10-Q 1 sfst4056641-10q.htm QUARTERLY REPORT

 

Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2022
OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from         to           

 

Commission file number 000-27719

 

 

Southern First Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 
South Carolina   58-2459561
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
100 Verdae Boulevard, Suite 100    
Greenville, S.C.   29607
(Address of principal executive offices)   (Zip Code)

 

864-679-9000
(Registrant’s telephone number, including area code)

 

Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  Trading Symbol(s)  Name of each exchange on which registered
Common Stock  SFST  The Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller Reporting Company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

7,983,269 shares of common stock, par value $0.01 per share, were issued and outstanding as of April 28, 2022.

 

 

 

 

 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
March 31, 2022 Form 10-Q

 

INDEX

 

  Page
   
PART I – CONSOLIDATED FINANCIAL INFORMATION 1
     
Item 1. Consolidated Financial Statements 1
     
  Consolidated Balance Sheets 1
     
  Consolidated Statements of Income 2
     
  Consolidated Statements of Comprehensive Income 3
     
  Consolidated Statements of Shareholders’ Equity 4
     
  Consolidated Statements of Cash Flows 5
     
  Notes to Unaudited Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
     
Item 4. Controls and Procedures 42
     
PART II – OTHER INFORMATION 43
     
Item 1. Legal Proceedings 43
     
Item 1A. Risk Factors 43
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
     
Item 3. Defaults upon Senior Securities 43
     
Item 4. Mine Safety Disclosures 43
     
Item 5. Other Information 43
     
Item 6. Exhibits 44

 

i

 

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

 

 
   March 31,   December 31, 
(dollars in thousands, except share data)  2022   2021 
   (Unaudited)   (Audited) 
ASSETS        
Cash and cash equivalents:          
Cash and due from banks  $20,992    21,770 
Federal funds sold   95,093    86,882 
Interest-bearing deposits with banks   33,131    58,557 
Total cash and cash equivalents   149,216    167,209 
Investment securities:          
Investment securities available for sale   106,978    120,281 
Other investments   4,104    4,021 
Total investment securities   111,082    124,302 
Mortgage loans held for sale   17,840    13,556 
Loans   2,660,675    2,489,877 
Less allowance for credit losses   (32,944)   (30,408)
Loans, net   2,627,731    2,459,469 
Bank owned life insurance   50,148    49,833 
Property and equipment, net   95,129    92,370 
Deferred income taxes, net   10,635    8,397 
Accrued interest receivable   7,627    7,624 
Other assets   3,232    2,788 
Total assets  $3,072,640    2,925,548 
LIABILITIES          
Deposits  $2,708,174    2,563,826 
Subordinated debentures   36,133    36,106 
Other liabilities   49,809    47,715 
Total liabilities   2,794,116    2,647,647 
SHAREHOLDERS’ EQUITY          
Preferred stock, par value $.01 per share, 10,000,000 shares authorized   
-
    
-
 
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,980,519 and 7,925,819 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively   80    79 
Nonvested restricted stock   (3,425)   (1,435)
Additional paid-in capital   117,286    114,226 
Accumulated other comprehensive loss   (6,393)   (740)
Retained earnings   170,976    165,771 
Total shareholders’ equity   278,524    277,901 
Total liabilities and shareholders’ equity  $3,072,640    2,925,548 

 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

 

1

 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 

 

   For the three months 
   ended March 31, 
(dollars in thousands, except share data)  2022   2021 
Interest income          
Loans  $23,931    22,465 
Investment securities   474    301 
Federal funds sold and interest-bearing deposits with banks   59    47 
Total interest income   24,464    22,813 
Interest expense          
Deposits   908    1,155 
Borrowings   392    385 
Total interest expense   1,300    1,540 
Net interest income   23,164    21,273 
Provision for (reversal of) credit losses   1,105    (300)
Net interest income after provision for credit losses   22,059    21,573 
Noninterest income          
Mortgage banking income   1,494    4,633 
Service fees on deposit accounts   191    185 
ATM and debit card income   528    470 
Income from bank owned life insurance   315    267 
Other income   399    349 
Total noninterest income   2,927    5,904 
Noninterest expenses          
Compensation and benefits   8,144    6,683 
Mortgage production costs   1,649    2,867 
Occupancy   1,777    1,637 
Other real estate owned expenses   
-
    387 
Outside service and data processing costs   1,411    1,142 
Insurance   261    301 
Professional fees   496    421 
Marketing   256    182 
Other   691    542 
Total noninterest expenses   14,685    14,162 
Income before income tax expense   10,301    13,315 
Income tax expense   2,331    2,949 
Net income  $7,970    10,366 
Earnings per common share          
Basic  $1.00    1.33 
Diluted   0.98    1.31 
Weighted average common shares outstanding          
Basic   7,931,855    7,774,515 
Diluted   8,096,310    7,908,537 

 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

 

2

 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

   For the three months
ended March 31,
 
(dollars in thousands)  2022   2021 
Net income  $7,970    10,366 
Other comprehensive income:          
Unrealized gain (loss) on securities available for sale:          
Unrealized holding loss arising during the period, pretax   (7,141)   (1,409)
Tax benefit   1,500    296 
Reclassification of realized gain   (15)   
-
 
Tax benefit   3    
-
 
Other comprehensive loss   (5,653)   (1,113)
Comprehensive income  $2,317    9,253 

 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

 

3

 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

   For the three months ended March 31, 
   Common stock   Preferred stock   Nonvested
restricted
   Additional
paid-in
   Accumulated
other
comprehensive
   Retained     
(dollars in thousands, except share data)  Shares   Amount   Shares   Amount   stock   capital   income (loss)   earnings   Total 
December 31, 2020   7,772,748   $78    
   -
   $
    -
   $(698)  $108,831   $1,023   $119,060   $228,294 
Net income   -    
-
    -    
-
    
-
    
-
    
-
    10,366    10,366 
Proceeds from exercise of stock options   69,598    1    
-
    
-
    
-
    1,577    
-
    
-
    1,578 
Issuance of restricted stock   10,750    
-
    
-
    
-
    (477)   477    
-
    
-
    
-
 
Compensation expense related to restricted stock, net of tax   -    
-
    -    
-
    100    
-
    
-
    
-
    100 
Compensation expense related to stock options, net of tax   -    
-
    -    
-
    
-
    296    
-
    
-
    296 
Other comprehensive loss   -    
-
    -    
-
    
-
    
-
    (1,113)   
-
    (1,113)
                                              
March 31, 2021   7,853,096   $79    
-
   $
-
   $(1,075)  $111,181   $(90)  $129,426   $239,521 
December 31, 2021   7,925,819   $79    
-
   $
-
   $(1,435)  $114,226   $(740)  $165,771   $277,901 
Net income   -    
-
    -    
-
    
-
    
-
    
-
    7,970    7,970 
Proceeds from exercise of stock options   18,125    
-
    
-
    
-
    
-
    579    
-
    
-
    579 
Issuance of restricted stock   36,575    1    
-
    
-
    (2,235)   2,234    
-
    
-
    
-
 
Adoption of ASU 2016-13   -    
-
    -    
-
    
-
    
-
    
-
    (2,765)   (2,765)
Compensation expense related to restricted stock, net of tax   -    
-
    -    
-
    245    
-
    
-
    
-
    245 
Compensation expense related to stock options, net of tax   -    
-
    -    
-
    
-
    247    
-
    
-
    247 
Other comprehensive loss   -    
-
    -    
-
    
-
    
-
    (5,653)   
-
    (5,653)
                                              
March 31, 2022   7,980,519   $80    
-
   $
-
   $(3,425)  $117,286   $(6,393)  $170,976   $278,524 

 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

 

4

 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 
   For the three months ended
March 31,
 
(dollars in thousands)  2022   2021 
Operating activities          
Net income  $7,970    10,366 
Adjustments to reconcile net income to cash provided by operating activities:          
Provision for (reversal of) credit losses   1,105    (300)
Depreciation and other amortization   583    551 
Accretion and amortization of securities discounts and premium, net   210    232 
Loss on sale of real estate owned   
-
    380 
Gain on sale of fixed assets   
-
    (10)
Gain on sale of securities   (15)   
-
 
Net change in operating leases   108    121 
Compensation expense related to stock options and restricted stock grants   492    396 
Gain on sale of loans held for sale   (899)   (4,813)
Loans originated and held for sale   (75,729)   (173,380)
Proceeds from sale of loans held for sale   72,344    181,377 
Increase in cash surrender value of bank owned life insurance   (315)   (267)
Decrease in deferred tax asset   
-
    1 
Decrease (increase) in accrued interest receivable   (3)   499 
Decrease (increase) in other assets   (444)   (123)
Increase (decrease) in other liabilities   2,460    (4,461)
Net cash provided by operating activities   7,867    10,569 
Investing activities          
Increase (decrease) in cash realized from:          
Increase in loans, net   (170,787)   (41,165)
Purchase of property and equipment   (5,869)   (2,609)
Purchase of investment securities:          
Available for sale   (10,094)   (5,366)
Other investments   (2,265)   
-
 
Payments and maturities, calls and repayments of investment securities:          
Available for sale   16,046    5,458 
Other investments   2,182    1,862 
Purchase of bank owned life insurance   
-
    (7,500)
Proceeds from sale of fixed assets   
-
    50 
Proceeds from sale of other real estate owned   
-
    788 
Net cash used for investing activities   (170,787)   (48,482)
Financing activities          
Increase (decrease) in cash realized from:          
Increase in deposits, net   144,348    115,993 
Decrease in Federal Home Loan Bank advances and other borrowings, net   
-
    (25,000)
Proceeds from the exercise of stock options   579    1,578 
Net cash provided by financing activities   144,927    92,571 
Net increase (decrease) in cash and cash equivalents   (17,993)   54,658 
Cash and cash equivalents at beginning of the period   167,209    100,687 
Cash and cash equivalents at end of the period  $149,216    155,345 
Supplemental information          
Cash paid for          
Interest  $1,789    2,767 
Income taxes   
-
    
-
 
Schedule of non-cash transactions          
Unrealized loss on securities, net of income taxes   (5,653)   (1,113)

 

See notes to consolidated financial statements that are an integral part of these consolidated statements.

 

5

 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – Summary of Significant Accounting Policies

 

Nature of Business

 

Southern First Bancshares, Inc. (the “Company”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the “Bank”) and all of the stock of Greenville First Statutory Trusts I and II (collectively, the “Trusts”). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank’s primary federal regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 4, 2022. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.

 

Business Segments

 

In determining proper segment definition, the Company considers the materiality of a potential segment and components of the business about which financial information is available and regularly evaluated, relative to a resource allocation and performance assessment. The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were generated to third parties, that is, at current market prices. Please refer to “Note 10 – Reportable Segments” for further information on the reporting for the Company’s three business segments.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, real estate acquired in the settlement of loans, fair value of financial instruments, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets.

 

Risks and Uncertainties

 

The impact of the coronavirus (COVID-19) pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including increases in new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccines along with concerns related to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; labor shortages; decreases in consumer confidence and spending; and rising geopolitical tensions.

 

6

 

The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole.

 

As of March 31, 2022, the Company’s and the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses.

 

The Company maintains access to multiple sources of liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at the subsidiary bank. As of March 31, 2022, the $15.0 million line was unused.

 

Reclassifications

 

Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on shareholders’ equity or net income.

 

Subsequent Events

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

 

Adoption of New Accounting Standard

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, the Current Expected Credit Loss (“CECL”) methodology, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU.

 

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. It also applies to off-balance sheet credit exposures, such as unfunded commitments to extend credit. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk.

 

On January 1, 2022, the Company adopted the guidance prospectively with a cumulative adjustment to retained earnings. Results for reporting periods beginning after January 1, 2022 are presented under CECL while prior period amounts continue to be reported in accordance with the previously applicable incurred loss accounting methodology. The transition adjustment for the adoption of CECL included an increase in the allowance for credit losses on loans of $1.5 million and an increase in the reserve for unfunded loan commitments of $2.0 million, which is recorded within other liabilities. The adoption of CECL had an insignificant impact on the Company’s investment securities portfolio. The Company recorded a net decrease to retained earnings of $2.8 million as of January 1, 2022 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Federal banking regulatory agencies provided optional relief to delay the adverse regulatory capital impact of CECL at adoption. The Company did not elect to use this optional relief.

 

Significant Accounting Policy Changes

 

Upon adoption of ASC 326, the Company revised the accounting policy for the Allowance for Credit Losses as detailed below.

 

7

 

Allowance for Credit Losses - Securities Available for Sale

 

For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with the establishment of an allowance under CECL compared to a direct write down of the security under Incurred Loss. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

 

Changes in the allowance for credit losses under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2022, there was no allowance for credit losses related to the available-for-sale portfolio.

 

Accrued interest receivable on available for sale debt securities totaled $436,000 at March 31, 2022 and was excluded from the estimate of credit losses.

 

Allowance for Credit Losses - Loans

 

Under the current expected credit loss model, the allowance for credit losses on loans is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

 

Management assesses the adequacy of the allowance on a quarterly basis. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. Management believes the level of the allowance for credit losses is adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off.

 

The allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:

 

Commercial loans

 

Owner occupied real estate - Owner occupied commercial mortgages consist of loans to purchase or re-finance owner occupied nonresidential properties. This includes office buildings, other commercial facilities, and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

 

Non-owner occupied real estate - Non-owner occupied commercial mortgages consist of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

 

8

 

Construction - Construction loans consist of loans to finance land for development of commercial or residential real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers.

 

Commercial business - Commercial business loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease.

 

Consumer loans

 

Real estate - Residential mortgages consist of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral.

 

Home equity – Home equity loans consist of home equity lines of credit and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior lines as a substantial decline in value could render the junior lien position effectively unsecured.

 

Construction - Construction loans consist of loans to construct a borrower’s primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. There is risk these construction and development projects can experience delays and cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.

 

Other - Consumer loans consist of loans to finance unsecured home improvements, student loans, automobiles and revolving lines of credit that can be secured or unsecured. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.

 

For all loan pools, the Company uses a lifetime probability of default and loss given default modeling approach to estimate the allowance for credit losses on loans. This method uses historical correlations between default experience and the age of loans to forecast defaults and losses, assuming that a loan in a pool shares similar risk characteristics such as loan product type, risk rating and loan age, and demonstrates similar default characteristics as other loans in that pool, as the loan progresses through its lifecycle. The Company calculates lifetime probability of default and loss given default rates based on historical loss experience, which is used to calculate expected losses based on the pool’s loss rate and the age of loans in the pool. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses to determine the allowance for credit losses. The Company uses its own internal data to measure historical credit loss experience within the pools with similar risk characteristics over an economic cycle. The probability of default and loss given default method also includes assumptions of observed migration over the lifetime of the underlying loan data.

 

9

 

Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools. These adjustments are based upon quarterly trend assessments in certain economic factors as well as associate retention and turnover, portfolio concentrations, and growth characteristics. The qualitative analysis increases or decreases the allowance allocation for each loan pool based on the assessment of factors described above.

 

Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated loan pools. Individual loan evaluations are generally performed for impaired loans, which includes nonaccrual loans and loans modified in a troubled debt restructuring (“TDR”). Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral. The Company has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, which considers selling costs in the event sale of the collateral is expected. Loans for which terms have been modified in a TDR are evaluated using these same individual evaluation methods. In the event the discounted cash flow method is used for a TDR, the original interest rate is used to discount expected cash flows.

 

While the Company’s policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond the Company’s control, such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses.

 

Accrued Interest Receivable

 

Accrued interest receivable related to loans totaled $7.2 million at March 31, 2022 and was reported in accrued interest receivable on the consolidated balance sheets. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectable interest.

 

Unfunded Commitments

 

Effective with the adoption of CECL, the Company estimates expected credit losses on commitments to extend credit over the contractual period in which the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancelable by the Company. The allowance for off-balance sheet credit exposures, which is reflected within other liabilities on the consolidated balance sheet, is adjusted for as an increase or decrease to the provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund.

 

The Company’s CECL allowances will fluctuate over time due to macroeconomic conditions and forecasts as well as the size and composition of the loan portfolios.

 

Newly Issued, But Not Yet Effective Accounting Standards

 

In March 2022, the FASB amended the Receivables–Troubled Debt Restructuring by Creditors subtopic and Financial Instruments–Credit Losses subtopic to the Accounting Standards Codification. The amendments eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments require disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendments is permitted if ASU 2016-13 has been adopted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

 

10

 

NOTE 2 – Investment Securities

 

The amortized costs and fair value of investment securities are as follows:

 

     
   March 31, 2022 
   Amortized   Gross Unrealized   Fair 
(dollars in thousands)  Cost   Gains   Losses   Value 
Available for sale                
Corporate bonds  $2,191    
-
    125    2,066 
US treasuries   999    
-
    65    934 
US government agencies   13,005    
-
    1,187    11,818 
State and political subdivisions   23,202    26    1,587    21,641 
Asset-backed securities   8,423    4    76    8,351 
Mortgage-backed securities                    
FHLMC   22,138    
-
    1,846    20,292 
FNMA   37,907    
-
    2,816    35,091 
GNMA   7,206    
-
    421    6,785 
Total mortgage-backed securities   67,251    
-
    5,083    62,168 
Total investment securities available for sale  $115,071    30    8,123    106,978 

 

   December 31, 2021 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
Available for sale                
Corporate bonds  $2,198    
-
    10    2,188 
US treasuries   999    
-
    7    992 
US government agencies   14,504    1    336    14,169 
SBA securities   429    9    
-
    438 
State and political subdivisions   24,887    549    260    25,176 
Asset-backed securities   10,136    45    17    10,164 
Mortgage-backed securities                    
FHLMC   23,057    102    494    22,665 
FNMA   40,924    235    660    40,499 
GNMA   4,084    3    97    3,990 
Total mortgage-backed securities   68,065    340    1,251    67,154 
Total investment securities available for sale  $121,218    944    1,881    120,281 

 

Contractual maturities and yields on the Company’s investment securities at March 31, 2022 and December 31, 2021 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

11

 

     
   March 31, 2022 
   Less than one year   One to five years   Five to ten years   Over ten years   Total 
(dollars in thousands)  Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield 
Available for sale                                        
Corporate bonds  $
   -
    
   -
   $
-
    
-
   $2,066    1.99%  $
-
    
-
   $2,066    1.99%
US treasuries   
-
    
-
    
-
    
-
    934    1.27%   
-
    
-
    934    1.27%
US government agencies   
-
    
-
    954    0.45%   8,176    1.31%   2,688    1.79%   11,818    1.35%
State and political subdivisions   
-
    
-
    470    2.13%   4,859    1.62%   16,312    2.19%   21,641    2.06%
Asset-backed securities   
-
    
-
    
-
    
-
    1,412    2.22%   6,939    1.08%   8,351    1.27%
Mortgage-backed securities   
-
    
-
    3,422    1.22%   5,196    1.43%   53,550    1.50%   62,168    1.47%
Total  $
-
    
-
   $4,846    1.16%  $22,643    1.52%  $79,489    1.61%  $106,978    1.57%

 

   December 31, 2021 
   Less than one year   One to five years   Five to ten years   Over ten years   Total 
(dollars in thousands)  Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield 
Available for sale                                        
Corporate bonds  $
-
    
-
   $
-
    
-
   $2,188    1.98%  $
-
    
-
   $2,188    1.98%
US treasuries   
-
    
-
    
-
    
-
    992    1.27%   
-
    
-
    992    1.27%
US government agencies   
-
    
-
    2,481    0.36%   8,756    1.31%   2,932    1.79%   14,169    1.24%
SBA securities   
-
    
-
    
-
    
-
    
-
    
-
    438    1.01%   438    1.01%
State and political subdivisions   
-
    
-
    471    2.13%   4,282    1.61%   20,423    2.21%   25,176    2.11%
Asset-backed securities   
-
    
-
    
-
    
-
    1,614    1.79%   8,550    0.97%   10,164    1.10%
Mortgage-backed securities   387    2.10%   4,411    1.29%   9,121    1.59%   53,235    1.38%   67,154    1.40%
Total  $387    2.10%  $7,363    1.03%  $26,953    1.53%  $85,578    1.55%  $120,281    1.52%

 

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at March 31, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

 

     
   March 31, 2022 
   Less than 12 months   12 months or longer   Total 
(dollars in thousands)  #   Fair
value
   Unrealized
losses
   #   Fair
value
   Unrealized
losses
   #   Fair
value
   Unrealized
losses
 
Available for sale                                    
Corporate bonds   1   $2,066   $125    
-
   $
-
   $
-
    1   $2,066   $125 
US treasures   1    934    65    
-
    
-
    
-
    1    934    65 
US government agencies   4    6,399    612    6    5,420    575    10    11,819    1,187 
State and political subdivisions   20    15,206    1,033    8    4,461    554    28    19,667    1,587 
Asset-backed   6    5,861    55    2    1,612    21    8    7,473    76 
Mortgage-backed securities                                             
FHLMC   14    15,318    1,286    5    4,974    560    19    20,292    1,846 
FNMA   26    23,751    1,692    10    11,329    1,124    36    35,080    2,816 
GNMA   4    4,107    212    3    2,678    209    7    6,785    421 
Total   76   $73,642   $5,080    34   $30,474   $3,043    110   $104,116   $8,123 

 

12

 

     
   December 31, 2021 
   Less than 12 months   12 months or longer   Total 
(dollars in thousands)  #   Fair
value
   Unrealized
losses
   #   Fair
value
   Unrealized
losses
   #   Fair
value
   Unrealized
losses
 
Available for sale                                    
Corporate bonds   1   $2,188   $10    
-
   $
-
   $
-
    1   $2,188   $10 
US treasures   1    992    7    
-
    
-
    
-
    1    992    7 
US government agencies   7    9,831    173    4    3,837    163    11    13,668    336 
State and political subdivisions   9    7,821    193    6    2,909    67    15    10,730    260 
Asset-backed   2    1,751    9    2    1,717    7    4    3,468    16 
Mortgage-backed securities                                             
FHLMC   10    13,705    303    4    4,644    192    14    18,349    495 
FNMA   11    16,098    296    9    11,264    364    20    27,362    660 
GNMA   2    655    4    3    3,215    93    5    3,870    97 
Total   43   $53,041   $995    28   $27,586   $886    71   $80,627   $1,881 

 

At March 31, 2022 the Company had 76 individual investments with a fair market value of $73.6 million that were in an unrealized loss position for less than 12 months and 34 individual investments with a fair market value of $30.5 million that were in an unrealized loss position for 12 months or longer. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.

 

Other investments are comprised of the following and are recorded at cost which approximates fair value.

 

         
(dollars in thousands)  March 31, 2022   December 31, 2021 
Federal Home Loan Bank stock  $1,256    1,241 
Other nonmarketable investments   2,445    2,377 
Investment in Trust Preferred subsidiaries   403    403 
Total other investments  $4,104    4,021 

 

The Company has evaluated other investments for impairment and determined that the other investments are not impaired as of March 31, 2022 and that ultimate recoverability of the par value of the investments is probable. All of the FHLB stock is used to collateralize advances with the FHLB.

 

NOTE 3 – Mortgage Loans Held for Sale

 

Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan. At March 31, 2022, mortgage loans held for sale totaled $17.8 million compared to $13.6 million at December 31, 2021.

 

13

 

NOTE 4 – Loans and Allowance for Credit Losses

 

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

 

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

 

Maturities and Sensitivity of Loans to Changes in Interest Rates

 

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

 

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

 

14

 

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

 

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

 

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

 

Credit Quality Indicators

 

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

 

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

 

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

 

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

 

Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

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

 

15

 

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

 

     
   March 31, 2022 
(dollars in thousands)  2022   2021   2020   2019   2018   Prior   Revolving   Total 
Commercial                                
Owner occupied RE                                
Pass  $48,943    136,043    91,485    76,409    42,537    130,973    
-
    526,390 
Special Mention   
-
    163    
-
    
-
    
-
    159    
-
    322 
Substandard   
-
    
-
    653    
-
    298    113    
-
    1,064 
Total Owner occupied RE   48,943    136,206    92,138    76,409    42,835    131,245    
-
    527,776 
                                         
Non-owner occupied RE                                        
Pass   61,668    186,526    118,651    82,442    84,310    145,200    
-
    678,797 
Special Mention   
-
    205    
-
    313    5,544    5,614    
-
    11,676 
Substandard   
-
    141    
-
    13,237    309    1,651    
-
    15,338 
Total Non-owner occupied RE   61,668    186,872    118,651    95,992    90,163    152,465    
-
    705,811 
                                         
Construction                                        
Pass   6,472    53,371    9,073    4,498    1,601    
-
    
-
    75,015 
Special Mention   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Substandard   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Construction   6,472    53,371    9,073    4,498    1,601    
-
    
-
    75,015 
                                         
Business                                        
Pass   30,305    62,583    36,345    27,908    38,361    36,286    117,232    349,020 
Special Mention   224    53    398    
-
    
-
    168    101    944 
Substandard   
-
    
-
    1,294    204    362    1,083    25    2,968 
Total Business   30,529    62,636    38,037    28,112    38,723    37,537    117,358    352,932 
Total Commercial loans   147,612    439,085    257,899    205,011    173,322    321,247    117,358    1,661,534 
                                         
Consumer                                        
Real estate                                        
Pass   69,226    255,662    197,008    80,005    42,490    91,948    
-
    736,339 
Special Mention        1,113    1,387    1,068    568    848    
-
    4,984 
Substandard   -    902    230    419    963    1,830    
-
    4,344 
Total Real estate   69,226    257,677    198,625    81,492    44,021    94,626    
-
    745,667 
                                         
Home equity                                        
Pass   
-
    
-
    
-
    
-
    
-
    
-
    150,767    150,767 
Special Mention   
-
    
-
    
-
    
-
    
-
    
-
    2,186    2,186 
Substandard   
-
    
-
    
-
    
-
    
-
    
-
    2,725    2,725 
Total Home equity   
-
    
-
    
-
    
-
    
-
    
-
    155,678    155,678 
                                         
Construction                                        
Pass   10,078    42,845    19,420    
-
    
-
    
-
    
-
    72,343 
Special Mention   
-
    
-
    
-
    284    
-
    
-
    
-
    284 
Substandard   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Construction   10,078    42,845    19,420    284    
-
    
-
    
-
    72,627 
                                         
Other                                        
Pass   1,177    2,700    1,250    2,001    711    3,916    13,227    24,982 
Special Mention   
-
    
-
    8    38    76    10    33    165 
Substandard   
-
    
-
    
-
    12    
-
    
-
    10    22 
Total Other   1,177    2,700    1,258    2,051    787    3,926    13,270    25,169 
Total Consumer loans   80,481    303,222    219,303    83,827    44,808    98,552    168,948    999,141 
Total loans  $228,093    742,307    477,202    288,838    218,130    419,799    286,306    2,660,675 

 

16

 

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

 

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

 

The following tables loan balances by payment status.

 

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

 

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

 

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

 

17

 

Nonperforming assets

 

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

 

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

 

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

 

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

 

18

 

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

 

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

 

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

 

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

 

19

 

Allowance for Credit Losses

 

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

 

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

 

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

 

     
  

Three months ended March 31, 2021

 
   Commercial   Consumer         
(dollars in thousands)  Owner
occupied
RE
   Non-
owner
occupied
RE
   Construction   Business  

Real

Estate

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

 

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

 

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

 

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

 

20

 

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

 

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

 

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

 

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

 

Allowance for Credit Losses - Unfunded Loan Commitments

 

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