Loans and Allowance for Credit Losses | 5. Loans and Allowance for Credit Losses The following table presents the Corporation’s loan portfolio by category of loans as of March 31, 2023 (in thousands): March 31, 2023 $ Agriculture 240,006 Business Loans 353,537 Consumer 6,061 Home Equity 100,743 Non-Owner Occupied Commercial Real Estate 119,412 Residential Real Estate (a) 434,215 Gross loans prior to deferred costs 1,253,974 Deferred loan costs, net 2,625 Allowance for credit losses (16,054 ) Total net loans (b) 1,240,545 (a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $295,917,000 as of March 31, 2023. (b) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The following table presents the Corporation’s loan portfolio, prior to the adoption of ASC 326, by category of loans and the impact of the change from the adoption of the standard (in thousands): Post Adoption December 31, Adoption January, 1 2022 Impact 2023 $ $ $ Agriculture — 238,734 238,734 Business Loans — 336,340 336,340 Home Equity — 98,854 98,854 Non-Owner Occupied CRE — 111,333 111,333 Residential Real Estate (a) — 397,260 397,260 Commercial real estate Commercial mortgages 210,823 (210,823 ) — Agriculture mortgages 221,167 (221,167 ) — Construction 86,793 (86,793 ) — Total commercial real estate 518,783 (518,783 ) — Consumer real estate (a) 1-4 family residential mortgages 410,301 (410,301 ) — Home equity loans 11,937 (11,937 ) — Home equity lines of credit 98,349 (98,349 ) — Total consumer real estate 520,587 (520,587 ) — Commercial and industrial Commercial and industrial 87,528 (87,528 ) — Tax-free loans 28,664 (28,664 ) — Agriculture loans 27,122 (27,122 ) — Total commercial and industrial 143,314 (143,314 ) — Consumer 5,769 163 5,932 Gross loans prior to deferred fees 1,188,453 — 1,188,453 Deferred loan costs, net 2,664 Allowance for credit losses (14,151 ) Total net loans 1,176,966 (a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $298,375,000 as of December 31, 2022. Age Analysis of Past-Due Loans Receivable The performance and credit quality of the loan portfolio is monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past-due status as of March 31, 2023 (in thousands): March 31, 2023 31-60 61-90 Greater Than Days Days 90 Days Total Total Current Past Due Past Due Past Due Past Due Loans Agriculture $ 239,264 $ 473 $ — $ 269 $ 742 $ 240,006 Business Loans 353,325 58 — 154 212 353,537 Consumer 5,994 31 1 35 67 6,061 Home Equity 100,566 154 23 — 177 100,743 Non-Owner Occupied CRE 119,412 — — — — 119,412 Residential Real Estate 433,737 341 — 137 478 434,215 Total (a) $ 1,252,298 $ 1,057 $ 24 $ 595 $ 1,676 $ 1,253,974 (a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The following table presents the classes of the loan portfolio summarized by the past-due status as of December 31, 2022 (in thousands): December 31, 2022 Loans Greater Receivable > 30-59 Days 60-89 Days than 90 Total Past Total Loans 90 Days and Past Due Past Due Days Due Current Receivable Accruing $ $ $ $ $ $ $ Commercial real estate Commercial mortgages — — 554 554 210,269 210,823 — Agriculture mortgages — — 2,787 2,787 218,380 221,167 — Construction — — — — 86,793 86,793 — Consumer real estate 1-4 family residential mortgages 905 — 447 1,352 408,949 410,301 139 Home equity loans 17 — 339 356 11,581 11,937 — Home equity lines of credit 165 16 — 181 98,168 98,349 — Commercial and industrial Commercial and industrial — — 190 190 87,338 87,528 — Tax-free loans — — — — 28,664 28,664 — Agriculture loans — — — — 27,122 27,122 — Consumer 9 5 30 44 5,725 5,769 30 Total 1,096 21 4,347 5,464 1,182,989 1,188,453 169 Nonperforming Loans The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing interest as of March 31, 2023, (in thousands): Nonaccrual Nonaccrual Loans Past with no with Total Due Over 90 Days Total ACL ACL Nonaccrual Still Accruing Nonperforming Agriculture $ 1,005 $ — $ 1,005 $ 269 $ 1,274 Business Loans 2,509 — 2,509 — 2,509 Consumer Loans — — — 35 35 Home Equity — — — — — Non-Owner Occupied CRE — — — — — Residential Real Esate — — — 137 137 Total (a) $ 3,514 $ — $ 3,514 $ 441 $ 3,955 (a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2022 (in thousands): Nonaccrual Loans December 31, 2022 $ Commercial real estate Commercial mortgages 554 Agriculture mortgages 2,787 Construction — Consumer real estate 1-4 family residential mortgages 308 Home equity loans 339 Home equity lines of credit — Commercial and industrial Commercial and industrial 190 Tax-free loans — Agriculture loans — Consumer — Total 4,178 Credit Quality Indicators 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, 2023 and December 31, 2022. 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. Based on the most recent analysis performed, the following table presents the recorded investment by internal risk rating system for Commercial Credit exposure as of March 31, 2023 (in thousands): Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted March 31, 2023 2023 2022 2021 2020 2019 Prior Cost Basis to Term Total Agriculture Risk Rating Pass $ 9,568 $ 45,812 $ 52,338 $ 21,590 $ 16,144 $ 65,217 $ 23,566 $ — $ 234,235 Special Mention — 74 505 — 199 1,246 76 — 2,100 Substandard — — — 763 288 2,585 35 — 3,671 Doubtful — — — — — — — — — Total $ 9,568 $ 45,886 $ 52,843 $ 22,353 $ 16,631 $ 69,048 $ 23,677 $ — $ 240,006 Agriculture Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Business Loans Risk Rating Pass $ 18,194 $ 104,502 $ 72,834 $ 40,876 $ 17,883 $ 54,141 $ 37,884 $ — $ 346,314 Special Mention — — — — — — — — — Substandard 3,036 1,622 — 317 — 1,308 940 — 7,223 Doubtful — — — — — — — — — Total $ 21,230 $ 106,124 $ 72,834 $ 41,193 $ 17,883 $ 55,449 $ 38,824 $ — $ 353,537 Business Loans Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Non-Owner Occupied CRE Risk Rating Pass $ 7,587 $ 42,243 $ 26,412 $ 13,336 $ 8,062 $ 13,887 $ 4,605 $ — $ 116,132 Special Mention — 548 — — — — — — 548 Substandard — — — — 2,413 319 — — 2,732 Doubtful — — — — — — — — — Total $ 7,587 $ 42,791 $ 26,412 $ 13,336 $ 10,475 $ 14,206 $ 4,605 $ — $ 119,412 Non-Owner Occupied CRE Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total Risk Rating Pass $ 35,349 $ 192,557 $ 151,584 $ 75,802 $ 42,089 $ 133,245 $ 66,055 $ — $ 696,681 Special Mention — 622 505 — 199 1,246 76 — 2,648 Substandard 3,036 1,622 — 1,080 2,701 4,212 975 — 13,626 Doubtful — — — — — — — — — Total (a) $ 38,385 $ 194,801 $ 152,089 $ 76,882 $ 44,989 $ 138,703 $ 67,106 $ — $ 712,955 (a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The following table presents the recorded investment in loans by internal risk rating system for Commercial Credit Exposure as of December 31, 2022 in accordance with ASC 310 (in thousands): December 31, 2022 Commercial Agriculture Construction Commercial Tax-free Agriculture Total $ $ $ $ $ $ $ Grade: Pass 209,534 214,905 83,240 85,977 28,664 26,749 649,069 Special Mention — 1,966 3,553 893 — 132 6,544 Substandard 1,289 4,296 — 658 — 241 6,484 Doubtful — — — — — — — Loss — — — — — — — Total 210,823 221,167 86,793 87,528 28,664 27,122 662,097 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 table presents the balances of consumer loans by classes of the loan portfolio based on payment performance as of March 31, 2023 (in thousands): Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted March 31, 2023 2023 2022 2021 2020 2019 Prior Cost Basis to Term Total Consumer Payment Performance Performing $ 1,670 $ 1,756 $ 747 $ 336 $ 82 $ 8 $ 1,427 $ — $ 6,026 Nonperforming — 7 21 — — 7 — — 35 Total $ 1,670 $ 1,763 $ 768 $ 336 $ 82 $ 15 $ 1,427 $ — $ 6,061 Consumer Current period gross charge-offs $ — $ — $ — $ — $ 1 $ — $ — $ — $ 1 Home equity Payment Performance Performing $ — $ 20,660 $ 1,151 $ 659 $ 618 $ 2,393 $ 72,563 $ 2,699 $ 100,743 Nonperforming — — — — — — — — — Total $ — $ 20,660 $ 1,151 $ 659 $ 618 $ 2,393 $ 72,563 $ 2,699 $ 100,743 Home equity Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Residential Real Estate Payment Performance Performing $ 30,002 $ 161,355 $ 111,396 $ 46,244 $ 34,016 $ 51,065 $ — $ — $ 434,078 Nonperforming — — — — — 137 — — 137 Total $ 30,002 $ 161,355 $ 111,396 $ 46,244 $ 34,016 $ 51,202 $ — $ — $ 434,215 Residential Real Estate Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total Payment Performance Performing $ 34,373 $ 183,771 $ 113,294 $ 47,239 $ 34,716 $ 53,466 $ 73,990 $ — $ 540,849 Nonperforming — 7 21 — — 144 — — 172 Total (a) $ 34,373 $ 183,778 $ 113,315 $ 47,239 $ 34,716 $ 53,610 $ 73,990 $ — $ 541,021 (a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The following table presents the balances of consumer loans by classes of the loan portfolio based on payment performance as of December 31, 2022 in accordance with ASC 310 (in thousands): December 31, 2022 1-4 Family Home Equity Home Equity Consumer Total Payment performance: $ $ $ $ $ Performing 409,854 11,598 98,349 5,739 525,539 Non-performing 447 339 — 30 816 Total 410,301 11,937 98,349 5,769 526,355 As of December 31, 2022, 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, 2022, in accordance with ASC 310 is as follows: Three Months Ended March 31 2022 $ Average recorded balance of impaired loans 2,878 Interest income recognized on impaired loans 8 The following tables summarize information regarding impaired loans by loan portfolio class as of December 31, 2022, in accordance with ASC 310: IMPAIRED LOAN ANALYSIS (DOLLARS IN THOUSANDS) December 31, 2022 Recorded Unpaid Related $ $ $ With no related allowance recorded: Commercial real estate Commercial mortgages 1,201 1,271 — Agriculture mortgages 3,229 3,348 — Construction — — — Total commercial real estate 4,430 4,619 — Commercial and industrial Commercial and industrial 190 199 — Tax-free loans — — — Agriculture loans — — — Total commercial and industrial 190 199 — Total with no related allowance 4,620 4,818 — With an allowance recorded: Commercial real estate Commercial mortgages — — — Agriculture mortgages — — — Construction — — — Total commercial real estate — — — Commercial and industrial Commercial and industrial — — — Tax-free loans — — — Agriculture loans — — — Total commercial and industrial — — — Total with a related allowance — — — Total by loan class: Commercial real estate Commercial mortgages 1,201 1,271 — Agriculture mortgages 3,229 3,348 — Construction — — — Total commercial real estate 4,430 4,619 — Commercial and industrial Commercial and industrial 190 199 — Tax-free loans — — — Agriculture loans — — — Total commercial and industrial 190 199 — Total 4,620 4,818 — Allowance for Credit Losses The following table presents the activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2023 (in thousands): Impact of Beginning adopting Provisions Ending Balance ASC 326 Charge-offs Recoveries (Reductions) Balance Allowance for credit losses: Commercial Real Estate $ 6,074 $ (6,074 ) $ — $ — $ — $ — Consumer Real Estate 5,442 (5,442 ) — — — — Commerical & Industrial 2,151 (2,151 ) — — — — Consumer 67 (67 ) — — — — Agriculture — 3,537 — 63 (9 ) 3,591 Business Loans — 3,382 — 13 78 3,473 Consumer Loans — 250 (1 ) — 21 270 Home Equity — 2,129 — — 189 2,318 Non-Owner Occupied CRE — 875 — — 67 942 Residential Real Estate — 4,658 — 1 801 5,460 Unallocated 417 (417 ) — — — — Total (a) $ 14,151 $ 680 $ (1 ) $ 77 $ 1,147 $ 16,054 (a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. During the three months ended March 31, 2023, management charged off $1,000 in loans while recovering $77,000 and added $1,147,000 to the provision for credit losses related to loans and added $110,000 to the provision for off-balance sheet credit exposure for a combined provision of $1,257,000. The ACL is maintained at a level determined to be adequate to absorb estimated expected credit losses within the loan portfolio over the contractual life of an instrument that considers our historical loss experience, current conditions, and forecasts of future economic conditions as of the balance sheet date. The Corporation develops and documents a systematic ACL methodology based on the following portfolio segments: Agriculture, Business Loans, Consumer Loans, Home Equity, Non-Owner Occupied CRE, and Residential Real Estate. The following are key risks within each portfolio segment: Agriculture – Business Loans Consumer - Home Equity – Non-Owner Occupied CRE - Residential Real Estate The following table details activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2022: ALLOWANCE FOR CREDIT LOSSES (DOLLARS IN THOUSANDS) Commercial Consumer Commercial Consumer Unallocated Total $ $ $ $ $ $ Allowance for credit losses: Beginning balance - December 31, 2021 6,263 3,834 2,112 87 635 12,931 Charge-offs (65 ) — — (1 ) — (66 ) Recoveries — 3 10 1 — 14 Provision (90 ) 41 193 (16 ) (28 ) 100 Balance - March 31, 2022 6,108 3,878 2,315 71 607 12,979 During the three months ended March 31, 2022, management charged off $66,000 in loans while recovering $14,000 and added $100,000 to the provision. During the three months ended March 31, 2022, 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, 2021, 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, 2022, so the provision expense was primarily related to an increase in loan balances as well as slightly higher unallocated portion of the allowance. The following table presents 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, 2023: ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE (DOLLARS IN THOUSANDS) As of March 31, 2023: Agriculture Business Consumer Home Non- Residential Total $ $ $ $ $ $ $ Allowance for credit losses: Ending balance: individually evaluated — — — — — — — Ending balance: collectively evaluated 3,591 3,473 270 2,318 942 5,460 16,054 Loans receivable: Ending balance 240,006 353,537 6,061 100,743 119,412 434,215 1,253,974 Ending balance: individually evaluated 2,591 1,351 — — — — 3,942 Ending balance: collectively evaluated 237,415 352,186 6,061 100,743 119,412 434,215 1,250,032 The following table presents the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of December 31, 2022: ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE (DOLLARS IN THOUSANDS) As of December 31, 2022: Commercial Real Consumer Commercial Consumer Unallocated Total $ $ $ $ $ $ Allowance for credit losses: Ending balance: individually evaluated for impairment — — — — — — Ending balance: collectively evaluated for impairment 6,074 5,442 2,151 67 417 14,151 Loans receivable: Ending balance 518,783 520,587 143,314 5,769 1,188,453 Ending balance: individually evaluated for impairment 4,430 — 190 — 4,620 Ending balance: collectively evaluated for impairment 514,353 520,587 143,124 5,769 1,183,833 |