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Allowance for Credit Losses

9 Months Ended

Sep. 30, 2023

NOTE 4: 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. All allowance for credit loss information presented as of September 30, 2023 is in accordance with ASC 326. All allowance for credit loss information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.

The following table shows the allowance for credit losses activity by loan portfolio for the nine months ended September 30, 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)

406

(113)

Impact of ASC 326 adoption on PCD loans

595

—

604

Provision charged to operations

839

362

4,250

5,451

Loans charged off

(16)

(240)

(9,306)

(9,562)

Recoveries of loans previously charged off

144

136

3,070

3,350

Balance at September 30, 2023

12,164

3,695

24,389

40,248

The following table presents a breakdown of the provision for credit losses for the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Provision for credit losses:
Provision for loans	$	2,100	$	1,200	$	5,451	$	1,402
Provision for unfunded commitments		(50)		—		349		—
Total	$	2,050	$	1,200	$	5,800	$	1,402

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 recorded balance of the classes of loans within the commercial and consumer loan portfolios by loan rating and year of origination as of September 30, 2023:


													Revolving		Revolving
	Term Loans Recorded Balance by Origination Year												Loans		Loans
													Recorded		Converted
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Balance		to Term		Total
Commercial real estate:
Loan Rating
Pass	$	64,729	$	124,701	$	155,982	$	107,937	$	38,611	$	146,396	$	—	$	119	$	638,475
Special Mention		—		—		5,763		—		—		965		—		—		6,728
Substandard Nonaccrual		—		—		—		—		—		264		—		—		264
Total	$	64,729	$	124,701	$	161,745	$	107,937	$	38,611	$	147,625	$	—	$	119	$	645,467

Commercial business:
Loan Rating
Pass	$	17,317	$	19,330	$	18,728	$	14,045	$	15,376	$	14,196	$	19,496	$	88	$	118,576
Special Mention		65		—		—		—		—		—		—		—		65
Total	$	17,382	$	19,330	$	18,728	$	14,045	$	15,376	$	14,196	$	19,496	$	88	$	118,641

Construction - commercial real estate:
Loan Rating
Pass	$	23,177	$	30,632	$	1,150	$	8,035	$	—	$	—	$	—	$	—	$	62,994
Total	$	23,177	$	30,632	$	1,150	$	8,035	$	—	$	—	$	—	$	—	$	62,994

Land acquisition and development:
Loan Rating
Pass	$	1,049	$	6,062	$	10,969	$	9,992	$	—	$	328	$	—	$	—	$	28,400
Total	$	1,049	$	6,062	$	10,969	$	9,992	$	—	$	328	$	—	$	—	$	28,400

Builder lines:
Loan Rating
Pass	$	16,390	$	9,202	$	4,585	$	—	$	404	$	—	$	206	$	—	$	30,787
Total	$	16,390	$	9,202	$	4,585	$	—	$	404	$	—	$	206	$	—	$	30,787

Construction - consumer real estate:
Loan Rating
Pass	$	5,543	$	5,735	$	768	$	—	$	—	$	—	$	—	$	—	$	12,046
Total	$	5,543	$	5,735	$	768	$	—	$	—	$	—	$	—	$	—	$	12,046

Residential mortgage:
Loan Rating
Pass	$	48,024	$	93,630	$	45,721	$	42,276	$	11,828	$	48,123	$	—	$	—	$	289,602
Special Mention		—		—		4		—		—		96		—		—		100
Substandard		—		—		—		104		—		378		—		—		482
Substandard Nonaccrual		—		—		—		—		—		141		—		—		141
Total	$	48,024	$	93,630	$	45,725	$	42,380	$	11,828	$	48,738	$	—	$	—	$	290,325

Equity lines:
Loan Rating
Pass	$	—	$	—	$	35	$	70	$	—	$	878	$	46,680	$	299	$	47,962
Substandard		—		—		—		—		5		—		—		—		5
Substandard Nonaccrual		—		—		—		—		—		9		—		51		60
Total	$	—	$	—	$	35	$	70	$	5	$	887	$	46,680	$	350	$	48,027

Other consumer:
Loan Rating
Pass	$	4,856	$	3,061	$	717	$	329	$	227	$	627	$	50	$	—	$	9,867
Total	$	4,856	$	3,061	$	717	$	329	$	227	$	627	$	50	$	—	$	9,867

Total:
Loan Rating
Pass	$	181,085	$	292,353	$	238,655	$	182,684	$	66,446	$	210,548	$	66,432	$	506	$	1,238,709
Special Mention		65		—		5,767		—		—		1,061		—		—		6,893
Substandard		—		—		—		104		5		378		—		—		487
Substandard Nonaccrual		—		—		—		—		—		414		—		51		465
Total	$	181,150	$	292,353	$	244,422	$	182,788	$	66,451	$	212,401	$	66,432	$	557	$	1,246,554

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 3) 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 recorded balance of the classes of loans within the consumer finance loan portfolio by credit rating and year of origination as of September 30, 2023:

Revolving

Term Loans Recorded Balance by Origination Year

Loans

Revolving

Converted

(Dollars in thousands)

2023

2022

2021

2020

2019

Prior

Loans

to Term

Total

Consumer finance - automobiles:

Credit rating

Very good

7,814

13,655

4,904

1,170

338

—

27,915

Good

26,830

46,654

17,211

3,913

1,391

456

—

96,455

Fairly good

36,253

60,018

29,527

7,068

4,816

2,061

—

139,743

Fair

24,257

40,299

24,503

7,973

5,854

2,676

—

105,562

Marginal

5,538

9,690

8,647

3,733

3,410

2,461

—

33,479

Total

100,692

170,316

84,792

23,857

15,809

7,688

—

403,154

Consumer finance - marine and recreational vehicles:

Credit rating

Very good

6,475

15,774

10,291

10,386

2,654

2,556

—

48,136

Good

6,942

8,280

1,712

1,461

425

466

—

19,286

Fairly good

267

225

—

599

Total

13,684

24,279

12,041

11,878

3,079

3,060

—

68,021

Total:

Credit rating

Very good

14,289

29,429

15,195

11,556

2,992

2,590

—

76,051

Good

33,772

54,934

18,923

5,374

1,816

922

—

115,741

Fairly good

36,520

60,243

29,565

7,099

4,816

2,099

—

140,342

Fair

24,257

40,299

24,503

7,973

5,854

2,676

—

105,562

Marginal

5,538

9,690

8,647

3,733

3,410

2,461

—

33,479

Total

114,376

194,595

96,833

35,735

18,888

10,748

—

471,175

The following table details the current period gross charge-offs of loans by year of origination for the nine months ended September 30, 2023:


															Revolving
	Current Period Gross Charge-offs by Origination Year														Loans
													Revolving		Converted
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total
Commercial business	$	—	$	16	$	—	$	—	$	—	$	—	$	—	$	—	$	16
Equity lines		—		—		—		—		—		8		—		—		8
Other consumer¹		199		25		—		3		2		3		—		—		232
Consumer finance - automobiles		490		4,396		2,628		583		477		567		—		—		9,141
Consumer finance - marine and recreational vehicles		—		82		—		40		6		37		—		—		165
Total	$	689	$	4,519	$	2,628	$	626	$	485	$	615	$	—	$	—	$	9,562

1	Gross charge-offs of other consumer loans for the nine months ended September 30, 2023 included $199,000 of demand deposit overdrafts that originated in 2023.

Gross charge-offs increased for the nine months ended September 30, 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 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 September 30, 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 nine months ended September 30, 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		(6)		(62)		(623)		(60)		83		2,070		1,402
Loans charged off		—		—		(11)		—		(193)		(4,115)		(4,319)
Recoveries of loans previously charged off		16		—		13		2		93		3,516		3,640
Balance at September 30, 2022	$	2,670	$	794	$	10,464	$	535	$	155	$	26,262	$	40,880

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		Total¹
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 not 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