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Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2022

NOTE 4 – Loans and Allowance for Credit Losses

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $5.5 million as of March 31, 2022 and $5.0 million as of December 31, 2021.


	March 31, 2022						December 31, 2021
(dollars in thousands)	Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE	$	527,776			19.8	%	$	488,965			19.6	%
Non-owner occupied RE		705,811			26.5	%		666,833			26.8	%
Construction		75,015			2.8	%		64,425			2.6	%
Business		352,932			13.3	%		333,049			13.4	%
Total commercial loans		1,661,534			62.4	%		1,553,272			62.4	%
Consumer
Real estate		745,667			28.0	%		694,401			27.9	%
Home equity		155,678			5.9	%		154,839			6.2	%
Construction		72,627			2.7	%		59,846			2.4	%
Other		25,169			1.0	%		27,519			1.1	%
Total consumer loans		999,141			37.6	%		936,605			37.6	%
Total gross loans, net of deferred fees		2,660,675			100.0	%		2,489,877			100.0	%
Less—allowance for credit losses		(32,944	)					(30,408	)
Total loans, net	$	2,627,731					$	2,459,469

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.


	March 31, 2022
(dollars in thousands)	One year or less		After one but within five years		After five but within fifteen years		After fifteen years		Total
Commercial
Owner occupied RE	$	15,677		116,156		353,233		42,710		527,776
Non-owner occupied RE		48,491		338,553		290,547		28,220		705,811
Construction		4,668		24,360		36,711		9,276		75,015
Business		71,844		155,045		122,820		3,223		352,932
Total commercial loans		140,680		634,114		803,311		83,429		1,661,534
Consumer
Real estate		9,839		45,057		182,195		508,576		745,667
Home equity		2,309		20,411		127,604		5,354		155,678
Construction		932		1,651		8,858		61,186		72,627
Other		5,160		16,368		3,219		422		25,169
Total consumer loans		18,240		83,487		321,876		575,538		999,141
Total gross loans, net of deferred fees	$	158,920		717,601		1,125,187		658,967		2,660,675


	December 31, 2021
(dollars in thousands)	One year or less		After one but within five years		After five but within fifteen years		After fifteen years		Total
Commercial
Owner occupied RE	$	16,858		120,480		316,261		35,366		488,965
Non-owner occupied RE		47,453		329,085		263,317		26,978		666,833
Construction		4,882		16,393		29,310		13,840		64,425
Business		66,833		152,732		109,008		4,476		333,049
Total commercial loans		136,026		618,690		717,896		80,660		1,553,272
Consumer
Real estate		14,632		45,219		162,655		471,895		694,401
Home equity		2,178		21,280		125,427		5,954		154,839
Construction		961		594		8,956		49,335		59,846
Other		8,071		15,711		3,341		396		27,519
Total consumer		25,842		82,804		300,379		527,580		936,605
Total gross loans, net of deferred fees	$	161,868		701,494		1,018,275		608,240		2,489,877

The following table summarizes the loans due after one year by category as of March 31, 2022.


	Interest Rate

(dollars in thousands)	Fixed		Floating or Adjustable
Commercial
Owner occupied RE	$	507,622		4,477
Non-owner occupied RE		578,786		78,534
Construction		66,873		3,474
Business		212,419		68,669
Total commercial loans		1,365,700		155,154
Consumer
Real estate		735,758		70
Home equity		11,634		141,735
Construction		71,695		-
Other		13,208		6,801
Total consumer loans		832,295		148,606
Total gross loans, net of deferred fees	$	2,197,995		303,760

Credit Quality Indicators

The Company tracks credit quality based on its internal risk ratings. Upon origination, a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. After loans are initially graded, they are monitored regularly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.

A description of the general characteristics of the risk grades is as follows:

●

Pass—These loans range from minimal to average credit risk however still have acceptable credit risk.

●

Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

●

Substandard—A substandard loan 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 may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

●

Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

The following table presents loan balances classified by credit quality indicators by year of origination as of March 31, 2022.


	March 31, 2022
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Total
Commercial
Owner occupied RE
Pass	$	48,943		136,043		91,485		76,409		42,537		130,973		-		526,390
Special Mention		-		163		-		-		-		159		-		322
Substandard		-		-		653		-		298		113		-		1,064
Total Owner occupied RE		48,943		136,206		92,138		76,409		42,835		131,245		-		527,776

Non-owner occupied RE
Pass		61,668		186,526		118,651		82,442		84,310		145,200		-		678,797
Special Mention		-		205		-		313		5,544		5,614		-		11,676
Substandard		-		141		-		13,237		309		1,651		-		15,338
Total Non-owner occupied RE		61,668		186,872		118,651		95,992		90,163		152,465		-		705,811

Construction
Pass		6,472		53,371		9,073		4,498		1,601		-		-		75,015
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Construction		6,472		53,371		9,073		4,498		1,601		-		-		75,015

Business
Pass		30,305		62,583		36,345		27,908		38,361		36,286		117,232		349,020
Special Mention		224		53		398		-		-		168		101		944
Substandard		-		-		1,294		204		362		1,083		25		2,968
Total Business		30,529		62,636		38,037		28,112		38,723		37,537		117,358		352,932
Total Commercial loans		147,612		439,085		257,899		205,011		173,322		321,247		117,358		1,661,534

Consumer
Real estate
Pass		69,226		255,662		197,008		80,005		42,490		91,948		-		736,339
Special Mention				1,113		1,387		1,068		568		848		-		4,984
Substandard		-		902		230		419		963		1,830		-		4,344
Total Real estate		69,226		257,677		198,625		81,492		44,021		94,626		-		745,667

Home equity
Pass		-		-		-		-		-		-		150,767		150,767
Special Mention		-		-		-		-		-		-		2,186		2,186
Substandard		-		-		-		-		-		-		2,725		2,725
Total Home equity		-		-		-		-		-		-		155,678		155,678

Construction
Pass		10,078		42,845		19,420		-		-		-		-		72,343
Special Mention		-		-		-		284		-		-		-		284
Substandard		-		-		-		-		-		-		-		-
Total Construction		10,078		42,845		19,420		284		-		-		-		72,627

Other
Pass		1,177		2,700		1,250		2,001		711		3,916		13,227		24,982
Special Mention		-		-		8		38		76		10		33		165
Substandard		-		-		-		12		-		-		10		22
Total Other		1,177		2,700		1,258		2,051		787		3,926		13,270		25,169
Total Consumer loans		80,481		303,222		219,303		83,827		44,808		98,552		168,948		999,141
Total loans	$	228,093		742,307		477,202		288,838		218,130		419,799		286,306		2,660,675

The following table presents loan balances classified by credit quality indicators and loan categories as of December 31, 2021.


	December 31, 2021
	Commercial								Consumer
(dollars in thousands)	Owner occupied RE		Non-owner occupied RE		Construction		Business		Real Estate		Home Equity		Construction		Other		Total
Pass	$	487,422		589,280		64,425		328,371		684,923		148,933		59,846		27,365		2,390,565
Special mention		327		48,310		-		1,530		4,294		2,986		-		129		57,576
Substandard		1,216		29,243		-		3,148		5,184		2,920		-		25		41,736
Total	$	488,965		666,833		64,425		333,049		694,401		154,839		59,846		27,519		2,489,877

The following tables loan balances by payment status.


	March 31, 2022
(dollars in thousands)	Accruing 30-59 days past due		Accruing 60-89 days past due		Accruing 90 days or more past due		Nonaccrual loans		Accruing current		Total
Commercial
Owner occupied RE	$	-		-		-		-		527,776		527,776
Non-owner occupied RE		75		-		-		1,026		704,710		705,811
Construction		-		-		-		-		75,015		75,015
Business		124		-		-		-		352,808		352,932
Consumer
Real estate		757		695		-		1,482		742,733		745,667
Home equity		-		1		-		2,024		153,653		155,678
Construction		-		-		-		-		72,627		72,627
Other		3		-		-		-		25,166		25,169
Total	$	959		696		-		4,532		2,654,488		2,660,675

	December 31, 2021
(dollars in thousands)	Accruing 30-59 days past due		Accruing 60-89 days past due		Accruing 90 days or more past due		Nonaccrual loans		Accruing current		Total
Commercial
Owner occupied RE	$	-		-		-		-		488,965		488,965
Non-owner occupied RE		-		-		-		1,069		665,764		666,833
Construction		-		-		-		-		64,425		64,425
Business		-		-		-		-		333,049		333,049
Consumer
Real estate		136		-		-		1,750		692,515		694,401
Home equity		417		174		-		2,045		152,203		154,839
Construction		-		-		-		-		59,846		59,846
Other		5		-		-		-		27,514		27,519
Total	$	558		174		-		4,864		2,484,281		2,489,877

As of March 31, 2022 and December 31, 2021, loans 30 days or more past due represented 0.13% and 0.09% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.01% and 0.00% of the Company’s total loan portfolio as of March 31, 2022 and December 31, 2021, respectively. Consumer loans 30 days or more past due were 0.12% and 0.09% of total loans as of March 31, 2022 and December 31, 2021, respectively.

Nonperforming assets

Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when the Company believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans.


(dollars in thousands)	March 31, 2022			December 31, 2021
Nonaccrual loans	$	1,819			-
Nonaccruing TDRs		2,713			2,952
Total nonaccrual loans, including nonaccruing TDRs		4,532			4,864
Other real estate owned		-			-
Total nonperforming assets	$	4,532			4,864
Nonperforming assets as a percentage of:
Total assets		0.15	%		0.17	%
Gross loans		0.17	%		0.20	%
Total loans over 90 days past due	$	554			554
Loans over 90 days past due and still accruing		-			-
Accruing troubled debt restructurings		3,241			3,299

The table below summarizes nonaccrual loans by major categories for the periods presented.


	CECL						Incurred loss
	March 31, 2022						December 31, 2021
	Nonaccrual		Nonaccrual
	loans		loans		Total		Total
	with no		with an		nonaccrual		nonaccrual
(dollars in thousands)	allowance		allowance		loans		loans
Commercial
Owner occupied RE	$	-		-		-		-
Non-owner occupied RE		265		761		1,026		1,070
Construction		-		-		-		-
Business		-		-		-		-
Total commercial		265		761		1,026		1,070
Consumer
Real estate		987		495		1,482		1,750
Home equity		1,971		53		2,024		2,044
Construction		-		-		-		-
Other		-		-		-		-
Total consumer		2,958		548		3,506		3,794
Total	$	3,224		1,309		4,532		4,864

The table below summarizes key information for loans individually evaluated for impairment loans under the incurred loss methodology. These loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These loans may have estimated impairment which is included in the allowance for credit losses.


					December 31, 2021
					Recorded investment
					Impaired loans		Impaired loans
	Unpaid				with no related		with related		Related
(dollars in thousands)	Principal Balance		Impaired loans		allowance for credit losses		allowance for credit losses		allowance for credit losses
Commercial
Owner occupied RE	$	1,261		1,261		1,261		-		-
Non-owner occupied RE		2,012		1,070		270		800		171
Construction		-		-		-		-		-
Business		1,104		1,104		-		1,104		452
Total commercial		4,377		3,435		1,531		1,904		623
Consumer
Real estate		2,638		2,561		1,743		818		144
Home equity		2,206		2,044		1,989		55		55
Construction		-		-		-		-		-
Other		123		123		-		123		14
Total consumer		4,967		4,728		3,732		996		213
Total	$	9,344		8,163		5,263		2,900		836

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.


	Three months ended March 31, 2021				Year ended December 31, 2021
(dollars in thousands)	Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income
Commercial
Owner occupied RE	$	1,569		16		1,387		65
Non-owner occupied RE		2,161		62		3,128		182
Construction		137		2		55		-
Business		2,329		34		2,218		62
Total commercial		6,196		114		6,788		309
Consumer
Real estate		4,212		43		3,641		98
Home equity		2,030		16		1,964		85
Construction		-		-		-		-
Other		134		1		129		4
Total consumer		6,376		60		5,734		187
Total	$	12,572		174		12,522		496

Allowance for Credit Losses

The following table summarizes the activity related to the allowance for credit losses for the three months ended March 31, 2022 under the CECL methodology.


	Three months ended March 31, 2022
	Commercial										Consumer
(dollars in thousands)	Owner occupied RE			Non- owner occupied RE			Construction		Business		Real Estate			Home Equity			Construction		Other			Total
Balance, beginning of period	$	4,700			10,518			625		4,887		7,083			1,697			578		320			30,408
Adjustment for CECL		(313	)		333			154		1,057		(294	)		438			130		(5	)		1,500
Provision for credit losses		511			(878	)		150		159		813			165			136		(31	)		1,025
Loan charge-offs		-			-			-		-		-			(169	)		-		-			(169	)
Loan recoveries		-			-			-		114		-			66			-		-			180
Net loan recoveries (charge-offs)		-			-			-		114		-			(103	)		-		-			11
Balance, end of period	$	4,898			9,973			929		6,217		7,602			2,197			844		284			32,944
Net charge-offs (recoveries) to average loans (annualized)																							0.00	%
Allowance for credit losses to gross loans																							1.24	%
Allowance for credit losses to nonperforming loans																							726.88	%

Prior to the adoption of ASC 326 on January 1, 2022, the Company calculated the allowance for loan losses under the incurred loss methodology. The following two tables are disclosures related to the allowance for loan losses in prior periods under this methodology.


	Three months ended March 31, 2021
	Commercial											Consumer
(dollars in thousands)	Owner occupied RE			Non- owner occupied RE		Construction			Business			Real Estate			Home Equity			Construction			Other			Total
Balance, beginning of period	$	8,145			12,049		1,154			7,845			10,453			3,249			747			507			44,149
Provision for loan losses		(991	)		3,146		(327	)		(785	)		(787	)		(423	)		(62	)		(71	)		(300	)
Loan charge-offs		-			-		-			(267	)		-			(139	)		-			-			(406	)
Loan recoveries		-			-		-			55			-			1			-			-			56
Net loan recoveries (charge-offs)		-			-		-			(212	)		-			(138	)		-			-			(350	)
Balance, end of period	$	7,154			15,195		827			6,848			9,666			2,688			685			436			43,499
Net charge-offs to average loans (annualized)																									0.07	%
Allowance for loan losses to gross loans																									1.99	%
Allowance for loan losses to nonperforming loans																									557.47	%

The following table disaggregates the allowance for loan losses and recorded investment in loans by impairment methodology under the incurred loss methodology.


	December 31, 2021
	Allowance for loan losses						Recorded investment in loans
(dollars in thousands)	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	623		213		836		3,435		4,728		8,163
Collectively evaluated		20,107		9,465		29,572		1,549,837		931,877		2,481,714
Total	$	20,730		9,678		30,408		1,553,272		936,605		2,489,877

	March 31, 2021
	Allowance for loan losses						Recorded investment in loans
(dollars in thousands)	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	1,171		464		1,635		5,967		6,215		12,182
Collectively evaluated		28,853		13,011		41,864		1,382,616		788,884		2,171,500
Total	$	30,024		13,475		43,499		1,388,583		795,099		2,183,682

Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses.

The following table presents an analysis of collateral-dependent loans of the Company as of March 31, 2022.


	March 31, 2022
	Real		Business
(dollars in thousands)	estate		assets		Other		Total
Commercial
Owner occupied RE	$	1,250		-		-		1,250
Non-owner occupied RE		265		-		-		265
Construction		-		-		-		-
Business		-		-		-		-
Total commercial		1,515		-		-		1,515
Consumer
Real estate		1,484		-		-		1,484
Home equity		2,024		-		-		2,024
Construction		-		-		-		-
Other		-		-		-		-
Total consumer		3,508		-		-		3,508
Total	$	5,023		-		-		5,023

Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

Allowance for Credit Losses - Unfunded Loan Commitments

The allowance for credit losses for unfunded loan commitments was $2.1 million at March 31, 2022 and is separately classified on the balance sheet within other liabilities. Prior to the adoption of CECL, the Company’s reserve for unfunded commitments was not material. The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended March 31, 2022.


	Three months ended
(dollars in thousands)	March 31, 2022
Balance, beginning of period		-
Adjustment for adoption of CECL	$	2,000
Provision for (reversal of) loan losses		80
Loan charge-offs		-
Loan recoveries		-
Net loan (charge-offs) recoveries		-
Balance, end of period	$	2,080