Loans | Note 4—Loans Loan Portfolio Composition The table below provides the composition of the loan portfolio at September 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. September 30, % Total December 31, % Total (dollars in thousands) 2022 Loans 2021 Loans Builder & developer $ 139,232 8.7 $ 156,462 10.2 Commercial real estate investor 376,438 23.5 322,887 21.1 Residential real estate investor 243,659 15.2 227,017 14.8 Hotel/Motel 62,944 3.9 70,254 4.6 Wholesale & retail 68,408 4.3 76,340 5.0 Manufacturing 91,615 5.7 72,720 4.8 Agriculture 90,730 5.7 95,317 6.2 Service 70,347 4.4 65,163 4.3 Other 210,571 13.3 222,179 14.5 Total commercial related loans 1,353,944 84.7 1,308,339 85.5 Residential mortgages 124,005 7.8 103,741 6.8 Home equity 95,906 6.0 94,842 6.2 Other 25,178 1.5 22,829 1.5 Total consumer related loans 245,089 15.3 221,412 14.5 Total loans $ 1,599,033 100.0 $ 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 September 30, 2022 and December 31, 2021. Special (dollars in thousands) Pass Mention Substandard Nonaccrual Total September 30, 2022 Builder & developer $ 127,548 $ 4,779 $ 4,637 $ 2,268 $ 139,232 Commercial real estate investor 372,564 0 1,346 2,528 376,438 Residential real estate investor 242,794 0 0 865 243,659 Hotel/Motel 58,153 0 4,791 0 62,944 Wholesale & retail 65,780 344 2,284 0 68,408 Manufacturing 87,173 0 646 3,796 91,615 Agriculture 81,085 8,111 384 1,150 90,730 Service 63,993 391 5,963 0 70,347 Other 191,447 3,701 11,275 4,148 210,571 Total commercial related loans 1,290,537 17,326 31,326 14,755 1,353,944 Residential mortgage 123,185 0 777 43 124,005 Home equity 95,443 0 0 463 95,906 Other 25,178 0 0 0 25,178 Total consumer related loans 243,806 0 777 506 245,089 Total loans $ 1,534,343 $ 17,326 $ 32,103 $ 15,261 $ 1,599,033 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 September 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 September 30, 2022 Builder & developer $ 978 $ 1,069 $ 1,465 $ 1,509 $ 423 $ 2,443 $ 2,578 Commercial real estate investor 2,832 4,080 0 0 0 2,832 4,080 Residential real estate investor 654 667 211 215 154 865 882 Hotel/Motel 0 0 0 0 0 0 0 Wholesale & retail 0 0 0 0 0 0 0 Manufacturing 3,796 3,835 0 0 0 3,796 3,835 Agriculture 402 480 748 930 655 1,150 1,410 Service 0 0 0 0 0 0 0 Other commercial 0 0 4,147 5,059 3,199 4,147 5,059 Total impaired commercial related loans 8,662 10,131 6,571 7,713 4,431 15,233 17,844 Residential mortgage 810 811 0 0 0 810 811 Home equity 463 515 0 0 0 463 515 Other consumer 0 0 0 0 0 0 0 Total impaired consumer related loans 1,273 1,326 0 0 0 1,273 1,326 Total impaired loans $ 9,935 $ 11,457 $ 6,571 $ 7,713 $ 4,431 $ 16,506 $ 19,170 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 nine months ended September 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 September 30, 2022 Builder & developer $ 982 $ 0 $ 1,492 $ 0 $ 2,474 $ 0 Commercial real estate investor 2,855 4 0 0 2,855 4 Residential real estate investor 711 4 213 0 924 4 Hotel/Motel 0 0 0 0 0 0 Wholesale & retail 0 0 0 0 0 0 Manufacturing 4,023 0 0 0 4,023 0 Agriculture 405 0 748 0 1,153 0 Service 0 0 0 0 0 0 Other commercial 0 0 4,179 0 4,179 0 Total impaired commercial related loans 8,976 8 6,632 0 15,608 8 Residential mortgage 842 6 0 0 842 6 Home equity 470 0 0 0 470 0 Other consumer 44 15 0 0 44 15 Total impaired consumer related loans 1,356 21 0 0 1,356 21 Total impaired loans $ 10,332 $ 29 $ 6,632 $ 0 $ 16,964 $ 29 Three months ended September 30, 2021 Builder & developer $ 1,006 $ 0 $ 0 $ 0 $ 1,006 $ 0 Commercial real estate investor 1,024 11 0 0 1,024 11 Residential real estate investor 2,496 8 395 0 2,891 8 Hotel/Motel 12,550 0 0 0 12,550 0 Wholesale & retail 0 0 0 0 0 0 Manufacturing 7,348 19 0 0 7,348 19 Agriculture 4,835 0 1,092 0 5,927 0 Service 486 0 485 0 971 0 Other commercial 3,612 0 4,128 61 7,740 61 Total impaired commercial related loans 33,357 38 6,100 61 39,457 99 Residential mortgage 33 0 0 0 33 0 Home equity 541 0 0 0 541 0 Other consumer 171 0 0 0 171 0 Total impaired consumer related loans 745 0 0 0 745 0 Total impaired loans $ 34,102 $ 38 $ 6,100 $ 61 $ 40,202 $ 99 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 Nine months ended September 30, 2022 Builder & developer $ 986 $ 0 746 $ 0 $ 1,732 $ 0 Commercial real estate investor 2,993 18 469 0 3,462 18 Residential real estate investor 466 27 106 0 572 27 Hotel/Motel 6,067 0 0 0 6,067 0 Wholesale & retail 0 0 0 0 0 0 Manufacturing 4,478 37 0 0 4,478 37 Agriculture 1,482 501 771 0 2,253 501 Service 0 0 486 0 486 0 Other commercial 996 177 3,596 0 4,592 177 Total impaired commercial related loans 17,468 760 6,174 0 23,642 760 Residential mortgage 452 13 280 8 732 21 Home equity 459 27 0 0 459 27 Other consumer 69 15 0 0 69 15 Total impaired consumer related loans 980 55 280 8 1,260 63 Total impaired loans $ 18,448 $ 815 6,454 $ 8 $ 24,902 $ 823 Nine months ended September 30, 2021 Builder & developer $ 901 $ 0 $ 0 $ 0 $ 901 $ 0 Commercial real estate investor 1,080 34 0 0 1,080 34 Residential real estate investor 1,557 66 1,305 0 2,862 66 Hotel/Motel 12,506 0 0 0 12,506 0 Wholesale & retail 118 14 0 0 118 14 Manufacturing 7,500 19 0 0 7,500 19 Agriculture 3,491 37 1,105 0 4,596 37 Service 728 0 243 0 971 0 Other commercial 4,871 26 3,990 61 8,861 87 Total impaired commercial related loans 32,752 196 6,643 61 39,395 257 Residential mortgage 54 0 0 0 54 0 Home equity 592 0 0 0 592 0 Other consumer 222 7 0 0 222 7 Total impaired consumer related loans 868 7 0 0 868 7 Total impaired loans $ 33,620 $ 203 $ 6,643 $ 61 $ 40,263 $ 264 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 September 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 September 30, 2022 Builder & developer $ 0 $ 0 $ 0 $ 2,268 $ 2,268 $ 136,964 $ 139,232 Commercial real estate investor 0 0 0 2,528 2,528 373,910 376,438 Residential real estate investor 0 0 16 865 881 242,778 243,659 Hotel/Motel 0 0 0 0 0 62,944 62,944 Wholesale & retail 2 41 0 0 43 68,365 68,408 Manufacturing 0 0 0 3,796 3,796 87,819 91,615 Agriculture 0 0 0 1,150 1,150 89,580 90,730 Service 0 0 0 0 0 70,347 70,347 Other 0 0 0 4,148 4,148 206,423 210,571 Total commercial related loans 2 41 16 14,755 14,814 1,339,130 1,353,944 Residential mortgage 0 0 0 43 43 123,962 124,005 Home equity 81 0 0 463 544 95,362 95,906 Other 6 0 0 0 6 25,172 25,178 Total consumer related loans 87 0 0 506 593 244,496 245,089 Total loans $ 89 $ 41 $ 16 $ 15,261 $ 15,407 $ 1,583,626 $ 1,599,033 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 $ 2,891,000 at September 30, 2022 and $ 954,000 at December 31, 2021. There was a $ 1,645,000 allowance allocated at September 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 September 30, 2022, there are no modifications for consumer loans, no modifications for mortgage loans and two commercial loans totaling approximately $ 26,208,000 under the CARES Act, which are not considered TDRs. As of September 30, 2021, there were no modifications for consumer loans, two mortgage loans totaling approximately $ 1,163,000 and five commercial loans totaling approximately $ 40,000,000 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 nine months ended September 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 nine months ended September 30, 2022 and September 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: September 30, 2022 None September 30, 2021 None Nine months ended: September 30, 2022 Commercial related loans nonaccrual 2 $ 0 Consumer related loans accruing 2 $ 767 Consumer related loans nonaccrual 1 $ 0 September 30, 2021 None |