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Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 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 $6.2 million as of June 30, 2022 and $5.0 million as of December 31, 2021.


	June 30, 2022						December 31, 2021
(dollars in thousands)	Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE		551,544			19.4	%	$	488,965			19.6	%
Non-owner occupied RE		741,263			26.1	%		666,833			26.8	%
Construction		84,612			3.0	%		64,425			2.6	%
Business		389,790			13.7	%		333,049			13.4	%
Total commercial loans		1,767,209			62.2	%		1,553,272			62.4	%
Consumer
Real estate		812,130			28.5	%		694,401			27.9	%
Home equity		161,512			5.6	%		154,839			6.2	%
Construction		76,878			2.7	%		59,846			2.4	%
Other		27,476			1.0	%		27,519			1.1	%
Total consumer loans		1,077,996			37.8	%		936,605			37.6	%
Total gross loans, net of deferred fees		2,845,205			100.0	%		2,489,877			100.0	%
Less—allowance for credit losses		(34,192	)					(30,408	)
Total loans, net	$	2,811,013					$	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.


	June 30, 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	$	13,891		117,631		377,520		42,502		551,544
Non-owner occupied RE		38,324		347,550		327,641		27,748		741,263
Construction		4,763		23,348		44,728		11,773		84,612
Business		77,526		159,130		148,909		4,225		389,790
Total commercial loans		134,504		647,659		898,798		86,248		1,767,209
Consumer
Real estate	$	8,016		43,504		207,090		553,520		812,130
Home equity		1,554		22,238		132,251		5,469		161,512
Construction		1,102		591		14,226		60,959		76,878
Other		3,867		19,360		3,461		788		27,476
Total consumer loans		14,539		85,693		357,028		620,736		1,077,996
Total gross loans, net of deferred fees	$	149,043		733,352		1,255,826		706,984		2,845,205

					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 loan, 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.


	June 30, 2022				December 31, 2021
	Interest Rate						Interest Rate
(dollars in thousands)	Fixed		Floating or Adjustable		Fixed		Floating or Adjustable
Commercial
Owner occupied RE	$	534,364		3,289		463,589		8,518
Non-owner occupied RE		631,885		71,054		533,565		85,815
Construction		74,537		5,312		57,139		2,404
Business		240,839		71,425		191,522		74,694
Total commercial loans		1,481,625		151,080		1,245,815		171,431
Consumer
Real estate		804,102		12		679,756		13
Home equity		11,946		148,012		12,850		139,811
Construction		75,776		-		58,884		-
Other		17,522		6,087		13,220		6,228
Total consumer loans		909,346		154,111		764,710		146,052
Total gross loans, net of deferred fees	$	2,390,971		305,191		2,010,525		317,483

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 June 30, 2022.


													June 30, 2022
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving Converted to Term		Total
Commercial
Owner occupied RE
Pass	$	84,469		134,506		90,382		75,694		37,899		127,229		-		-		550,179
Special Mention		-		159		-		-		-		156		-		-		315
Substandard		-		-		648		-		294		108		-		-		1,050
Total Owner occupied RE		84,469		134,665		91,030		75,694		38,193		127,493		-		-		551,544

Non-owner occupied RE
Pass		135,632		175,361		118,012		74,974		79,186		130,248		603		-		714,016
Special Mention		-		204		-		310		5,494		5,533		-		-		11,541
Substandard		-		139		-		13,659		306		1,602		-		-		15,706
Total Non-owner occupied RE		135,632		175,704		118,012		88,943		84,986		137,383		603		-		741,263

Construction
Pass		17,630		54,916		8,762		2,771		-		533		-		-		84,612
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total Construction		17,630		54,916		8,762		2,771		-		533		-		-		84,612

Business
Pass		63,532		65,669		35,262		25,887		37,371		34,691		122,374		625		385,411
Special Mention		961		-		394		-		-		165		113		183		1,816
Substandard		-		-		1,065		182		345		946		25		-		2,563
Total Business		64,493		65,669		36,721		26,069		37,716		35,802		122,512		808		389,790
Total Commercial loans		302,224		430,954		254,525		193,477		160,895		301,211		123,115		808		1,767,209

Consumer
Real estate
Pass		143,204		260,391		193,806		77,863		41,377		86,659		-		-		803,300
Special Mention		-		1,105		1,376		1,191		564		1,094		-		-		5,330
Substandard		-		895		229		418		406		1,552		-		-		3,500
Total Real estate		143,204		262,391		195,411		79,472		42,347		89,305		-		-		812,130

Home equity
Pass		-		-		-		-		-		-		156,910		-		156,910
Special Mention		-		-		-		-		-		-		2,122		-		2,122
Substandard		-		-		-		-		-		-		2,480		-		2,480
Total Home equity		-		-		-		-		-		-		161,512		-		161,512

Construction
Pass		19,945		42,828		13,799		-		-		-		-		-		76,572
Special Mention		-		-		-		306		-		-		-		-		306
Substandard		-		-		-		-		-		-		-		-		-
Total Construction		19,945		42,828		13,799		306		-		-		-		-		76,878

Other
Pass		2,726		2,706		2,076		1,778		639		3,590		13,801		-		27,316
Special Mention		5		-		7		34		56		6		32		-		140
Substandard		-		-		-		9		-		-		11		-		20
Total Other		2,731		2,706		2,083		1,821		695		3,596		13,844		-		27,476
Total Consumer loans		165,880		307,925		211,293		81,599		43,042		92,901		175,356		-		1,077,996
Total loans	$	468,104		738,879		465,818		275,076		203,937		394,112		298,471		808		2,845,205

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 loans	$	488,965		666,833		64,425		333,049		694,401		154,839		59,846		27,519		2,489,877

The following tables present loan balances by payment status.


	June 30, 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	$	-		-		-		-		551,544		551,544
Non-owner occupied RE		-		-		-		981		740,282		741,263
Construction		-		-		-		-		84,612		84,612
Business		91		-		-		-		389,699		389,790
Consumer
Real estate		482		697		-		552		810,399		812,130
Home equity		-		-		-		1,398		160,114		161,512
Construction		-		-		-		-		76,878		76,878
Other		-		-		-		-		27,476		27,476
Total loans	$	573		697		-		2,931		2,839,806		2,845,205

	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 loans	$	558		174		-		4,864		2,484,281		2,489,877

As of June 30, 2022 and December 31, 2021, loans 30 days or more past due represented 0.10% 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 June 30, 2022 and December 31, 2021, respectively. Consumer loans 30 days or more past due were 0.09% of total loans as of June 30, 2022 and December 31, 2021.

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)	June 30, 2022			December 31, 2021
Nonaccrual loans	$	642			-
Nonaccruing TDRs		2,289			2,952
Total nonaccrual loans, including nonaccruing TDRs		2,931			4,864
Other real estate owned		-			-
Total nonperforming assets	$	2,931			4,864
Nonperforming assets as a percentage of:
Total assets		0.09	%		0.17	%
Gross loans		0.10	%		0.20	%
Total loans over 90 days past due	$	-			554
Loans over 90 days past due and still accruing		-			-
Accruing troubled debt restructurings		3,558			3,299

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


	CECL						Incurred loss
	June 30, 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	$	121		860		981		1,070
Construction		-		-		-		-
Business		-		-		-		-
Total commercial		121		860		981		1,070
Consumer
Real estate		-		552		552		1,750
Home equity		200		1,198		1,398		2,044
Construction		-		-		-		-
Other		-		-		-		-
Total consumer		200		1,750		1,950		3,794
Total	$	321		2,610		2,931		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
	Principal		Impaired		allowance for		allowance for		allowance for
(dollars in thousands)	Balance		loans		credit losses		credit losses		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 gross loans	$	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 June 30, 2022					Three months ended June 30, 2021
(dollars in thousands)	Average recorded investment		Recognized interest income			Average recorded investment		Recognized interest income
Commercial
Owner occupied RE	$	1,247		11			1,379		16
Non-owner occupied RE		874		36			2,073		32
Construction		-		-			68		-
Business		1,051		10			2,118		20
Total commercial		3,172		57			5,638		68
Consumer
Real estate		1,908		17			4,337		60
Home equity		1,611		(3	)		1,679		18
Construction		-		-			-		-
Other		118		1			131		1
Total consumer		3,637		15			6,147		79
Total gross loans	$	6,809		72			11,785		147


	Six months ended June 30, 2022				Six months ended June 30, 2021				Year ended December 31, 2021
(dollars in thousands)	Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income
Commercial
Owner occupied RE	$	1,253		32		1,469		32		1,387		65
Non-owner occupied RE		896		78		2,111		94		3,128		182
Construction		-		-		91		2		55		-
Business		1,070		28		2,229		54		2,218		62
Total commercial		3,219		138		5,900		182		6,788		309
Consumer
Real estate		2,045		39		4,235		103		3,641		98
Home equity		1,621		21		1,910		34		1,964		85
Construction		-		-		-		-		-		-
Other		120		2		132		2		129		4
Total consumer		3,786		62		6,277		139		5,734		187
Total gross loans	$	7,005		200		12,177		321		12,522		496

Allowance for Credit Losses

The following table summarizes the activity related to the allowance for credit losses for the six months ended June 30, 2022 under the CECL methodology.


								Three months ended June 30, 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	$	4,898			9,973		929		6,217			7,602		2,197			844		284			32,944
Provision for credit losses		(69	)		37		131		524			390		407			7		98			1,525
Loan charge-offs		-			-		-		(55	)		-		(170	)		-		(91	)		(316	)
Loan recoveries		-			-		-		31			-		8			-		-			39
Net loan recoveries (charge-offs)		-			-		-		(24	)		-		(162	)		-		(91	)		(277	)
Balance, end of period	$	4,829			10,010		1,060		6,717			7,992		2,442			851		291			34,192
Net charge-offs to average loans (annualized)																						0.04	%
Allowance for credit losses to gross loans																						1.20	%
Allowance for credit losses to nonperforming loans																						1166.70	%


									Six months ended June 30, 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		442			(841	)		281		683			1,203			572			143		67			2,550
Loan charge-offs		-			-			-		(55	)		-			(339	)		-		(91	)		(485	)
Loan recoveries		-			-			-		145			-			74			-		-			219
Net loan recoveries (charge-offs)		-			-			-		90			-			(265	)		-		(91	)		(266	)
Balance, end of period	$	4,829			10,010			1,060		6,717			7,992			2,442			851		291			34,192
Net charge-offs (recoveries) to average loans (annualized)																								0.02	%
Allowance for credit losses to gross loans																								1.20	%
Allowance for credit losses to nonperforming loans																								1166.70	%

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 June 30, 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	$	7,154			15,195			827		6,848			9,666		2,688			685		436			43,499
Provision for loan losses		(149	)		(2,096	)		124		(226	)		362		(129	)		68		146			(1,900	)
Loan charge-offs		-			-			-		-			-		-			-		(8	)		(8	)
Loan recoveries		94			124			-		100			-		3			-		-			321
Net loan recoveries (charge-offs)		94			124			-		100			-		3			-		(8	)		313
Balance, end of period	$	7,099			13,223			951		6,722			10,028		2,562			753		574			41,912
Net charge-offs (recoveries) to average loans (annualized)																							(0.06	%)
Allowance for loan losses to gross loans																							1.86	%
Allowance for loan losses to nonperforming loans																							619.47	%

												Six months ended June 30, 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		(1,140	)		1,050		(203	)		(1,011	)		(425	)		(552	)		6		75			(2,200	)
Loan charge-offs		-			-		-			(268	)		-			(139	)		-		(8	)		(415	)
Loan recoveries		94			124		-			156			-			4			-		-			378
Net loan recoveries (charge-offs)		94			124		-			(112	)		-			(135	)		-		(8	)		(37	)
Balance, end of period	$	7,099			13,223		951			6,722			10,028			2,562			753		574			41,912
Net charge-offs to average loans (annualized)																								0.00	%

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

									June 30, 2021
	Allowance for loan losses						Recorded investment in loans
(dollars in thousands)	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	1,454		134		1,588		5,308		6,079		11,387
Collectively evaluated		26,536		13,788		40,324		1,415,635		827,113		2,242,748
Total	$	27,995		13,917		41,912		1,420,943		833,192		2,254,135

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 June 30, 2022.

					June 30, 2022
	Real		Business
(dollars in thousands)	estate		assets		Other		Total
Commercial
Owner occupied RE	$	-		-		-		-
Non-owner occupied RE		121		-		-		121
Construction		-		-		-		-
Business		-		-		-		-
Total commercial		121		-		-		121
Consumer
Real estate		-		-		-		-
Home equity		200		-		-		200
Construction		-		-		-		-
Other		-		-		-		-
Total consumer		200		-		-		200
Total	$	321		-		-		321

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 $2.3 million at June 30, 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 six months ended June 30, 2022.


	Six months ended
(dollars in thousands)	June 30, 2022
Balance, beginning of period		-
Adjustment for adoption of CECL	$	2,000
Provision for loan losses		330
Balance, end of period	$	2,330