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Loans, net and allowance for credit losses

6 Months Ended

Jun. 30, 2024

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, 2024 and December 31, 2023 are summarized as follows. The Company had net deferred loan origination fees of $0.8 million and $0.4 million at June 30, 2024 and December 31, 2023, respectively.



(Dollars in thousands)			June 30, 2024		December 31, 2023
Commercial and Industrial		$	461,014		$	368,411
Municipal			170,991			175,304
Total			632,005			543,715
Real estate
Commercial			1,793,652			1,863,118
Residential			369,671			360,803
Total			2,163,323			2,223,921
Consumer
Indirect Auto			66,792			75,389
Consumer Other			7,433			6,872
Total			74,225			82,261
Total		$	2,869,553		$	2,849,897

The ACL represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and held to maturity securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the ACL for loans is considered a critical accounting estimate by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded ACL. The ACL related to loans receivable and held to maturity debt securities is reported separately as a contra-asset on the consolidated balance sheets. The expected credit loss for unfunded lending commitments and

unfunded loan commitments is reported on the consolidated balance sheets in other liabilities while the provision for credit losses related to unfunded commitments is reported in other noninterest expense in the consolidated statements of income and comprehensive income.

The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans, available for sale securities, and held to maturity securities. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Consolidated Balance Sheets, totaled $11.4 million and $9.7 million at June 30, 2024 and 2023 and is excluded from the estimate of credit losses. Accrued interest receivable on available for sale securities and held to maturity securities, also a component of accrued interest receivable on the Consolidated Balance Sheets, and totaled $1.7 million and $188 thousand, respectively, at June 30, 2024 and is excluded from the estimate of credit losses, as the Company has a policy to charge off accrued interest deemed uncollectible in a timely manner. At June 30, 2023, accrued interest receivable on available for sale securities and held to maturity securities was $1.5 million and $198 thousand, respectively.

The following tables present the balance of the allowance for credit losses at June 30, 2024 and 2023. 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.


		June 30, 2024
								Real estate
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Total
Allowance for credit losses:
Beginning Balance April 1, 2024		$	2,287		$	698		$	14,470		$	4,258		$	884		$	22,597
Charge-offs			(41)												(94)			(135)
Recoveries			25									2			38			65
(Credits) provisions			(100)			13			686			(30)			27			596
Ending balance		$	2,171		$	711		$	15,156		$	4,230		$	855		$	23,123

		June 30, 2023
								Real estate
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Total
Allowance for loan 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


		June 30, 2024
								Real estate
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Total
Allowance for credit losses:
Beginning Balance January 1, 2024		$	2,272		$	788		$	14,153		$	3,782		$	900		$	21,895
Charge-offs			(46)												(197)			(243)
Recoveries			80									4			83			167
(Credits) provisions			(135)			(77)			1,003			444			69			1,304
Ending balance		$	2,171		$	711		$	15,156		$	4,230		$	855		$	23,123

		June 30, 2023
								Real estate
(Dollars in thousands)		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 ASC 326			(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

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, 2024 and December 31, 2023.


		June 30, 2024
								Real estate
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Total
Allowance for credit losses:
Ending balance		$	2,171		$	711		$	15,156		$	4,230		$	855		$	23,123
Ending balance: individually evaluated			7						415									422
Ending balance: collectively evaluated		$	2,164		$	711		$	14,741		$	4,230		$	855		$	22,701
Loans receivable:
Ending balance		$	461,014		$	170,991		$	1,793,652		$	369,671		$	74,225		$	2,869,553
Individually evaluated - collateral dependent - real estate			378						5,139			1,327						6,844
Individually evaluated - collateral dependent - non-real estate			7															7
Collectively evaluated			460,629			170,991			1,788,513			368,344			74,225			2,862,702



		December 31, 2023
								Real estate
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Total
Allowance for loan losses:
Ending balance		$	2,272		$	788		$	14,153		$	3,782		$	900		$	21,895
Ending balance: individually evaluated for impairment			10						21									31
Ending balance: collectively evaluated for impairment		$	2,262		$	788		$	14,132		$	3,782		$	900		$	21,864
Loans receivable:
Ending balance		$	368,411		$	175,304		$	1,863,118		$	360,803		$	82,261		$	2,849,897
Individually evaluated - collateral dependent - real estate			7						2,974			1,749						4,730
Individually evaluated - collateral dependent - non-real estate			10															10
Collectively evaluated			368,394			175,304			1,860,144			359,054			82,261			2,845,157

Nonaccrual Loans

The following table presents the Company’s nonaccrual loans at June 30, 2024 and December 31, 2023.



			June 30, 2024
			Total			Nonaccrual with			Nonaccrual with
			Nonaccrual			an Allowance for			no Allowance for
(Dollars in thousands)			Loans			Credit Losses			Credit Losses
Commercial		$	378		$	7		$	371
Municipal
Real estate:
Commercial			5,138			4,923			215
Residential			1,327						1,327
Consumer			274						274
Total		$	7,117		$	4,930		$	2,187



			December 31, 2023
			Total			Nonaccrual with			Nonaccrual with
			Nonaccrual			an Allowance for			no Allowance for
(Dollars in thousands)			Loans			Credit Losses			Credit Losses
Commercial		$	10		$	10		$
Municipal
Real estate:
Commercial			2,974			1,170			1,804
Residential			760						760
Consumer			218						218
Total		$	3,962		$	1,180		$	2,782

Interest income recorded on nonaccrual loans was $43 thousand and $35 thousand for the three months ended June 30, 2024 and June 30, 2023, respectively. Interest income recorded on nonaccrual loans was $74 thousand and $414 thousand for the six months ended June 30, 2024 and June 30, 2023, respectively.

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, 2024 and December 31, 2023:


		As of June 30, 2024
(Dollars in thousands)			2024			2023			2022			2021			2020			Prior			Revolving Loans Amortized Cost Basis			Revolving Loans Converted to Term			Total
Commercial
Pass		$	13,103		$	36,862		$	67,146		$	65,299		$	35,316		$	91,621		$	141,169		$	139		$	450,655
Special Mention			1,253			1,142			733			246			2,113			1,451			1,777						8,715
Substandard						32			62			40						497			1,013						1,644
Total Commercial			14,356			38,036			67,941			65,585			37,429			93,569			143,959			139			461,014

Municipal
Pass			1,106			1,307			49,200			93,134			10,433			15,773			38						170,991
Special Mention
Substandard
Total Municipal			1,106			1,307			49,200			93,134			10,433			15,773			38						170,991

Commercial real estate
Pass			67,209			131,565			532,372			437,529			127,512			461,610						92			1,757,889
Special Mention						2,360			967			1,138			1,061			19,988									25,514
Substandard						167			1,845			1,318			157			6,762									10,249
Total Commercial real estate			67,209			134,092			535,184			439,985			128,730			488,360						92			1,793,652

Residential real estate
Pass			12,525			28,059			50,687			64,295			25,489			95,395			91,919			60			368,429
Special Mention
Substandard						4									307			927			4						1,242
Total Residential real estate			12,525			28,063			50,687			64,295			25,796			96,322			91,923			60			369,671

Consumer
Pass			7,199			22,998			24,658			9,795			3,842			3,942			1,517						73,951
Special Mention
Substandard						60			31			115			35			33									274
Total Consumer			7,199			23,058			24,689			9,910			3,877			3,975			1,517						74,225

Total Loans		$	102,395		$	224,556		$	727,701		$	672,909		$	206,265		$	697,999		$	237,437		$	291		$	2,869,553

Gross charge-offs
Commercial		$			$	41		$			$			$			$	5		$			$			$	46
Municipal
Commercial real estate
Residential real estate
Consumer						15			81			60			11			30									197
Total Gross charge-offs		$			$	56		$	81		$	60		$	11		$	35		$			$			$	243



		As of December 31, 2023
(Dollars in thousands)			2023			2022			2021			2020			2019			Prior			Revolving Loans Amortized Cost Basis			Revolving Loans Converted to Term			Total
Commercial
Pass		$	9,856		$	38,172		$	28,127		$	29,966		$	44,551		$	82,190		$	131,536		$	650		$	365,048
Special Mention						876			182									49			832						1,939
Substandard			15			19			42						33			534			781						1,424
Total Commercial			9,871			39,067			28,351			29,966			44,584			82,773			133,149			650			368,411

Municipal
Pass			1,888			48,095			94,791			10,804			16			19,652			58						175,304
Special Mention
Substandard
Total Municipal			1,888			48,095			94,791			10,804			16			19,652			58						175,304

Commercial real estate
Pass			156,277			553,754			491,506			143,068			153,426			351,142						117			1,849,290
Special Mention						1,299									360			2,761									4,420
Substandard			169			1,338			1,520			160			697			5,524									9,408
Total Commercial real estate			156,446			556,391			493,026			143,228			154,483			359,427						117			1,863,118

Residential real estate
Pass			17,385			52,093			65,280			27,118			16,652			84,652			83,507			13,490			360,177
Special Mention
Substandard			4									329						288			5						626
Total Residential real estate			17,389			52,093			65,280			27,447			16,652			84,940			83,512			13,490			360,803

Consumer
Pass			27,053			30,307			12,460			5,441			3,107			2,981			694						82,043
Special Mention
Substandard						58			79			31			30			20									218
Total Consumer			27,053			30,365			12,539			5,472			3,137			3,001			694						82,261

Total Loans		$	212,647		$	726,011		$	693,987		$	216,917		$	218,872		$	549,793		$	217,413		$	14,257		$	2,849,897

Gross charge-offs
Commercial		$			$			$			$	21		$			$	33		$	4		$			$	58
Municipal
Commercial real estate																		2,598									2,598
Residential real estate
Consumer						95			101			69			49			55									369
Total Gross charge-offs		$			$	95		$	101		$	90		$	49		$	2,686		$	4		$			$	3,025

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


		June 30, 2024
								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		$	463		$	290		$	7		$	760		$	460,254		$	461,014		$
Municipal															170,991			170,991
Real estate:
Commercial			3,871			2,086			4,003			9,960			1,783,692			1,793,652
Residential			1,395			101			713			2,209			367,462			369,671
Consumer			865			313			134			1,312			72,913			74,225
Total		$	6,594		$	2,790		$	4,857		$	14,241		$	2,855,312		$	2,869,553		$


		December 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		$	53		$	155		$	10		$	218		$	368,193		$	368,411		$
Municipal															175,304			175,304
Real estate:
Commercial			152			5			279			436			1,862,682			1,863,118
Residential			1,456			50			1,610			3,116			357,687			360,803			986
Consumer			1,069			285			85			1,439			80,822			82,261
Total		$	2,730		$	495		$	1,984		$	5,209		$	2,844,688		$	2,849,897		$	986

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 three and six months ended June 30, 2024 and 2023:


			For the three months ended
(Dollars in thousands)			June 30, 2024			June 30, 2023
Beginning balance		$	530		$	264
Provision for (credit to) credit losses recorded in noninterest expense			(196)			(171)
Total allowance for credit losses on off balance sheet commitments		$	334		$	93

			For the six months ended
(Dollars in thousands)			June 30, 2024			June 30, 2023
Beginning balance		$	43		$	179
Impact of adopting Topic 326						270
Provision for (credit to) credit losses recorded in noninterest expense			291			(356)
Total allowance for credit losses on off balance sheet commitments		$	334		$	93

The contractual amounts of off-balance sheet commitments at June 30, 2024 and 2023 are as follows:


(Dollars in thousands)		2024			2023
Commitments to extend credit		$	86,125		$	228,887
Unused portions of lines of credit			383,483			368,372
Standby letters of credit			43,659			52,826
		$	513,267		$	650,085

Modifications to Borrowers Experiencing Financial Difficulty

ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) eliminated the accounting guidance for troubled debt restructurings while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In accordance with the new guidance, the Company no longer evaluates loans with modifications made to borrowers experiencing financial difficulty individually for impairment, nor establishes a related specific reserve for such loans, but rather these loans are included in their respective portfolio segment and evaluated collectively for impairment to establish an ACL.

There was one modification made to a commercial and industrial loan with a borrower experiencing financial difficulty during the three and six months ended June 30, 2024 which involved the deferral of the principal payment and the extension of the loan’s maturity date three months to September 16, 2024. The loan had an outstanding principal balance of $370 thousand at June 30, 2024. There were no loans made to borrowers that were modified during the three and six months ended June 30, 2023.

During the three and six months ended June 30, 2024 and June 30, 2023, there were no defaults on loan modifications made to borrowers experiencing financial difficulty.