ 536 $ 260 $ 251 $ 22 $ 12,869 Period-end amount allocated to: Loans individually evaluated for impairment 21 19 — 168 49 2 — 259 Loans collectively evaluated for impairment 2,585 7,387 1,788 368 211 249 22 12,610 Balance as of March 31, 2020 $ 2,606 $ 7,406 $ 1,788 $ 536 $ 260 $ 251 $ 22 $ 12,869 Three months ended March 31, 2019 ($ in thousands) Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Unallocated Total Balance as of December 31, 2018 $ 3,198 $ 5,890 $ 1,632 $ 643 $ 318 $ 279 $ 862 $ 12,822 Provision for (reversal of) loan losses (568 ) 496 202 (197 ) (102 ) — 169 — Charge-offs (150 ) — — — — (7 ) — (157 ) Recoveries 19 — — 56 1 5 — 81 Net charge-offs (131 ) — — 56 1 (2 ) — (76 ) Balance as of March 31, 2019 $ 2,499 $ 6,386 $ 1,834 $ 502 $ 217 $ 277 $ 1,031 $ 12,746 Period-end amount allocated to: Loans individually evaluated for impairment 37 21 — 267 48 2 — 375 Loans collectively evaluated for impairment 2,462 6,365 1,834 235 169 275 1,031 12,371 Balance as of March 31, 2019 $ 2,499 $ 6,386 $ 1,834 $ 502 $ 217 $ 277 $ 1,031 $ 12,746 The following table details activity in the allowance for loan losses and the amount allocated to loans individually and collectively evaluated for impairment by loan class as of and for the period ended December 31, 2019. Year ended December 31, 2019 ($ in thousands) Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Unallocated Total Balance as of December 31, 2018 $ 3,198 $ 5,890 $ 1,632 $ 643 $ 318 $ 279 $ 862 $ 12,822 Provision for (reversal of) loan losses (415 ) 956 520 (251 ) (138 ) (9 ) (663 ) — Charge-offs (638 ) — (98 ) — — (43 ) — (779 ) Recoveries 209 — — 74 21 9 — 313 Net charge-offs (429 ) — (98 ) 74 21 (34 ) — (466 ) Ending Balance 2,354 6,846 2,054 466 201 236 199 12,356 Period-end amount allocated to: Loans individually evaluated for impairment 26 19 — 171 56 1 — 273 Loans collectively evaluated for impairment 2,328 6,827 2,054 295 145 235 199 12,083 Balance as of December 31, 2019 $ 2,354 $ 6,846 $ 2,054 $ 466 $ 201 $ 236 $ 199 $ 12,356 The Company’s investment in loans as of March 31, 2020, March 31, 2019, and December 31, 2019 related to each balance in the allowance for loan losses by loan class and disaggregated on the basis of the Company’s impairment methodology was as follows: ($ in thousands) Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Total March 31, 2020 Loans individually evaluated for impairment $ 1,462 $ 756 $ — $ 1,075 $ 681 $ 330 $ 4,304 Loans collectively evaluated for impairment 111,884 451,855 94,303 65,109 18,405 24,705 766,261 Ending Balance $ 113,346 $ 452,611 $ 94,303 $ 66,184 $ 19,086 $ 25,035 $ 770,565 March 31, 2019 Loans individually evaluated for impairment $ 2,174 $ 625 $ 4,779 $ 1,351 $ 743 $ 383 $ 10,055 Loans collectively evaluated for impairment 111,401 418,915 104,970 50,331 16,883 31,052 733,552 Ending Balance $ 113,575 $ 419,540 $ 109,749 $ 51,682 $ 17,626 $ 31,435 $ 743,607 December 31, 2019 Loans individually evaluated for impairment $ 1,651 $ 716 $ — $ 1,084 $ 691 $ 333 $ 4,475 Loans collectively evaluated for impairment 104,489 451,058 115,751 63,859 14,521 26,492 776,170 Ending Balance $ 106,140 $ 451,774 $ 115,751 $ 64,943 $ 15,212 $ 26,825 $ 780,645 |
