Loans

9 Months Ended

Sep. 30, 2020

Note 4—Loans

Loan Portfolio Composition

The table below provides the composition of the loan portfolio at September 30, 2020 and December 31, 2019. 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)	2020		Loans		2019		Loans
Builder & developer	$	163,722		10.4	$	159,312		10.6
Commercial real estate investor		200,666		12.7		207,227		13.8
Residential real estate investor		242,602		15.4		247,969		16.5
Hotel/Motel		78,991		5.0		80,260		5.3
Wholesale & retail		113,805		7.2		109,238		7.3
Manufacturing		95,906		6.1		86,511		5.7
Agriculture		78,321		5.0		80,719		5.4
Other		381,267		24.2		313,371		20.7
Total commercial related loans		1,355,280		86.0		1,284,607		85.3
Residential mortgages		97,012		6.2		94,868		6.3
Home equity		98,724		6.3		100,827		6.7
Other		23,995		1.5		24,833		1.7
Total consumer related loans		219,731		14.0		220,528		14.7
Total loans	$	1,575,011		100.0	$	1,505,135		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 and residential mortgages held for investment are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer loans, and commercial loans up to $500,000, the Corporation uses third-party credit scoring software models 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 are generally performed by the Special Asset Committee (the ‘Committee’), which includes senior management. The Committee, which typically meets at least quarterly, makes changes, as appropriate, to risk ratings when it becomes aware of credit events such as payment delinquency, cessation of a business or project, bankruptcy or death of the borrower, or changes in collateral value. In addition to review by the Committee, 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. An external consultant is also used to review a portion of the existing portfolio and recommend rating changes as appropriate. Primary loan officers and internal loan review officers may downgrade existing loans, except to nonaccrual status. Only the Committee, Executive Chairman or President/CEO may downgrade a loan to nonaccrual status or upgrade a loan that is classified.

The Corporation uses ten risk ratings to grade commercial loans. The first seven ratings, representing the lowest risk, are combined and given a “pass” rating. 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 net worth or paying capacity of the borrower, 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 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, 2020 and December 31, 2019.



			Special
(dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total
September 30, 2020
Builder & developer	$	150,570	$	10,843	$	1,930	$	379	$	163,722
Commercial real estate investor		194,020		6,439		0		207		200,666
Residential real estate investor		238,059		1,300		136		3,107		242,602
Hotel/Motel		53,308		12,509		13,174		0		78,991
Wholesale & retail		103,926		8,796		1,083		0		113,805
Manufacturing		84,502		0		11,404		0		95,906
Agriculture		70,297		755		3,778		3,491		78,321
Other		355,831		2,297		12,740		10,399		381,267
Total commercial related loans		1,250,513		42,939		44,245		17,583		1,355,280
Residential mortgage		96,725		124		11		152		97,012
Home equity		98,093		56		0		575		98,724
Other		23,798		0		0		197		23,995
Total consumer related loans		218,616		180		11		924		219,731
Total loans	$	1,469,129	$	43,119	$	44,256	$	18,507	$	1,575,011

December 31, 2019
Builder & developer	$	151,672	$	6,503	$	252	$	885	$	159,312
Commercial real estate investor		201,967		3,890		1,145		225		207,227
Residential real estate investor		238,216		3,780		202		5,771		247,969
Hotel/Motel		67,732		12,528		0		0		80,260
Wholesale & retail		89,556		10,513		1,954		7,215		109,238
Manufacturing		76,721		1,058		7,597		1,135		86,511
Agriculture		76,350		1,123		404		2,842		80,719
Other		277,634		16,490		13,748		5,499		313,371
Total commercial related loans		1,179,848		55,885		25,302		23,572		1,284,607
Residential mortgage		94,388		131		74		275		94,868
Home equity		100,089		61		0		677		100,827
Other		24,600		0		7		226		24,833
Total consumer related loans		219,077		192		81		1,178		220,528
Total loans	$	1,398,925	$	56,077	$	25,383	$	24,750	$	1,505,135

Impaired Loans

The table below presents a summary of impaired loans at September 30, 2020 and December 31, 2019. Generally, impaired loans are all loans risk rated nonaccrual or classified troubled debt restructuring. An allowance is established for individual loans that are commercial related 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, 2020
Builder & developer	$	579	$	631	$	0	$	0	$	0	$	579	$	631
Commercial real estate investor		1,216		1,221		0		0		0		1,216		1,221
Residential real estate investor		2,653		2,681		454		468		242		3,107		3,149
Hotel/Motel		0		0		0		0		0		0		0
Wholesale & retail		238		238		0		0		0		238		238
Manufacturing		0		0		0		0		0		0		0
Agriculture		2,313		2,390		1,178		1,218		534		3,491		3,608
Other commercial		6,412		6,655		3,987		4,309		2,513		10,399		10,964
Total impaired commercial related loans		13,411		13,816		5,619		5,995		3,289		19,030		19,811
Residential mortgage		152		152		0		0		0		152		152
Home equity		575		592		0		0		0		575		592
Other consumer		197		206		0		0		0		197		206
Total impaired consumer related loans		924		950		0		0		0		924		950
Total impaired loans	$	14,335	$	14,766	$	5,619	$	5,995	$	3,289	$	19,954	$	20,761



December 31, 2019
Builder & developer	$	621	$	651	$	473	$	474	$	238	$	1,094	$	1,125
Commercial real estate investor		1,370		1,371		0		0		0		1,370		1,371
Residential real estate investor		734		753		5,037		5,137		1,873		5,771		5,890
Hotel/Motel		0		0		0		0		0		0		0
Wholesale & retail		273		273		7,184		7,811		2,537		7,457		8,084
Manufacturing		13		13		1,122		1,220		463		1,135		1,233
Agriculture		1,784		1,791		1,058		1,058		701		2,842		2,849
Other commercial		1,864		1,974		3,635		3,888		1,608		5,499		5,862
Total impaired commercial related loans		6,659		6,826		18,509		19,588		7,420		25,168		26,414
Residential mortgage		275		277		0		0		0		275		277
Home equity		677		677		0		0		0		677		677
Other consumer		226		231		0		0		0		226		231
Total impaired consumer related loans		1,178		1,185		0		0		0		1,178		1,185
Total impaired loans	$	7,837	$	8,011	$	18,509	$	19,588	$	7,420	$	26,346	$	27,599

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, 2020 and 2019.



	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, 2020
Builder & developer	$	585		9		70		0	$	655	$	9
Commercial real estate investor		1,244		16		0		0		1,244		16
Residential real estate investor		1,779		3		2,710		0		4,489		3
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		239		2		0		0		239		2
Manufacturing		0		0		0		0		0		0
Agriculture		2,337		37		1,200		0		3,537		37
Other commercial		5,696		33		3,805		0		9,501		33
Total impaired commercial related loans		11,880		100		7,785		0		19,665		100
Residential mortgage		152		2		0		0		152		2
Home equity		614		5		0		0		614		5
Other consumer		206		2		0		0		206		2
Total impaired consumer related loans		972		9		0		0		972		9
Total impaired loans	$	12,852	$	109	$	7,785	$	0	$	20,637	$	109

Three months ended September 30, 2019
Builder & developer	$	1,281	$	4	$	243	$	0	$	1,524	$	4
Commercial real estate investor		2,594		35		0		0		2,594		35
Residential real estate investor		588		4		5,113		0		5,701		4
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		244		2		7,317		0		7,561		2
Manufacturing		15		4		1,281		0		1,296		4
Agriculture		1,221		6		529		0		1,750		6
Other commercial		2,096		0		5,788		0		7,884		0
Total impaired commercial related loans		8,039		55		20,271		0		28,310		55
Residential mortgage		121		0		0		0		121		0
Home equity		575		5		0		0		575		5
Other consumer		278		4		0		0		278		4
Total impaired consumer related loans		974		9		0		0		974		9
Total impaired loans	$	9,013	$	64	$	20,271	$	0	$	29,284	$	64



	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, 2020
Builder & developer	$	771		31		189		0	$	960	$	31
Commercial real estate investor		1,296		56		0		0		1,296		56
Residential real estate investor		1,311		22		3,865		0		5,176		22
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		255		5		3,564		0		3,819		5
Manufacturing		6		3		537		0		543		3
Agriculture		2,217		95		1,106		0		3,323		95
Other commercial		4,257		71		3,719		0		7,976		71
Total impaired commercial related loans		10,113		283		12,980		0		23,093		283
Residential mortgage		183		5		0		0		183		5
Home equity		643		42		0		0		643		42
Other consumer		215		9		0		0		215		9
Total impaired consumer related loans		1,041		56		0		0		1,041		56
Total impaired loans	$	11,154	$	339	$	12,980	$	0	$	24,134	$	339

Nine months ended September 30, 2019
Builder & developer	$	1,202	$	32	$	156	$	0	$	1,358	$	32
Commercial real estate investor		3,102		103		0		0		3,102		103
Residential real estate investor		601		15		4,729		0		5,330		15
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		1,483		8		7,359		0		8,842		8
Manufacturing		342		13		1,462		0		1,804		13
Agriculture		939		17		265		0		1,204		17
Other commercial		4,849		0		5,329		0		10,178		0
Total impaired commercial related loans		12,518		188		19,300		0		31,818		188
Residential mortgage		335		9		0		0		335		9
Home equity		590		15		0		0		590		15
Other consumer		278		13		0		0		278		13
Total impaired consumer related loans		1,203		37		0		0		1,203		37
Total impaired loans	$	13,721	$	225	$	19,300	$	0	$	33,021	$	225

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, 2020 and December 31, 2019.



					≥ 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, 2020
Builder & developer	$	849	$	78	$	721	$	379	$	2,027	$	161,695	$	163,722
Commercial real estate investor		0		0		0		207		207		200,459		200,666
Residential real estate investor		0		0		0		3,107		3,107		239,495		242,602
Hotel/Motel		0		12,509		0		0		12,509		66,482		78,991
Wholesale & retail		30		0		0		0		30		113,775		113,805
Manufacturing		368		0		654		0		1,022		94,884		95,906
Agriculture		0		0		0		3,491		3,491		74,830		78,321
Other		0		25		0		10,399		10,424		370,843		381,267
Total commercial related loans		1,247		12,612		1,375		17,583		32,817		1,322,463		1,355,280
Residential mortgage		0		336		407		152		895		96,117		97,012
Home equity		143		131		0		575		849		97,875		98,724
Other		28		363		0		197		588		23,407		23,995
Total consumer related loans		171		830		407		924		2,332		217,399		219,731
Total loans	$	1,418	$	13,442	$	1,782	$	18,507	$	35,149	$	1,539,862	$	1,575,011

December 31, 2019
Builder & developer	$	0	$	0	$	43	$	885	$	928	$	158,384	$	159,312
Commercial real estate investor		0		0		0		225		225		207,002		207,227
Residential real estate investor		295		0		0		5,771		6,066		241,903		247,969
Hotel/Motel		0		0		0		0		0		80,260		80,260
Wholesale & retail		0		0		0		7,215		7,215		102,023		109,238
Manufacturing		409		0		0		1,135		1,544		84,967		86,511
Agriculture		14		0		0		2,842		2,856		77,863		80,719
Other		463		1,865		120		5,499		7,947		305,424		313,371
Total commercial related loans		1,181		1,865		163		23,572		26,781		1,257,826		1,284,607
Residential mortgage		0		70		104		275		449		94,419		94,868
Home equity		249		276		0		677		1,202		99,625		100,827
Other		750		68		13		226		1,057		23,776		24,833
Total consumer related loans		999		414		117		1,178		2,708		217,820		220,528
Total loans	$	2,180	$	2,279	$	280	$	24,750	$	29,489	$	1,475,646	$	1,505,135

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 generally involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. 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 loss 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 management believes that future loan payments are reasonably assured under the modified terms. TDRs included as impaired loan totaled $1,447,000 and $3,824,000 as of September 30, 2020 and September 30, 2019, respectively. There are no commitments to lend additional amounts to these TDRs as of September 30, 2020 and September 30, 2019.

As of September 30, 2020, there are 3 modifications remaining for consumer loans totaling approximately $20,000, 12 mortgage loans totaling approximately $4,200,000 and 88 commercial loans totaling approximately $93,100,000 under the CARES Act, which are not considered TDRs.

The table below shows loans whose terms have been modified under TDRs during the three and nine months ended September 30, 2020 and 2019. The loan modified during 2019, detailed in the table below, was charged off in the third quarter of 2020. There were no defaults during the three and nine months ended September 30, 2020 and September 30, 2019 for TDRs entered into during the previous 12 month period.



	Modifications
		Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding		Recorded
	of	Recorded		Recorded		Investment
(dollars in thousands)	Contracts	Investments		Investments		at Period End
Three months ended:

September 30, 2020
None

September 30, 2019
None

Nine months ended:

September 30, 2020
None
September 30, 2019
Commercial related loans accruing	1	$	63	$	63	$	56