Loans | (4) Loans The composition of the Company’s loan portfolio, by loan class, at December 31, is as follows: 2020 2019 Commercial $ 255,926 $ 106,140 Commercial Real Estate 454,053 451,774 Agriculture 95,048 115,751 Residential Mortgage 64,497 64,943 Residential Construction 4,223 15,212 Consumer 19,467 26,825 893,214 780,645 Allowance for loan losses (15,416 ) (12,356 ) Net deferred origination fees and costs (1,968 ) 584 Loans, net $ 875,830 $ 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. Once repayment is questionable, and the loan has been deemed classified, collateral valuations are obtained periodically (generally annually but may be more frequent depending on the collateral type). At December 31, 2020, approximately 29% in principal amount of the Company’s loans were for general commercial uses, including professional, retail and small businesses. Approximately 51% in principal amount of the Company’s loans were secured by commercial real estate, which consists primarily of loans secured by commercial properties and construction and land development loans. Approximately 11% in principal amount of the Company’s loans were for agriculture, approximately 7% in principal amount of the Company’s loans were residential mortgage loans, approximately 0% in principal amount of the Company’s loans were residential construction loans and approximately 2% 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 December 31, 2020 and 2019, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank. Non-accrual and Past Due Loans The Company’s loans by delinquency and non-accrual status, as of December 31, 2020 and 2019, was as follows: Current & Accruing 30-59 Days Past Due & Accruing 60-89 Days Past Due & Accruing 90 Days or more Past Due & Accruing Nonaccrual Total Loans December 31, 2020 Commercial $ 255,563 $ — $ — $ — $ 363 $ 255,926 Commercial Real Estate 449,178 — — — 4,875 454,053 Agriculture 85,918 — — — 9,130 95,048 Residential Mortgage 64,344 — — — 153 64,497 Residential Construction 4,223 — — — — 4,223 Consumer 18,777 — — — 690 19,467 Total $ 878,003 $ — $ — $ — $ 15,211 $ 893,214 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 $ at December 31, 2020 and were comprised of commercial loans totaling $ , commercial real estate loans totaling $ , agriculture loans totaling $ , residential mortgage loan totaling $ , and consumer loans totaling $ . Non-accrual loans amounted to $ at December 31, 2019, and were comprised of commercial loans totaling $ , commercial real estate loans totaling $ , residential mortgage loans totaling $ , and consumer loan totaling $ . 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 December 31, 2020 and 2019, were as follows: Unpaid Contractual Principal Balance Recorded Investment with no Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance December 31, 2020 Commercial $ 1,087 $ 363 $ 661 $ 1,024 $ 11 Commercial Real Estate 5,146 4,875 — 4,875 — Agriculture 9,189 4,165 4,965 9,130 2,093 Residential Mortgage 1,046 153 883 1,036 159 Residential Construction 684 — 652 652 83 Consumer 773 690 64 754 1 Total $ 17,925 $ 10,246 $ 7,225 $ 17,471 $ 2,347 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 years ended December 31, 2020, 2019, and 2018, was as follows: December 31, 2020 December 31, 2019 December 31, 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial $ 1,344 $ 60 $ 2,184 $ 128 $ 2,986 $ 181 Commercial Real Estate 3,489 58 636 182 1,681 15 Agriculture 5,481 — 1,922 240 966 — Residential Mortgage 1,062 30 1,219 72 1,834 72 Residential Construction 671 34 681 35 612 28 Consumer 630 17 366 31 439 27 Total $ 12,677 $ 199 $ 7,008 $ 688 $ 8,518 $ 323 None of the interest on impaired loans was recognized using a cash basis of accounting for the years ended December 31, 2020, 2019, and 2018. 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 $2,325 and $3,413 in TDR loans as of December 31, 2020 and 2019, respectively. Specific reserves for TDR loans totaled $253 and $273 as of December 31, 2020 and 2019, respectively. TDR loans performing in compliance with modified terms totaled $2,260 and $3,318 as of December 31, 2020 and 2019, respectively. There were no commitments to advance additional funds on existing TDR loans as of December 31, 2020. On March 22, 2020, the federal bank regulatory agencies issued joint guidance advising that the agencies have confirmed with the staff of the Financial Accounting Standards Board that short-term modifications due to COVID-19, made on a good faith basis to borrowers who were current prior to relief, are not TDRs. The CARES Act also provided relief from TDR classification for certain COVID-19 loan modifications. The Bank elected not to classify modifications that meet the criteria under either the CARES Act or the criteria specified by the regulatory agencies as TDRs. There were loans modified as TDRs during the year ended December 31, 2020. Loans modified as troubled debt restructurings during the years ended December 31, 2019 and 2018, were as follows: Year Ended December 31, 2019 Number of Contracts Pre-modification outstanding recorded investment Post- modification outstanding recorded investment Residential Construction 2 $ 189 $ 189 Total 2 $ 189 $ 189 Year Ended December 31, 2018 Number of Contracts Pre-modification outstanding recorded investment Post- modification outstanding recorded investment Consumer 1 $ 191 $ 191 Total 1 $ 191 $ 191 Loan modifications generally involve reductions in the interest rate, payment extensions, forgiveness of principal, or forbearance. No loans were modified as a TDR within the previous 12 months that subsequently defaulted during the years ended December 31, 2020, 2019 and 2018. The Company considers a loan to be in payment default when it is 90 days or more past due. Credit Quality Indicators All new 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 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. General definitions for each risk rating are as follows: Risk Rating “1” – Pass (High Quality): Risk Rating “2” – Pass (Above Average Quality): Risk Rating “3” – Pass (Average Quality): Risk Rating “4” – Pass (Below Average Quality): Risk Rating “5” – Special Mention (Criticized): Risk Rating “6” – Substandard (Classified): Risk Rating “7” – Doubtful (Classified): Risk Rating “8” – Loss (Classified): Active Charge-Off. Inactive Charge-Off. The following table presents the risk ratings by loan class as of December 31, 2020 and 2019. Pass Special Mention Substandard Doubtful Loss Total December 31, 2020 Commercial $ 244,327 $ 10,731 $ 868 $ — $ — $ 255,926 Commercial Real Estate 431,381 9,255 13,417 — — 454,053 Agriculture 83,493 — 11,555 — — 95,048 Residential Mortgage 64,018 — 479 — — 64,497 Residential Construction 4,223 — — — — 4,223 Consumer 18,697 — 770 — — 19,467 Total $ 846,139 $ 19,986 $ 27,089 $ — $ — $ 893,214 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 table details activity in the allowance for loan losses by loan category for the years ended December 31, 2020, 2019 and 2018. 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 loan losses (91 ) 1,069 1,780 169 (73 ) (43 ) 239 3,050 Charge-offs (212 ) — — — — (15 ) — (227 ) Recoveries 201 — — — — 36 — 237 Net charge-offs (11 ) — — — — 21 — 10 Ending Balance 2,252 7,915 3,834 635 128 214 438 15,416 Period-end amount allocated to: Loans individually evaluated for impairment 11 — 2,093 159 83 1 — 2,347 Loans collectively evaluated for impairment 2,241 7,915 1,741 476 45 213 438 13,069 Balance as of December 31, 2020 $ 2,252 $ 7,915 $ 3,834 $ 635 $ 128 $ 214 $ 438 $ 15,416 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 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 Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Unallocated Total Balance as of December 31, 2017 $ 2,625 $ 5,460 $ 1,547 $ 628 $ 360 $ 342 $ 171 $ 11,133 Provision for loan losses 1,036 572 85 (19 ) (173 ) (92 ) 691 2,100 Charge-offs (509 ) (142 ) — — — (34 ) — (685 ) Recoveries 46 — — 34 131 63 — 274 Net charge-offs (463 ) (142 ) — 34 131 29 — (411 ) Ending Balance 3,198 5,890 1,632 643 318 279 862 12,822 Period-end amount allocated to: Loans individually evaluated for impairment 496 21 — 287 49 2 — 855 Loans collectively evaluated for impairment 2,702 5,869 1,632 356 269 277 862 11,967 Balance as of December 31, 2018 $ 3,198 $ 5,890 $ 1,632 $ 643 $ 318 $ 279 $ 862 $ 12,822 The Company’s investment in loans as of December 31, 2020, 2019, and 2018 related to each balance in the allowance for loan losses by loan category and disaggregated on the basis of the Company’s impairment methodology was as follows: Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Total December 31, 2020 Loans individually evaluated for impairment $ 1,024 $ 4,875 $ 9,130 $ 1,036 $ 652 $ 754 $ 17,471 Loans collectively evaluated for impairment 254,902 449,178 85,918 63,461 3,571 18,713 875,743 Ending Balance $ 255,926 $ 454,053 $ 95,048 $ 64,497 $ 4,223 $ 19,467 $ 893,214 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 December 31, 2018 Loans individually evaluated for impairment $ 2,902 $ 642 $ 4,830 $ 1,551 $ 560 $ 389 $ 10,874 Loans collectively evaluated for impairment 122,275 419,464 118,796 49,513 19,564 35,008 764,620 Ending Balance $ 125,177 $ 420,106 $ 123,626 $ 51,064 $ 20,124 $ 35,397 $ 775,494 |