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Loans, net and allowance for credit losses

3 Months Ended

Mar. 31, 2023

Loans, net and allowance for credit losses

Loans, net and allowance for credit losses

5. Loans, net and allowance for credit losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at March 31, 2023 and December 31, 2022 are summarized as follows. The Company had net deferred loan origination fees of $0.1 million and $0.3 million at March 31, 2023 and December 31, 2022, respectively.



(Dollars in thousands)		March 31, 2023	December 31, 2022
Commercial and Industrial	$	430,098	$	433,048
Municipal		169,278		166,210
Total		599,376		599,258
Real estate
Commercial		1,782,911		1,709,827
Residential		342,459		330,728
Total		2,125,370		2,040,555
Consumer
Indirect Auto		86,587		76,461
Consumer Other		6,710		13,842
Total		93,297		90,303
Total	$	2,818,043	$	2,730,116

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.

Included in the commercial and industrial balances at March 31, 2023 are Paycheck Protection Program (PPP) loans that

had an outstanding balance of $22.2 million comprised of $10.9 million remaining from those originated during 2021 as part of round two and $11.3 million remaining from loans originated during 2020 under round one of the program. At December 31, 2022, PPP loans had outstanding balances totaling $22.3 million. Net deferred loan origination fees remaining related to PPP loans was $0.2 million at March 31, 2023 and December 31, 2022. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for credit losses due to a 100% SBA guarantee. At March 31, 2023 and December 31, 2022, the outstanding PPP balances were considered current.

The following tables present the balance of the allowance for credit losses at March 31, 2023 and 2022. For the three months ended March 31, 2023, the balance of the allowance for credit losses is based on the CECL methodology, as presented in Note 1. For the three months ended March 31, 2022, the allowance for loan losses is based upon the calculation methodology as described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The tables identify the valuation allowances attributable to specifically identified impairments on individually evaluated loans, including those acquired with deteriorated credit quality, as well as valuation allowances for impairments on loans evaluated collectively. The tables include the underlying balance of loans receivable applicable to each category as of those dates.


					Real estate
March 31, 2023	Commercial		Municipal		Commercial		Residential		Consumer		Total
Allowance for credit losses:	$	4,365	$	1,247	$	17,915	$	3,072	$	873	$	27,472
Impact of adopting ASU 2016-13		(1,683)		747		(3,344)		987		30		(3,263)
Adjusted Beginning Balance January 1, 2023		2,682		1,994		14,571		4,059		903		24,209
Charge-offs		(4)								(71)		(75)
Recoveries						1		16		49		66
Provisions (credits)		(197)		324		1,120		(207)		204		1,244
Ending balance	$	2,481	$	2,318	$	15,692	$	3,868	$	1,085	$	25,444

					Real estate
March 31, 2022	Commercial		Municipal		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2022	$	7,466	$	987	$	15,928	$	3,209	$	793	$	28,383
Charge-offs		(161)				(132)				(62)		(355)
Recoveries		9				16		3		51		79
Provisions (credits)		(887)		179		977		43		(12)		300
Ending balance	$	6,427	$	1,166	$	16,789	$	3,255	$	770	$	28,407

The following table represents the allowance for credit losses by major classification of loan and whether the loans were individually or collectively evaluated and collateral dependent by class of loans at March 31, 2023 under ASU 2016-13.


					Real estate
March 31, 2023	Commercial		Municipal		Commercial		Residential		Consumer		Total
Allowance for credit losses:
Ending balance	$	2,481	$	2,318	$	15,692	$	3,868	$	1,085	$	25,444
Ending balance: individually evaluated		14										14
Ending balance: collectively evaluated	$	2,467	$	2,318	$	15,692	$	3,868	$	1,085	$	25,430
Loans receivable:
Ending balance	$	430,098	$	169,278	$	1,782,911	$	342,459	$	93,297	$	2,818,043
Individually evaluated - collateral dependent - real estate		10				867		789				1,666
Individually evaluated - collateral dependent - non-real estate		14										14
Collectively evaluated		430,074		169,278		1,782,044		341,670		93,297		2,816,363

The following table represents the allowance for loan losses by major classification of loan and whether the loans were individually or collectively evaluated for impairment at December 31, 2022 prior to the adoption of ASU 2016-13.



					Real estate
December 31, 2022	Commercial		Municipal		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	4,365	$	1,247	$	17,915	$	3,072	$	873	$	27,472
Ending balance: individually evaluated for impairment		19						21				40
Ending balance: collectively evaluated for impairment	$	4,346	$	1,247	$	17,915	$	3,051	$	873	$	27,432
Loans receivable:
Ending balance	$	433,048	$	166,210	$	1,709,827	$	330,728	$	90,303	$	2,730,116
Ending balance: individually evaluated for impairment		98				2,063		1,760				3,921
Ending balance: collectively evaluated for impairment		432,950		166,210		1,707,764		328,968		90,303		2,726,195

Nonaccrual Loans

The following table presents the Company’s nonaccrual loans at March 31, 2023 and December 31, 2022 and interest income for the quarter that would have been recorded under the original terms of such nonaccrual loans.



		March 31, 2023
								Interest Income
								Recorded for
		Total		Nonaccrual with		Nonaccrual with		Nonaccrual Loans
		Nonaccrual		an Allowance for		no Allowance for		in the three months
(Dollars in thousands)		Loans		Credit Losses		Credit Losses		ended March 31, 2023
Commercial	$	14	$	14	$		$	5
Municipal
Real estate:
Commercial		867				867		374
Residential		723				723
Consumer		194				194
Total	$	1,798	$	14	$	1,784	$	379



		December 31, 2022
								Interest Income
								Recorded for
		Total		Nonaccrual with		Nonaccrual with		Nonaccrual Loans
		Nonaccrual		an Allowance for		no Allowance for		in the three months
(Dollars in thousands)		Loans		Credit Losses		Credit Losses		ended December 31, 2022
Commercial	$	86	$	19	$	67	$
Municipal
Real estate:
Commercial		1,155				1,155
Residential		562				562
Consumer		232				232
Total	$	2,035	$	19	$	2,016	$

The following table summarizes information concerning impaired loans, which include nonaccrual loans, troubled debt restructurings and loans past due 90 days or more and still accruing, as of and for the three months ended March 31, 2022 by major loan classification:


	March 31, 2022
							For the Quarter Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	138	$	475	$		$	148	$	2
Municipal
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
Municipal
Real estate:
Commercial		440		452		45		477		4
Residential		273		274		49		338		3
Consumer
Total		734		747		115		846		7
Total impaired loans
Commercial		159		496		21		179		2
Municipal
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

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 table presents the amortized cost of loans and gross chargeoffs by year of origination and by 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, 2023:




(Dollars in thousands)		2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial
Pass	$	11,531	$	50,495	$	46,353	$	32,496	$	50,260	$	89,938	$	140,615	$	421,688
Special Mention														67		67
Substandard		15				46				53		276		7,953		8,343
Total Commercial		11,546		50,495		46,399		32,496		50,313		90,214		148,635		430,098

Municipal
Pass		1,400		45,146		91,776		11,850		36		18,983		87		169,278
Special Mention
Substandard
Total Municipal		1,400		45,146		91,776		11,850		36		18,983		87		169,278

Commercial real estate
Pass		55,319		531,819		488,524		151,845		154,002		386,268				1,767,777
Special Mention		1,763								303		3,301				5,367
Substandard		175				1,637		165		628		7,162				9,767
Total Commercial real estate		57,257		531,819		490,161		152,010		154,933		396,731				1,782,911

Residential real estate
Pass		5,741		55,051		69,011		28,927		17,764		93,343		72,014		341,851
Special Mention
Substandard						17		214				377				608
Total Residential real estate		5,741		55,051		69,028		29,141		17,764		93,720		72,014		342,459

Consumer
Pass		17,548		39,005		17,087		8,127		5,179		5,457		700		93,103
Special Mention
Substandard						111		30		19		34				194
Total Consumer		17,548		39,005		17,198		8,157		5,198		5,491		700		93,297

Total Loans	$	93,492	$	721,516	$	714,562	$	233,654	$	228,244	$	605,139	$	221,436	$	2,818,043

Gross charge-offs
Commercial	$		$		$		$		$		$		$	4	$	4
Municipal
Commercial real estate
Residential real estate
Consumer				1		35		17		10		8				71
Total Gross charge-offs	$		$	1	$	35	$	17	$	10	$	8	$	4	$	75

The following table presents the amortized cost of loans by 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 December 31, 2022 as disclosed prior to ASU 2016-13:


	December 31, 2022
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	424,411	$	7,822	$	815	$	$	433,048
Municipal		166,210							166,210
Real estate:
Commercial		1,699,041		7,509		3,277			1,709,827
Residential		329,098				1,630			330,728
Consumer		90,020				283			90,303
Total	$	2,708,780	$	15,331	$	6,005	$	$	2,730,116

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


	March 31, 2023
					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
(Dollars in thousands)	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	156	$		$	14	$	170	$	429,928	$	430,098	$
Municipal										169,278		169,278
Real estate:
Commercial		92		616		245		953		1,781,958		1,782,911
Residential		1,965		444		467		2,876		339,583		342,459		59
Consumer		487		92		53		632		92,665		93,297
Total	$	2,700	$	1,152	$	779	$	4,631	$	2,813,412	$	2,818,043	$	59


	December 31, 2022
					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
(Dollars in thousands)	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	137	$	38	$	86	$	261	$	432,787	$	433,048	$
Municipal										166,210		166,210
Real estate:
Commercial		102		2		334		438		1,709,389		1,709,827
Residential		1,162		128		988		2,278		328,450		330,728		748
Consumer		690		199		120		1,009		89,294		90,303
Total	$	2,091	$	367	$	1,528	$	3,986	$	2,726,130	$	2,730,116	$	748

Allowance for Credit Losses on Off Balance Sheet Commitments

The following table presents the activity in the ACL on off balance sheet commitments for the three months ended March 31, 2023:


(Dollars in thousands)		March 31, 2023
Balance at December 31, 2022	$	179
Impact of adopting Topic 326		270
Credit recorded in noninterest expense		(185)
Total allowance for credit losses on off balance sheet commitments	$	264

Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

There were no loans made to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2023 and hence there were no loans made to borrowers experiencing financial difficulty that subsequently defaulted.

Information on loan modifications prior to the adoption of ASU 2022-02 on January 1, 2023 is presented in accordance with the applicable accounting standards in effect at that time. During the three months ended March 31, 2022, the Company did not modify any loans that were determined to be a troubled debt restructuring.