Loans and Allowance for Credit Losses | 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 $7.4 million as of March 31, 2023 and $7.3 million as of December 31, 2022. March 31, 2023 December 31, 2022 (dollars in thousands) Amount % of Total Amount % of Total Commercial Owner occupied RE $ 615,094 18.0 % $ 612,901 18.7 % Non-owner occupied RE 928,059 27.2 % 862,579 26.3 % Construction 94,641 2.8 % 109,726 3.4 % Business 495,161 14.5 % 468,112 14.3 % Total commercial loans 2,132,955 62.5 % 2,053,318 62.7 % Consumer Real estate 993,258 29.1 % 931,278 28.4 % Home equity 180,974 5.3 % 179,300 5.5 % Construction 71,137 2.1 % 80,415 2.5 % Other 39,621 1.0 % 29,052 0.9 % Total consumer loans 1,284,990 37.5 % 1,220,045 37.3 % Total gross loans, net of deferred fees 3,417,945 100.0 % 3,273,363 100.0 % Less—allowance for credit losses (40,435 ) (38,639 ) Total loans, net $ 3,377,510 $ 3,234,724 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, 2023 (dollars in thousands) One year After one After five After Total Commercial Owner occupied RE $ 9,295 144,602 418,450 42,747 615,094 Non-owner occupied RE 57,909 449,859 394,421 25,870 928,059 Construction 2,742 30,409 59,103 2,387 94,641 Business 92,502 211,145 187,033 4,481 495,161 Total commercial loans 162,448 836,015 1,059,007 75,485 2,132,955 Consumer Real estate 9,871 46,324 280,204 656,859 993,258 Home equity 1,028 20,452 154,189 5,305 180,974 Construction 1,014 227 32,358 37,538 71,137 Other 3,569 21,975 13,272 805 39,621 Total consumer loans 15,482 88,978 480,023 700,507 1,284,990 Total gross loans, net of deferred fees $ 177,930 924,993 1,539,030 775,992 3,417,945 December 31, 2022 (dollars in thousands) One year After one After five After fifteen Total Commercial Owner occupied RE $ 10,574 133,017 420,881 48,429 612,901 Non-owner occupied RE 44,570 419,976 371,208 26,825 862,579 Construction 5,509 36,537 61,009 6,671 109,726 Business 96,157 194,489 173,259 4,207 468,112 Total commercial loans 156,810 784,019 1,026,357 86,132 2,053,318 Consumer Real estate 12,137 38,948 260,005 620,188 931,278 Home equity 1,336 20,933 151,696 5,335 179,300 Construction 665 182 23,788 55,780 80,415 Other 3,926 21,890 2,458 778 29,052 Total consumer loans 18,064 81,953 437,947 682,081 1,220,045 Total gross loans, net of deferred fees $ 174,874 865,972 1,464,304 768,213 3,273,363 The following table summarizes the loans due after one year by category. March 31, 2023 December 31, 2022 Interest Rate Interest Rate (dollars in thousands) Fixed Floating or Fixed Floating or Commercial Owner occupied RE $ 602,302 3,497 598,513 3,814 Non-owner occupied RE 784,868 85,282 742,763 75,246 Construction 75,041 16,858 90,246 13,971 Business 310,976 91,683 298,866 73,089 Total commercial loans 1,773,187 197,320 1,730,388 166,120 Consumer Real estate 983,376 11 919,130 11 Home equity 13,508 166,438 14,173 163,791 Construction 70,123 - 79,750 - Other 19,173 16,879 19,113 6,013 Total consumer loans 1,086,180 183,328 1,032,166 169,815 Total gross loans, net of deferred fees $ 2,859,367 380,648 2,762,554 335,935 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— A pass loan ranges from minimal to average credit risk; however, still has acceptable credit risk. ● Watch—A watch loan exhibits above average credit risk due to minor weaknesses and warrants closer scrutiny by management. ● 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. The following table presents loan balances classified by credit quality indicators by year of origination as of March 31, 2023. March 31, 2023 (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Revolving Converted to Term Total Commercial Owner occupied RE Pass $ 19,874 160,403 143,384 76,171 65,408 121,520 - 169 586,929 Watch - 3,548 475 9,281 3,628 6,716 - - 23,648 Special Mention - 196 - - - 3,133 - - 3,329 Substandard - - - - - 1,188 - - 1,188 Total Owner occupied RE 19,874 164,147 143,859 85,452 69,036 132,557 - 169 615,094 Non-owner occupied RE Pass 47,280 298,161 177,421 112,850 59,025 181,699 623 - 877,059 Watch 200 972 9,496 - 7,555 13,070 - - 31,293 Special Mention - - 201 - 8,893 906 - - 10,000 Substandard - 615 - - 7,996 1,096 - - 9,707 Total Non-owner occupied RE 47,480 299,748 187,118 112,850 83,469 196,771 623 - 928,059 Construction Pass 942 62,604 22,778 6,737 246 - - - 93,307 Watch - 1,334 - - - - - - 1,334 Special Mention - - - - - - - - - Substandard - - - - - - - - - Total Construction 942 63,938 22,778 6,737 246 - - - 94,641 Business Pass 17,705 140,684 54,235 21,675 20,611 58,086 147,734 442 461,172 Watch 145 14,571 2,031 1,627 1,061 3,607 5,420 - 28,462 Special Mention - 1,259 236 463 279 424 15 99 2,775 Substandard - 495 - 28 202 1,344 683 - 2,752 Total Business 17,850 157,009 56,502 23,793 22,153 63,461 153,852 541 495,161 Total Commercial loans 86,146 684,842 410,257 228,832 174,904 392,789 154,475 710 2,132,955 Consumer Real estate Pass 49,330 253,611 284,238 183,939 69,806 112,705 - - 953,629 Watch 494 5,765 8,023 4,016 2,086 4,582 - - 24,966 Special Mention - 2,346 1,687 2,152 2,444 3,127 - - 11,756 Substandard - - 646 224 330 1,707 - - 2,907 Total Real estate 49,824 261,722 294,594 190,331 74,666 122,121 - - 993,258 Home equity Pass - - - - - - 167,694 - 167,694 Watch - - - - - - 6,701 - 6,701 Special Mention - - - - - - 3,861 - 3,861 Substandard - - - - - - 2,718 - 2,718 Total Home equity - - - - - - 180,974 - 180,974 Construction Pass 2,656 47,570 20,066 845 - - - - 71,137 Watch - - - - - - - - - Special Mention - - - - - - - - - Substandard - - - - - - - - - Total Construction 2,656 47,570 20,066 845 - - - - 71,137 Other Pass 390 3,375 2,829 1,645 1,433 3,205 25,359 - 38,236 Watch 10 42 363 11 4 183 118 - 731 Special Mention - 11 - - 37 90 93 - 231 Substandard - 327 88 - 3 - 5 - 423 Total Other 400 3,755 3,280 1,656 1,477 3,478 25,575 - 39,621 Total Consumer loans 52,880 313,047 317,940 192,832 76,143 125,599 206,549 - 1,284,990 Total loans $ 139,026 997,889 728,197 421,664 251,047 518,388 361,024 710 3,417,945 Current period gross write-offs (160 ) (1 ) (161 ) The following table presents loan balances classified by credit quality indicators by year of origination as of December 31, 2022. December 31, 2022 (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Revolving Converted to Term Total Commercial Owner occupied RE Pass $ 169,083 122,654 85,867 66,299 36,718 93,915 - - 574,536 Watch 14,648 479 9,339 3,658 - 6,792 - - 34,916 Special Mention 200 - - - - 2,960 - - 3,160 Substandard - - - - 289 - - - 289 Total Owner occupied RE 183,931 123,133 95,206 69,957 37,007 103,667 - - 612,901 Non-owner occupied RE Pass 281,890 169,599 113,264 59,550 79,722 106,967 604 137 811,733 Watch 1,061 9,491 - 10,683 1,408 11,660 - - 34,303 Special Mention - 202 - 6,087 - 930 - - 7,219 Substandard - 134 - 7,992 327 871 - - 9,324 Total Non-owner occupied RE 282,951 179,426 113,264 84,312 81,457 120,428 604 137 862,579 Construction Pass 48,420 55,129 4,811 247 - - - - 108,607 Watch 1,119 - - - - - - - 1,119 Special Mention - - - - - - - - - Substandard - - - - - - - - - Total Construction 49,539 55,129 4,811 247 - - - - 109,726 Business Pass 136,489 57,804 29,864 21,808 35,249 28,914 136,337 709 447,174 Watch 3,186 2,058 1,318 1,282 179 3,074 3,783 439 15,319 Special Mention 1,137 260 386 210 - 252 115 642 3,002 Substandard 498 - 188 233 315 911 472 - 2,617 Total Business 141,310 60,122 31,756 23,533 35,743 33,151 140,707 1,790 468,112 Total Commercial loans 657,731 417,810 245,037 178,049 154,207 257,246 141,311 1,927 2,053,318 Consumer Real estate Pass 243,589 269,565 189,075 72,499 39,042 76,172 - - 889,942 Watch 6,196 8,256 3,847 2,278 494 3,671 - - 24,742 Special Mention 3,114 1,938 2,644 2,258 955 2,639 - - 13,548 Substandard - 648 227 341 408 1,422 - - 3,046 Total Real estate 252,899 280,407 195,793 77,376 40,899 83,904 - - 931,278 Home equity Pass - - - - - - 165,847 - 165,847 Watch - - - - - - 7,226 - 7,226 Special Mention - - - - - - 4,055 - 4,055 Substandard - - - - - - 2,172 - 2,172 Total Home equity - - - - - - 179,300 - 179,300 Construction Pass 41,138 34,039 4,923 - - - - - 80,100 Watch - - - - - - - - - Special Mention - - - 315 - - - - 315 Substandard - - - - - - - - - Total Construction 41,138 34,039 4,923 315 - - - - 80,415 Other Pass 3,894 3,038 1,702 1,534 341 3,015 14,465 - 27,989 Watch 46 367 15 5 16 175 93 - 717 Special Mention 94 - - 44 75 23 97 - 332 Substandard - - - 5 - - 9 - 14 Total Other 4,034 3,405 1,717 1,588 432 3,213 14,663 - 29,052 Total Consumer loans 298,071 317,851 202,433 79,279 41,331 87,117 193,963 - 1,220,045 Total loans $ 955,802 735,661 447,470 257,328 195,538 344,363 335,274 1,927 3,273,363 The following tables present loan balances by age and payment status. March 31, 2023 (dollars in thousands) Accruing Accruing Accruing 90 Nonaccrual Accruing Total Commercial Owner occupied RE $ - - - - 615,094 615,094 Non-owner occupied RE 151 - - 1,384 926,524 928,059 Construction - - - - 94,641 94,641 Business 135 235 - 1,196 493,595 495,161 Consumer Real estate 886 - - 1,075 991,297 993,258 Home equity 587 - - 1,078 179,309 180,974 Construction - - - - 71,137 71,137 Other 1 88 - - 39,532 39,621 Total loans $ 1,760 323 - 4,733 3,411,129 3,417,945 Total loans over 90 days past due - - - - - 192 December 31, 2022 (dollars in thousands) Accruing Accruing Accruing 90 Nonaccrual Accruing Total Commercial Owner occupied RE $ - - - - 612,901 612,901 Non-owner occupied RE 119 757 - 247 861,456 862,579 Construction - - - - 109,726 109,726 Business 24 1 - 182 467,905 468,112 Consumer Real estate 330 - - 1,099 929,849 931,278 Home equity 50 - - 1,099 178,151 179,300 Construction - - - - 80,415 80,415 Other 88 - - - 28,964 29,052 Total loans $ 611 758 - 2,627 3,269,367 3,273,363 Total loans over 90 days past due - - - - - 402 As of March 31, 2023 and December 31, 2022, loans 30 days or more past due represented 0.11% of the Company’s total loan portfolio. Commercial loans 30 days or more past due were 0.03% of the Company’s total loan portfolio as of March 31, 2023 and December 31, 2022. Consumer loans 30 days or more past due were 0.08% of total loans as of March 31, 2023 and December 31, 2022. The table below summarizes nonaccrual loans by major categories for the periods presented. March 31, 2023 December 31, 2022 Nonaccrual Nonaccrual Nonaccrual Nonaccrual loans loans Total loans loans Total with no with an nonaccrual with no with an nonaccrual (dollars in thousands) allowance allowance loans allowance allowance loans Commercial Owner occupied RE - - - - - - Non-owner occupied RE $ 615 769 1,384 114 133 247 Construction - - - - - - Business 1,045 151 1,196 - 182 182 Total commercial 1,660 920 2,580 114 315 429 Consumer Real estate - 1,075 1,075 - 1,099 1,099 Home equity 192 886 1,078 194 905 1,099 Construction - - - - - - Other - - - - - - Total consumer 192 1,961 2,153 194 2,004 2,198 Total nonaccrual loans 1,852 2,881 4,733 308 2,319 2,627 We did not recognize interest income on nonaccrual loans for the three months ended March 31, 2023 and March 31, 2022. Accrued interest of $23,000 was reversed during the three months ended March 31, 2023. Accrued interest of $3,000 was reversed during the three months ended March 31, 2022. The table below summarizes information regarding nonperforming assets. (dollars in thousands) March 31, December 31, Nonaccrual loans $ 4,733 2,627 Other real estate owned - - Total nonperforming assets $ 4,733 2,627 Nonperforming assets as a percentage of: Total assets 0.12 % 0.07 % Gross loans 0.14 % 0.08 % Total loans over 90 days past due $ 192 402 Loans over 90 days past due and still accruing - - Accruing troubled debt restructurings - 4,503 Modifications to Borrowers Experiencing Financial Difficulty The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. There were no loan modifications to borrowers experiencing financial difficulty during the three months ended March 31, 2023. Allowance for Credit Losses The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the credit loss allowance is conducted quarterly. 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 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. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. 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 Company generally utilizes a four-quarter forecast period in evaluating the appropriateness of the reasonable and supportable forecast scenarios which are incorporated through qualitative adjustments. There is immediate reversion to historical loss rates. 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 such as labor, inflation, consumer sentiment and real disposable income, 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. The following table summarizes the activity related to the allowance for credit losses for the three months ended March 31, 2023 under the CECL methodology. Three months ended March 31, 2023 Commercial Consumer (dollars in thousands) Owner occupied RE Non-owner occupied RE Construction Business Real Estate Home Construction Other Total Balance, beginning of period $ 5,867 10,376 1,292 7,861 9,487 2,551 893 312 38,639 Provision for credit losses 117 1,038 (182 ) 150 592 53 (83 ) 170 1,855 Loan charge-offs - (160 ) - (1 ) - - - - (161 ) Loan recoveries - 31 - 12 - 59 - - 102 Net loan recoveries (charge-offs) - (129 ) - 11 - 59 - - (59 ) Balance, end of period $ 5,984 11,285 1,110 8,022 10,079 2,663 810 482 40,435 Net charge-offs to average loans (annualized) 0.01 % Allowance for credit losses to gross loans 1.18 % Allowance for credit losses to nonperforming loans 854.33 % Three months ended March 31, 2022 Commercial Consumer (dollars in thousands) Owner occupied RE Non-owner occupied RE Construction Business Real Estate Home 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 % The $1.9 million provision for credit losses for the three months ended March 31, 2023 was driven by $144.6 million in loan growth for the quarter. In addition to loan growth, the provision for credit losses was impacted by slightly lower expected loss rates due to continued low charge-offs during the first quarter of 2023, while minor adjustments to an internal qualitative factor increased the qualitative component of the allowance and related provision expense. 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 tables present an analysis of collateral-dependent loans of the Company. March 31, 2023 (dollars in thousands) Real Business Other Total Commercial Owner occupied RE $ - - - - Non-owner occupied RE 651 - - 651 Construction - - - - Business 28 - 1,045 1,073 Total commercial 679 - 1,045 1,724 Consumer Real estate 197 - - 197 Home equity 192 - - 192 Construction - - - - Other - - - - Total consumer 389 - - 389 Total $ 1,068 - 1,045 2,113 December 31, 2022 Real Business (dollars in thousands) estate assets Other Total Commercial Owner occupied RE $ - - - - Non-owner occupied RE 114 - - 114 Construction - - - - Business 30 - - 30 Total commercial 144 - - 144 Consumer Real estate 207 - - 207 Home equity 194 - - 194 Construction - - - - Other - - - - Total consumer 401 - - 401 Total $ 545 - - 545 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 $2.8 million at March 31, 2023 and is separately classified on the balance sheet within other liabilities. 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, 2023 and for the twelve months ended December 31, 2022. Three months ended Twelve months ended (dollars in thousands) March 31, 2023 December 31, 2022 Balance, beginning of period $ 2,780 - Adjustment for adoption of CECL - 2,000 Provision (reversal of) for credit losses (30 ) 780 Balance, end of period $ 2,750 2,780 Unfunded Loan Commitments $ 882,489 878,324 Reserve for Unfunded Commitments to Unfunded Loan Commitments 0.31 % 0.32 % |