Quarterly report pursuant to Section 13 or 15(d)

LOANS

v3.22.1
LOANS
3 Months Ended
Mar. 31, 2022
LOANS [Abstract]  
LOANS
NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

   
March 31,
2022
   
December 31,
2021
 
Commercial and industrial
           
Commercial and industrial, excluding PPP
 
$
402,854
   
$
378,318
 
PPP
   
7,393
     
41,939
 
Total commercial and industrial
   
410,247
     
420,257
 
Commercial real estate:
               
Residential developed
   
3,758
     
4,862
 
Unsecured to residential developers
    5,000
      5,000
 
Vacant and unimproved
   
37,749
     
36,240
 
Commercial development
   
117
     
171
 
Residential improved
   
100,145
     
100,077
 
Commercial improved
   
258,537
     
259,039
 
Manufacturing and industrial
   
117,007
     
110,712
 
Total commercial real estate
   
522,313
     
516,101
 
Consumer:
               
Residential mortgage
   
114,284
     
117,800
 
Unsecured
   
201
     
210
 
Home equity
   
50,831
     
51,269
 
Other secured
   
4,026
     
3,356
 
Total consumer
   
169,342
     
172,635
 
Total loans
   
1,101,902
     
1,108,993
 
Allowance for loan losses
   
(14,616
)
   
(15,889
)
   
$
1,087,286
   
$
1,093,104
 

The totals above are shown net of deferred fees and costs.  Deferred fees on loans totaled $1.6 million and $2.6 million at March 31, 2022 and December 31, 2021, respectively.  Deferred costs on loans totaled $1.3 million and $1.3 million at March 31, 2022 and December 31, 2021, respectively.
 
NOTE 3 – LOANS (Continued)

Activity in the allowance for loan losses by portfolio segment was as follows (dollars in thousands):

Three months ended March 31, 2022
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
5,176
   
$
8,051
   
$
2,633
   
$
29
   
$
15,889
 
Charge-offs
   
     
     
(35
)
   
     
(35
)
Recoveries
   
5
     
233
     
24
     
     
262
 
Provision for loan losses
   
148
     
(1,213
)
   
(469
)
   
34
     
(1,500
)
Ending Balance
 
$
5,329
   
$
7,071
   
$
2,153
   
$
63
   
$
14,616
 

Three months ended March 31, 2021
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,632
   
$
7,999
   
$
2,758
   
$
19
   
$
17,408
 
Charge-offs
   
     
     
(50
)
   
     
(50
)
Recoveries
   
20
     
39
     
35
     
     
94
 
Provision for loan losses
   
(851
)
   
860
     
(25
)
   
16
     
 
Ending Balance
 
$
5,801
   
$
8,898
   
$
2,718
   
$
35
   
$
17,452
 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (dollars in thousands):

March 31, 2022
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                             
Ending allowance attributable to loans:
                             
Individually reviewed for impairment
 
$
303
   
$
24
   
$
213
   
$
   
$
540
 
Collectively evaluated for impairment
   
5,026
     
7,047
     
1,940
     
63
     
14,076
 
Total ending allowance balance
 
$
5,329
   
$
7,071
   
$
2,153
   
$
63
   
$
14,616
 
Loans:
                                       
Individually reviewed for impairment
 
$
4,773
   
$
594
   
$
2,796
   
$
   
$
8,163
 
Collectively evaluated for impairment
   
405,474
     
521,719
     
166,546
     
     
1,093,739
 
Total ending loans balance
 
$
410,247
   
$
522,313
   
$
169,342
   
$
   
$
1,101,902
 

December 31, 2021
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                             
Ending allowance attributable to loans:
                             
Individually reviewed for impairment
 
$
303
   
$
24
   
$
238
   
$
   
$
565
 
Collectively evaluated for impairment
   
4,873
     
8,027
     
2,395
     
29
     
15,324
 
Total ending allowance balance
 
$
5,176
   
$
8,051
   
$
2,633
   
$
29
   
$
15,889
 
Loans:
                                       
Individually reviewed for impairment
 
$
3,375
   
$
1,127
   
$
3,024
   
$
   
$
7,526
 
Collectively evaluated for impairment
   
416,882
     
514,974
     
169,611
     
     
1,101,467
 
Total ending loans balance
 
$
420,257
   
$
516,101
   
$
172,635
   
$
   
$
1,108,993
 
 
NOTE 3 – LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2022 (dollars in thousands):

March 31, 2022
 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
Allocated
 
With no related allowance recorded:
                 
Commercial and industrial
 
$
566
   
$
566
   
$
 
Commercial real estate:
                       
Residential improved
   
40
     
40
     
 
Commercial improved
   
49
     
49
     
 
     
89
     
89
     
 
Consumer
   
     
     
 
Total with no related allowance recorded
 
$
655
   
$
655
   
$
 
                         
With an allowance recorded:
                       
Commercial and industrial
 
$
4,207
   
$
4,207
   
$
303
 
Commercial real estate:
                       
Commercial improved
   
317
     
317
     
14
 
Manufacturing and industrial
   
188
     
188
     
10
 
     
505
     
505
     
24
 
Consumer:
                       
Residential mortgage
   
2,546
     
2,546
     
194
 
Unsecured
   
44
     
44
     
3
 
Home equity
   
206
     
206
     
16
 
Other secured
   
     
     
 
     
2,796
     
2,796
     
213
 
Total with an allowance recorded
 
$
7,508
   
$
7,508
   
$
540
 
Total
 
$
8,163
   
$
8,163
   
$
540
 
 
NOTE 3 – LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2021 (dollars in thousands):

December 31, 2021
 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
Allocated
 
With no related allowance recorded:
                 
Commercial and industrial
 
$
669
   
$
669
   
$
 
Commercial real estate:
                       
Residential improved
   
41
     
41
     
 
Commercial improved
   
577
     
577
     
 
     
618
     
618
     
 
Consumer
   
     
     
 
Total with no related allowance recorded
 
$
1,287
   
$
1,287
   
$
 
                         
With an allowance recorded:
                       
Commercial and industrial
 
$
2,706
   
$
2,706
   
$
303
 
Commercial real estate:
                       
Commercial improved
   
318
     
318
     
14
 
Manufacturing and industrial
   
191
     
191
     
10
 
     
509
     
509
     
24
 
Consumer:
                       
Residential mortgage
   
2,726
     
2,726
     
214
 
Unsecured
   
64
     
64
     
5
 
Home equity
   
234
     
234
     
19
 
     
3,024
     
3,024
     
238
 
Total with an allowance recorded
 
$
6,239
   
$
6,239
   
$
565
 
Total
 
$
7,526
   
$
7,526
   
$
565
 
 
NOTE 3 – LOANS (Continued)

The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three month periods ended March 31, 2022 and 2021 (dollars in thousands):

   
Three
Months
Ended
March 31,
2022
   
Three
Months
Ended
March 31,
2021
 
Average of impaired loans during the period:
           
Commercial and industrial
 
$
4,181
   
$
4,586
 
Commercial real estate:
               
Residential developed
   
     
45
 
Residential improved
   
40
     
87
 
Commercial improved
   
543
     
2,208
 
Manufacturing and industrial
   
189
     
199
 
Consumer
   
2,855
     
3,941
 
Interest income recognized during impairment:
               
Commercial and industrial
   
140
     
134
 
Commercial real estate
   
9
     
31
 
Consumer
   
26
     
38
 
Cash-basis interest income recognized
               
Commercial and industrial
   
130
     
125
 
Commercial real estate
   
12
     
31
 
Consumer
   
27
     
36
 
 
NOTE 3 – LOANS (Continued)

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2022 and December 31, 2021:

March 31, 2022
 
Nonaccrual
   
Over 90
days
Accruing
 
Commercial and industrial
 
$
   
$
 
Commercial real estate:
               
Residential improved
   
5
     
 
     
5
     
 
Consumer:
               
Residential mortgage
   
85
     
 
     
85
     
 
Total
 
$
90
   
$
 

December 31, 2021
 
Nonaccrual
   
Over 90 days
Accruing
 
Commercial and industrial
 
$
   
$
 
Commercial real estate:
               
Residential improved
   
5
     
 
     
5
     
 
Consumer:
               
Residential mortgage
   
86
     
 
     
86
     
 
Total
 
$
91
   
$
 
 
NOTE 3 – LOANS (Continued)

The following table presents the aging of the recorded investment in past due loans as of March 31, 2022 and December 31, 2021 by class of loans (dollars in thousands):

March 31, 2022
 
30-90
Days
   
Greater Than
90 Days
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
Commercial and industrial
 
$
    $
   
$
   
$
410,247
   
$
410,247
 
Commercial real estate:
                                       
Residential developed
   
     
     
     
3,758
     
3,758
 
Unsecured to residential developers
   
     
     
      5,000
      5,000
 
Vacant and unimproved
   
     
     
     
37,749
     
37,749
 
Commercial development
   
     
     
     
117
     
117
 
Residential improved
   
     
5
     
5
     
100,140
     
100,145
 
Commercial improved
   
82
     
     
82
     
258,455
     
258,537
 
Manufacturing and industrial
   
     
     
     
117,007
     
117,007
 
     
82
     
5
     
87
     
522,226
     
522,313
 
Consumer:
                                       
Residential mortgage
   
     
84
     
84
     
114,200
     
114,284
 
Unsecured
   
     
     
     
201
     
201
 
Home equity
   
     
     
     
50,831
     
50,831
 
Other secured
   
     
     
     
4,026
     
4,026
 
     
     
84
     
84
     
169,258
     
169,342
 
Total
 
$
82
   
$
89
   
$
171
   
$
1,101,731
   
$
1,101,902
 

December 31, 2021
 
30-90
Days
   
Greater Than
90 Days
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
Commercial and industrial
 
$
39
   
$
1
   
$
40
   
$
420,217
   
$
420,257
 
Commercial real estate:
                                       
Residential developed
   
     
     
     
4,862
     
4,862
 
Unsecured to residential developers
   
     
     
      5,000
      5,000
 
Vacant and unimproved
   
     
     
     
36,240
     
36,240
 
Commercial development
   
     
     
     
171
     
171
 
Residential improved
   
     
5
     
5
     
100,072
     
100,077
 
Commercial improved
   
     
     
     
259,039
     
259,039
 
Manufacturing and industrial
   
     
     
     
110,712
     
110,712
 
     
     
5
     
5
     
516,096
     
516,101
 
Consumer:
                                       
Residential mortgage
   
     
84
     
84
     
117,716
     
117,800
 
Unsecured
   
     
     
     
210
     
210
 
Home equity
   
     
     
     
51,269
     
51,269
 
Other secured
   
     
     
     
3,356
     
3,356
 
     
     
84
     
84
     
172,551
     
172,635
 
Total
 
$
39
   
$
90
   
$
129
   
$
1,108,864
   
$
1,108,993
 
 
NOTE 3 – LOANS (Continued)

The Company had allocated $540,000 and $565,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of March 31, 2022 and December 31, 2021, respectively.  These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure.  For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan.  In some cases, the modification will include separating the note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt.  The second note is charged off immediately and collected only after the first note is paid in full.  This modification type is commonly referred to as an A-B note structure.  For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief.  For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt.  An analysis is also performed to determine whether the restructured loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring.  In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.  After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.

In situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired loan designations may be removed.  In addition, the TDR designation may also be removed from loans modified under an A-B note structure.  If the remaining “A” note is at a market rate at the time of restructuring (taking into account the borrower’s credit risk and prevailing market conditions), the loan can be removed from TDR designation in a subsequent calendar year after six months of performance in accordance with the new terms.  The market rate relative to the borrower’s credit risk is determined through analysis of market pricing information gathered from peers and use of a loan pricing model.  The general objective of the model is to achieve a consistent return on equity from one credit to the next, taking into consideration differences in credit risk.  In the model, credits with higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.

As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for each loan.  For impaired commercial real estate loans that are collateral dependent, the allowance is computed based on the fair value of the underlying collateral, less estimated costs to sell.  For impaired commercial loans where repayment is expected from cash flows from business operations, the allowance is computed based on a discounted cash flow computation.  Certain groups of TDRs, such as residential mortgages, have common characteristics and for them the allowance is computed based on a discounted cash flow computation on the change in weighted rate for the pool.  The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms discounted at the original contractual rate.

The following table presents information regarding troubled debt restructurings as of March 31, 2022 and December 31, 2021 (dollars in thousands):

   
March 31, 2022
   
December 31, 2021
 
   
Number of
Loans
   
Outstanding
Recorded
Balance
   
Number of
Loans
   
Outstanding
Recorded
Balance
 
Commercial and industrial
   
4
   
$
4,773
     
4
   
$
3,375
 
Commercial real estate
   
5
     
594
     
6
     
1,127
 
Consumer
   
38
     
2,796
     
44
     
3,024
 
     
47
   
$
8,163
     
54
   
$
7,526
 
 
NOTE 3 – LOANS (Continued)

The following table presents information related to accruing TDRs as of March 31, 2022 and December 31, 2021.  The table presents the amount of accruing troubled debt restructurings that were on nonaccrual status prior to the restructuring, accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructured terms as of each period reported (dollars in thousands):

   
March 31,
2022
   
December 31,
2021
 
Accruing TDR - nonaccrual at restructuring
 
$
   
$
 
Accruing TDR - accruing at restructuring
   
3,773
     
4,552
 
Accruing TDR - upgraded to accruing after six consecutive payments
   
4,384
     
2,968
 
   
$
8,157
   
$
7,520
 

There were no TDRs executed during the three month periods ended March 31, 2022 and 2021.

According to the accounting standards, not all loan modifications are TDRs.  TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress.  The Company reviews all modifications and renewals for determination of TDR status.  In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession.  These modifications are not considered TDRs.  In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress.  This could be the case if the Company is matching a competitor’s interest rate.  These modifications would also not be considered TDRs.  Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs.  As with other loans not considered TDR or impaired, allowance allocations are based on the historical based allocation for the applicable loan grade and loan class.

Payment defaults on TDRs have been minimal and during the three month periods ended March 31, 2022 and 2021 and the balance of loans that became delinquent by more than 90 days past due or that were transferred to nonaccrual within 12 months of restructuring were not material.
 
NOTE 3 – LOANS (Continued)

Credit Quality Indicators:   The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Company analyzes commercial loans individually and classifies these relationships by credit risk grading.  The Company uses an eight point grading system, with grades 5 through 8 being considered classified, or watch, credits.  All commercial loans are assigned a grade at origination, at each renewal or any amendment.  When a credit is first downgraded to a watch credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by the credit department and the loan officer.  All watch credits have an ALR completed quarterly which analyzes the collateral position and cash flow of the borrower and its guarantors.  Management meets quarterly with loan officers to discuss each of these credits in detail and to help formulate solutions where progress has stalled.  When necessary, the loan officer proposes changes to the assigned loan grade as part of the ALR.  Additionally, Loan Review reviews all loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process.  The credit will stay on the ALR until either its grade has improved to a 4 or the credit relationship is at a zero balance.  The Company uses the following definitions for the risk grades:

1. Excellent - Loans supported by extremely strong financial condition or secured by the Bank’s own deposits. Minimal risk to the Bank and the probability of serious rapid financial deterioration is extremely small.

2. Above Average - Loans supported by sound financial statements that indicate the ability to repay or borrowings secured (and margined properly) with marketable securities. Nominal risk to the Bank and probability of serious financial deterioration is highly unlikely. The overall quality of these credits is very high.

3. Good Quality - Loans supported by satisfactory asset quality and liquidity, good debt capacity coverage, and good management in all critical positions. Loans are secured by acceptable collateral with adequate margins. There is a slight risk of deterioration if adverse market conditions prevail.

4. Acceptable Risk - Loans carrying an acceptable risk to the Bank, which may be slightly below average quality. The borrower has limited financial strength with considerable leverage. There is some probability of deterioration if adverse market conditions prevail. These credits should be monitored closely by the Relationship Manager.

5. Marginally Acceptable - Loans are of marginal quality with above normal risk to the Bank. The borrower shows acceptable asset quality but very little liquidity with high leverage. There is inconsistent earning performance without the ability to sustain adverse market conditions. The primary source of repayment is questionable, but the secondary source of repayment still remains an option. Very close attention by the Relationship Manager and management is needed.

6. Substandard - Loans are inadequately protected by the net worth and paying capacity of the borrower or the collateral pledged. The primary and secondary sources of repayment are questionable. Heavy debt condition may be evident and volume and earnings deterioration may be underway. It is possible that the Bank will sustain some loss if the deficiencies are not immediately addressed and corrected.

7. Doubtful - Loans supported by weak or no financial statements, as well as the ability to repay the entire loan, are questionable. Loans in this category are normally characterized less than adequate collateral, insolvent, or extremely weak financial condition. A loan classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses makes collection or liquidation in full highly questionable. The possibility of loss is extremely high, however, activity may be underway to minimize the loss or maximize the recovery.

8. Loss - Loans are considered uncollectible and of little or no value as a bank asset.
 
NOTE 3 – LOANS (Continued)

As of March 31, 2022 and December 31, 2021, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

March 31, 2022
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
   
Total
 
Commercial and industrial
 
$
22,430
   
$
15,815
   
$
135,029
   
$
229,730
   
$
6,947
   
$
296
   
$
   
$
   
$
410,247
 
                                                                         
Commercial real estate:
                                                                       
Residential developed
   
     
     
     
3,758
     
     
     
     
     
3,758
 
Unsecured to residential developers
   
     
     
      5,000
     
     
     
     
      5,000
 
Vacant and unimproved
   
     
2,076
     
14,150
     
21,523
     
     
     
     
     
37,749
 
Commercial development
   
     
     
117
     
     
     
     
     
     
117
 
Residential improved
   
     
     
23,330
     
76,695
     
115
     
     
5
     
     
100,145
 
Commercial improved
   
     
14,841
     
70,460
     
166,173
     
6,745
     
318
     
     
     
258,537
 
Manufacturing & industrial
   
     
     
42,554
     
71,135
     
3,318
     
     
     
     
117,007
 
   
$
22,430
   
$
32,732
   
$
285,640
   
$
574,014
   
$
17,125
   
$
614
   
$
5
   
$
   
$
932,560
 

December 31, 2021
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
   
Total
 
Commercial and industrial
 
$
56,979
   
$
19,300
   
$
110,877
   
$
227,087
   
$
2,700
   
$
3,314
   
$
   
$
   
$
420,257
 
                                                                         
Commercial real estate:
                                                                       
Residential developed
   
     
     
     
4,862
     
     
     
     
     
4,862
 
Unsecured to residential developers
   
     
     
      5,000
     
     
     
     
      5,000
 
Vacant and unimproved
   
     
1,763
     
13,492
     
20,985
     
     
     
     
     
36,240
 
Commercial development
   
     
     
171
     
     
     
     
     
     
171
 
Residential improved
   
     
     
24,450
     
75,503
     
119
     
     
5
     
     
100,077
 
Commercial improved
   
     
15,115
     
71,211
     
165,268
     
7,127
     
318
     
     
     
259,039
 
Manufacturing & industrial
   
     
     
41,757
     
65,601
     
3,354
     
     
     
     
110,712
 
   
$
56,979
   
$
36,178
   
$
261,958
   
$
564,306
   
$
13,300
   
$
3,632
   
$
5
   
$
   
$
936,358
 

Commercial loans rated a 6 or worse per the Company’s internal risk rating system are considered substandard, doubtful or loss. Commercial loans classified as substandard or worse were as follows at period-end (dollars in thousands):

   
March 31,
2022
   
December 31,
2021
 
Not classified as impaired
 
$
197
   
$
233
 
Classified as impaired
   
422
     
3,404
 
Total commercial loans classified substandard or worse
 
$
619
   
$
3,637
 

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in consumer loans based on payment activity (dollars in thousands):

March 31, 2022
 
Residential
Mortgage
   
Consumer
Unsecured
   
Home
Equity
   
Consumer
Other
 
Performing
 
$
114,200
   
$
201
   
$
50,831
   
$
4,026
 
Nonperforming
   
84
     
     
     
 
Total
 
$
114,284
   
$
201
   
$
50,831
   
$
4,026
 
 
NOTE 3 – LOANS (Continued)

December 31, 2021
 
Residential
Mortgage
   
Consumer
Unsecured
   
Home
Equity
   
Consumer
Other
 
Performing
 
$
117,716
   
$
210
   
$
51,269
   
$
3,356
 
Nonperforming
   
84
     
     
     
 
Total
 
$
117,800
   
$
210
   
$
51,269
   
$
3,356