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 September 30, 2024 (in thousands): September 30, December 31, 2024 2023 $ $ Agriculture 280,446 257,372 Business Loans 349,089 354,252 Consumer 6,460 6,392 Home Equity 116,748 107,176 Non-Owner Occupied Commercial Real Estate 135,006 135,117 Residential Real Estate (a) 520,889 497,553 Gross loans prior to deferred costs 1,408,638 1,357,862 Deferred loan costs, net 1,873 2,216 Allowance for credit losses (14,742 ) (15,176 ) Total net loans 1,395,769 1,344,902 (a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $328,932,000 and $301,822,000 as of September 30, 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 September 30, 2024 and December 31, 2023 (in thousands): September 30, 2024 31-60 61-90 Greater Than Days Days 90 Days Total Total Current Past Due Past Due Past Due Past Due Loans Agriculture $ 279,113 $ 1,333 $ — $ — $ 1,333 $ 280,446 Business Loans 344,941 133 3,937 78 4,148 349,089 Consumer 6,455 5 — — 5 6,460 Home Equity 116,396 79 — 273 352 116,748 Non-Owner Occupied CRE 135,006 — — — — 135,006 Residential Real Estate 517,110 — 1,618 2,161 3,779 520,889 Total $ 1,399,021 $ 1,550 $ 5,555 $ 2,512 $ 9,617 $ 1,408,638 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 September 30, 2024 and December 31, 2023, (in thousands): September 30, 2024 Nonaccrual Nonaccrual Loans Past with no with Total Due Over 90 Days Total ACL ACL Nonaccrual Still Accruing Nonperforming Agriculture $ 1,530 $ 1 $ 1,531 $ — $ 1,531 Business Loans 4,523 1,171 5,694 — 5,694 Consumer Loans — 1 1 — 1 Home Equity 417 — 417 — 417 Non-Owner Occupied CRE — — — — — Residential Real Estate 2,219 — 2,219 — 2,219 Total $ 8,689 $ 1,173 $ 9,862 $ — $ 9,862 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 September 30, 2024 and December 31, 2023 (in thousands). September 30, 2024 Real Estate Other None Total Agriculture $ 1,531 $ — $ — $ 1,531 Business Loans 5,694 — — 5,694 Consumer Loans 1 — — 1 Home Equity 417 — — 417 Non-Owner Occupied — — — — Residential Real Estate 2,219 — — 2,219 Total $ 9,862 $ — $ — $ 9,862 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 September 30, 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 September 30, 2024 (in thousands): Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted September 30, 2024 2024 2023 2022 2021 2020 Prior Cost Basis to Term Total Agriculture Risk Rating Pass $ 18,047 $ 50,979 $ 39,874 $ 46,141 $ 17,709 $ 67,281 $ 21,134 $ — $ 261,165 Special Mention 1,044 186 19 6,503 — 1,579 1,696 — 11,027 Substandard 491 1,765 1,447 1,045 1,329 1,957 220 — 8,254 Doubtful — — — — — — — — — Total $ 19,582 $ 52,930 $ 41,340 $ 53,689 $ 19,038 $ 70,817 $ 23,050 $ — $ 280,446 Agriculture Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Business Loans Risk Rating Pass $ 36,101 $ 40,910 $ 89,552 $ 56,573 $ 33,254 $ 47,199 $ 35,624 $ — $ 339,213 Special Mention — — — 414 — 260 — — 674 Substandard — 2,945 2,287 — — 918 3,052 — 9,202 Doubtful — — — — — — — — — Total $ 36,101 $ 43,855 $ 91,839 $ 56,987 $ 33,254 $ 48,377 $ 38,676 $ — $ 349,089 Business Loans Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Non-Owner Occupied CRE Risk Rating Pass $ 9,058 $ 32,823 $ 34,316 $ 25,613 $ 12,375 $ 18,072 $ — $ — $ 132,257 Special Mention — — — — — — — — — Substandard — 383 — — — 2,366 — — 2,749 Doubtful — — — — — — — — — Total $ 9,058 $ 33,206 $ 34,316 $ 25,613 $ 12,375 $ 20,438 $ — $ — $ 135,006 Non-Owner Occupied CRE Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total Risk Rating Pass $ 63,206 $ 124,712 $ 163,742 $ 128,327 $ 63,338 $ 132,552 $ 56,758 $ — $ 732,635 Special Mention 1,044 186 19 6,917 — 1,839 1,696 — 11,701 Substandard 491 5,093 3,734 1,045 1,329 5,241 3,272 — 20,205 Doubtful — — — — — — — — — Total $ 64,741 $ 129,991 $ 167,495 $ 136,289 $ 64,667 $ 139,632 $ 61,726 $ — $ 764,541 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 September 30, 2024 (in thousands): Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted September 30, 2024 2024 2023 2022 2021 2020 Prior Cost Basis to Term Total Consumer Payment Performance Performing $ 3,097 $ 1,121 $ 507 $ 148 $ 73 $ 8 $ 1,506 $ — $ 6,460 Nonperforming — — 1 — — — — — 1 Total $ 3,097 $ 1,121 $ 508 $ 148 $ 73 $ 8 $ 1,506 $ — $ 6,461 Consumer Current period gross charge-offs $ — $ 13 $ 32 $ 6 $ — $ 4 $ — $ — $ 55 Home equity Payment Performance Performing $ 1,884 $ 7,157 $ 15,677 $ 939 $ 509 $ 1,782 $ 88,100 $ 427 $ 116,475 Nonperforming — — 144 — — — 273 — 417 Total $ 1,884 $ 7,157 $ 15,821 $ 939 $ 509 $ 1,782 $ 88,373 $ 427 $ 116,892 Home equity Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Residential Real Estate Payment Performance Performing $ 59,316 $ 110,090 $ 141,654 $ 100,379 $ 41,047 $ 66,243 $ — $ — $ 518,729 Nonperforming — 1,073 812 175 — 159 — — 2,219 Total $ 59,316 $ 111,163 $ 142,466 $ 100,554 $ 41,047 $ 66,402 $ — $ — $ 520,948 Residential Real Estate Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total Payment Performance Performing $ 64,297 $ 118,368 $ 157,838 $ 101,466 $ 41,629 $ 68,033 $ 89,606 $ 427 $ 641,664 Nonperforming — 1,073 957 175 — 159 273 — 2,637 Total $ 64,297 $ 119,441 $ 158,795 $ 101,641 $ 41,629 $ 68,192 $ 89,879 $ 427 $ 644,301 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 September 30, 2024 and September 30, 2023 (in thousands): Beginning Provisions Ending Balance Charge-offs Recoveries (Reductions) Balance Allowance for credit losses: Agriculture 2,660 — — 258 2,918 Business Loans 2,641 — — 500 3,141 Consumer Loans 327 (19 ) 5 (5 ) 308 Home Equity 2,660 — — (113 ) 2,547 Non-Owner Occupied CRE 693 — — (26 ) 667 Residential Real Estate 5,358 — — (197 ) 5,161 Total $ 14,339 $ (19 ) $ 5 $ 417 $ 14,742 Beginning Provisions Ending Balance Charge-offs Recoveries (Reductions) Balance Allowance for credit losses: Agriculture 3,666 — — (290 ) 3,376 Business Loans 3,449 — — (432 ) 3,017 Consumer Loans 357 (26 ) 3 33 367 Home Equity 2,339 — — (26 ) 2,313 Non-Owner Occupied CRE 943 — — (30 ) 913 Residential Real Estate 6,079 — — 284 6,363 Total $ 16,833 $ (26 ) $ 3 $ (461 ) $ 16,349 During the three months ended September 30, 2024, management charged off $19,000 in loans while recovering $5,000 and added $417,000 to the provision for credit losses related to loans and $80,000 in provision expense for off-balance sheet credit exposure for a net provision expense of $497,000. The following table presents the activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2024 and September 30, 2023 (in thousands): Beginning Provisions Ending Balance Charge-offs Recoveries (Reductions) Balance Allowance for credit losses: Agriculture 3,106 — — (188 ) 2,918 Business Loans 2,684 — 5 452 3,141 Consumer Loans 355 (55 ) 16 (8 ) 308 Home Equity 2,341 — — 206 2,547 Non-Owner Occupied CRE 818 — — (151 ) 667 Residential Real Estate 5,872 — — (711 ) 5,161 Total $ 15,176 $ (55 ) $ 21 $ (400 ) $ 14,742 Beginning Provisions Ending Balance Charge-offs Recoveries (Reductions) Balance Allowance for credit losses: Agriculture 3,537 — 71 (232 ) 3,376 Business Loans 3,382 — 8 (373 ) 3,017 Consumer Loans 250 (41 ) 3 155 367 Home Equity 2,129 — — 184 2,313 Non-Owner Occupied CRE 875 — — 38 913 Residential Real Estate 4,658 — 8 1,697 6,363 Total $ 14,831 $ (41 ) $ 90 $ 1,469 $ 16,349 During the nine ended September 30, 2024, management charged off $55,000 in loans while recovering $21,000 and released $400,000 from the provision for credit losses related to loans and added $46,000 to the provision for off-balance sheet credit exposure for a combined release of $354,000. 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 September 30, 2024: ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE (DOLLARS IN THOUSANDS) As of September 30, 2024: Agriculture Business Consumer Home Non- Residential Total $ $ $ $ $ $ $ Allowance for credit losses: Ending balance: individually evaluated 1 457 2 — — — 460 Ending balance: collectively evaluated 2,917 2,684 306 2,547 667 5,161 14,282 Loans receivable: Ending balance 280,446 349,089 6,460 116,748 135,006 520,889 1,408,638 Ending balance: individually evaluated 1,531 5,694 1 417 2,158 2,219 12,020 Ending balance: collectively evaluated 278,915 343,395 6,459 116,331 132,848 518,670 1,396,618 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 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- 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 was one modification of a loan to a borrower experiencing financial difficulty in the amount of $2,158,000 for the nine months ended September 30, 2024 and none for the nine months ended September 30, 2023. |