Allowance for Loan Losses | 6. Allowance for Loan Losses The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors. The following table summarizes the changes in the Company’s allowance for loan losses for the years indicated. An analysis of the allowance for loan losses for each of the three years ending December 31, 2020, 2019 and 2018 is as follows: 2020 2019 2018 (dollars in thousands) Allowance for loan losses, beginning of year $ 29,585 $ 28,543 $ 26,255 Loans charged-off (238 ) (454 ) (833 ) Recoveries on loans previously charged-off 314 246 1,771 Net recoveries (charge-offs ) 76 (208 ) 938 Provision charged to expense 5,825 1,250 1,350 Allowance for loan losses, end of year $ 35,486 $ 29,585 $ 28,543 Further information pertaining to the allowance for loan losses at December 31, 2020 follows: Construction Commercial Municipal Commercial Residential Consumer Home Unallocated Total (dollars in thousands) Allowance for Loan Losses: Ending balance at December 31, 2019 $ 331 $ 11,596 $ 2,566 $ 11,464 $ 2,194 $ 312 $ 1,065 $ 57 $ 29,585 Charge-offs — (29 ) — — — (209 ) — — (238 ) Recoveries — 197 — — — 112 5 — 314 Provision 98 4,949 238 287 (83 ) 26 138 172 5,825 Ending balance at December 31, 2020 $ 429 $ 16,713 $ 2,804 $ 11,751 $ 2,111 $ 241 $ 1,208 $ 229 $ 35,486 Amount of allowance for loan losses for loans deemed to be impaired $ — $ 140 $ — $ 449 $ — $ — $ — $ — $ 589 Amount of allowance for loan losses for loans not deemed to be impaired $ 429 $ 16,573 $ 2,804 $ 11,302 $ 2,111 $ 241 $ 1,208 $ 229 $ 34,897 Loans: Ending balance $ 10,909 $ 1,314,245 $ 137,607 $ 789,836 $ 448,436 $ 20,439 $ 274,357 $ — $ 2,995,829 Loans deemed to be impaired $ — $ 439 $ — $ 4,940 $ — $ — $ — $ — $ 5,379 Loans not deemed to be impaired $ 10,909 $ 1,313,806 $ 137,607 $ 784,896 $ 448,436 $ 20,439 $ 274,357 $ — $ 2,990,450 Further information pertaining to the allowance for loan losses at December 31, 2019 follows: Construction Commercial Municipal Commercial Residential Consumer Home Unallocated Total (dollars in thousands) Allowance for Loan Losses: Ending balance at December 31, 2018 $ 1,092 $ 10,998 $ 1,838 $ 10,663 $ 2,190 $ 365 $ 1,111 $ 286 $ 28,543 Charge-offs — (137 ) — — — (295 ) (22 ) — (454 ) Recoveries — 60 — — — 186 — — 246 Provision (761 ) 675 728 801 4 56 (24 ) (229 ) 1,250 Ending balance at December 31, 2019 $ 331 $ 11,596 $ 2,566 $ 11,464 $ 2,194 $ 312 $ 1,065 $ 57 $ 29,585 Amount of allowance for loan losses for loans deemed to be impaired $ — $ 15 $ — $ 87 $ — $ — $ — $ — $ 102 Amount of allowance for loan losses for loans not deemed to be impaired $ 331 $ 11,581 $ 2,566 $ 11,377 $ 2,194 $ 312 $ 1,065 $ 57 $ 29,483 Loans: Ending balance $ 8,992 $ 812,417 $ 120,455 $ 786,102 $ 371,897 $ 21,893 $ 304,363 $ — $ 2,426,119 Loans deemed to be impaired $ — $ 906 $ — $ 2,346 $ — $ — $ — $ — $ 3,252 Loans not deemed to be impaired $ 8,992 $ 811,511 $ 120,455 $ 783,756 $ 371,897 $ 21,893 $ 304,363 $ — $ 2,422,867 CREDIT QUALITY INFORMATION The Company utilizes a six-grade Loans rated 1-3 Loans rated 4 (Monitor)—These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of December 31, 2020. Loans rated 5 (Substandard)—Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of December 31, 2020. Loans rated 6 (Doubtful)—Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of December 31, 2020 and are doubtful for full collection. Impaired—Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due. The following table presents the Company’s loans by risk rating at December 31, 2020. Construction Commercial Municipal Commercial (dollars in thousands) Grade: 1-3 $10,909 $ 1,309,861 $ 137,607 $761,101 4 (Monitor) — 3,945 — 23,795 5 (Substandard) — — — — 6 (Doubtful) — — — — Impaired — 439 — 4,940 Total $10,909 $ 1,314,245 $ 137,607 $789,836 The Company has increased its exposure to larger loans to large institutions with publicly available credit ratings. These ratings are tracked as a credit quality indicator for these loans. The following table presents the Company’s loans by credit rating at December 31, 2020. Commercial Municipal Commercial Total (dollars in thousands) Credit Rating: Aaa-Aa3 $ 710,955 $ 74,291 $ 38,035 $ 823,281 A1-A3 183,123 7,103 145,583 335,809 Baa1-Baa3 50,000 51,133 140,905 242,038 Ba2 — 5,080 — 5,080 Total $ 944,078 $ 137,607 $ 324,523 $ 1,406,208 The following table presents the Company’s loans by risk rating at December 31, 2019. Construction Commercial Municipal Commercial (dollars in thousands) Grade: 1-3 $ 8,992 $ 807,486 $ 120,455 $ 759,402 4 (Monitor) — 4,025 — 24,354 5 (Substandard) — — — — 6 (Doubtful) — — — — Impaired — 906 — 2,346 Total $ 8,992 $ 812,417 $ 120,455 $ 786,102 The following table presents the Company’s loans by credit rating at December 31, 2019. Commercial Municipal Commercial Total (dollars in thousands) Credit Rating: Aaa-Aa3 $ 523,644 $ 53,273 $ 40,437 $ 617,354 A1-A3 186,044 7,354 148,346 341,744 Baa1-Baa3 — 51,133 144,711 195,844 Ba2 — 5,895 — 5,895 Total $ 709,688 $ 117,655 $ 333,494 $ 1,160,837 The Company utilized payment performance as credit quality indicators for residential real estate, consumer and overdrafts, and the home equity portfolio. The indicators are depicted in the table “aging of past-due AGING OF PAST-DUE At December 31, 2020, the aging of past due loans are as follows: Accruing 30-89 Days Non Accruing Total Current Total (dollars in thousands) Construction and land development $ — $ — $ — $ — $ 10,909 $ 10,909 Commercial and industrial 56 297 90 443 1,313,802 1,314,245 Municipal — — — — 137,607 137,607 Commercial real estate — 2,881 — 2,881 786,955 789,836 Residential real estate 390 527 — 917 447,519 448,436 Consumer and overdrafts 21 1 — 22 20,417 20,439 Home equity 1,001 290 — 1,291 273,066 274,357 Total $ 1,468 $ 3,996 $ 90 $ 5,554 $ 2,990,275 $ 2,995,829 At December 31, 2019 the aging of past due loans are as follows: Accruing 30-89 Days Non Accruing Total Current Total (dollars in thousands) Construction and land development $ — $ — $ — $ — $ 8,992 $ 8,992 Commercial and industrial 227 400 — 627 811,790 812,417 Municipal — — — — 120,455 120,455 Commercial real estate 840 492 — 1,332 784,770 786,102 Residential real estate 1,563 683 — 2,246 369,651 371,897 Consumer and overdrafts 18 4 — 22 21,871 21,893 Home equity 603 435 — 1,038 303,325 304,363 Total $ 3,251 $ 2,014 $ — $ 5,265 $ 2,420,854 $ 2,426,119 IMPAIRED LOANS A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off charged-off The following is information pertaining to impaired loans at December 31, 2020: Carrying Unpaid Required Average Interest (dollars in thousands) With no required reserve recorded: Construction and land development $ — $ — $ — $ — $ — Commercial and industrial 4 5 — 633 — Municipal — — — — — Commercial real estate 272 306 — 437 — Residential real estate — — — 127 — Consumer — — — — — Home equity — — — — — Total $ 276 $ 311 $ — $ 1,197 $ — With required reserve recorded: Construction and land development $ — $ — $ — $ — $ — Commercial and industrial 435 454 140 121 8 Municipal — — — — — Commercial real estate 4,668 4,797 449 2,323 86 Residential real estate — — — — — Consumer — — — — — Home equity — — — — — Total $ 5,103 $ 5,251 $ 589 $ 2,444 $ 94 Total Construction and land development $ — $ — $ — $ — $ — Commercial and industrial 439 459 140 754 8 Municipal — — — — — Commercial real estate 4,940 5,103 449 2,760 86 Residential real estate — — — 127 — Consumer — — — — — Home equity — — — — — Total $ 5,379 $ 5,562 $ 589 $ 3,641 $ 94 The following is information pertaining to impaired loans at December 31, 2019: Carrying Unpaid Required Average Interest (dollars in thousands) With no required reserve recorded: Construction and land development $ — $ — $ — $ — $ — Commercial and industrial 770 976 — 138 6 Municipal — — — — — Commercial real estate 160 189 — 445 — Residential real estate — — — — — Consumer — — — — — Home equity — — — — — Total $ 930 $ 1,165 $ — $ 583 $ 6 With required reserve recorded: Construction and land development $ — $ — $ — $ — $ — Commercial and industrial 136 137 15 264 7 Municipal — — — — — Commercial real estate 2,186 2,306 87 2,314 90 Residential real estate — — — — — Consumer — — — — — Home equity — — — — — Total $ 2,322 $ 2,443 $ 102 $ 2,578 $ 97 Total Construction and land development $ — $ — $ — $ — $ — Commercial and industrial 906 1,113 15 402 13 Municipal — — — — — Commercial real estate 2,346 2,495 87 2,759 90 Residential real estate — — — — — Consumer — — — — — Home equity — — — — — Total $ 3,252 $ 3,608 $ 102 $ 3,161 $ 103 Troubled Debt Restructurings (TDRs) are identified as a modification in which a concession was granted to a customer who was having financial difficulties. This concession may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations. There was one commercial and industrial loan that was modified during the first quarter of 2019. The loan was modified by reducing the interest rates as well as extending the term on the loan. The pre-modification There were no TDRs that occurred during the year 2020. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during 2020. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 COVID-19 COVID-19 As of December 31, 2020, and as a result of COVID-19 |