XML 25 R12.htm IDEA: XBRL DOCUMENT

Note 5 - Loans and Leases

12 Months Ended

Dec. 31, 2022

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

5.	LOANS AND LEASES

The classifications of loans and leases at December 31, 2022 and 2021 are summarized as follows:

(dollars in thousands)	*December 31, 2022*			December 31, 2021
Commercial and industrial	$	234,478		$	236,304
Commercial real estate:
Non-owner occupied		316,867			312,848
Owner occupied		270,810			248,755
Construction		18,941			21,147
Consumer:
Home equity installment		59,118			47,571
Home equity line of credit		52,568			54,878
Auto loans		131,936			118,029
Direct finance leases		33,223			26,232
Other		7,611			8,013
Residential:
Real estate		398,136			325,861
Construction		42,232			34,919
Total		1,565,920			1,434,557
Less:
Allowance for loan losses		(17,149	)		(15,624	)
Unearned lease revenue		(1,746	)		(1,429	)
Loans and leases, net	$	1,547,025		$	1,417,504

As of December 31, 2022, total loans of $1.6 billion were reflected including deferred loan costs of $4.6 million. As of December 31, 2021, total loans of $1.4 billion were reflected including deferred loan costs of $3.0 million, comprised of $4.2 million in deferred loan costs partially offset by $1.2 million in deferred fee income from Paycheck Protection Program (PPP) loans.

Commercial and industrial (C&I) loan balances were $234.5 million at December 31, 2022 and $236.3 million at December 31, 2021. The $1.8 million decrease was attributed to the reduction in PPP loans (net of deferred fees) which declined by $38.5 million to $1.3 million at December 31, 2022 due to standard forgiveness under the SBA program. As of December 31, 2022, the Company increased the balance of C&I loans by $36.7 million (excluding PPP loans).

Direct finance leases include the lease receivable and the guaranteed lease residual. Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease. Unearned revenue is accrued over the life of the lease using the effective interest method.

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced for others amounted to $465.7 million as of December 31, 2022 and $430.9 million as of December 31, 2021. Mortgage servicing rights amounted to $1.6 million and $1.7 million as of December 31, 2022 and 2021, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Paycheck Protection Program Loans

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP).

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. The SBA guaranteed 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted, extending the authority to make PPP loans through May 31, 2021, revising certain PPP requirements, and permitting second draw PPP loans. On March 11, 2021, the American Rescue Plan Act of 2021 (American Rescue Plan Act) was enacted expanding eligibility for first and second draw PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness.

Acquired loans

Acquired loans are marked to fair value on the date of acquisition. For detailed information on calculating the fair value of acquired loans, see Footnote 20, “Acquisition.”

The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflects only those losses incurred after acquisition and represents the present value of cash flows expected at acquisition that is no longer expected to be collected.

The Company reported fair value adjustments regarding the acquired MNB and Landmark loan portfolios. Therefore, the Company did not record an allowance on the acquired non-purchased credit impaired loans. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the calculation of the allowance for loan losses after the initial valuation and provide reserves accordingly.

Upon acquisition, in accordance with U.S. GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC 310-30 deemed as purchased credit impaired (PCI). As part of this process, the Company’s senior management and other relevant individuals reviewed the seller’s loan portfolio on a loan-by-loan basis to determine if any loans met the two-part definition of an impaired loan as defined by ASC 310-30: 1) Credit deterioration on the loan from its inception until the acquisition date, and 2) It is probable that not all contractual cash flows will be collected on the loan.

With regards to ASC 310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows result in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value result in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan's acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.

Over the life of the acquired ASC 310-30 loan, the Company continues to estimate cash flows expected to be collected. Decreases in expected cash flows, other than from prepayments or rate adjustments, are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized after acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized on a prospective basis over the loan’s remaining life.

Acquired ASC 310-30 loans that met the criteria for non-accrual of interest prior to acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent if the Company can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, the Company does not consider acquired contractually delinquent loans to be non-accruing and continues to recognize accretable yield on these loans which is recognized as interest income on a level yield method over the life of the loan.

Acquired ASC 310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Company used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, and environment factors to estimate the expected cash flow for each loan pool.

Within the ASC 310-20 loans, the Company identified certain loans that have higher risk. Although performing at the time of acquisition and likely will continue making payments in accordance with contractual terms, management elected a higher credit adjustment on these loans to reflect the greater inherent risk that the borrower will default on payments. Risk factors used to identify these loans included: loans that received COVID-19 related forbearance consistent with the regulatory guidance, loans that were in industries determined to be at greater risk to economic disruption due to COVID-19, loans that had a prior history of delinquency greater than 60 days at any point in the lifetime of the loan; loans with a Special Mention or Substandard risk rating; and/or loans borrowers in the Gasoline Station industry due to the environmental risk potential of these loans.

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.

	For the years ended
(dollars in thousands)	*December 31, 2022*			December 31, 2021
Balance at beginning of period	$	1,088		$	563
Accretable yield on acquired loans		-			589
Reclassification from non-accretable difference		543			453
Reclassification to loan balance due to charge-off		(3	)		-
Accretion of accretable yield		(399	)		(517	)
Balance at end of period	$	1,229		$	1,088

The above table excludes the $275 thousand in non-accretable yield accreted to interest income for the year ended December 31, 2021.

During the twelve months ended December 31, 2022, management performed an analysis of all loans acquired from mergers, consistent with and applicable to ASC 310-30 (Purchased Credit Impaired loans – PCI). During this period, the accretable yield increased $141 thousand from $1,088 thousand to $1,229 thousand due to a $543 thousand reclassification from non-accretable discount to accretable discount resulting from five loans that had actual payments exceed estimates and one loan that had a positive change in collateral value, which was partially offset by yield accretion of $399 thousand and a reclassification of a loan balance for $3 thousand.

During the twelve months ended December 31, 2021, the accretable yield balance increased from $563 thousand to $1,088 thousand. The $525 thousand increase resulted from $589 thousand in accretable yield on loans acquired from the Landmark merger during the third quarter of 2021; $453 thousand reclassified from non-accretable yield to accretable yield including $167 thousand from improved collateral values and $286 thousand from payments received on PCI in excess of estimates partially offset by $517 thousand in accretable yield accreted to interest income due to contractual payments received during the twelve months ended December 31, 2021.

Expected cash flows on acquired loans are estimated quarterly by incorporating several key assumptions. These key assumptions include probability of default and the number of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured.

Non-accrual loans

Non-accrual loans, segregated by class, at December 31, were as follows:

(dollars in thousands)	*December 31, 2022*		December 31, 2021
Commercial and industrial	$	719	$	154
Commercial real estate:
Non-owner occupied		383		478
Owner occupied		1,066		1,570
Consumer:
Home equity installment		-		-
Home equity line of credit		211		97
Auto loans		153		78
Residential:
Real estate		3		572
Total	$	2,535	$	2,949

The table above excludes $4.7 million and $4.7 million in purchased credit impaired loans, net of unamortized fair value adjustments as of December 31, 2022 and 2021, respectively.

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. C&I and CRE loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 90 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

Troubled Debt Restructuring

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company typically considers the following concessions when modifying a loan, which may include lowering interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically does not forgive principal when granting a TDR modification.

The following presents by class, information related to loans modified in a TDR:

	Loans modified as TDRs for the twelve months ended:
(dollars in thousands)	*December 31, 2022*						December 31, 2021

			Recorded		Increase in				Recorded		Increase in
	Number		investment		allowance		Number		investment		allowance
	of		(as of		(as of		of		(as of		(as of
	contracts		period end)		period end)		contracts		period end)		period end)
Commercial real estate - owner occupied		-	$	-	$	-		1	$	512	$	-
Total		-	$	-	$	-		1	$	512	$	-

In the above table, the period end balance is inclusive of all partial pay downs and charge-offs since the modification date. For all loans modified in a TDR, the pre-modification recorded investment was the same as the post-modification recorded investment.

Of the TDRs outstanding as of December 31, 2022 and 2021, when modified, the concessions granted consisted of temporary interest-only payments, extensions of maturity date, or a reduction in the rate of interest to a below-market rate for a contractual period of time. Other than the TDRs that were placed on non-accrual status, the TDRs were performing in accordance with their modified terms.

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. There were no loans modified as a TDR within the previous twelve months that subsequently defaulted (i.e. 90 days or more past due following a modification) during the twelve months ended December 31, 2022 and 2021.

The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price. If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance.

As of December 31, 2022 and 2021, the balance of outstanding TDRs was $1.5 million and $3.5 million, respectively. As of December 31, 2022 and 2021, the allowance for impaired loans that have been modified in a TDR was $48 thousand and $0.5 million, respectively.

Past due loans

Loans are considered past due when the contractual principal and/or interest is not received by the due date. For loans reported 30-59 days past due, certain categories of loans are reported past due as and when the loan is in arrears for two payments or billing cycles. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):

Recorded

Past due

investment past

30 - 59 Days

60 - 89 Days

90 days

Total

due ≥ 90 days

December 31, 2022

past due

or more ⁽¹⁾

past due

Current

loans ⁽³⁾

and accruing

Commercial and industrial

719

233,759

234,478

Commercial real estate:

Non-owner occupied

383

316,484

316,867

Owner occupied

1,066

1,108

269,702

270,810

Construction

18,941

Consumer:

Home equity installment

239

58,879

59,118

Home equity line of credit

110

151

211

472

52,096

52,568

Auto loans

563

201

169

933

131,003

131,936

Direct finance leases

186

203

31,274

31,477

⁽²⁾

Other

7,592

7,611

Residential:

Real estate

327

330

397,806

398,136

Construction

42,232

Total

1,152

686

2,568

4,406

1,559,768

1,564,174

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of $1.7 million. ⁽³⁾ Includes net deferred loan costs of $4.6 million.

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2021	past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing

Commercial and industrial	$	-	$	4	$	154	$	158	$	236,146	$	236,304		$	-
Commercial real estate:
Non-owner occupied		-		675		478		1,153		311,695		312,848			-
Owner occupied		-		-		1,570		1,570		247,185		248,755			-
Construction		-		-		-		-		21,147		21,147			-
Consumer:
Home equity installment		87		32		-		119		47,452		47,571			-
Home equity line of credit		-		-		97		97		54,781		54,878			-
Auto loans		410		45		78		533		117,496		118,029			-
Direct finance leases		173		38		64		275		24,528		24,803	⁽²⁾		64
Other		49		17		-		66		7,947		8,013			-
Residential:
Real estate		-		452		572		1,024		324,837		325,861			-
Construction		-		-		-		-		34,919		34,919			-
Total	$	719	$	1,263	$	3,013	$	4,995	$	1,428,133	$	1,433,128		$	64

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of $1.4 million. ⁽³⁾Includes net deferred loan costs of $3.0 million.

Impaired loans

Impaired loans, segregated by class, as of the period indicated are detailed below:

Recorded

Unpaid

investment

Total

principal

with

with no

recorded

Related

(dollars in thousands)

balance

allowance

investment

allowance

December 31, 2022

Commercial and industrial

942

139

580

719

Commercial real estate:

Non-owner occupied

762

215

547

762

Owner occupied

2,347

1,304

716

2,020

Consumer:

Home equity installment

Home equity line of credit

255

211

Auto loans

213

135

153

Residential:

Real estate

Total

4,602

1,676

2,192

3,868

161

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
December 31, 2021
Commercial and industrial	$	218	$	18	$	136	$	154	$	18
Commercial real estate:
Non-owner occupied		2,470		1,674		796		2,470		474
Owner occupied		3,185		1,802		762		2,564		763
Consumer:
Home equity installment		33		-		-		-		-
Home equity line of credit		137		-		97		97		-
Auto loans		98		10		68		78		4
Residential:
Real estate		699		-		572		572		-
Total	$	6,840	$	3,504	$	2,431	$	5,935	$	1,259

At December 31, 2022, impaired loans totaled $3.9 million consisting of $1.4 million in accruing TDRs and $2.5 million in non-accrual loans. At December 31, 2021, impaired loans totaled $5.9 million consisting of $3.0 million in accruing TDRs and $2.9 million in non-accrual loans. As of December 31, 2022, the non-accrual loans included one TDR totaling $0.2 million compared with three TDRs to two unrelated borrowers totaling $0.6 million as of December 31, 2021.

A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case-by-case basis. All circumstances surrounding the loan are considered. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below. The average balances are calculated based on the quarter-end balances of impaired loans. Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.


	*December 31, 2022*						December 31, 2021
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	468	$	-	$	-	$	380	$	2	$	-
Commercial real estate:
Non-owner occupied		1,263		104		-		2,698		195		-
Owner occupied		2,279		125		-		1,883		55		-
Construction		-		-		-		-		-		-
Consumer:
Home equity installment		-		-		-		28		6		-
Home equity line of credit		153		7		-		202		20		-
Auto loans		162		5		-		42		2		-
Direct finance leases		-		-		-		-		-		-
Other		-		-		-		-		-		-
Residential:
Real estate		158		41		-		682		-		-
Construction		-		-		-		-		-		-
Total	$	4,483	$	282	$	-	$	5,915	$	280	$	-

Average recorded investment refers to the five quarter average of impaired loans preceding the reporting period.

The average recorded investment for the year ended December 31, 2020 was $5.5 million. There was also interest income recognized of $147 thousand and cash basis interest income recognized of $0.

Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.

The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans:

Pass

Loans in this category have an acceptable level of risk and are graded in a range of one to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is competent, and a reasonable succession plan is evident. Payment experience on the loans has been good with minor or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality.

Special Mention

Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow may not be sufficient to support total debt service requirements.

Substandard

Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is weak. There is a distinct possibility that the Company may sustain a loss. All loans on non-accrual are rated substandard. Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due. Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as TDRs can be graded substandard.

Doubtful

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than an eight is considered to be uncollectible and charged-off.

Consumer and residential

The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated. For these portfolios, the Company utilizes payment activity and history in assessing performance. Non-performing loans are comprised of non-accrual loans and loans past due 90 days or more and accruing. All loans not classified as non-performing are considered performing.

The following table presents loans including $4.6 million and $3.0 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category as of December 31, 2022 and 2021, respectively:

Commercial credit exposure

Credit risk profile by creditworthiness category

December 31, 2022

(dollars in thousands)

Pass

Special mention

Substandard

Doubtful

Total

Commercial and industrial

231,614

229

2,635

234,478

Commercial real estate - non-owner occupied

301,386

4,227

11,254

316,867

Commercial real estate - owner occupied

255,921

803

14,086

270,810

Commercial real estate - construction

18,941

Total commercial

807,862

5,259

27,975

841,096

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

December 31, 2022

(dollars in thousands)

Performing

Non-performing

Total

Consumer

Home equity installment

59,118

Home equity line of credit

52,357

211

52,568

Auto loans

131,767

169

131,936

Direct finance leases ⁽¹⁾

31,460

31,477

Other

7,611

Total consumer

282,313

397

282,710

Residential

Real estate

398,133

398,136

Construction

42,232

Total residential

440,365

440,368

Total consumer & residential

722,678

400

723,078

⁽¹⁾Net of unearned lease revenue of $1.7 million.

Commercial credit exposure

Credit risk profile by creditworthiness category

	December 31, 2021
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	233,565	$	339	$	2,400	$	-	$	236,304
Commercial real estate - non-owner occupied		289,679		16,614		6,555		-		312,848
Commercial real estate - owner occupied		230,146		7,089		11,520		-		248,755
Commercial real estate - construction		21,147		-		-		-		21,147
Total commercial	$	774,537	$	24,042	$	20,475	$	-	$	819,054

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	December 31, 2021
(dollars in thousands)	Performing		Non-performing		Total

Consumer
Home equity installment	$	47,571	$	-	$	47,571
Home equity line of credit		54,781		97		54,878
Auto loans		117,951		78		118,029
Direct finance leases ⁽²⁾		24,739		64		24,803
Other		8,013		-		8,013
Total consumer		253,055		239		253,294
Residential
Real estate		325,289		572		325,861
Construction		34,919		-		34,919
Total residential		360,208		572		360,780
Total consumer & residential	$	613,263	$	811	$	614,074

⁽²⁾ Net of unearned lease revenue of $1.4 million.

Allowance for loan losses

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows:

■

identification of specific impaired loans by loan category;

■

identification of specific loans that are not impaired, but have an identified potential for loss;

■

calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

■

determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

■

application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;

■

application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.

■

Qualitative factor adjustments include:

levels of and trends in delinquencies and non-accrual loans;

levels of and trends in charge-offs and recoveries;

trends in volume and terms of loans;

changes in risk selection and underwriting standards;

changes in lending policies and legal and regulatory requirements;

experience, ability and depth of lending management;

national and local economic trends and conditions; and

changes in credit concentrations.

Allocation of the allowance for different categories of loans is based on the methodology as explained above. A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual C&I and CRE loans. C&I and CRE loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The credit risk grades for the C&I and CRE loan portfolios are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the C&I and CRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies.

Each quarter, management performs an assessment of the allowance. The Company’s Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.

The Company’s policy is to charge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

Information related to the change in the allowance for loan losses and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows:

*As of and for the year ended December 31, 2022*
	Commercial &			Commercial							Residential
(dollars in thousands)	industrial			real estate			Consumer				real estate		Unallocated			Total
Allowance for Loan Losses:
Beginning balance	$	2,204		$	7,422		$	2,404			$	3,508	$	86		$	15,624
Charge-offs		(371	)		(67	)		(377	)			-		-			(815	)
Recoveries		11			153			74				2		-			240
Provision		1,080			(346	)		726				659		(19	)		2,100
Ending balance	$	2,924		$	7,162		$	2,827			$	4,169	$	67		$	17,149
Ending balance: individually evaluated for impairment	$	48		$	112		$	1			$	-	$	-		$	161
Ending balance: collectively evaluated for impairment	$	2,876		$	7,050		$	2,826			$	4,169	$	67		$	16,988
Loans Receivables:
Ending balance ⁽²⁾	$	234,478		$	606,618		$	282,710		*(1)*	$	440,368	$	-		$	1,564,174
Ending balance: individually evaluated for impairment	$	719		$	2,782		$	364			$	3	$	-		$	3,868
Ending balance: collectively evaluated for impairment	$	233,759		$	603,836		$	282,346			$	440,365	$	-		$	1,560,306

⁽¹⁾ Net of unearned lease revenue of $1.7 million. ⁽²⁾ Includes $4.6 million of net deferred loan costs.

As of and for the year ended December 31, 2021
	Commercial &			Commercial						Residential
(dollars in thousands)	industrial			real estate			Consumer			real estate			Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	2,407		$	6,383		$	2,552		$	2,781		$	79	$	14,202
Charge-offs		(130	)		(491	)		(206	)		(162	)		-		(989	)
Recoveries		23			250			138			-			-		411
Provision		(96	)		1,280			(80	)		889			7		2,000
Ending balance	$	2,204		$	7,422		$	2,404		$	3,508		$	86	$	15,624
Ending balance: individually evaluated for impairment	$	18		$	1,237		$	4		$	-		$	-	$	1,259
Ending balance: collectively evaluated for impairment	$	2,186		$	6,185		$	2,400		$	3,508		$	86	$	14,365
Loans Receivables:
Ending balance ⁽²⁾	$	236,304		$	582,750		$	253,294	⁽¹⁾	$	360,780		$	-	$	1,433,128
Ending balance: individually evaluated for impairment	$	154		$	5,034		$	175		$	572		$	-	$	5,935
Ending balance: collectively evaluated for impairment	$	236,150		$	577,716		$	253,119		$	360,208		$	-	$	1,427,193

⁽¹⁾ Net of unearned lease revenue of $1.4 million. ⁽²⁾ Includes $3.0 million of net deferred loan costs.

As of and for the year ended December 31, 2020
	Commercial &			Commercial						Residential
(dollars in thousands)	industrial			real estate			Consumer			real estate			Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,484		$	3,933		$	2,013		$	2,278		$	39	$	9,747
Charge-offs		(372	)		(465	)		(296	)		(35	)		-		(1,168	)
Recoveries		26			30			120			197			-		373
Provision		1,269			2,885			715			341			40		5,250
Ending balance	$	2,407		$	6,383		$	2,552		$	2,781		$	79	$	14,202

Direct finance leases

The Company originates direct finance leases through two automobile dealerships. The carrying amount of the Company’s lease receivables, net of unearned income, was $7.9 million and $7.7 million as of December 31, 2022 and 2021, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to $23.6 million and $17.1 million at December 31, 2022 and 2021, respectively, and are included in the carrying value of direct finance leases.

The undiscounted cash flows to be received on an annual basis for the direct finance leases are as follows:

(dollars in thousands)	Amount

2023	$	10,838
2024		10,035
2025		10,889
2026		1,433
2027		28
2028 and thereafter		-
Total future minimum lease payments receivable		33,223
Less: Unearned income		(1,746	)
Undiscounted cash flows to be received	$	31,477