Note 5—Loans

Loan Portfolio Composition

The table below provides the composition of the loan portfolio at September 30, 2013 and December 31, 2012. 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 the following industries, including health services, professional services, public administration, restaurant, service, transportation, finance, natural resources, recreation and religious organizations. 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,		December 31,
(dollars in thousands)		2013		2012
Builder & developer	$	103,112	$	96,936
Commercial real estate investor		136,481		122,714
Residential real estate investor		72,992		66,419
Hotel/Motel		65,940		64,948
Wholesale & retail		74,479		70,443
Manufacturing		34,150		40,258
Agriculture		35,310		20,928
Other		151,740		124,834
Total commercial related loans		674,204		607,480
Residential mortgages		25,125		23,511
Home equity		75,080		65,858
Other		39,252		40,285
Total consumer related loans		139,457		129,654
Total loans	$	813,661	$	737,134

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 $750,000, 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, which includes senior management. The Committee, which meets monthly, 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.

The Corporation uses ten risk ratings to grade 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. Accordingly, 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 known loan losses.

The table below presents a summary of loan risk ratings by loan class at September 30, 2013 and December 31, 2012.



				Special
(dollars in thousands)		Pass		Mention		Substandard		Nonaccrual		Total
September 30, 2013
Builder & developer	$	87,864	$	7,386	$	7,615	$	247	$	103,112
Commercial real estate investor		124,882		4,926		3,286		3,387		136,481
Residential real estate investor		70,222		260		50		2,460		72,992
Hotel/Motel		65,940		0		0		0		65,940
Wholesale & retail		71,733		1,407		0		1,339		74,479
Manufacturing		33,474		0		676		0		34,150
Agriculture		32,054		2,798		458		0		35,310
Other		148,788		1,089		380		1,483		151,740
Total commercial related loans		634,957		17,866		12,465		8,916		674,204
Residential mortgage		24,955		19		30		121		25,125
Home equity		74,818		63		0		199		75,080
Other		38,496		171		39		546		39,252
Total consumer related loans		138,269		253		69		866		139,457
Total loans	$	773,226	$	18,119	$	12,534	$	9,782	$	813,661

December 31, 2012
Builder & developer	$	79,101	$	6,567	$	11,013	$	255	$	96,936
Commercial real estate investor		107,415		9,563		2,459		3,277		122,714
Residential real estate investor		62,327		1,361		2,044		687		66,419
Hotel/Motel		64,948		0		0		0		64,948
Wholesale & retail		66,155		1,521		983		1,784		70,443
Manufacturing		39,559		0		699		0		40,258
Agriculture		20,457		0		471		0		20,928
Other		121,223		1,156		612		1,843		124,834
Total commercial related loans		561,185		20,168		18,281		7,846		607,480
Residential mortgage		23,421		5		32		53		23,511
Home equity		65,406		112		188		152		65,858
Other		39,318		325		351		291		40,285
Total consumer related loans		128,145		442		571		496		129,654
Total loans	$	689,330	$	20,610	$	18,852	$	8,342	$	737,134

Impaired Loans

The table below presents a summary of impaired loans at September 30, 2013 and December 31, 2012. Generally, impaired loans are loans risk rated substandard and nonaccrual or classified as troubled debt restructurings. An allowance is established for individual commercial related loans where the Corporation has doubt as to full recovery of the outstanding principal balance. Typically, impaired consumer related loans are partially or fully charged off obviating the need for a specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for charge-offs.



		September 30, 2013						December 31, 2012
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with no related allowance:
Builder & developer	$	9,020	$	9,020		-	$	12,211	$	12,211		-
Commercial real estate investor		6,673		6,773		-		5,736		5,836		-
Residential real estate investor		287		512		-		72		72		-
Hotel/Motel		0		0		-		0		0		-
Wholesale & retail		1,616		4,101		-		3,048		5,323		-
Manufacturing		676		676		-		699		699		-
Agriculture		0		0		-		0		0		-
Other commercial		1,536		1,536		-		1,483		1,611		-
Residential mortgage		151		177		-		85		111		-
Home equity		387		412		-		340		340		-
Other consumer		585		585		-		642		718		-
Total impaired loans with no related allowance	$	20,931	$	23,792		-	$	24,316	$	26,921		-

Impaired loans with a related allowance:
Builder & developer	$	0	$	0	$	0	$	256	$	256	$	147
Commercial real estate investor		0		0		0		0		0		0
Residential real estate investor		2,223		2,223		650		2,659		2,659		700
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		0		0		0		0		0		0
Manufacturing		0		0		0		0		0		0
Agriculture		458		458		100		471		471		100
Other commercial		326		326		120		972		972		215
Residential mortgage		0		0		0		0		0		0
Home equity		0		0		0		0		0		0
Other consumer		0		0		0		0		0		0
Total impaired loans with a related allowance	$	3,007	$	3,007	$	870	$	4,358	$	4,358	$	1,162

Total impaired loans:
Builder & developer	$	9,020	$	9,020	$	0	$	12,467	$	12,467	$	147
Commercial real estate investor		6,673		6,773		0		5,736		5,836		0
Residential real estate investor		2,510		2,735		650		2,731		2,731		700
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		1,616		4,101		0		3,048		5,323		0
Manufacturing		676		676		0		699		699		0
Agriculture		458		458		100		471		471		100
Other commercial		1,862		1,862		120		2,455		2,583		215
Residential mortgage		151		177		0		85		111		0
Home equity		387		412		0		340		340		0
Other consumer		585		585		0		642		718		0
Total impaired loans	$	23,938	$	26,799	$	870	$	28,674	$	31,279	$	1,162

The tables below present 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, 2013 and 2012.


		For the three months ended
		September 30, 2013						September 30, 2012
	Average		Total		Cash Basis		Average		Total		Cash Basis
	Recorded		Interest		Interest		Recorded		Interest		Interest
(dollars in thousands)	Investment		Income		Income		Investment		Income		Income
Impaired loans with no related allowance:
Builder & developer	$	9,094	$	132	$	0	$	10,771	$	121	$	11
Commercial real estate investor		6,182		61		23		5,146		73		34
Residential real estate investor		305		0		1		268		1		1
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		1,882		65		62		2,299		3		1
Manufacturing		679		11		0		706		10		0
Agriculture		0		0		0		0		0		0
Other commercial		1,563		4		0		3,936		3		1
Residential mortgage		152		3		2		86		1		1
Home equity		392		2		0		268		1		0
Other consumer		626		2		4		473		7		4
Total impaired loans with no related allowance	$	20,875	$	280	$	92	$	23,953	$	220	$	53

Impaired loans with a related allowance:
Builder & developer	$	0	$	0	$	0	$	259	$	2	$	2
Commercial real estate investor		0		0		0		0		0		0
Residential real estate investor		2,236		0		0		2,289		31		0
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		0		0		0		263		0		0
Manufacturing		0		0		0		0		0		0
Agriculture		460		8		0		479		9		0
Other commercial		602		0		0		927		0		0
Residential mortgage		0		0		0		0		0		0
Home equity		0		0		0		0		0		0
Other consumer		0		0		0		0		0		0
Total impaired loans with a related allowance	$	3,298	$	8	$	0	$	4,217	$	42	$	2

Total impaired loans:
Builder & developer	$	9,094	$	132	$	0	$	11,030	$	123	$	13
Commercial real estate investor		6,182		61		23		5,146		73		34
Residential real estate investor		2,541		0		1		2,557		32		1
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		1,882		65		62		2,562		3		1
Manufacturing		679		11		0		706		10		0
Agriculture		460		8		0		479		9		0
Other commercial		2,165		4		0		4,863		3		1
Residential mortgage		152		3		2		86		1		1
Home equity		392		2		0		268		1		0
Other consumer		626		2		4		473		7		4
Total impaired loans	$	24,173	$	288	$	92	$	28,170	$	262	$	55



		For the nine months ended
		September 30, 2013						September 30, 2012
	Average		Total		Cash Basis		Average		Total		Cash Basis
	Recorded		Interest		Interest		Recorded		Interest		Interest
(dollars in thousands)	Investment		Income		Income		Investment		Income		Income
Impaired loans with no related allowance:
Builder & developer	$	9,913	$	396	$	5	$	8,008	$	355	$	65
Commercial real estate investor		5,953		195		92		4,703		209		108
Residential real estate investor		210		5		4		366		4		4
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		2,435		108		126		2,627		5		4
Manufacturing		686		33		0		709		31		0
Agriculture		0		0		0		0		0		0
Other commercial		1,589		10		4		4,654		93		138
Residential mortgage		118		7		5		145		5		4
Home equity		351		8		0		257		5		1
Other consumer		628		15		17		384		16		10
Total impaired loans with no related allowance	$	21,883	$	777	$	253	$	21,853	$	723	$	334

Impaired loans with a related allowance:
Builder & developer	$	97	$	0	$	0	$	261	$	4	$	4
Commercial real estate investor		0		0		0		57		0		0
Residential real estate investor		2,447		(9)		0		1,189		33		0
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		0		0		0		131		(3)		0
Manufacturing		0		0		0		0		0		0
Agriculture		465		24		0		484		26		0
Other commercial		786		0		0		926		0		0
Residential mortgage		0		0		0		0		0		0
Home equity		0		0		0		0		0		0
Other consumer		0		0		0		0		0		0
Total impaired loans with a related allowance	$	3,795	$	15	$	0	$	3,048	$	60	$	4

Total impaired loans:
Builder & developer	$	10,010	$	396	$	5	$	8,269	$	359	$	69
Commercial real estate investor		5,953		195		92		4,760		209		108
Residential real estate investor		2,657		(4)		4		1,555		37		4
Hotel/Motel		0		0		0		0		0		0
Wholesale & retail		2,435		108		126		2,758		2		4
Manufacturing		686		33		0		709		31		0
Agriculture		465		24		0		484		26		0
Other commercial		2,375		10		4		5,580		93		138
Residential mortgage		118		7		5		145		5		4
Home equity		351		8		0		257		5		1
Other consumer		628		15		17		384		16		10
Total impaired loans	$	25,678	$	792	$	253	$	24,901	$	783	$	338

The performance and credit quality of the loan portfolio is also monitored by using an aging schedule which 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, 2013 and December 31, 2012.



					≥ 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, 2013
Builder & developer	$	0	$	0	$	0	$	247	$	247	$	102,865	$	103,112
Commercial real estate investor		997		0		0		3,387		4,384		132,097		136,481
Residential real estate investor		0		50		0		2,460		2,510		70,482		72,992
Hotel/Motel		335		0		0		0		335		65,605		65,940
Wholesale & retail		0		0		0		1,339		1,339		73,140		74,479
Manufacturing		0		0		0		0		0		34,150		34,150
Agriculture		0		0		0		0		0		35,310		35,310
Other		130		0		0		1,483		1,613		150,127		151,740
Total commercial related loans		1,462		50		0		8,916		10,428		663,776		674,204
Residential mortgage		0		24		0		121		145		24,980		25,125
Home equity		25		0		0		199		224		74,856		75,080
Other		159		67		0		546		772		38,480		39,252
Total consumer related loans		184		91		0		866		1,141		138,316		139,457
Total loans	$	1,646	$	141	$	0	$	9,782	$	11,569	$	802,092	$	813,661

December 31, 2012
Builder & developer	$	400	$	0	$	0	$	255	$	655	$	96,281	$	96,936
Commercial real estate investor		0		0		0		3,277		3,277		119,437		122,714
Residential real estate investor		2,044		0		0		687		2,731		63,688		66,419
Hotel/Motel		0		0		0		0		0		64,948		64,948
Wholesale & retail		1,067		0		0		1,784		2,851		67,592		70,443
Manufacturing		0		0		0		0		0		40,258		40,258
Agriculture		0		0		0		0		0		20,928		20,928
Other		456		0		0		1,843		2,299		122,535		124,834
Total commercial related loans		3,967		0		0		7,846		11,813		595,667		607,480
Residential mortgage		474		129		0		53		656		22,855		23,511
Home equity		62		0		0		152		214		65,644		65,858
Other		842		195		186		291		1,514		38,771		40,285
Total consumer related loans		1,378		324		186		496		2,384		127,270		129,654
Total loans	$	5,345	$	324	$	186	$	8,342	$	14,197	$	722,937	$	737,134

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 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.

The table below shows loans whose terms have been modified under TDRs during the three and nine months ended September 30, 2013 and 2012. There was no impairment loss recognized on any of these TDRs, and they are all performing under their modified terms. There were no defaults during the three and nine months ended September 30, 2013 and 2012 for TDRs entered into for the last 12 months.



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

September 30, 2013
Commercial related loans nonaccrual	1	$	375		375

September 30, 2012
None

Nine months ended:

September 30, 2013
Commercial related loans accruing	1	$	208	$	208
Commercial related loans nonaccrual	1	$	375		375

September 30, 2012
Commercial related loans nonaccrual	1	$	286	$	286