Loans | Note 4—Loans Loan Portfolio Composition The table below provides the composition of the loan portfolio at June 30, 2022 and December 31, 2021. The portfolio is comprised of two segments, commercial and consumer loans. The commercial loan segment is disaggregated by industry class which allows the Corporation to monitor risk and performance. Those industries representing the largest dollar investment and most risk are listed separately. The “Other” commercial loans category is comprised of various industries. The consumer related segment is comprised of residential mortgages, home equity and other consumer loans. The Corporation has not engaged in sub-prime residential mortgage originations. June 30, % Total December 31, % Total (dollars in thousands) 2022 Loans 2021 Loans Builder & developer $ 151,749 9.6 $ 156,462 10.2 Commercial real estate investor 377,800 23.8 322,887 21.1 Residential real estate investor 237,899 15.0 227,017 14.8 Hotel/Motel 69,525 4.4 70,254 4.6 Wholesale & retail 66,312 4.2 76,340 5.0 Manufacturing 80,933 5.1 72,720 4.8 Agriculture 95,025 6.0 95,317 6.2 Service 67,919 4.3 65,163 4.3 Other 208,222 13.1 222,179 14.5 Total commercial related loans 1,355,384 85.5 1,308,339 85.5 Residential mortgages 111,704 7.0 103,741 6.8 Home equity 94,453 6.0 94,842 6.2 Other 22,991 1.5 22,829 1.5 Total consumer related loans 229,148 14.5 221,412 14.5 Total loans $ 1,584,532 100.0 $ 1,529,751 100.0 Loan Risk Ratings The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer and residential mortgage loans, the bank follows the Uniform Retail Credit Classification guidance. Commercial loans up to $ 500,000 may be scored using a third-party credit scoring software model for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior management. Adjustments of loan risk ratings within the Watch, Criticized and Classified categories are generally performed by the Watch and Special Asset Committees, which includes senior management. The Committees, which typically meet at least quarterly, make changes, as appropriate, to these risk ratings. In addition to review by the Committees, existing loans are monitored by the primary loan officer and loan review officer to determine if any changes, upward or downward, in risk ratings are appropriate. Primary loan officers may recommend a change to a risk rating and internal loan review officers may downgrade existing loans, except to non-accrual status. Only the President/CEO or CFO may approve a downgrade of a loan to non-accrual status. The Special Asset Committee or President/CEO may upgrade a loan that is criticized or classified. The Corporation uses eleven risk ratings to grade commercial loans. The first six ratings are considered “pass” ratings. A pass rating is a satisfactory credit rating, which applies to a loan that is expected to perform in accordance with the loan agreement and has a low probability of loss. A loan rated “special mention” has a potential weakness which may, if not corrected, weaken the loan or inadequately protect the Corporation’s position at some future date. A loan rated “substandard” is inadequately protected by the current sound worth or paying capacity of the obligor, or of the collateral pledged. A “substandard” loan has a well-defined weakness or weaknesses that could jeopardize liquidation of the loan, which exposes the Corporation to potential loss if the deficiencies are not corrected. When circumstances indicate that collection of the loan is doubtful, the loan is risk-rated “nonaccrual,” the accrual of interest income is discontinued, and any unpaid interest previously credited to income is reversed. The table below does not include the regulatory classification of “doubtful,” nor does it include the regulatory classification of “loss”, because the Corporation promptly charges off loan losses. The table below presents a summary of loan risk ratings by loan class at June 30, 2022 and December 31, 2021. Special (dollars in thousands) Pass Mention Substandard Nonaccrual Total June 30, 2022 Builder & developer $ 134,874 $ 5,450 $ 9,099 $ 2,326 $ 151,749 Commercial real estate investor 374,413 614 223 2,550 377,800 Residential real estate investor 236,524 0 391 984 237,899 Hotel/Motel 64,700 0 4,825 0 69,525 Wholesale & retail 63,832 319 2,161 0 66,312 Manufacturing 76,003 0 679 4,251 80,933 Agriculture 81,772 11,711 386 1,156 95,025 Service 61,320 395 6,204 0 67,919 Other 191,657 1,270 11,083 4,212 208,222 Total commercial related loans 1,285,095 19,759 35,051 15,479 1,355,384 Residential mortgage 111,601 0 0 103 111,704 Home equity 93,977 0 0 476 94,453 Other 22,903 0 0 88 22,991 Total consumer related loans 228,481 0 0 667 229,148 Total loans $ 1,513,576 $ 19,759 $ 35,051 $ 16,146 $ 1,584,532 December 31, 2021 Builder & developer $ 142,983 $ 6,016 $ 6,656 $ 807 $ 156,462 Commercial real estate investor 316,976 929 1,039 3,943 322,887 Residential real estate investor 226,126 0 611 280 227,017 Hotel/Motel 40,789 0 17,273 12,192 70,254 Wholesale & retail 73,821 1,346 1,173 0 76,340 Manufacturing 67,544 0 51 5,125 72,720 Agriculture 90,226 80 714 4,297 95,317 Service 57,667 404 6,121 971 65,163 Other 201,226 1,384 14,197 5,372 222,179 Total commercial related loans 1,217,358 10,159 47,835 32,987 1,308,339 Residential mortgage 103,669 0 10 62 103,741 Home equity 94,358 47 0 437 94,842 Other 22,733 0 0 96 22,829 Total consumer related loans 220,760 47 10 595 221,412 Total loans $ 1,438,118 $ 10,206 $ 47,845 $ 33,582 $ 1,529,751 Impaired Loans The table below presents a summary of impaired loans at June 30, 2022 and December 31, 2021. Generally, impaired loans are all loans risk rated nonaccrual or classified troubled debt restructuring. An allowance is established for those individual loans where the Corporation has doubt as to the full recovery of the outstanding principal balance. Typically, impaired consumer related loans are partially or fully charged-off eliminating the need for specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for payments collected on a non-cash basis and charge-offs. With No Allowance With A Related Allowance Total Recorded Unpaid Recorded Unpaid Related Recorded Unpaid (dollars in thousands) Investment Principal Investment Principal Allowance Investment Principal June 30, 2022 Builder & developer $ 984 $ 1,072 $ 1,520 $ 1,537 $ 435 $ 2,504 $ 2,609 Commercial real estate investor 2,878 4,105 0 0 0 2,878 4,105 Residential real estate investor 769 907 215 215 163 984 1,122 Hotel/Motel 0 0 0 0 0 0 0 Wholesale & retail 0 0 0 0 0 0 0 Manufacturing 4,251 4,776 0 0 0 4,251 4,776 Agriculture 408 482 748 930 400 1,156 1,412 Service 0 0 0 0 0 0 0 Other commercial 0 0 4,212 5,075 3,263 4,212 5,075 Total impaired commercial related loans 9,290 11,342 6,695 7,757 4,261 15,985 19,099 Residential mortgage 874 103 0 0 0 874 103 Home equity 476 521 0 0 0 476 521 Other consumer 88 99 0 0 0 88 99 Total impaired consumer related loans 1,438 723 0 0 0 1,438 723 Total impaired loans $ 10,728 $ 12,065 $ 6,695 $ 7,757 $ 4,261 $ 17,423 $ 19,822 December 31, 2021 Builder & developer $ 991 $ 1,078 $ 0 $ 0 $ 0 $ 991 $ 1,078 Commercial real estate investor 2,834 2,854 1,878 1,878 1,464 4,712 4,732 Residential real estate investor 280 438 0 0 0 280 438 Hotel/Motel 12,192 12,754 0 0 0 12,192 12,754 Wholesale & retail 0 0 0 0 0 0 0 Manufacturing 5,125 5,501 0 0 0 5,125 5,501 Agriculture 2,709 2,893 1,588 1,784 467 4,297 4,677 Service 0 0 971 1,061 377 971 1,061 Other commercial 3,622 4,376 1,750 2,389 1,750 5,372 6,765 Total impaired commercial related loans 27,753 29,894 6,187 7,112 4,058 33,940 37,006 Residential mortgage 62 64 0 0 0 62 64 Home equity 437 474 0 0 0 437 474 Other consumer 96 104 0 0 0 96 104 Total impaired consumer related loans 595 642 0 0 0 595 642 Total impaired loans $ 28,348 $ 30,536 $ 6,187 $ 7,112 $ 4,058 $ 34,535 $ 37,648 The table below presents a summary of average impaired loans and related interest income that was included in net income for the three and six months ended June 30, 2022 and 2021. Interest income on loans with no related allowance is the result of interest collected on a cash basis, except accruing TDRs. With No Related Allowance With A Related Allowance Total Average Total Average Total Average Total Recorded Interest Recorded Interest Recorded Interest (dollars in thousands) Investment Income Investment Income Investment Income Three months ended June 30, 2022 Builder & developer $ 986 $ 0 $ 760 $ 0 $ 1,746 $ 0 Commercial real estate investor 3,153 14 0 0 3,153 14 Residential real estate investor 466 0 107 0 573 0 Hotel/Motel 6,037 0 0 0 6,037 0 Wholesale & retail 0 0 0 0 0 0 Manufacturing 4,495 16 0 0 4,495 16 Agriculture 1,409 315 374 0 1,783 315 Service 0 0 486 0 486 0 Other commercial 181 62 4,243 0 4,424 62 Total impaired commercial related loans 16,727 407 5,970 0 22,697 407 Residential mortgage 468 7 559 8 1,027 15 Home equity 467 27 0 0 467 27 Other consumer 90 0 0 0 90 0 Total impaired consumer related loans 1,025 34 559 8 1,584 42 Total impaired loans $ 17,752 $ 441 $ 6,529 $ 8 $ 24,281 $ 449 Three months ended June 30, 2021 Builder & developer $ 1,014 $ 0 $ 0 $ 0 $ 1,014 $ 0 Commercial real estate investor 1,080 12 0 0 1,080 12 Residential real estate investor 1,623 58 1,306 0 2,929 58 Hotel/Motel 12,620 0 0 0 12,620 0 Wholesale & retail 118 13 0 0 118 13 Manufacturing 7,749 0 0 0 7,749 0 Agriculture 2,974 0 1,101 0 4,075 0 Service 971 0 0 0 971 0 Other commercial 4,914 16 4,291 0 9,205 16 Total impaired commercial related loans 33,063 99 6,698 0 39,761 99 Residential mortgage 0 0 0 0 0 0 Home equity 601 0 0 0 601 0 Other consumer 216 4 0 0 216 4 Total impaired consumer related loans 817 4 0 0 817 4 Total impaired loans $ 33,880 $ 103 $ 6,698 $ 0 $ 40,578 $ 103 With No Related Allowance With A Related Allowance Total Average Total Average Total Average Total Recorded Interest Recorded Interest Recorded Interest (dollars in thousands) Investment Income Investment Income Investment Income Six months ended June 30, 2022 Builder & developer $ 988 $ 0 507 $ 0 $ 1,495 $ 0 Commercial real estate investor 3,047 14 626 0 3,673 14 Residential real estate investor 404 23 72 0 476 23 Hotel/Motel 8,090 0 0 0 8,090 0 Wholesale & retail 0 0 0 0 0 0 Manufacturing 4,705 37 0 0 4,705 37 Agriculture 1,842 501 779 0 2,621 501 Service 0 0 647 0 647 0 Other commercial 1,328 177 3,412 0 4,740 177 Total impaired commercial related loans 20,404 752 6,043 0 26,447 752 Residential mortgage 333 7 372 8 705 15 Home equity 457 27 0 0 457 27 Other consumer 91 0 0 0 91 0 Total impaired consumer related loans 881 34 372 8 1,253 42 Total impaired loans $ 21,285 $ 786 6,415 $ 8 $ 27,700 $ 794 Six months ended June 30, 2021 Builder & developer $ 868 $ 0 $ 0 $ 0 $ 868 $ 0 Commercial real estate investor 1,108 23 0 0 1,108 23 Residential real estate investor 1,275 58 1,610 0 2,885 58 Hotel/Motel 12,570 0 0 0 12,570 0 Wholesale & retail 158 14 0 0 158 14 Manufacturing 7,687 0 0 0 7,687 0 Agriculture 2,739 37 1,120 0 3,859 37 Service 971 0 0 0 971 0 Other commercial 5,513 26 4,045 0 9,558 26 Total impaired commercial related loans 32,889 158 6,775 0 39,664 158 Residential mortgage 51 0 0 0 51 0 Home equity 610 0 0 0 610 0 Other consumer 240 7 0 0 240 7 Total impaired consumer related loans 901 7 0 0 901 7 Total impaired loans $ 33,790 $ 165 $ 6,775 $ 0 $ 40,565 $ 165 Past Due and Nonaccrual The performance and credit quality of the loan portfolio is also monitored by using an aging schedule that shows the length of time a loan is past due. The table below presents a summary of past due loans, nonaccrual loans and current loans by loan segment and class at June 30, 2022 and December 31, 2021. ≥ 90 Days 30-59 60-89 Past Due Total Past Days Days and Due and Total (dollars in thousands) Past Due Past Due Accruing Nonaccrual Nonaccrual Current Loans June 30, 2022 Builder & developer $ 418 $ 0 $ 0 $ 2,326 $ 2,744 $ 149,005 $ 151,749 Commercial real estate investor 0 0 0 2,550 2,550 375,250 377,800 Residential real estate investor 0 0 0 984 984 236,915 237,899 Hotel/Motel 0 0 0 0 0 69,525 69,525 Wholesale & retail 0 0 0 0 0 66,312 66,312 Manufacturing 0 0 0 4,251 4,251 76,682 80,933 Agriculture 0 0 0 1,156 1,156 93,869 95,025 Service 4,505 0 0 0 4,505 63,414 67,919 Other 0 0 0 4,212 4,212 204,010 208,222 Total commercial related loans 4,923 0 0 15,479 20,402 1,334,982 1,355,384 Residential mortgage 0 0 0 103 103 111,601 111,704 Home equity 307 114 0 476 897 93,556 94,453 Other 9 0 0 88 97 22,894 22,991 Total consumer related loans 316 114 0 667 1,097 228,051 229,148 Total loans $ 5,239 $ 114 $ 0 $ 16,146 $ 21,499 $ 1,563,033 $ 1,584,532 December 31, 2021 Builder & developer $ 0 $ 0 $ 0 $ 807 $ 807 $ 155,655 $ 156,462 Commercial real estate investor 0 812 0 3,943 4,755 318,132 322,887 Residential real estate investor 0 0 0 280 280 226,737 227,017 Hotel/Motel 0 0 0 12,192 12,192 58,062 70,254 Wholesale & retail 0 183 0 0 183 76,157 76,340 Manufacturing 0 0 0 5,125 5,125 67,595 72,720 Agriculture 0 0 324 4,297 4,621 90,696 95,317 Service 0 0 0 971 971 64,192 65,163 Other 9 34 0 5,372 5,415 216,764 222,179 Total commercial related loans 9 1,029 324 32,987 34,349 1,273,990 1,308,339 Residential mortgage 0 308 0 62 370 103,371 103,741 Home equity 193 0 0 437 630 94,212 94,842 Other 5,869 132 0 96 6,097 16,732 22,829 Total consumer related loans 6,062 440 0 595 7,097 214,315 221,412 Total loans $ 6,071 $ 1,469 $ 324 $ 33,582 $ 41,446 $ 1,488,305 $ 1,529,751 Troubled Debt Restructurings Loans classified as troubled debt restructurings (TDRs) are designated impaired and arise when the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted with respect to these loans involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. The principal balance of outstanding TDRs was $ 2,967,000 at June 30, 2022 and $ 954,000 at December 31, 2021. There was a $ 1,690,000 allowance allocated at June 30, 2022 and none at December 31, 2021. There are no commitments to lend to existing TDRs. A TDR is considered to be in payment default once it is contractually past due pursuant to the terms of the loan documents. Generally, these loans are secured by real estate. If repayment of the loan is determined to be collateral dependent, the loan is evaluated for impairment based on the fair value of the collateral. For loans that are not collateral dependent, the present value of expected future cash flows, discounted at the loan’s original effective interest rate, is used to determine any impairment loss. A nonaccrual TDR represents a nonaccrual loan, as previously defined, which includes an economic concession. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive payments after the modification and future principal and interest payments are reasonably assured. In contrast, an accruing TDR represents a loan that, at the time of the modification, has a demonstrated history of payments and with respect to which management believes that future loan payments are reasonably assured under the modified terms. As of June 30, 2022, there are no modifications for consumer loans, no modifications for mortgage loans and three commercial loans totaling approximately $ 26,298,000 under the CARES Act, which are not considered TDRs. As of June 30, 2021, there were no modifications for consumer loans, four mortgage loans totaling approximately $ 1,422,000 and 16 commercial loans totaling approximately $ 67,734,000 under the CARES Act, which are not considered TDRs. The below table shows loans whose terms have been modified as TDRs during the three and six months ended June 30, 2022 and 2021. TDR concessions include maturity extensions, below market interest rates relative to new debt with similar risk and interest or principal forgiveness. There were no defaults for the three and six months ended June 30, 2022 and June 30, 2021 for TDRs entered into during the previous 12 month period. TDR Modifications Number Recorded of Investment (dollars in thousands) Contracts at Period End Three months ended: June 30, 2022 Consumer related loans accruing 1 $ 638 June 30, 2021 None Six months ended: June 30, 2022 Commercial related loans nonaccrual 2 $ 0 Consumer related loans accruing 2 $ 771 Consumer related loans nonaccrual 1 $ 0 June 30, 2021 None |