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, 2024 (in thousands): March 31, December 31, 2024 2023 $ $ Agriculture 258,916 257,372 Business Loans 379,233 354,252 Consumer 6,768 6,392 Home Equity 108,809 107,176 Non-Owner Occupied Commercial Real Estate 123,650 135,117 Residential Real Estate (a) 500,937 497,553 Gross loans prior to deferred costs 1,378,313 1,357,862 Deferred loan costs, net 2,146 2,216 Allowance for credit losses (14,616 ) (15,176 ) Total net loans 1,365,843 1,344,902 (a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $312,482,000 and $301,822,000 as of March 31, 2024 and December 31, 2023. 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, 2024 and December 31, 2023 (in thousands): March 31, 2024 31-60 61-90 Greater Than Days Days 90 Days Total Total Current Past Due Past Due Past Due Past Due Loans Agriculture $ 257,502 $ — $ 1,100 $ 314 $ 1,414 $ 258,916 Business Loans 379,006 125 1 101 227 379,233 Consumer 6,746 13 7 2 22 6,768 Home Equity 108,162 183 197 267 647 108,809 Non-Owner Occupied CRE 123,650 — — — — 123,650 Residential Real Estate 498,659 1,093 35 1,150 2,278 500,937 Total $ 1,373,725 $ 1,414 $ 1,340 $ 1,834 $ 4,588 $ 1,378,313 December 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 $ 257,372 $ — $ — $ — $ — $ 257,372 Business Loans 354,008 130 — 114 244 354,252 Consumer 6,361 15 3 13 31 6,392 Home Equity 106,787 170 69 150 389 107,176 Non-Owner Occupied CRE 135,117 — — — — 135,117 Residential Real Estate 495,952 1,245 — 356 1,601 497,553 Total $ 1,355,597 $ 1,560 $ 72 $ 633 $ 2,265 $ 1,357,862 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, 2024 and December 31, 2023, (in thousands): March 31, 2024 Nonaccrual Nonaccrual Loans Past with no with Total Due Over 90 Days Total ACL ACL Nonaccrual Still Accruing Nonperforming Agriculture $ 913 $ — $ 913 $ 314 $ 1,227 Business Loans 1,685 — 1,685 — 1,685 Consumer Loans — — — 2 2 Home Equity — — — 267 267 Non-Owner Occupied CRE — — — — — Residential Real Estate 1,073 — 1,073 77 1,150 Total $ 3,671 $ — $ 3,671 $ 660 $ 4,331 December 31, 2023 Nonaccrual Nonaccrual Loans Past with no with Total Due Over 90 Days Total ACL ACL Nonaccrual Still Accruing Nonperforming Agriculture $ 941 $ — $ 941 $ — $ 941 Business Loans 1,817 — 1,817 — 1,817 Consumer Loans — — — 13 13 Home Equity — — — 150 150 Non-Owner Occupied CRE — — — — — Residential Real Estate — — — 356 356 Total $ 2,758 $ — $ 2,758 $ 519 $ 3,277 The following table presents, by class of loans, the collateral-dependent nonaccrual loans and type of collateral as of March 31, 2024, and December 31, 2023 (in thousands). March 31, 2024 Real Estate Other None Total Agriculture $ 913 $ — $ — $ 913 Business Loans 1,685 — — 1,685 Consumer Loans — — — — Home Equity — — — — Non-Owner Occupied — — — — Residential Real Estate 1,073 — — 1,073 Total $ 3,671 $ — $ — $ 3,671 December 31, 2023 Real Estate Other None Total Agriculture $ 941 $ — $ — $ 941 Business Loans 1,817 — — 1,817 Consumer Loans — — — — Home Equity — — — — Non-Owner Occupied — — — — Residential Real Estate — — — — Total $ 2,758 $ — $ — $ 2,758 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, 2024 and December 31, 2023. 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 exposures as of March 31, 2024 (in thousands): Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted March 31, 2024 2024 2023 2022 2021 2020 Prior Cost Basis to Term Total Agriculture Risk Rating Pass $ 2,704 $ 48,960 $ 39,484 $ 48,274 $ 18,224 $ 70,385 $ 22,841 $ — $ 250,872 Special Mention 200 539 — 89 — 1,260 422 — 2,510 Substandard — — 1,334 424 1,382 2,372 22 — 5,534 Doubtful — — — — — — — — — Total $ 2,904 $ 49,499 $ 40,818 $ 48,787 $ 19,606 $ 74,017 $ 23,285 $ — $ 258,916 Agriculture Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Business Loans Risk Rating Pass $ 11,514 $ 46,088 $ 108,012 $ 64,845 $ 35,722 $ 60,134 $ 45,936 $ — $ 372,251 Special Mention — — 10 422 — 267 — — 699 Substandard — 2,988 1,980 — 245 971 99 — 6,283 Doubtful — — — — — — — — — Total $ 11,514 $ 49,076 $ 110,002 $ 65,267 $ 35,967 $ 61,372 $ 46,035 $ — $ 379,233 Business Loans Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Non-Owner Occupied CRE Risk Rating Pass $ 2,222 $ 25,134 $ 35,900 $ 25,323 $ 12,706 $ 19,343 $ — $ — $ 120,628 Special Mention — — — — — 35 — — 35 Substandard — 390 — — — 2,597 — — 2,987 Doubtful — — — — — — — — — Total $ 2,222 $ 25,524 $ 35,900 $ 25,323 $ 12,706 $ 21,975 $ — $ — $ 123,650 Non-Owner Occupied CRE Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total Risk Rating Pass $ 16,440 $ 120,182 $ 183,396 $ 138,442 $ 66,652 $ 149,862 $ 68,777 $ — $ 743,751 Special Mention 200 539 1,344 511 — 1,562 422 — 4,578 Substandard — 3,378 1,980 424 1,627 5,940 121 — 13,470 Doubtful — — — — — — — — — Total $ 16,640 $ 124,099 $ 186,720 $ 139,377 $ 68,279 $ 157,364 $ 69,320 $ — $ 761,799 Based on the most recent analysis performed, the following table presents the recorded investment by internal risk rating system for Commercial Credit exposures as of December 31, 2023 (in thousands): Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted December 31, 2023 2023 2022 2021 2020 2019 Prior Cost Basis to Term Total Agriculture Risk Rating Pass $ 47,599 $ 41,741 $ 49,276 $ 18,699 $ 14,793 $ 58,459 $ 21,157 $ — $ 251,724 Special Mention 60 9 96 697 170 1,136 204 — 2,372 Substandard — — 424 719 361 1,772 — 3,276 Doubtful — — — — — — — — — Total $ 47,659 $ 41,750 $ 49,796 $ 20,115 $ 15,324 $ 61,367 $ 21,361 $ — $ 257,372 Agriculture Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Business Loans Risk Rating Pass $ 43,670 $ 102,419 $ 64,030 $ 36,675 $ 17,785 $ 45,583 $ 37,269 $ — $ 347,431 Special Mention — 43 426 — — 270 100 — 839 Substandard 3,152 1,369 — 263 — 838 360 — 5,982 Doubtful — — — — — — — — — Total $ 46,822 $ 103,831 $ 64,456 $ 36,938 $ 17,785 $ 46,691 $ 37,729 $ — $ 354,252 Business Loans Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Non-Owner Occupied CRE Risk Rating Pass $ 26,757 $ 43,976 $ 27,377 $ 12,849 $ 7,705 $ 12,397 $ 375 $ — $ 131,436 Special Mention 392 639 — — — 37 — — 1,068 Substandard — — — — 2,312 301 — — 2,613 Doubtful — — — — — — — — — Total $ 27,149 $ 44,615 $ 27,377 $ 12,849 $ 10,017 $ 12,735 $ 375 $ — $ 135,117 Non-Owner Occupied CRE Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total Risk Rating Pass $ 118,026 $ 188,136 $ 140,683 $ 68,223 $ 40,283 $ 116,439 $ 58,801 $ — $ 730,591 Special Mention 452 691 522 697 170 1,443 304 — 4,279 Substandard 3,152 1,369 424 982 2,673 2,911 360 — 11,871 Doubtful — — — — — — — — — Total $ 121,630 $ 190,196 $ 141,629 $ 69,902 $ 43,126 $ 120,793 $ 59,465 $ — $ 746,741 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, 2024 (in thousands): Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted March 31, 2024 2024 2023 2022 2021 2020 Prior Cost Basis to Term Total Consumer Payment Performance Performing $ 2,482 $ 1,553 $ 854 $ 248 $ 147 $ 22 $ 1,460 $ — $ 6,766 Nonperforming — — 2 — — — — — 2 Total $ 2,482 $ 1,553 $ 856 $ 248 $ 147 $ 22 $ 1,460 $ — $ 6,768 Consumer Current period gross charge-offs $ — $ — $ 25 $ — $ — $ — $ — $ — $ 25 Home equity Payment Performance Performing $ — $ 7,970 $ 17,707 $ 1,014 $ 552 $ 2,243 $ 78,436 $ 620 $ 108,542 Nonperforming — — — — — — 267 — 267 Total $ — $ 7,970 $ 17,707 $ 1,014 $ 552 $ 2,243 $ 78,703 $ 620 $ 108,809 Home equity Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Residential Real Estate Payment Performance Performing $ 10,292 $ 122,409 $ 147,102 $ 104,035 $ 43,236 $ 72,713 $ — $ — $ 499,787 Nonperforming — 1,073 — — — 77 — — 1,150 Total $ 10,292 $ 123,482 $ 147,102 $ 104,035 $ 43,236 $ 72,790 $ — $ — $ 500,937 Residential Real Estate Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total Payment Performance Performing $ 12,774 $ 131,932 $ 165,663 $ 105,297 $ 43,935 $ 74,978 $ 79,896 $ 620 $ 615,095 Nonperforming — 1,073 2 — — 77 267 — 1,419 Total $ 12,774 $ 133,005 $ 165,665 $ 105,297 $ 43,935 $ 75,055 $ 80,163 $ 620 $ 616,514 The following table presents the balances of consumer loans by classes of the loan portfolio based on payment performance as of December 31, 2023 (in thousands): Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted 2023 2022 2021 2020 2019 Prior Cost Basis to Term Total Consumer Payment Performance Performing $ 3,251 $ 1,085 $ 351 $ 176 $ 31 $ 3 $ 1,482 $ — $ 6,379 Nonperforming — 13 — — — — — — 13 Total $ 3,251 $ 1,098 $ 351 $ 176 $ 31 $ 3 $ 1,482 $ — $ 6,392 Consumer Current period gross charge-offs $ — $ 40 $ 17 $ 1 $ 1 $ 6 $ — $ — $ 65 Home equity Payment Performance Performing $ 7,086 $ 18,476 $ 1,049 $ 564 $ 529 $ 1,847 $ 76,076 1,399 $ 107,026 Nonperforming — — — — — — 150 — 150 Total $ 7,086 $ 18,476 $ 1,049 $ 564 $ 529 $ 1,847 $ 76,226 $ 1,399 $ 107,176 Home equity Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Residential Real Estate Payment Performance Performing $ 123,368 $ 148,835 $ 105,283 $ 43,961 $ 31,514 $ 44,236 $ — $ — $ 497,197 Nonperforming — — 356 — — — — — 356 Total $ 123,368 $ 148,835 $ 105,639 $ 43,961 $ 31,514 $ 44,236 $ — $ — $ 497,553 Residential Real Estate Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total Payment Performance Performing $ 133,705 $ 168,396 $ 106,683 $ 44,701 $ 32,074 $ 46,086 $ 77,558 $ 1,399 $ 610,602 Nonperforming — 13 356 — — — 150 — 519 Total $ 133,705 $ 168,409 $ 107,039 $ 44,701 $ 32,074 $ 46,086 $ 77,708 $ 1,399 $ 611,121 Allowance for Credit Losses The following table presents the activity in the allowance for credit losses (ACL) by portfolio segment for the three months ended March 31, 2024 (in thousands): Beginning Provisions Ending Balance Charge-offs Recoveries (Reductions) Balance Allowance for credit losses: Agriculture 3,106 — — (282 ) 2,824 Business Loans 2,684 — — (139 ) 2,545 Consumer Loans 355 (25 ) 5 16 351 Home Equity 2,341 — — 12 2,353 Non-Owner Occupied CRE 818 — — (105 ) 713 Residential Real Estate 5,872 — — (42 ) 5,830 Total $ 15,176 $ (25 ) $ 5 $ (540 ) $ 14,616 During the three months ended March 31, 2024, management charged off $25,000 in loans while recovering $5,000 and released $540,000 from the provision for credit losses related to loans and released $104,000 from the provision for off-balance sheet credit exposure for a combined release to the provision of $644,000. 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) There were reclassifications 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. 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 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 Commercial Real Estate (CRE), and Residential Real Estate. The following are key risks within each portfolio segment: Agriculture – Business Loans Consumer - economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. Home Equity– Non-Owner Occupied CRE - Residential Real Estate The following table presents the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on the estimation method as of March 31, 2024: ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE (DOLLARS IN THOUSANDS) As of March 31, 2024: Agriculture Business Consumer Home Non- Residential Total $ $ $ $ $ $ $ Allowance for credit losses: Ending balance: individually evaluated — 113 — — — — 113 Ending balance: collectively evaluated 2,824 2,432 351 2,353 713 5,830 14,503 Loans receivable: Ending balance 258,916 379,233 6,768 108,809 123,650 500,937 1,378,313 Ending balance: individually evaluated 913 3,988 — — — 1,073 5,974 Ending balance: collectively evaluated 258,003 375,245 6,768 108,809 123,650 499,864 1,372,339 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, 2023: ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE (DOLLARS IN THOUSANDS) As of December 31, 2023: Agriculture Business Consumer Home Non-Owner Residential Total $ $ $ $ $ $ $ Allowance for credit losses: Ending balance: individually evaluated — — — — — — Ending balance: collectively evaluated 3,106 2,684 355 2,341 818 5,872 15,176 Loans receivable: Ending balance 257,372 354,252 6,392 107,176 135,117 497,553 1,357,862 Ending balance: individually evaluated 1,327 1,817 — — — — 3,144 Ending balance: collectively evaluated 256,045 352,435 6,392 107,176 135,117 497,553 1,354,718 Modifications to Borrowers Experiencing Financial Difficulty The Corporation may grant a modification to borrowers in financial distress by providing a temporary reduction in interest rate, or an extension of a loan’s stated maturity date. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. The Corporation identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower's financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. There were no modifications of loans to borrowers experiencing financial difficulty for the quarter ending March 31, 2024 or for the quarter ending March 31, 2023. |