| Allowance for Credit Losses | NOTE 5: Allowance for Credit Losses On January 1, 2023, the Corporation adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update see Note 1 and Note 2. All allowance for credit loss information presented as of March 31, 2023 is in accordance with ASC 326. All allowance for credit loss information presented as of December The following table shows the allowance for credit losses activity by loan portfolio for the three months ended March 31, 2023: Consumer (Dollars in thousands) Commercial Consumer Finance Total Allowance for credit losses: Balance at December 31, 2022 $ 11,219 $ 3,330 $ 25,969 $ 40,518 Impact of ASC 326 adoption on non-PCD loans (617) 98 406 (113) Impact of ASC 326 adoption on PCD loans 595 9 — 604 Provision charged to operations 233 117 1,600 1,950 Loans charged off (16) (89) (3,108) (3,213) Recoveries of loans previously charged off 35 45 1,008 1,088 Balance at March 31, 2023 $ 11,449 $ 3,510 $ 25,875 $ 40,834 The following table presents a breakdown of the provision for credit losses for the periods indicated. Three Months Ended March 31, (Dollars in thousands) 2023 2022 Provision for credit losses: Provision (recovery) for loans $ 1,950 $ (328) Provision for unfunded commitments 100 — Total $ 2,050 $ (328) Commercial and consumer loans are assigned loan classification ratings based on their credit quality and risk of loss. These loan ratings are reviewed on a quarterly basis and updated as new information becomes available. The characteristics of these loan ratings are as follows: ● Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan. ● Special mention loans have a specific, identified weakness in the borrower’s operations and in the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may be characterized by late payments. The Corporation’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable. ● Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Corporation’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Corporation. There is a distinct possibility that the Corporation will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet the Corporation’s definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Corporation will be unable to collect all amounts due. ● Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a nonaccrual classification because it is probable that the Corporation will not be able to collect all amounts due. ● Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high. ● Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off. The table below details the amortized cost of the classes of loans within the commercial and consumer loan portfolios by loan rating and year of origination as of March 31, 2023: Revolving Revolving Term Loans Amortized Cost Basis by Origination Year Loans Loans Amortized Converted (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Cost Basis Total to Term Commercial real estate: Loan Rating Pass $ 38,598 $ 127,916 $ 153,349 $ 86,593 $ 42,784 $ 158,278 $ — $ 607,518 $ — Special Mention — — — — — 1,024 — 1,024 — Substandard — — 5,814 — — 264 — 6,078 — Total $ 38,598 $ 127,916 $ 159,163 $ 86,593 $ 42,784 $ 159,566 $ — $ 614,620 $ — Commercial business: Loan Rating Pass $ 3,737 $ 21,039 $ 19,697 $ 14,620 $ 15,926 $ 16,243 $ 23,388 $ 114,650 $ — Substandard 72 — — — — — — 72 — Total $ 3,809 $ 21,039 $ 19,697 $ 14,620 $ 15,926 $ 16,243 $ 23,388 $ 114,722 $ — Construction - commercial real estate: Loan Rating Pass $ 2,731 $ 12,088 $ 6,507 $ 32,475 $ — $ — $ — $ 53,801 $ — Total $ 2,731 $ 12,088 $ 6,507 $ 32,475 $ — $ — $ — $ 53,801 $ — Land acquisition and development: Loan Rating Pass $ — $ 17,477 $ 11,621 $ 9,975 $ — $ 1,141 $ — $ 40,214 $ — Total $ — $ 17,477 $ 11,621 $ 9,975 $ — $ 1,141 $ — $ 40,214 $ — Builder lines: Loan Rating Pass $ 3,947 $ 23,251 $ 5,066 $ — $ 404 $ — $ — $ 32,668 $ — Total $ 3,947 $ 23,251 $ 5,066 $ — $ 404 $ — $ — $ 32,668 $ — Construction - consumer real estate: Loan Rating Pass $ 610 $ 10,793 $ 1,149 $ — $ — $ — $ — $ 12,552 $ — Total $ 610 $ 10,793 $ 1,149 $ — $ — $ — $ — $ 12,552 $ — Residential mortgage: Loan Rating Pass $ 20,088 $ 98,376 $ 47,269 $ 45,164 $ 12,461 $ 53,566 $ — $ 276,924 $ — Special Mention — — — — — 246 — 246 — Substandard — — — 105 — 677 — 782 — Substandard Nonaccrual — — — — — 154 — 154 — Total $ 20,088 $ 98,376 $ 47,269 $ 45,269 $ 12,461 $ 54,643 $ — $ 278,106 $ — Equity lines: Loan Rating Pass $ — $ — $ — $ 70 $ — $ 1,060 $ 42,164 $ 43,294 $ 101 Special Mention — — 36 — — — — 36 — Substandard — — — — 5 — — 5 — Substandard Nonaccrual — — — — — 108 — 108 — Total $ — $ — $ 36 $ 70 $ 5 $ 1,168 $ 42,164 $ 43,443 $ 101 Other consumer: Loan Rating Pass $ 864 $ 4,005 $ 979 $ 552 $ 359 $ 1,106 $ 46 $ 7,911 $ — Total $ 864 $ 4,005 $ 979 $ 552 $ 359 $ 1,106 $ 46 $ 7,911 $ — Total: Loan Rating Pass $ 70,575 $ 314,945 $ 245,637 $ 189,449 $ 71,934 $ 231,394 $ 65,598 $ 1,189,532 $ 101 Special Mention — — 36 — — 1,270 — 1,306 — Substandard 72 — 5,814 105 5 941 — 6,937 — Substandard Nonaccrual — — — — — 262 — 262 — Total $ 70,647 $ 314,945 $ 251,487 $ 189,554 $ 71,939 $ 233,867 $ 65,598 $ 1,198,037 $ 101 For consumer finance loans, the Corporation utilizes credit scores based on the methods developed and defined by the Fair Isaac Corporation (FICO) as a key indicator of the risk of loss to manage the portfolio and estimate the allowance for credit losses. A FICO Score is a three-digit number based on the information in an applicant’s credit reports. It helps lenders determine how likely an applicant is to repay a loan. This, in turn, affects the loan amount that may be approved, repayment terms, and interest rate. Consumer finance loans are assigned a credit rating based on borrowers’ credit scores at the time of origination and are categorized within ranges of credit ratings used internally that parallel FICO Score rating bands. The Corporation monitors the consumer finance loan portfolio by past due status (refer to Note 4) and by credit rating at the time of origination, which the Corporation believes serves as a relevant indicator of aggregate credit quality and risk of loan defaults in the portfolio based upon the use of FICO Scores over time for loan approval decisions and through experience analyzing loss patterns. The characteristics of these credit ratings are as follows: ● Very Good and Good credit rated borrowers are near or above the average FICO Score of consumers. Borrowers generally have limited to no prior credit difficulties or have shown extensive creditworthiness over a recent period of time. ● Fairly Good and Fair credit rated borrowers are approaching or slightly below the average FICO Score of consumers but typically have a credit profile acceptable to most lenders. Borrowers may have experienced minor credit difficulties or have a relatively limited credit history. ● Marginal credit rated borrowers are well below the average FICO Score of consumers. Borrowers may have limited access to traditional financing due to having experienced prior credit difficulties or have a limited credit history. The risk of future charge-offs is higher. The table below details the amortized cost of the classes of loans within the consumer finance loan portfolio by credit rating and year of origination as of March 31, 2023: Revolving Revolving Term Loans Amortized Cost Basis by Origination Year Loans Loans Amortized Converted (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Cost Basis Total to Term Consumer finance - automobiles: Credit rating Very good $ 2,369 $ 16,535 $ 6,155 $ 1,599 $ 547 $ 83 $ — $ 27,288 $ — Good 9,673 55,759 21,174 5,085 1,987 792 — 94,470 — Fairly good 13,069 70,481 36,142 9,404 6,831 3,670 — 139,597 — Fair 7,722 48,092 29,599 10,493 8,258 4,754 — 108,918 — Marginal 2,083 11,971 11,021 4,794 4,845 4,363 — 39,077 — Total $ 34,916 $ 202,838 $ 104,091 $ 31,375 $ 22,468 $ 13,662 $ — $ 409,350 $ — Consumer finance - marine and recreational vehicles: Credit rating Very good $ 1,446 $ 17,371 $ 11,459 $ 11,807 $ 3,121 $ 3,108 $ — $ 48,312 $ — Good 3,358 9,101 1,811 1,657 494 541 — 16,962 — Fairly good 149 274 39 33 — 39 — 534 — Total $ 4,953 $ 26,746 $ 13,309 $ 13,497 $ 3,615 $ 3,688 $ — $ 65,808 $ — Total: Credit rating Very good $ 3,815 $ 33,906 $ 17,614 $ 13,406 $ 3,668 $ 3,191 $ — $ 75,600 $ — Good 13,031 64,860 22,985 6,742 2,481 1,333 — 111,432 — Fairly good 13,218 70,755 36,181 9,437 6,831 3,709 — 140,131 — Fair 7,722 48,092 29,599 10,493 8,258 4,754 — 108,918 — Marginal 2,083 11,971 11,021 4,794 4,845 4,363 — 39,077 — Total $ 39,869 $ 229,584 $ 117,400 $ 44,872 $ 26,083 $ 17,350 $ — $ 475,158 $ — The following table details the current period gross charge-offs of loans by year of origination as of March 31, 2023: Revolving Revolving Current Period Gross Charge-offs by Origination Year Loans Loans Amortized Converted (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Cost Basis Total to Term Commercial business $ — $ 16 $ — $ — $ — $ — $ — $ 16 $ — Construction - consumer real estate — — — — — — 8 8 — Other consumer 1 81 — — — — — — 81 — Consumer finance - automobiles — 1,384 938 320 135 285 — 3,062 — Consumer finance - marine and recreational vehicles — 46 — — — — — 46 — Total $ 81 $ 1,446 $ 938 $ 320 $ 135 $ 285 $ 8 $ 3,213 $ — 1 Gross charge-offs of other consumer loans for the three months ended March 31, 2023 included $81,000 of demand deposit overdrafts that originated in 2023. Gross charge-offs increased for the three months ended March 31, 2023 compared to the same period in 2022 due primarily to higher charge-offs within the consumer finance-automobile portfolio segment as a result of an increase in the number of delinquent loans following a period of historically low delinquencies during the COVID-19 pandemic, a decline in wholesale values of used automobiles from a recent peak during the COVID-19 pandemic and continued recent challenges in repossessing automobiles due to a decline in the number of repossession agencies, which results in a fully charged-off loan when the automobile cannot be repossessed. As of March 31, 2023, the Corporation had no collateral dependent loans for which repayment was expected to be derived substantially through the operation or sale of the collateral and where the borrower is experiencing financial difficulty. Prior to the adoption of ASC 326 The following table presents the changes in the allowance for loan losses by major classification during the three months ended March 31, 2022: Real Estate Commercial, Residential Real Estate Financial & Equity Consumer (Dollars in thousands) Mortgage Construction Agricultural Lines Consumer Finance Total Allowance for loan losses: Balance at December 31, 2021 $ 2,660 $ 856 $ 11,085 $ 593 $ 172 $ 24,791 $ 40,157 Provision (credited) charged to operations (38) 37 (636) (49) 8 350 (328) Loans charged off — — (11) — (48) (1,313) (1,372) Recoveries of loans previously charged off 6 — 2 — 32 1,271 1,311 Balance at March 31, 2022 $ 2,628 $ 893 $ 10,440 $ 544 $ 164 $ 25,099 $ 39,768 The following table presents, as of December 31, 2022, the balance of the allowance for loan losses, the allowance by impairment methodology, total loans and loans by impairment methodology. Real Estate Commercial, Residential Real Estate Financial & Equity Consumer (Dollars in thousands) Mortgage Construction Agricultural Lines Consumer Finance Total Allowance balance attributable to loans: Individually evaluated for impairment $ 51 $ — $ — $ — $ — $ — $ 51 Collectively evaluated for impairment 2,571 788 10,431 497 211 25,969 40,467 Acquired loans - PCI — — — — — — — Total allowance $ 2,622 $ 788 $ 10,431 $ 497 $ 211 $ 25,969 $ 40,518 Loans: Individually evaluated for impairment $ 797 $ — $ — $ 26 $ — $ — $ 823 Collectively evaluated for impairment 265,170 59,675 781,867 43,259 8,912 474,557 1,633,440 Acquired loans - PCI 300 — 1,114 15 26 — 1,455 Total loans $ 266,267 $ 59,675 $ 782,981 $ 43,300 $ 8,938 $ 474,557 $ 1,635,718 Loans by credit quality indicators as of December 31, 2022 were as follows: Special Substandard (Dollars in thousands) Pass Mention Substandard Nonaccrual Total 1 Residential mortgage $ 264,891 $ 518 $ 702 $ 156 $ 266,267 Real estate – construction: Construction - commercial real estate 49,136 — — — 49,136 Construction - consumer real estate 10,539 — — — 10,539 Commercial, financial and agricultural: Commercial real estate 585,707 738 5,856 — 592,301 Land acquisition and development 37,537 — — — 37,537 Builder lines 34,538 — — — 34,538 Commercial business 118,605 — — — 118,605 Equity lines 43,147 40 5 108 43,300 Other consumer 8,747 191 — — 8,938 $ 1,152,847 $ 1,487 $ 6,563 $ 264 $ 1,161,161 1 At December 31, 2022, the Corporation did no t have any loans classified as Doubtful or Loss. Non- (Dollars in thousands) Performing Performing Total Consumer finance: Automobiles $ 410,270 $ 842 $ 411,112 Marine and recreational vehicles 63,362 83 63,445 $ 473,632 $ 925 $ 474,557 |
