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Loans, net and allowance for loan losses

3 Months Ended

Mar. 31, 2022

Loans, net and allowance for loan losses

Loans, net and allowance for loan losses

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at March 31, 2022 and December 31, 2021 are summarized as follows. The Company had net deferred loan origination fees of $618 and $1,567 at March 31, 2022 and December 31, 2021, respectively. The decrease to the fees since yearend is due in part to the forgiveness by the Small Business Administration (“SBA”) of Paycheck Protection Program (“PPP”) loans.



		March 31, 2022		December 31, 2021
Commercial	$	580,758	$	613,127
Real estate:
Commercial		1,436,196		1,343,539
Residential		306,068		297,624
Consumer		74,659		74,883
Total	$	2,397,681	$	2,329,173

PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years or five years, if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. PPP fees are deferred and accreted into interest income over the contractual period of 24 months or 60 months, as applicable. Upon SBA forgiveness, unamortized fees are then recognized into interest income.

The Bank originated additional loans through the PPP, which expired on May 31, 2021. During 2021, the Bank had generated and received SBA approval on 1,062 PPP loans totaling $121.6 million and generated $4.3 million in related deferred PPP net fees.

Net deferred loan origination fees remaining related to PPP loans is $740 at March 31, 2022, compared to $1,659 at December 31, 2021. The PPP loans are included in the commercial loan classification and had an outstanding balance at March 31, 2022 of $38,680 comprised of $25,444 remaining from those originated during 2021 as part of round two and $13,236 remaining from loans originated during 2020 under round one of the program. At December 31, 2021, PPP loans had outstanding balances totaling $68,893. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for loan losses due to a 100% SBA guarantee. The outstanding balance is considered current at March 31, 2022 and December 31, 2021.

The changes in the allowance for loan losses account by major classification of loan for the three months ended March 31, 2022 and 2021 are summarized as follows:


			Real estate
March 31, 2022	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2022	$	8,453	$	15,928	$	3,209	$	793	$	28,383
Charge-offs		(161)		(132)				(62)		(355)
Recoveries		9		16		3		51		79
Provisions (credits)		(708)		977		43		(12)		300
Ending balance	$	7,593	$	16,789	$	3,255	$	770	$	28,407

			Real estate
March 31, 2021	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2021	$	8,734	$	14,559	$	3,129	$	922	$	27,344
Charge-offs		(15)		(96)		(22)		(62)		(195)
Recoveries		61		58		1		14		134
Provisions (credits)		(565)		182		(114)		(3)		(500)
Ending balance	$	8,215	$	14,703	$	2,994	$	871	$	26,783

The allocation of the allowance for loan losses and the related loans by major classifications of loans at March 31, 2022 and December 31, 2021 is summarized as follows:


			Real estate
March 31, 2022	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	7,593	$	16,789	$	3,255	$	770	$	28,407
Ending balance: individually evaluated for impairment		21		45		49		—		115
Ending balance: collectively evaluated for impairment	$	7,572	$	16,744	$	3,206	$	770	$	28,292
Loans receivable:
Ending balance	$	580,758	$	1,436,196	$	306,068	$	74,659	$	2,397,681
Ending balance: individually evaluated for impairment		159		3,188		1,148		—		4,495
Ending balance: collectively evaluated for impairment	$	580,599	$	1,433,008	$	304,920	$	74,659	$	2,393,186



			Real estate
December 31, 2021	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	8,453	$	15,928	$	3,209	$	793	$	28,383
Ending balance: individually evaluated for impairment		40		109		26				175
Ending balance: collectively evaluated for impairment	$	8,413	$	15,819	$	3,183	$	793	$	28,208
Loans receivable:
Ending balance	$	613,127	$	1,343,539	$	297,624	$	74,883	$	2,329,173
Ending balance: individually evaluated for impairment		199		2,890		1,273				4,362
Ending balance: collectively evaluated for impairment	$	612,928	$	1,340,649	$	296,351	$	74,883	$	2,324,811

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

●

Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention.

●

Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

●

Substandard- A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or

weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

●

Doubtful – A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

●

Loss- A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at March 31, 2022 and December 31, 2021:


			Special
March 31, 2022	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	571,829	$	8,089	$	840	$	—	$	580,758
Real estate:
Commercial		1,421,727		8,322		6,147				1,436,196
Residential		304,324		127		1,617				306,068
Consumer		74,452				207				74,659
Total	$	2,372,332	$	16,538	$	8,811	$		$	2,397,681


			Special
December 31, 2021	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	611,151	$	896	$	1,080	$	—	$	613,127
Real estate:
Commercial		1,324,646		13,939		4,954				1,343,539
Residential		294,892		333		2,399				297,624
Consumer		74,744				139				74,883
Total	$	2,305,433	$	15,168	$	8,572	$		$	2,329,173

The increase to special mention commercial loans is primarily the result of the downgrade of one credit with an outstanding balance of $7.8 million due to insufficient cash flows as the borrower’s operations have not stabilized in the anticipated timeframe. The decrease to special mention commercial real estate loans is due in part to an upgrade of a $3.5 million credit resulting from improved financial performance and satisfactory repayment history, and the $0.8 million downgrade to ‘substandard’ of one credit and $0.2 million charge-off to a second credit of a commercial relationship. Substandard residential real estate loans decreased $0.8 million primarily due to the payoff of a $0.5 million credit.

Information concerning nonaccrual loans by major loan classification at March 31, 2022 and December 31, 2021 is summarized as follows:


		March 31, 2022		December 31, 2021
Commercial	$	146	$	185
Real estate:
Commercial		2,143		1,793
Residential		575		694
Consumer		206		139
Total	$	3,070	$	2,811

The increase to non-accrual loans since year end was due primarily to the addition of a $0.8 million commercial real estate loan due to its delinquency status; the loan was subsequently paid-off during April 2022. Partially offsetting the increase was the payoff of a $0.5 million non-accrual real estate loan.

The major classifications of loans by past due status are summarized as follows:


					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
March 31, 2022	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	60	$	14	$	126	$	200	$	580,558	$	580,758
Real estate:
Commercial		326		—		1,242		1,568		1,434,628		1,436,196
Residential		1,794		11		249		2,054		304,014		306,068	$	103
Consumer		542		188		95		825		73,834		74,659
Total	$	2,722	$	213	$	1,712	$	4,647	$	2,393,034	$	2,397,681	$	103

Improved credit quality resulted in lower levels of past due loans from year end.


					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2021	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	101		155	$	158	$	414	$	612,713	$	613,127
Real estate:
Commercial		768	$	423		834		2,025		1,341,514		1,343,539
Residential		1,552		207		265		2,024		295,600		297,624	$	13
Consumer		477		163		51		691		74,192		74,883
Total	$	2,898	$	948	$	1,308	$	5,154	$	2,324,019	$	2,329,173	$	13

The following tables summarize information concerning impaired loans as of and for the three months ended March 31, 2022 and March 31, 2021, and as of and for the year ended December 31, 2021 by major loan classification:


							For the Quarter Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
March 31, 2022	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	138	$	475			$	148	$	2
Real estate:
Commercial		2,748		3,505				2,562		12
Residential		874		1,047				874		4
Consumer		207		217				173
Total		3,967		5,244				3,757		18
With an allowance recorded:
Commercial		21		21	$	21		31
Real estate:
Commercial		440		452		45		477		4
Residential		273		274		49		338		3
Total		734		747		115		846		7
Total impaired loans
Commercial		159		496		21		179		2
Real estate:
Commercial		3,188		3,957		45		3,039		16
Residential		1,147		1,321		49		1,212		7
Consumer		207		217				173
Total	$	4,701	$	5,991	$	115	$	4,603	$	25


							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2021	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	158	$	481			$	964	$	13
Real estate:
Commercial		2,376		3,120				2,719		22
Residential		873		1,073				1,016		19
Consumer		139		148				100
Total		3,546		4,822				4,799		54
With an allowance recorded:
Commercial		41		41		40		1,091		15
Real estate:
Commercial		513		543		109		802		22
Residential		401		401		26		436		13
Consumer
Total		955		985		175		2,329		50
Total impaired loans
Commercial		199		522		40		2,055		28
Real estate:
Commercial		2,889		3,663		109		3,521		44
Residential		1,274		1,474		26		1,452		32
Consumer		139		148				100
Total	$	4,501	$	5,807	$	175	$	7,128	$	104


							For the Quarter Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
March 31, 2021	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	673	$	1,108			$	1,462	$	4
Real estate:
Commercial		3,280		4,051				2,826		6
Residential		1,121		1,241				1,104		6
Consumer		94		105				103
Total		5,168		6,505				5,495		16
With an allowance recorded:
Commercial		1,978		2,041	$	697		2,012		5
Real estate:
Commercial		710		796		108		1,145		4
Residential		422		457		64		441		4
Consumer
Total		3,110		3,294		869		3,598		13
Total impaired loans
Commercial		2,651		3,149		697		3,474		9
Real estate:
Commercial		3,990		4,847		108		3,971		10
Residential		1,543		1,698		64		1,545		10
Consumer		94		105				103
Total	$	8,278	$	9,799	$	869	$	9,093	$	29

Loan Modifications/Troubled Debt Restructurings/COVID-19

Included in the commercial real estate and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $1,503 at March 31, 2022, $1,649 at December 31, 2021 and $2,740 at March 31, 2021.

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:

●

Rate Modification - A modification in which the interest rate is changed to a below market rate.

●

Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

●

Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

●

Combination Modification - Any other type of modification, including the use of multiple categories above.

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2022 or 2021.

During the three months ended March 31, 2022, or 2021, there were no payment defaults on troubled debt restructurings.