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Loans | 9 Months Ended
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Sep. 30, 2022
Loans [Abstract] |
Loans | Note 5. Loans The Bank reports its loan portfolio based on the primary collateral of the loan. It further classifies these loans by the primary purpose, either consumer or commercial. The Bank’s residential real estate loans include long-term loans to individuals and businesses secured by mortgages on the borrower’s real property and include home equity loans. Construction loans are made to finance the purchase of land and the construction of residential and commercial buildings thereon and are secured by mortgages on real estate. Commercial real estate loans include construction, owner and non-owner occupied properties and farm real estate. Commercial loans are made to businesses of various sizes for a variety of purposes including property, plant and equipment, working capital and loans to government municipalities. Commercial lending is concentrated in the Bank’s primary market, but also includes purchased loan participations. Consumer loans are comprised of installment loans and unsecured personal lines of credit. Each class of loans involves a different kind of risk. However, risk factors such as changes in interest rates, general economic conditions and changes in collateral values are common across all classes. The risk of each loan class is presented below. Residential Real Estate 1-4 Family The largest risk in residential real estate loans to retail customers is the borrower’s inability to repay the loan due to the loss of the primary source of income. The Bank attempts to mitigate this risk through prudent underwriting standards including employment history, current financial condition and credit history. These loans are generally owner occupied and serve as the borrower’s primary residence. Commercial purpose loans, secured by residential real estate, are usually dependent upon repayment from the rental income or other business purposes. These loans are generally non-owner occupied. In addition to the real estate collateral, these loans may have personal guarantees or UCC filings on other business assets. If a payment default occurs on a 1-4 family residential real estate loan, the collateral serves as a source of repayment, but may be subject to a change in value due to economic conditions. Residential Real Estate Construction This class includes loans to individuals for construction of a primary residence and to contractors and developers to improve real estate and construct residential properties. Construction loans to individuals generally bear the same risk as 1-4 family residential loans. Additional risks may include cost overruns, delays in construction or contractor problems. Loans to contractors and developers are primarily dependent on the sale of improved lots or finished homes for repayment. Risks associated with these loans include the borrower’s character and capacity to complete a development, the effect of economic conditions on the valuation of lots or homes, cost overruns, delays in construction or contractor problems. In addition to real estate collateral, these loans may have personal guarantees or UCC filings on other business assets, depending on the financial strength and experience of the developer. Real estate construction loans are monitored on a regular basis by either an independent third party or the responsible loan officer, depending on the size and complexity of the project. This monitoring process includes at a minimum, the submission of invoices or American Institute of Architects (AIA) documents detailing the cost incurred by the borrower, on-site inspections, and an authorizing signature for disbursement of funds. Commercial Real Estate Commercial real estate loans may be secured by various types of commercial property including retail space, office buildings, warehouses, hotels and motels, manufacturing facilities, and agricultural land. Commercial real estate loans present a higher level of risk than residential real estate loans. Repayment of these loans is normally dependent on cash-flow generated by the operation of a business that utilizes the real estate. The successful operation of the business, and therefore repayment ability, may be affected by general economic conditions outside of the control of the operator. On most commercial real estate loans ongoing monitoring of cash flow and other financial performance indictors is completed annually through financial statement analysis. In addition, the value of the collateral may be negatively affected by economic conditions and may be insufficient to repay the loan in the event of default. In the event of foreclosure, commercial real estate may be more difficult to liquidate than residential real estate. Commercial Commercial loans are made for various business purposes to finance equipment, inventory, accounts receivables, and operating liquidity. These loans are generally secured by business assets or equipment, non-real estate collateral and/or personal guarantees. Commercial loans present a higher level of credit risk than other loans because repayment ability is usually dependent on cash-flow from a business operation that can be affected by general economic conditions. On most Commercial real estate loans ongoing monitoring of cash flow and other financial performance indictors is completed at least annually through financial statement analysis. In the event of a default, collateral for these loans may be more difficult to liquidate, and the valuation of the collateral may decline more quickly than loans secured by other types of collateral. Loans to governmental municipalities are also included in the Commercial class. These loans generally have less risk than Commercial & Industrial (C&I) loans due to the taxing authority of the municipality and its ability to assess fees on services. This class also includes loans made as part of the Paycheck Protection Program (PPP). The PPP is a small business loan program, administered by the Small Business Administration (SBA). The PPP loans are 100 percent guaranteed by the SBA and have a maturity of two years or five years with a fixed interest rate of 1.00% for the life of the loan. Because the PPP loans are 100% guaranteed by the SBA, they present no credit risk to the Bank once the SBA guarantee is fulfilled. However, if the SBA does not grant loan forgiveness, the PPP loan would present the same risk factors as any other commercial loan. Consumer These loans are made for a variety of reasons to consumers and include term loans and personal lines-of credit. The loans may be secured or unsecured. Repayment is primarily dependent on the income of the borrower and to a lesser extent the sale of collateral. The underwriting of these loans is based on the consumer’s ability and willingness to repay and is determined by the borrower’s employment history, current financial condition and credit background. Collateral for these loans, if any, usually depreciates quickly and therefore, may not be adequate to repay the loan if it is repossessed. Therefore, the overall health of the economy, including unemployment rates and wages, will have an effect on the credit quality in this loan class. ‎ A summary of loans outstanding, by class, at the end of the reporting periods is as follows:
|  | September 30, |  | December 31,
(Dollars in thousands) |  | 2022 |  | 2021
Residential Real Estate 1-4 Family |  |  |  |  |  |
Consumer first liens |  | $ | 78,686 |  | $ | 71,828
Commercial first lien |  |  | 60,219 |  |  | 60,655
Total first liens |  |  | 138,905 |  |  | 132,483
Consumer junior liens and lines of credit |  |  | 70,423 |  |  | 67,103
Commercial junior liens and lines of credit |  |  | 4,326 |  |  | 4,841
Total junior liens and lines of credit |  |  | 74,749 |  |  | 71,944
Total residential real estate 1-4 family |  |  | 213,654 |  |  | 204,427
Residential real estate - construction |  |  |  |  |  |
Consumer |  |  | 11,125 |  |  | 8,278
Commercial |  |  | 12,776 |  |  | 12,379
Total residential real estate construction |  |  | 23,901 |  |  | 20,657
Commercial real estate |  |  | 571,426 |  |  | 522,779
Commercial |  |  | 233,427 |  |  | 244,543
Total commercial |  |  | 804,853 |  |  | 767,322
Consumer |  |  | 6,099 |  |  | 6,406
|  |  | 1,048,507 |  |  | 998,812
Less: Allowance for loan losses |  |  | (14,989) |  |  | (15,066)
Net Loans |  | $ | 1,033,518 |  | $ | 983,746
Included in the loan balances are the following: |  |  |  |  |  |
Net unamortized deferred loan costs |  | $ | 2,013 |  | $ | 1,289
Loans pledged as collateral for borrowings and commitments from: |  |  |  |  |  |
FHLB |  | $ | 646,878 |  | $ | 614,828
Federal Reserve Bank |  |  | 49,191 |  |  | 45,453
|  | $ | 696,069 |  | $ | 660,281
Paycheck Protection Program (included in commercial loans) |  | $ | 205 |  | $ | 7,755

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- Definition The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses. + References Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -URI https://asc.fasb.org/subtopic&trid=2196772 + Details
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