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Loans, net and allowance for loan losses

6 Months Ended

Jun. 30, 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 June 30, 2022 and December 31, 2021 are summarized as follows. The Company had net deferred loan origination fees of $602 and $1,567 at June 30, 2022 and December 31, 2021, respectively. The decrease to the fees since year-end is due in part to the forgiveness by the Small Business Administration (“SBA”) of Paycheck Protection Program (“PPP”) loans.



		June 30, 2022		December 31, 2021
Commercial	$	596,809	$	613,127
Real estate:
Commercial		1,569,658		1,343,539
Residential		317,672		297,624
Consumer		81,440		74,883
Total	$	2,565,579	$	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 $121,599 and generated $4,370 in related deferred PPP net fees.

Net deferred loan origination fees remaining related to PPP loans is $392 at June 30, 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 June 30, 2022 of $27,036 comprised of $13,921 remaining from those originated during 2021 as part of round two and $13,115 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. At June 30, 2022, there were two loans past due totaling $7. At December 31, 2021, the outstanding PPP balance was considered current.

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2022 and 2021 are summarized as follows:


			Real estate
June 30, 2022	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2022	$	7,593	$	16,789	$	3,255	$	770	$	28,407
Charge-offs						(2)		(96)		(98)
Recoveries		20		61				34		115
Provisions (credits)		153		719		(33)		111		950
Ending balance	$	7,766	$	17,569	$	3,220	$	819	$	29,374

			Real estate
June 30, 2021	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance April 1, 2021	$	8,215	$	14,703	$	2,994	$	871	$	26,783
Charge-offs				(144)		(2)		(44)		(190)
Recoveries		18		8		1		19		46
Provisions (credits)		287		(286)		76		23		100
Ending balance	$	8,520	$	14,281	$	3,069	$	869	$	26,739


			Real estate
June 30, 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)		(2)		(158)		(453)
Recoveries		29		77		3		85		194
Provisions (credits)		(555)		1,696		10		99		1,250
Ending balance	$	7,766	$	17,569	$	3,220	$	819	$	29,374


			Real estate
June 30, 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)		(240)		(24)		(106)		(385)
Recoveries		79		66		2		33		180
Provisions (credits)		(278)		(104)		(38)		20		(400)
Ending balance	$	8,520	$	14,281	$	3,069	$	869	$	26,739

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2022 and December 31, 2021 is summarized as follows:


			Real estate
June 30, 2022	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	7,766	$	17,569	$	3,220	$	819	$	29,374
Ending balance: individually evaluated for impairment		34		15		48				97
Ending balance: collectively evaluated for impairment	$	7,732	$	17,554	$	3,172	$	819	$	29,277
Loans receivable:
Ending balance	$	596,809	$	1,569,658	$	317,672	$	81,440	$	2,565,579
Ending balance: individually evaluated for impairment		160		2,903		1,267				4,330
Ending balance: collectively evaluated for impairment	$	596,649	$	1,566,755	$	316,405	$	81,440	$	2,561,249



			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		2,889		1,274				4,362
Ending balance: collectively evaluated for impairment	$	612,928	$	1,340,650	$	296,350	$	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 June 30, 2022 and December 31, 2021:


			Special
June 30, 2022	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	587,907	$	8,077	$	825	$	$	596,809
Real estate:
Commercial		1,555,363		8,028		6,267			1,569,658
Residential		315,835		119		1,718			317,672
Consumer		81,131				309			81,440
Total	$	2,540,236	$	16,224	$	9,119	$	$	2,565,579


			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 $7,800 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 $3,531 credit resulting from improved financial performance and satisfactory repayment history and the payoff of a $2,429 credit. The increase to substandard commercial real estate loans is primarily due to the downgrade of three credits totaling $1,745 as a result of repayment uncertainty. These downgrades were offset by the payoff/reduction of various credits. Substandard residential real estate loans decreased $681 primarily due to the payoff of a $538 credit.

Information concerning nonaccrual loans by major loan classification at June 30, 2022 and December 31, 2021 is summarized as follows:


		June 30, 2022		December 31, 2021
Commercial	$	147	$	185
Real estate:
Commercial		1,889		1,793
Residential		613		694
Consumer		270		139
Total	$	2,919	$	2,811

Nonaccrual loans increased $108 from year end December 31, 2021 due to increases in commercial real estate and consumer loans, partially offset by reduced commercial and residential real estate loans.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
June 30, 2022	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	78	$	19	$	127	$	224	$	596,585	$	596,809	$
Real estate:
Commercial		1,561		240		708		2,509		1,567,149		1,569,658
Residential		270		475		375		1,120		316,552		317,672		190
Consumer		523		179		123		825		80,615		81,440
Total	$	2,432	$	913	$	1,333	$	4,678	$	2,560,901	$	2,565,579	$	190

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 and six months ended June 30, 2022 and June 30, 2021, and as of and for the year ended December 31, 2021 by major loan classification:


							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2022	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	126	$	471			$	132	$	2	$	141	$	4
Real estate:
Commercial		2,473		3,262				2,611		10		2,532		22
Residential		996		1,181				935		6		914		10
Consumer		270		283				238				205
Total		3,865		5,197				3,916		18		3,792		36
With an allowance recorded:
Commercial		34		34	$	34		28				32
Real estate:
Commercial		430		442		15		435		4		461		8
Residential		271		276		48		273		3		315		6
Total		735		752		97		736		7		808		14
Total impaired loans
Commercial		160		505		34		160		2		173		4
Real estate:
Commercial		2,903		3,704		15		3,046		14		2,993		30
Residential		1,267		1,457		48		1,208		9		1,229		16
Consumer		270		283				238				205
Total	$	4,600	$	5,949	$	97	$	4,652	$	25	$	4,600	$	50


							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


							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2021	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	1,105	$	1,603			$	889	$	3	$	1,343	$	7
Real estate:
Commercial		3,009		3,970				3,145		9		2,887		15
Residential		1,007		1,185				1,064		4		1,071		10
Consumer		76		86				85				94
Total		5,197		6,844				5,183		16		5,395		32
With an allowance recorded:
Commercial		966		999	$	549		1,472		5		1,663		10
Real estate:
Commercial		674		771		87		692		6		988		10
Residential		459		470		58		441		3		447		7
Consumer
Total		2,099		2,240		694		2,605		14		3,098		27
Total impaired loans
Commercial		2,071		2,602		549		2,361		8		3,006		17
Real estate:
Commercial		3,683		4,741		87		3,837		15		3,875		25
Residential		1,466		1,655		58		1,505		7		1,518		17
Consumer		76		86				85				94
Total	$	7,296	$	9,084	$	694	$	7,788	$	30	$	8,493	$	59

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 $1,468 at June 30, 2022, $1,649 at December 31, 2021 and $2,637 at June 30, 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 six months ended June 30, 2022 or 2021.

During the three months and six ended June 30, 2022, or 2021, there were no payment defaults on troubled debt restructurings.