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Loans, net and allowance for loan losses

9 Months Ended

Sep. 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 September 30, 2022 and December 31, 2021 are summarized as follows. The Company had net deferred loan origination fees of $0.3 million and $1.6 million at September 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.


At the period end		September 30, 2022	December 31, 2021
Commercial
Taxable	$	371,164	$	424,455
Non-taxable		224,764		188,672
Total		595,928		613,127
Real estate
Commercial		1,620,116		1,343,539
Residential		326,223		297,624
Total		1,946,339		1,641,163
Consumer
Indirect Auto		70,006		65,791
Consumer Other		11,433		9,092
Total		81,439		74,883
Total	$	2,623,706	$	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 $4.4 million in related deferred PPP net fees.

Net deferred loan origination fees remaining related to PPP loans is $0.3 million at September 30, 2022, compared to $1.7 million at December 31, 2021. The PPP loans are included in the taxable commercial loan classification and had an outstanding balance at September 30, 2022 of $22.7 million comprised of $11.2 million remaining from those originated during 2021 as part of round two and $11.5 million remaining from loans originated during 2020 under round one of the program. At December 31, 2021, PPP loans had outstanding balances totaling $68.9 million. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for loan losses due to a 100% SBA guarantee. At September 30, 2022 and December 31, 2021, the outstanding PPP balances were considered current.

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


			Real estate
September 30, 2022	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2022	$	7,766	$	17,569	$	3,220	$	819	$	29,374
Charge-offs				(15)				(86)		(101)
Recoveries		10		32		1		56		99
Provisions (credits)		(5)		437		9		9		450
Ending balance	$	7,771	$	18,023	$	3,230	$	798	$	29,822

			Real estate
September 30, 2021	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2021	$	8,520	$	14,281	$	3,069	$	869	$	26,739
Charge-offs		(446)		(12)				(8)		(466)
Recoveries		4		1				15		20
Provisions (credits)		(164)		519		92		(47)		400
Ending balance	$	7,914	$	14,789	$	3,161	$	829	$	26,693


			Real estate
September 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)		(147)		(2)		(244)		(554)
Recoveries		39		109		4		141		293
Provisions (credits)		(560)		2,133		19		108		1,700
Ending balance	$	7,771	$	18,023	$	3,230	$	798	$	29,822


			Real estate
September 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		(461)		(252)		(24)		(114)		(851)
Recoveries		83		67		2		48		200
Provisions (credits)		(442)		415		54		(27)		—
Ending balance	$	7,914	$	14,789	$	3,161	$	829	$	26,693

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


			Real estate
September 30, 2022	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	7,771	$	18,023	$	3,230	$	798	$	29,822
Ending balance: individually evaluated for impairment		19		1		21				41
Ending balance: collectively evaluated for impairment	$	7,752	$	18,022	$	3,209	$	798	$	29,781
Loans receivable:
Ending balance	$	595,928	$	1,620,116	$	326,223	$	81,439	$	2,623,706
Ending balance: individually evaluated for impairment		114		2,721		1,161				3,996
Ending balance: collectively evaluated for impairment	$	595,814	$	1,617,395	$	325,062	$	81,439	$	2,619,710



			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 September 30, 2022 and December 31, 2021:


			Special
September 30, 2022	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	587,033	$	8,065	$	830	$	$	595,928
Real estate:
Commercial		1,606,076		7,722		6,318			1,620,116
Residential		324,452		114		1,657			326,223
Consumer		81,170				269			81,439
Total	$	2,598,731	$	15,901	$	9,074	$	$	2,623,706


			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 payoff of a $2.4 million credit. The increase to substandard commercial real estate loans is primarily due to the downgrade of three credits totaling $1.7 million as a result of repayment uncertainty. These downgrades were offset by the payoff/reduction of various credits. Substandard residential real estate loans decreased $0.7 million primarily due to the payoff of a $0.5 million credit.

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


		September 30, 2022		December 31, 2021
Commercial	$	102	$	185
Real estate:
Commercial		1,787		1,793
Residential		423		694
Consumer		245		139
Total	$	2,557	$	2,811

Nonaccrual loans decreased $254 thousand from year end December 31, 2021 due to decreases in commercial, commercial real estate and residential loans, partially offset by increases in consumer 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
September 30, 2022	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	35	$		$	102	$	137	$	595,791	$	595,928	$
Real estate:
Commercial		146		605		330		1,081		1,619,035		1,620,116
Residential		341		640		565		1,546		324,677		326,223		280
Consumer		405		234		98		737		80,702		81,439
Total	$	927	$	1,479	$	1,095	$	3,501	$	2,620,205	$	2,623,706	$	280

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 nine months ended September 30, 2022 and September 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
September 30, 2022	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	94	$	425			$	110	$	3	$	129	$	7
Real estate:
Commercial		2,389		3,193				2,431		9		2,497		31
Residential		918		1,102				957		6		915		16
Consumer		245		256				258				215
Total		3,646		4,976				3,756		18		3,756		54
With an allowance recorded:
Commercial		20		20	$	19		27		—		29		—
Real estate:
Commercial		332		332		1		381		7		429		15
Residential		243		247		21		257		3		297		9
Total		595		599		41		665		10		755		24
Total impaired loans
Commercial		114		445		19		137		3		158		7
Real estate:
Commercial		2,721		3,525		1		2,812		16		2,926		46
Residential		1,161		1,349		21		1,214		9		1,212		25
Consumer		245		256				258				215
Total	$	4,241	$	5,575	$	41	$	4,421	$	28	$	4,511	$	78


							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
September 30, 2021	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	634	$	1,097			$	870	$	2	$	1,166	$	9
Real estate:
Commercial		2,560		3,275				2,785		4		2,805		19
Residential		991		1,184				999		5		1,051		15
Consumer		82		96				79				91
Total		4,267		5,652				4,733		11		5,113		43
With an allowance recorded:
Commercial		424		424	$	18		695		5		1,354		15
Real estate:
Commercial		534		564		107		604		4		875		14
Residential		440		446		41		450		3		445		10
Consumer
Total		1,398		1,434		166		1,749		12		2,674		39
Total impaired loans
Commercial		1,058		1,521		18		1,565		7		2,520		24
Real estate:
Commercial		3,094		3,839		107		3,389		8		3,680		33
Residential		1,431		1,630		41		1,449		8		1,496		25
Consumer		82		96				79				91
Total	$	5,665	$	7,086	$	166	$	6,482	$	23	$	7,787	$	82

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 $1.4 million at September 30, 2022, $1.6 million at December 31, 2021 and $2.6 million at September 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 nine months ended September 30, 2022 or 2021.

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