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Loans, net and allowance for credit losses

6 Months Ended

Jun. 30, 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 June 30, 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 June 30, 2023 and December 31, 2022, respectively.



(Dollars in thousands)			June 30, 2023		December 31, 2022
Commercial and Industrial		$	437,012		$	433,048
Municipal			172,875			166,210
Total			609,887			599,258
Real estate
Commercial			1,794,355			1,709,827
Residential			348,911			330,728
Total			2,143,266			2,040,555
Consumer
Indirect Auto			83,348			76,461
Consumer Other			6,737			13,842
Total			90,085			90,303
Total		$	2,843,238		$	2,730,116

The following tables present the balance of the allowance for credit losses at June 30, 2023 and 2022. For the three and six months ended June 30, 2023, the balance of the allowance for credit losses is based on the CECL methodology, as presented in Note 1. For the three and six months ended June 30, 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.


(Dollars in thousands)								Real estate
June 30, 2023		Commercial			Municipal			Commercial			Residential			Consumer			Total
Allowance for credit losses:
Beginning Balance April 1, 2023		$	2,481		$	2,318		$	15,692		$	3,868		$	1,085		$	25,444
Charge-offs															(77)			(77)
Recoveries			5									3			44			52
Provisions (credits)			265			(1,491)			(731)			(104)			(140)			(2,201)
Ending balance		$	2,751		$	827		$	14,961		$	3,767		$	912		$	23,218

(Dollars in thousands)								Real estate
June 30, 2022		Commercial			Municipal			Commercial			Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance April 1, 2022		$	6,427		$	1,166		$	16,789		$	3,255		$	770		$	28,407
Charge-offs												(2)			(96)			(98)
Recoveries			20						61						34			115
Provisions (credits)			75			78			719			(33)			111			950
Ending balance		$	6,522		$	1,244		$	17,569		$	3,220		$	819		$	29,374


(Dollars in thousands)								Real estate
June 30, 2023		Commercial			Municipal			Commercial			Residential			Consumer			Total
Allowance for credit losses:
Beginning Balance January 1, 2023		$	4,365		$	1,247		$	17,915		$	3,072		$	873		$	27,472
Impact of adopting ASU 2016-13			(1,683)			747			(3,344)			967			30			(3,283)
Beginning Balance January 1, 2023			2,682			1,994			14,571			4,039			903			24,189
Charge-offs			(4)												(148)			(152)
Recoveries			5						1			19			93			118
Provisions (credits)			68			(1,167)			389			(291)			64			(937)
Ending balance		$	2,751		$	827		$	14,961		$	3,767		$	912		$	23,218

(Dollars in thousands)								Real estate
June 30, 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)			(2)			(158)			(453)
Recoveries			29						77			3			85			194
Provisions (credits)			(812)			257			1,696			10			99			1,250
Ending balance		$	6,522		$	1,244		$	17,569		$	3,220		$	819		$	29,374

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 June 30, 2023 under ASU 2016-13.


(Dollars in thousands)								Real estate
June 30, 2023		Commercial			Municipal			Commercial			Residential			Consumer			Total
Allowance for credit losses:
Ending balance		$	2,751		$	827		$	14,961		$	3,767		$	912		$	23,218
Ending balance: individually evaluated			12															12
Ending balance: collectively evaluated		$	2,739		$	827		$	14,961		$	3,767		$	912		$	23,206
Loans receivable:
Ending balance		$	437,012		$	172,875		$	1,794,355		$	348,911		$	90,085		$	2,843,238
Individually evaluated - collateral dependent - real estate			9						847			1,058						1,914
Individually evaluated - collateral dependent - non-real estate			12															12
Collectively evaluated			436,991			172,875			1,793,508			347,853			90,085			2,841,312

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.



(Dollars in thousands)								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 June 30, 2023 and December 31, 2022.



			June 30, 2023
			Total			Nonaccrual with			Nonaccrual with
			Nonaccrual			an Allowance for			no Allowance for
(Dollars in thousands)			Loans			Credit Losses			Credit Losses
Commercial		$	12		$	12		$
Municipal
Real estate:
Commercial			847						847
Residential			871						871
Consumer			170						170
Total		$	1,900		$	12		$	1,888



									December 31, 2022
									Total
									Nonaccrual
(Dollars in thousands)									Loans
Commercial								$	86
Municipal
Real estate:
Commercial									1,155
Residential									562
Consumer									232
Total								$	2,035

Interest income recorded on nonaccrual loans for the three and six months ended June 30, 2023 was $35 thousand and $414 thousand, respectively.

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 and six months ended June 30, 2022 by major loan classification:


		June 30, 2022
											This Quarter							Year-to-Date
					Unpaid						Average			Interest				Average			Interest
		Recorded			Principal			Related			Recorded			Income				Recorded			Income
(Dollars in thousands)		Investment			Balance			Allowance			Investment			Recognized				Investment			Recognized
With no related allowance:
Commercial		$	126		$	471		$			$	132		$	2		$	141		$	4
Municipal
Real estate:
Commercial			2,473			3,262						2,611			10			2532			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
Municipal
Real estate:
Commercial			430			442			15			435			4			461			8
Residential			271			276			48			273			3			315			6
Consumer
Total			735			752			97			736			7			808			14
Total impaired loans
Commercial			160			505			34			160			2			173			4
Municipal
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

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 charge-offs 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 June 30, 2023:




(Dollars in thousands)			2023			2022			2021			2020			2019			Prior			Revolving Loans Amortized Cost Basis			Total
Commercial
Pass		$	11,811		$	43,882		$	44,051		$	30,411		$	49,522		$	110,429		$	138,811		$	428,917
Special Mention																					43			43
Substandard			15						45						47			97			7,848			8,052
Total Commercial			11,826			43,882			44,096			30,411			49,569			110,526			146,702			437,012

Municipal
Pass			895			47,438			93,746			11,569			29			19,111			87			172,875
Special Mention
Substandard
Total Municipal			895			47,438			93,746			11,569			29			19,111			87			172,875

Commercial real estate
Pass			86,423			535,259			484,693			150,484			154,622			372,370						1,783,851
Special Mention															301			3,263						3,564
Substandard			173						1,637			163			624			4,343						6,940
Total Commercial real estate			86,596			535,259			486,330			150,647			155,547			379,976						1,794,355

Residential real estate
Pass			12,232			54,665			68,529			28,470			17,432			90,196			76,659			348,183
Special Mention
Substandard			5						17			210						496						728
Total Residential real estate			12,237			54,665			68,546			28,680			17,432			90,692			76,659			348,911

Consumer
Pass			21,460			35,968			15,453			7,232			4,483			4,544			775			89,915
Special Mention
Substandard									86			36			17			31						170
Total Consumer			21,460			35,968			15,539			7,268			4,500			4,575			775			90,085

Total Loans		$	133,014		$	717,212		$	708,257		$	228,575		$	227,077		$	604,880		$	224,223		$	2,843,238

Gross charge-offs
Commercial		$			$			$			$			$			$			$	4		$	4
Municipal
Commercial real estate
Residential real estate
Consumer						26			59			32			23			8						148
Total Gross charge-offs		$			$	26		$	59		$	32		$	23		$	8		$	4		$	152

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:


		June 30, 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		$	290		$			$	12		$	302		$	436,710		$	437,012		$
Municipal															172,875			172,875
Real estate:
Commercial			8			94			832			934			1,793,421			1,794,355
Residential			557			487			517			1,561			347,350			348,911			181
Consumer			773			150			100			1,023			89,062			90,085
Total		$	1,628		$	731		$	1,461		$	3,820		$	2,839,418		$	2,843,238		$	181


		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, which include commitments to extend credit, unused portions of lines of credit and standby letters of credit, for the six months ended June 30, 2023:


(Dollars in thousands)			June 30, 2023
Balance at December 31, 2022		$	179
Impact of adopting Topic 326			270
Credit recorded in noninterest expense			(356)
Total allowance for credit losses on off balance sheet commitments		$	93

Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted 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 six months ended June 30, 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 and six months ended June 30, 2022, the Company did not modify any loans that were determined to be a troubled debt restructuring.