Loans and Related Allowance for Loan Losses

12 Months Ended

Dec. 31, 2021

Loans and Related Allowance for Loan Losses [Abstract]

Loans and Related Allowance for Loan Losses

9. Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio as of December 31, 2021 and December 31, 2020:

(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Total
December 31, 2021
Individually evaluated for impairment	$	2,365	$	629	$	90	$	2,644	$	—	$	5,728
Collectively evaluated for impairment	$	371,926	$	127,448	$	180,886	$	402,042	$	65,657	$	1,147,959
Total loans	$	374,291	$	128,077	$	180,976	$	404,686	$	65,657	$	1,153,687
December 31, 2020
Individually evaluated for impairment	$	3,330	$	842	$	—	$	3,185	$	102	$	7,459
Collectively evaluated for impairment	$	365,846	$	116,119	$	266,745	$	375,985	$	35,658	$	1,160,353
Total loans	$	369,176	$	116,961	$	266,745	$	379,170	$	35,760	$	1,167,812

In the ordinary course of business, executive officers and directors of the Corporation, including their families and companies in which certain directors are principal owners, were loan customers of the Bank. Changes in the dollar amount of loans outstanding to officers, directors and their associates were as follows for the year ended December 31:

(in thousands)	2021
Balance at January 1	$	8,857
Loans or advances		1,877
Changes due to change in status		(3,910)
Repayments		(3,112)
Balance at December 31	$	3,712

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard. There were no loans classified as Doubtful within the internal risk rating system as of December 31, 2021 and 2020:

(in thousands)	Pass		Special Mention		Substandard		Total
December 31, 2021
Commercial real estate
Non owner-occupied	$	173,299	$	12,987	$	6,077	$	192,363
All other CRE		174,395		2,357		5,176		181,928
Acquisition and development
1-4 family residential construction		19,924		—		—		19,924
All other A&D		107,532		218		403		108,153
Commercial and industrial		161,429		5,071		14,476		180,976
Residential mortgage
Residential mortgage - term		338,832		—		5,624		344,456
Residential mortgage – home equity		59,533		—		697		60,230
Consumer		65,557		—		100		65,657
Total	$	1,100,501	$	20,633	$	32,553	$	1,153,687
December 31, 2020
Commercial real estate
Non owner-occupied	$	178,670	$	5,526	$	6,322	$	190,518
All other CRE		166,504		5,664		6,490		178,658
Acquisition and development
1-4 family residential construction		18,920		—		—		18,920
All other A&D		97,648		17		376		98,041
Commercial and industrial		245,185		8,867		12,693		266,745
Residential mortgage
Residential mortgage - term		309,177		283		6,117		315,577
Residential mortgage – home equity		62,804		—		789		63,593
Consumer		35,648		3		109		35,760
Total	$	1,114,556	$	20,360	$	32,896	$	1,167,812

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

The increase of $7.5 million in non-owner occupied offset the decreases in the commercial and industrial and all other commercial real estate categories of $3.8 million and $3.3 million, respectively.  In accordance with the CARES Act, as of December 31, 2021, total loan modifications were $9.4 million.  This amount included 13 commercial loans related to real estate rental, food services and health care sectors.  These loans are scheduled to return to contractual payment terms within the first quarter of 2022. Of these 13 loans, five are classified as pass, six are classified as special mention, and two classified as substandard. The pandemic triggered the Bank to proactively communicate with borrowers initially based on types of industry deemed to be at a higher risk level (i.e. hospitality, accommodations, etc.). This was then expanded to our top borrowers regardless of industry. Discussions evolved into weekly meetings between borrowers and Bank personnel; with the goal being to provide assistance to the communities we serve.

The following table presents the classes of the loan portfolio at December 31, 2021 and December 31, 2020, summarized by the aging categories of performing loans and non-accrual loans. Loans under modification are reported as current in accordance with CARES Act requirements:

(in thousands)	Current		30-59 Day Past Due		60-89 Days Past Due		90 Days+ Past Due		Total Past Due and still accruing		Non- Accrual		Total Loans
December 31, 2021
Commercial real estate
Non owner-occupied	$	192,363	$	—	$	—	$	—	$	—	$	—	$	192,363
All other CRE		181,847		—		—		—		—		81		181,928
Acquisition and development
1-4 family residential construction		19,924		—		—		—		—		—		19,924
All other A&D		107,763		—		—		—		—		390		108,153
Commercial and industrial		180,676		132		78		—		210		90		180,976
Residential mortgage
Residential mortgage - term		340,429		159		2,222		148		2,529		1,498		344,456
Residential mortgage – home equity		59,485		238		104		—		342		403		60,230
Consumer		65,208		268		29		152		449		—		65,657
Total	$	1,147,695	$	797	$	2,433	$	300	$	3,530	$	2,462	$	1,153,687
December 31, 2020
Commercial real estate
Non owner-occupied	$	190,510	$	—	$	—	$	—	$	—	$	8	$	190,518
All other CRE		177,360		408		—		—		408		890		178,658
Acquisition and development
1-4 family residential construction		18,920		—		—		—		—		—		18,920
All other A&D		97,660		5		—		10		15		366		98,041
Commercial and industrial		266,708		37		—		—		37		—		266,745
Residential mortgage
Residential mortgage - term		312,500		63		670		710		1,443		1,634		315,577
Residential mortgage – home equity		63,036		80		63		—		143		414		63,593
Consumer		35,473		230		26		4		260		27		35,760
Total	$	1,162,167	$	823	$	759	$	724	$	2,306	$	3,339	$	1,167,812

Non-accrual loans that have been subject to partial charge-offs totaled $0.5 million at December 31, 2021 and $0.4 million at December 31, 2020.  Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $0.2 million at December 31, 2021 and $0.4 million at December 31, 2020.  Foreclosure and repossession activities were temporarily suspended as a result of COVID-19 but resumed during the third quarter 2021. Management continues to conform to federal and state mandates relative to the foreclosure processes for both Federal Backed and Non-Federal Backed mortgages.  As a percentage of the loan portfolio, accruing loans past due 30 days or more increased to 0.31% at December 31, 2021 compared to 0.20% at December 31, 2020. 

The ALL is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement, for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies-Loss Contingencies, for loans collectively evaluated for impairment, as well as the Interagency

Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.  The total of the two components represents the Bank’s ALL.

(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Unallocated		Total
December 31, 2021
Individually evaluated for impairment	$	—	$	—	$	28	$	36	$	—	$	—	$	64
Collectively evaluated for impairment	$	6,032	$	2,615	$	2,432	$	3,448	$	934	$	430	$	15,891
Total ALL	$	6,032	$	2,615	$	2,460	$	3,484	$	934	$	430	$	15,955
December 31, 2020
Individually evaluated for impairment	$	4	$	13	$	—	$	40	$	—	$	—	$	57
Collectively evaluated for impairment	$	5,539	$	2,326	$	2,584	$	5,110	$	370	$	500	$	16,429
Total ALL	$	5,543	$	2,339	$	2,584	$	5,150	$	370	$	500	$	16,486

The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis.

The following table presents impaired loans by class, at December 31, 2021 and December 31, 2020, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary:

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
(in thousands)	Recorded Investment		Related Allowances		Recorded Investment		Recorded Investment		Unpaid Principal Balance
December 31, 2021
Commercial real estate
Non owner-occupied	$	—	$	—	$	106	$	106	$	106
All other CRE		—		—		2,259		2,259		2,259
Acquisition and development
1-4 family residential construction		—		—		239		239		239
All other A&D		—		—		390		390		1,599
Commercial and industrial		90		28		—		90		2,304
Residential mortgage
Residential mortgage - term		344		31		1,897		2,241		2,302
Residential mortgage – home equity		46		5		357		403		422
Consumer		—		—		—		—		—
Total impaired loans	$	480	$	64	$	5,248	$	5,728	$	9,231
December 31, 2020
Commercial real estate
Non owner-occupied	$	111	$	4	$	8	$	119	$	119
All other CRE		—		—		3,211		3,211		3,211
Acquisition and development
1-4 family residential construction		—		—		266		266		266
All other A&D		276		13		300		576		1,724
Commercial and industrial		—		—		—		—		2,214
Residential mortgage
Residential mortgage - term		936		34		1,910		2,846		3,031
Residential mortgage – home equity		76		6		339		415		447
Consumer		—		—		26		26		51
Total impaired loans	$	1,399	$	57	$	6,060	$	7,459	$	11,063

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of

consecutive historical quarters. Consumer pools currently utilize a rolling twelve quarters, while Commercial pools currently utilize a rolling eight quarters.

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. The un-criticized (“pass”) pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral. There are seven geographic regions utilized – six that represent the Bank’s lending footprint and a seventh for all out-of-market credits. Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are:  (i) national and local economic trends and conditions; (ii) levels of and trends in delinquency rates and non-accrual loans; (iii) trends in volumes and terms of loans; (iv) effects of changes in lending policies; (v) experience, ability, and depth of lending staff; (vi) value of underlying collateral; and (vii) concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances where due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged-off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value. In most cases, loans with partial charge-offs remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL.

Activity in the ALL is presented for the years ended December 31, 2021 and December 31, 2020:

(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Unallocated		Total
ALL balance at January 1, 2021	$	5,543	$	2,339	$	2,584	$	5,150	$	370	$	500	$	16,486
Charge-offs		(14)		(85)		(2)		(141)		(396)		—		(638)
Recoveries		—		175		513		66		170		—		924
Provision		503		186		(635)		(1,591)		790		(70)		(817)
ALL balance at December 31, 2021	$	6,032	$	2,615	$	2,460	$	3,484	$	934	$	430	$	15,955
ALL balance at January 1, 2020	$	2,882	$	3,674	$	1,341	$	3,828	$	312	$	500	$	12,537
Charge-offs		—		(1,172)		(232)		(217)		(341)		—		(1,962)
Recoveries		69		37		151		83		170		—		510
Provision		2,592		(200)		1,324		1,456		229		—		5,401
ALL balance at December 31, 2020	$	5,543	$	2,339	$	2,584	$	5,150	$	370	$	500	$	16,486

The ALL is based on estimates, and actual losses will vary from current estimates.  The granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the

application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

The following table presents the average recorded investment in impaired loans and related interest income recognized for the years ended December 31, 2021 and 2020:

	2021						2020
(in thousands)	Average investment		Interest income recognized on an accrual basis		Interest income recognized on a cash basis		Average investment		Interest income recognized on an accrual basis		Interest income recognized on a cash basis
Commercial real estate
Non owner-occupied	$	2,836	$	12	$	—	$	131	$	9	$	—
All other CRE		2,840		118		94		3,203		144		—
Acquisition and development
1-4 family residential construction		252		11		—		278		12		—
All other A&D		557		9		—		6,709		12		1
Commercial and industrial		18		—		—		16		—		—
Residential mortgage
Residential mortgage - term		2,561		70		5		2,593		82		—
Residential mortgage – home equity		439		—		—		604		—		4
Consumer		14		—		—		20		—		—
Total	$	9,517	$	220	$	99	$	13,554	$	259	$	5

In the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment, and to re-amortize or extend a loan term to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered to be a TDR when the Bank has determined that the borrower is troubled (i.e. experiencing financial difficulties) and a concession has been granted. The Bank evaluates the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations. See Note 3 for more details on loan modifications and the CARES Act.

When the Bank restructures a loan to a troubled borrower, the loan terms (i.e. interest rate, payment, amortization period and/or maturity date) are modified in such a way to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status or to foreclosure. A loan may be removed from being reported as a TDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months. Further, a loan that has been removed from TDR reporting status and has been subsequently re-modified at standard market terms, may be removed from impaired status as well.

The volume, type and performance of TDR activity is considered in the assessment of the local economic trend qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment.

There were 12 loans totaling $3.3 million and 14 loans totaling $4.0 million that were classified as TDRs at December 31, 2021 and December 31, 2020, respectively. The following table presents the volume and recorded

investment at the time of modification of TDRs by class and type of modification that occurred during the periods indicated:

	Temporary Rate Modification			Extension of Maturity			Modification of Payment and Other Terms
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
For the year ended December 31, 2021
Commercial real estate
Non owner-occupied	—	$	—	1	$	109	—	$	—
All other CRE	—		—	—		—	—		—
Acquisition and development
1-4 family residential construction	—		—	—		—	—		—
All other A&D	—		—	1		202	—		—
Commercial and industrial	—		—	—		—	—		—
Residential mortgage
Residential mortgage – term	—		—	2		299	—		—
Residential mortgage – home equity	—		—	—		—	—		—
Consumer	—		—	—		—	—		—
Total	—	$	—	4	$	610	—	$	—
For the year ended December 31, 2020
Commercial real estate
Non owner-occupied	—	$	—	—	$	—	—	$	—
All other CRE	—		—	—		—	1		2,226
Acquisition and development
1-4 family residential construction	—		—	—		—	—		—
All other A&D	—		—	2		430	—		0
Commercial and industrial	—		—	—		—	—		—
Residential mortgage
Residential mortgage – term	1		46	2		457	3		356
Residential mortgage – home equity	—		—	—		—	—		—
Consumer	—		—	—		—	—		—
Total	1	$	46	4	$	887	4	$	2,582

During the years ended December 31, 2021 and 2020, there were no payment defaults. Also, there were no additional funds committed to be advanced in connection with TDRs at December 31, 2021 or 2020.