| Loans and Allowance for Credit Losses | 4. Loans and Allowance for
Credit Losses The following table presents the Corporation’s loan portfolio by
category of loans as of March 31, 2021, and December 31, 2020: LOAN PORTFOLIO (DOLLARS IN THOUSANDS)
March 31, December 31,
2021 2020
$ $
Commercial real estate
Commercial mortgages 144,939 142,698
Agriculture mortgages 178,070 176,005
Construction 21,317 23,441
Total commercial real estate 344,326 342,144
Consumer real estate (a)
1-4 family residential mortgages 265,127 263,569
Home equity loans 10,614 10,708
Home equity lines of credit 70,898 71,290
Total consumer real estate 346,639 345,567
Commercial and industrial
Commercial and industrial 111,036 97,896
Tax-free loans 16,233 10,949
Agriculture loans 18,466 20,365
Total commercial and industrial 145,735 129,210
Consumer 4,827 5,155
Gross loans prior to deferred fees 841,527 822,076
Deferred loan costs, net 407 1,294
Allowance for credit losses (12,690 ) (12,327 )
Total net loans 829,244 811,043
(a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $253,527,000 and $235,437,000
as of March 31, 2021, and December 31, 2020, respectively. The largest movement within the Corporation’s loan portfolio since
December 31, 2020 was the growth in the commercial and industrial loan sector, which experienced a $13.1 million, or 13.4% increase. This
was a direct result of the Small Business Administration’s Paycheck Protection Program (PPP) established as part of the CARES Act
passed in March 2020, to provide relief to small businesses from the impact of COVID-19. The Corporation began making these loans in early
April 2020, but many of the original PPP loans had been forgiven as of December 31, 2020. Beginning in early 2021, another round of PPP
funding was approved and the Corporation had again begun making loans under this program. The majority of these new loans have been written
with a five-year term, however management expects the vast majority of these loans to be forgiven by the SBA, or paid off by the borrower,
prior to maturity of the loan. As a result, management expects the commercial and industrial loan balances to decline by December 31,
2021 with further declines during 2022. The Corporation grades commercial credits differently than consumer credits.
The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of March 31,
2021 and December 31, 2020. The grading analysis estimates the capability of the borrower to repay the contractual obligations under
the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly
graded loans. The Corporation's internally assigned grades for commercial
credits are as follows:
· Pass – loans which are protected by the current net worth and paying capacity of the obligor or
by the value of the underlying collateral.
· Special Mention – loans where a potential weakness or risk exists, which could cause a more serious
problem, if not corrected.
· Substandard – loans that have a well-defined weakness based on objective evidence and characterized
by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.
· Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset.
In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.
· Loss – loans classified as a loss are considered uncollectible, or of such value that continuance
as an asset is not warranted. COMMERCIAL CREDIT EXPOSURE CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE (DOLLARS IN THOUSANDS)
March 31, 2021 Commercial Agriculture Construction Commercial Tax-free Agriculture Total
$ $ $ $ $ $ $
Grade:
Pass 134,318 169,690 15,787 100,413 16,233 17,359 453,800
Special Mention 5,437 — 5,530 6,540 — 85 17,592
Substandard 5,184 8,380 — 4,083 — 1,022 18,669
Doubtful — — — — — — —
Loss — — — — — — —
Total 144,939 178,070 21,317 111,036 16,233 18,466 490,061
December 31, 2020 Commercial Agriculture Construction Commercial Tax-free Agriculture Total
$ $ $ $ $ $ $
Grade:
Pass 133,853 166,102 21,142 87,767 10,949 18,586 438,399
Special Mention 3,683 1,651 2,299 5,592 — 774 13,999
Substandard 5,162 8,252 — 4,537 — 1,005 18,956
Doubtful — — — — — — —
Loss — — — — — — —
Total 142,698 176,005 23,441 97,896 10,949 20,365 471,354 Substandard loans decreased by $287,000, or 1.5%, while special mention
loans have increased by $3,593,000, or 25.7%, from December 31, 2020 to March 31, 2021. Substandard loans decreased from $19.0 million
to $18.7 million from December 31, 2020, to March 31, 2021 while special mention loans increased from $14.0 million to $17.6 million during
this same period. The loan areas that experienced material changes in special mention were commercial
mortgages and construction loans. Under commercial mortgages, one $1.5 million loan was transferred to special mention due to COVID-19
negatively impacting business operations. This was the primary reason for the increase in special mention loans as well as other smaller
loan relationships that were downgraded during the first quarter of 2021. For consumer loans, the Corporation evaluates credit quality based on whether
the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and nonaccrual
loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of
March 31, 2021 and December 31, 2020: CONSUMER CREDIT EXPOSURE CREDIT RISK PROFILE BY PAYMENT PERFORMANCE (DOLLARS IN THOUSANDS)
March 31, 2021 1-4 Family Home Equity Home Equity Consumer Total
Payment performance: $ $ $ $ $
Performing 264,943 10,614 70,898 4,814 351,269
Non-performing 184 — — 13 197
Total 265,127 10,614 70,898 4,827 351,466
December 31, 2020 1-4 Family Home Equity Home Equity Consumer Total
Payment performance: $ $ $ $ $
Performing 262,185 10,708 71,267 5,141 349,301
Non-performing 1,384 — 23 14 1,421
Total 263,569 10,708 71,290 5,155 350,722 The following tables present an age analysis of the Corporation’s
past due loans, segregated by loan portfolio class, as of March 31, 2021 and December 31, 2020: AGING OF LOANS RECEIVABLE (DOLLARS IN THOUSANDS)
Loans
Greater Receivable >
30-59 Days 60-89 Days than 90 Total Past Total Loans 90 Days and
March 31, 2021 Past Due Past Due Days Due Current Receivable Accruing
$ $ $ $ $ $ $
Commercial real estate
Commercial mortgages — — 192 192 144,747 144,939 —
Agriculture mortgages 245 — — 245 177,825 178,070 —
Construction — — — — 21,317 21,317 —
Consumer real estate
1-4 family residential mortgages 1,351 174 184 1,709 263,418 265,127 139
Home equity loans — — — — 10,614 10,614 —
Home equity lines of credit — — — — 70,898 70,898 —
Commercial and industrial
Commercial and industrial 14 — 444 458 110,578 111,036 —
Tax-free loans — — — — 16,233 16,233 —
Agriculture loans 6 — — 6 18,460 18,466 —
Consumer 8 1 13 22 4,805 4,827 13
Total 1,624 175 833 2,632 838,895 841,527 152 AGING OF LOANS RECEIVABLE (DOLLARS IN THOUSANDS)
Loans
Greater Receivable >
30-59 Days 60-89 Days than 90 Total Past Total Loans 90 Days and
December 31, 2020 Past Due Past Due Days Due Current Receivable Accruing
$ $ $ $ $ $ $
Commercial real estate
Commercial mortgages — — 208 208 142,490 142,698 —
Agriculture mortgages — — — — 176,005 176,005 —
Construction — — — — 23,441 23,441 —
Consumer real estate
1-4 family residential mortgages 618 — 1,384 2,002 261,567 263,569 1,336
Home equity loans 1 — — 1 10,707 10,708 —
Home equity lines of credit — — 23 23 71,267 71,290 23
Commercial and industrial
Commercial and industrial — — 469 469 97,427 97,896 —
Tax-free loans — — — — 10,949 10,949 —
Agriculture loans 42 — — 42 20,323 20,365 —
Consumer 23 3 14 40 5,115 5,155 14
Total 684 3 2,098 2,785 819,291 822,076 1,373 The following table presents nonaccrual loans by classes of the loan portfolio
as of March 31, 2021 and December 31, 2020: NONACCRUAL LOANS BY LOAN CLASS (DOLLARS IN THOUSANDS)
March 31, December 31,
2021 2020
$ $
Commercial real estate
Commercial mortgages 192 208
Agriculture mortgages — —
Construction — —
Consumer real estate
1-4 family residential mortgages 45 48
Home equity loans — —
Home equity lines of credit — —
Commercial and industrial
Commercial and industrial 444 469
Tax-free loans — —
Agriculture loans — —
Consumer — —
Total 681 725 As of March 31, 2021 and December 31, 2020, all of the Corporation’s
commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three months ended
March 31, 2021 and March 31, 2020, is as follows: IMPAIRED LOANS (DOLLARS IN THOUSANDS)
Three Months Ended March 31,
2021 2020
$ $
Average recorded balance of impaired loans 5,739 3,937
Interest income recognized on impaired loans 66 35 No loan modifications were made during the first quarter of 2021 that would
be considered a troubled debt restructuring (TDR). There was one loan modification made during the third quarter of 2020 that would be
considered a TDR. One $3.6 million loan was restructured to provide relief to the commercial borrower by reducing the interest rate, providing
a six-month interest only period, and extending the amortization period by an additional nine years. In addition to this TDR, deferments
of principal related to the impact of COVID-19 did occur beginning in late March 2020, however these modifications are not considered
a TDR under the revised COVID-19 regulatory guidance. There was one loan modification that occurred during the first quarter of 2019,
constituting a TDR. A modification of the payment terms to a loan customer are considered a TDR if a concession was made to a borrower
that is experiencing financial difficulty. A concession is generally defined as more favorable payment or credit terms granted to a borrower
in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest
only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled
payments. Included in the impaired loan portfolio are three loans to unrelated borrowers that are being reported as TDRs. The balance
of these three TDR loans was $5,018,000 as of March 31, 2021. None of these TDR loans are non-accrual. The following tables summarize information regarding impaired loans by
loan portfolio class as of March 31, 2021 and December 31, 2020, and for the three months ended March 31, 2021, and the twelve months
ended December 31, 2020:
IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
March 31, 2021 Recorded Unpaid Related Average Interest
$ $ $ $ $
With no related allowance recorded:
Commercial real estate
Commercial mortgages 238 274 — 253 8
Agriculture mortgages 796 796 — 802 10
Construction — — — — —
Total commercial real estate 1,034 1,070 — 1,055 18
Commercial and industrial
Commercial and industrial 444 484 — 455 6
Tax-free loans — — — — —
Agriculture loans — — — — —
Total commercial and industrial 444 484 — 455 6
Total with no related allowance 1,478 1,554 — 1,510 24
With an allowance recorded:
Commercial real estate
Commercial mortgages 3,570 3,570 1,099 3,578 42
Agriculture mortgages 651 651 14 651 —
Construction — — — — —
Total commercial real estate 4,221 4,221 1,113 4,229 42
Commercial and industrial
Commercial and industrial — — — — —
Tax-free loans — — — — —
Agriculture loans — — — — —
Total commercial and industrial — — — — —
Total with a related allowance 4,221 4,221 1,113 4,229 42
Total by loan class:
Commercial real estate
Commercial mortgages 3,808 3,844 1,099 3,831 50
Agriculture mortgages 1,447 1,447 14 1,453 10
Construction — — — — —
Total commercial real estate 5,255 5,291 1,113 5,284 60
Commercial and industrial
Commercial and industrial 444 484 — 455 6
Tax-free loans — — — — —
Agriculture loans — — — — —
Total commercial and industrial 444 484 — 455 6
Total 5,699 5,775 1,113 5,739 66
IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 31, 2020 Recorded Unpaid Related Average Interest
$ $ $ $ $
With no related allowance recorded:
Commercial real estate
Commercial mortgages 256 318 — 798 —
Agriculture mortgages 806 835 — 1,170 46
Construction — — — — —
Total commercial real estate 1,062 1,153 — 1,968 46
Commercial and industrial
Commercial and industrial 469 504 — 513 23
Tax-free loans — — — — —
Agriculture loans — — — — —
Total commercial and industrial 469 504 — 513 23
Total with no related allowance 1,531 1,657 — 2,481 69
With an allowance recorded:
Commercial real estate
Commercial mortgages 3,581 3,581 1,110 1,468 57
Agriculture mortgages 651 651 21 679 34
Construction — — — — —
Total commercial real estate 4,232 4,232 1,131 2,147 91
Commercial and industrial
Commercial and industrial — — — — —
Tax-free loans — — — — —
Agriculture loans — — — — —
Total commercial and industrial — — — — —
Total with a related allowance 4,232 4,232 1,131 2,147 91
Total by loan class:
Commercial real estate
Commercial mortgages 3,837 3,899 1,110 2,266 57
Agriculture mortgages 1,457 1,486 21 1,849 80
Construction — — — — —
Total commercial real estate 5,294 5,385 1,131 4,115 137
Commercial and industrial
Commercial and industrial 469 504 — 513 23
Tax-free loans — — — — —
Agriculture loans — — — — —
Total commercial and industrial 469 504 — 513 23
Total 5,763 5,889 1,131 4,628 160 The following table details activity in the allowance for credit losses by portfolio segment for the three months
ended March 31, 2021: ALLOWANCE FOR CREDIT LOSSES (DOLLARS IN THOUSANDS)
Commercial Consumer Commercial Consumer Unallocated Total
$ $ $ $ $ $
Allowance for credit losses:
Beginning balance - December 31, 2020 6,329 3,449 1,972 52 525 12,327
Charge-offs — — — (14 ) — (14 )
Recoveries — — 1 1 — 2
Provision 173 (41 ) (15 ) 20 238 375
Balance - March 31, 2021 6,502 3,408 1,958 59 763 12,690 During the three months ended March 31, 2021, management charged off $14,000 in loans while recovering $2,000 and
added $375,000 to the provision. The unallocated portion of the allowance increased from 4.3% of total reserves as of December 31, 2020,
to 6.0% as of March 31, 2021. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately
5% over the long term, with a requirement of it not to exceed 10%. During the three months ended March 31, 2021, net provision expense was
recorded for the commercial real estate sector as well as the consumer sector with credit provisions recorded for the consumer real estate
and commercial and industrial sectors. The higher provision in the commercial real estate sector was due to growth in this portfolio of
loans since December 31, 2020, as well as an increase in the qualitative factor related to the trends in the nature and volume of this
sector. There were minimal charge-offs and recoveries recorded during the three months ended March 31, 2021, so the provision expense
was primarily related to an increase in loan balances as well as slightly higher unallocated portion of the allowance. As of March 31, 2021, the Corporation’s total delinquencies were
0.31%, a decline from 0.34% at December 31, 2020. The Corporation’s total delinquencies continue to compare favorably to the national
uniform bank performance group, which was at 1.31% as of December 31, 2020. Outside of the above measurements and indicators, management continues
to utilize nine qualitative factors to continually refine the potential credit risks across the Corporation’s various loan types.
In addition, the loan portfolio is sectored out into nine different categories to evaluate these qualitative factors. A total
score of the qualitative factors for each loan sector is calculated to utilize in the allowance for loan loss calculation. The agricultural
dairy sector carries the highest level of qualitative factors due to the long-term weakness in milk prices. While the dairy market has
improved recently, COVID-19 initially caused a sharp decline in milk prices. T ALLOWANCE FOR CREDIT LOSSES (DOLLARS IN THOUSANDS)
Commercial Consumer Commercial Consumer Unallocated Total
$ $ $ $ $ $
Allowance for credit losses:
Beginning balance - December 31, 2019 4,319 2,855 1,784 41 448 9,447
Charge-offs — — — (6 ) — (6 )
Recoveries 11 — 1 — — 12
Provision 252 296 171 21 (390 ) 350
Balance - March 31, 2020 4,582 3,151 1,956 56 58 9,803 During the three months ended March 31, 2020, management charged off $6,000
in loans while recovering $12,000 and added $350,000 to the provision. The unallocated portion of the allowance decreased from 4.7% of
total reserves as of December 31, 2019, to 0.6% as of March 31, 2020. During the three months ended March 31, 2020, net provision expense was
recorded for all sectors. The higher provision was primarily caused by increasing the qualitative factors across all industry lines to
various degrees as a result of the impact from COVID-19. A qualitative factor was increased for business loans specifically related to
the special federal governmental lending programs developed as a result of COVID-19. There were minimal charge-offs and recoveries recorded
during the three months ended March 31, 2020, so the provision expense was primarily related to this change in economic conditions and
potential for credit declines moving forward. The total amount of substandard loans at the end of the first quarter of 2020 was slightly
higher resulting in slightly more provision expense. As of March 31, 2020, the Corporation’s total delinquencies were
0.67%, a decline from 0.91% at December 31, 2019. The Corporation reduced one qualitative factor for residential mortgages
in the first quarter of 2020; this factor had been increased in the fourth quarter of 2019 because of higher delinquency. However, mortgage
loan delinquency declined in the first quarter of 2020. Delinquency among agriculture loans, excluding loans to dairy farmers, has
continued to increase, and ended at 2.32% at March 31, 2020. A total of six agriculture loans were delinquent at this time. The following tables present the balance in the allowance for credit losses
and the recorded investment in loans receivable by portfolio segment based on impairment method as of March 31, 2021 and December 31,
2020: ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE (DOLLARS IN THOUSANDS)
As of March 31, 2021: Commercial Real Consumer Commercial Consumer Unallocated Total
$ $ $ $ $ $
Allowance for credit losses:
Ending balance: individually evaluated
for impairment 1,113 — — — — 1,113
Ending balance: collectively evaluated
for impairment 5,389 3,408 1,958 59 763 11,577
Loans receivable:
Ending balance 344,326 346,639 145,735 4,827 841,527
Ending balance: individually evaluated
for impairment 5,255 — 444 — 5,699
Ending balance: collectively evaluated
for impairment 339,071 346,639 145,291 4,827 835,828
As of December 31, 2020: Commercial Real Consumer Commercial Consumer Unallocated Total
$ $ $ $ $ $
Allowance for credit losses:
Ending balance: individually evaluated
for impairment 1,131 — — — — 1,131
Ending balance: collectively evaluated
for impairment 5,198 3,449 1,972 52 525 11,196
Loans receivable:
Ending balance 342,144 345,567 129,210 5,155 822,076
Ending balance: individually evaluated
for impairment 5,294 — 469 — 5,763
Ending balance: collectively evaluated
for impairment 336,850 345,567 128,741 5,155 816,313 |
