Loans and Allowance for Credit Losses | Loans and Allowance for Credit Losses Loans Held for Sale Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of December 31, 2022 and 2021. Loans Held for Investment The following table presents amortized cost and unpaid principal balance of loans for the periods indicated: December 31, 2022 December 31, 2021 (In Thousands) Amortized Cost Unpaid Principal Difference Amortized Cost Unpaid Principal Difference Commercial & industrial loans $358,128 $359,900 ($1,772) $448,338 $454,106 ($5,768) Commercial real estate: Owner occupied properties 349,973 351,580 (1,607) 300,200 301,623 (1,423) Non-owner occupied and multifamily properties 482,270 486,021 (3,751) 435,311 438,631 (3,320) Residential real estate: 1-4 family residential properties secured by first liens 73,381 73,674 (293) 32,542 32,602 (60) 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 20,259 20,103 156 19,610 19,489 121 1-4 family residential construction loans 44,000 44,314 (314) 36,222 36,542 (320) Other construction, land development and raw land loans 99,182 100,075 (893) 88,094 88,604 (510) Obligations of states and political subdivisions in the US 32,539 32,540 (1) 16,403 16,565 (162) Agricultural production, including commercial fishing 34,099 34,263 (164) 27,959 28,082 (123) Consumer loans 4,335 4,293 42 4,801 4,763 38 Other loans 3,619 3,632 (13) 4,406 4,422 (16) Total 1,501,785 1,510,395 (8,610) 1,413,886 1,425,429 (11,543) Allowance for credit losses (13,838) (11,739) $1,487,947 $1,510,395 ($8,610) $1,402,147 $1,425,429 ($11,543) The difference between the amortized cost and unpaid principal balance is primarily net deferred origination fees totaling $8.6 million and $11.5 million at December 31, 2022 and 2021, respectively. Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $5.5 million at both December 31, 2022 and 2021, and was included in other assets Amortized cost in the above table includes $7.1 million and $118.2 million as of December 31, 2022 and 2021, respectively, in PPP loans administered by the U.S. Small Business Administration (“SBA”) within the Commercial & industrial loan segment. At December 31, 2022, approximately 69% of the Company’s loans, excluding PPP loans, are secured by real estate and 1% are unsecured. Approximately 30% are for general commercial uses, including professional, retail, and small businesses. Repayment is expected from the borrowers’ cash flow or, secondarily, the collateral. The Company’s exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is determined to be of no value. Allowance for Credit Losses The activity in the ACL related to loans held for investment for the periods indicated is as follows: Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2022 Commercial & industrial loans $3,027 ($1,124) ($506) $1,517 $2,914 Commercial real estate: Owner occupied properties 3,176 (137) — 55 3,094 Non-owner occupied and multifamily properties 2,930 685 — — 3,615 Residential real estate: 1-4 family residential properties secured by first liens 439 969 — 5 1,413 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 215 134 — 40 389 1-4 family residential construction loans 120 192 — — 312 Other construction, land development and raw land loans 1,635 168 — — 1,803 Obligations of states and political subdivisions in the US 32 47 — — 79 Agricultural production, including commercial fishing 91 39 — 15 145 Consumer loans 67 — (3) 4 68 Other loans 7 (1) — — 6 Total $11,739 $972 ($509) $1,636 $13,838 Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2021 Commercial & industrial loans $4,348 ($122) ($1,452) $253 $3,027 Commercial real estate: — Owner occupied properties 3,579 (412) — 9 3,176 Non-owner occupied and multifamily properties 4,944 (2,014) — — 2,930 Residential real estate: 1-4 family residential properties secured by first liens 673 (234) — — 439 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 419 (242) — 38 215 1-4 family residential construction loans 454 (334) — — 120 Other construction, land development and raw land loans 1,994 (359) — — 1,635 Obligations of states and political subdivisions in the US 44 (12) — — 32 Agricultural production, including commercial fishing 49 11 — 31 91 Consumer loans 118 (65) — 14 67 Other loans 3 4 — — 7 Total $16,625 ($3,779) ($1,452) $345 $11,739 As of December 31, 2022 the ACL increased to $13.8 million, or 0.92% of portfolio loans and 0.99% of portfolio loans, net of government guarantees from $11.7 million, or 0.83% of portfolio loans and 0.97% of portfolio loans, net of government guarantees at December 31, 2021. The Company primarily uses a DCF method to estimate the ACL for loans and generally does not record an ACL for the government guaranteed portion of loans. The increase in the ACL for loans at December 31, 2022, as compared to December 31, 2021 is primarily due to an increase in non-government guaranteed loan balances. Additionally, the Company forecasted a slight increase in future unemployment rates as of December 31, 2022 as compared to the forecast at December 31, 2021. Credit Quality Information As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. Loans graded 7 or higher are considered "classified" loans. A description of the general characteristics of the AQR risk classifications are as follows: Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The Company has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses. Classified loans: Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date. Substandard – 8: A "substandard" credit is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Doubtful – 9: An asset classified "doubtful" has all the weaknesses inherent in one that is classified "substandard-8" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety. Loss – 10: An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future. The following tables present the Company's portfolio of risk-rated loans by grade and by year of origination. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. December 31, 2022 2022 2021 2020 2019 2018 Prior Total (In Thousands) Commercial & industrial loans Pass $157,555 $86,543 $37,147 $17,881 $9,844 $40,571 $349,541 Classified 137 4,879 397 91 2,737 346 8,587 Total commercial & industrial loans $157,692 $91,422 $37,544 $17,972 $12,581 $40,917 $358,128 Commercial real estate: Owner occupied properties Pass $66,955 $70,777 $90,496 $32,564 $13,233 $69,701 $343,726 Classified — — — — 165 6,082 6,247 Total commercial real estate owner occupied properties $66,955 $70,777 $90,496 $32,564 $13,398 $75,783 $349,973 Non-owner occupied and multifamily properties Pass $94,412 $82,352 $71,407 $58,033 $16,905 $149,223 $472,332 Classified — — — 274 3 9,661 9,938 Total commercial real estate non-owner occupied and multifamily properties $94,412 $82,352 $71,407 $58,307 $16,908 $158,884 $482,270 Residential real estate: 1-4 family residential properties secured by first liens Pass $52,117 $5,088 $6,001 $2,535 $462 $6,968 $73,171 Classified — — — 79 131 210 Total residential real estate 1-4 family residential properties secured by first liens $52,117 $5,088 $6,001 $2,535 $541 $7,099 $73,381 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens Pass $6,992 $3,376 $2,041 $2,763 $2,781 $2,060 $20,013 Classified — — — — 239 7 246 Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $6,992 $3,376 $2,041 $2,763 $3,020 $2,067 $20,259 1-4 family residential construction loans Pass $26,860 $3,897 $61 $— $— $13,073 $43,891 Classified — — — — — 109 109 Total residential real estate 1-4 family residential construction loans $26,860 $3,897 $61 $— $— $13,182 $44,000 Other construction, land development and raw land loans Pass $38,673 $42,448 $5,740 $1,713 $3,675 $5,112 $97,361 Classified — — — — 369 1,452 1,821 Total other construction, land development and raw land loans $38,673 $42,448 $5,740 $1,713 $4,044 $6,564 $99,182 Obligations of states and political subdivisions in the US Pass $32,319 $— $— $— $219 $1 $32,539 Classified — — — — — — — Total obligations of states and political subdivisions in the US $32,319 $— $— $— $219 $1 $32,539 Agricultural production, including commercial fishing Pass $9,748 $17,692 $3,740 $604 $879 $1,436 $34,099 Classified — — — — — — — Total agricultural production, including commercial fishing $9,748 $17,692 $3,740 $604 $879 $1,436 $34,099 Consumer loans Pass $1,513 $363 $481 $345 $235 $1,391 $4,328 Classified — — — — — 7 7 Total consumer loans $1,513 $363 $481 $345 $235 $1,398 $4,335 Other loans Pass $1,291 $330 $1,547 $384 $— $67 $3,619 Classified — — — — — — — Total other loans $1,291 $330 $1,547 $384 $— $67 $3,619 Total loans Pass $488,435 $312,866 $218,661 $116,822 $48,233 $289,603 $1,474,620 Classified 137 4,879 397 365 3,592 17,795 27,165 Total loans $488,572 $317,745 $219,058 $117,187 $51,825 $307,398 $1,501,785 Total pass loans $488,435 $312,866 $218,661 $116,822 $48,233 $289,603 $1,474,620 Government guarantees (25,172) (36,531) (9,751) (12,885) (2,964) (5,314) (92,617) Total pass loans, net of government guarantees $463,263 $276,335 $208,910 $103,937 $45,269 $284,289 $1,382,003 Total classified loans $137 $4,879 $397 $365 $3,592 $17,795 $27,165 Government guarantees — (4,396) (1,135) — — (9,293) (14,824) Total classified loans, net government guarantees $137 $483 ($738) $365 $3,592 $8,502 $12,341 December 31, 2021 2021 2020 2019 2018 2017 Prior Total (In Thousands) Commercial & industrial loans Pass $227,376 $54,478 $29,846 $37,339 $23,205 $44,554 $416,798 Classified 18,853 714 3,564 3,118 517 4,774 31,540 Total commercial & industrial loans $246,229 $55,192 $33,410 $40,457 $23,722 $49,328 $448,338 Commercial real estate: Owner occupied properties Pass $81,533 $83,975 $39,254 $14,841 $14,452 $57,717 $291,772 Classified — 1,399 — 522 — 6,507 8,428 Total commercial real estate owner occupied properties $81,533 $85,374 $39,254 $15,363 $14,452 $64,224 $300,200 Non-owner occupied and multifamily properties Pass $77,205 $77,961 $61,147 $34,307 $19,833 $154,561 $425,014 Classified — — — 10 10,286 1 10,297 Total commercial real estate non-owner occupied and multifamily properties $77,205 $77,961 $61,147 $34,317 $30,119 $154,562 $435,311 Residential real estate: 1-4 family residential properties secured by first liens Pass $7,756 $8,023 $3,689 $531 $1,466 $8,812 $30,277 Classified 417 1,077 472 90 — 209 2,265 Total residential real estate 1-4 family residential properties secured by first liens $8,173 $9,100 $4,161 $621 $1,466 $9,021 $32,542 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens Pass $5,806 $2,535 $3,229 $3,464 $259 $4,046 $19,339 Classified — — — 259 — 12 271 Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $5,806 $2,535 $3,229 $3,723 $259 $4,058 $19,610 1-4 family residential construction loans Pass $21,409 $1,056 $1,707 $62 $— $11,879 $36,113 Classified — — — — 109 — 109 Total residential real estate 1-4 family residential construction loans $21,409 $1,056 $1,707 $62 $109 $11,879 $36,222 Other construction, land development and raw land loans Pass $39,624 $26,458 $11,044 $3,315 $139 $5,544 $86,124 Classified — — — 460 — 1,510 1,970 Total other construction, land development and raw land loans $39,624 $26,458 $11,044 $3,775 $139 $7,054 $88,094 Obligations of states and political subdivisions in the US Pass $4,120 $812 $1,875 $343 $2,733 $6,520 $16,403 Classified — — — — — — — Total obligations of states and political subdivisions in the US $4,120 $812 $1,875 $343 $2,733 $6,520 $16,403 Agricultural production, including commercial fishing Pass $19,970 $3,929 $810 $1,118 $741 $1,391 $27,959 Classified — — — — — — — Total agricultural production, including commercial fishing $19,970 $3,929 $810 $1,118 $741 $1,391 $27,959 Consumer loans Pass $873 $815 $653 $403 $291 $1,766 $4,801 Classified — — — — — — — Total consumer loans $873 $815 $653 $403 $291 $1,766 $4,801 Other loans Pass $2,028 $1,645 $430 $95 $— $208 $4,406 Classified — — — — — — — Total other loans $2,028 $1,645 $430 $95 $— $208 $4,406 Total loans Pass $487,700 $261,687 $153,684 $95,818 $63,119 $296,998 $1,359,006 Classified 19,270 3,190 4,036 4,459 10,912 13,013 54,880 Total loans $506,970 $264,877 $157,720 $100,277 $74,031 $310,011 $1,413,886 Total pass loans $487,700 $261,687 $153,684 $95,818 $63,119 $296,998 $1,359,006 Government guarantees (145,713) (12,725) (14,429) (3,299) (306) (6,562) (183,034) Total pass loans, net of government guarantees $341,987 $248,962 $139,255 $92,519 $62,813 $290,436 $1,175,972 Total classified loans $19,270 $3,190 $4,036 $4,459 $10,912 $13,013 $54,880 Government guarantees (7,201) (1,259) — — — (10,571) (19,031) Total classified loans, net government guarantees $12,069 $1,931 $4,036 $4,459 $10,912 $2,442 $35,849 Past Due Loans The following tables present an aging of contractually past due loans as of the periods indicated: (In Thousands) 30-59 Days 60-89 Days Greater Than Total Past Current Total Greater Than 90 Days Past Due Still Accruing December 31, 2022 Commercial & industrial loans $37 $521 $56 $614 $357,514 $358,128 $— Commercial real estate: Owner occupied properties — — 798 798 349,175 349,973 — Non-owner occupied and multifamily properties — — 274 274 481,996 482,270 — Residential real estate: 1-4 family residential properties secured by first liens 60 79 72 211 73,170 73,381 — 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 112 — 127 239 20,020 20,259 — 1-4 family residential construction loans — — 109 109 43,891 44,000 — Other construction, land development and raw land loans — — 1,545 1,545 97,637 99,182 — Obligations of states and political subdivisions in the US — — — — 32,539 32,539 — Agricultural production, including commercial fishing — — — — 34,099 34,099 — Consumer loans 6 80 — 86 4,249 4,335 — Other loans — — — — 3,619 3,619 — Total $215 $680 $2,981 $3,876 $1,497,909 $1,501,785 $— December 31, 2021 Commercial & industrial loans $206 $51 $469 $726 $447,612 $448,338 $— Commercial real estate: Owner occupied properties 12 — 1,176 1,188 299,012 300,200 — Non-owner occupied and multifamily properties — — — — 435,311 435,311 — Residential real estate: 1-4 family residential properties secured by first liens — — 90 90 32,452 32,542 — 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — — 139 139 19,471 19,610 — 1-4 family residential construction loans — — 109 109 36,113 36,222 — Other construction, land development and raw land loans — — 1,636 1,636 86,458 88,094 — Obligations of states and political subdivisions in the US — — — — 16,403 16,403 — Agricultural production, including commercial fishing — — — — 27,959 27,959 — Consumer loans — — — — 4,801 4,801 — Other loans — — — — 4,406 4,406 — Total $218 $51 $3,619 $3,888 $1,409,998 $1,413,886 $— Nonaccrual Loans Nonaccrual loans net of government guarantees totaled $6.4 million and $10.7 million at December 31, 2022 and December 31, 2021, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual status for which there was no related ACL: December 31, 2022 December 31, 2021 (In Thousands) Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL Commercial & industrial loans $3,294 $3,287 $4,350 $4,298 Commercial real estate: Owner occupied properties 1,457 1,457 3,506 3,506 Residential real estate: 1-4 family residential properties secured by first liens 151 144 1,778 1,778 1-4 family residential properties secured by junior liens 246 198 271 215 1-4 family residential construction loans 109 109 109 109 Other construction, land development and raw land loans 1,545 1,545 1,636 1,636 Consumer loans — — — — Total nonaccrual loans 7,076 7,014 11,650 11,542 Government guarantees on nonaccrual loans (646) (646) (978) (978) Net nonaccrual loans $6,430 $6,368 $10,672 $10,564 Interest income which would have been earned on nonaccrual loans for 2022, 2021, and 2020 amounted to $434,000, $744,000, and $856,000, respectively. There was $10,000 in interest on nonaccrual loans reversed through interest income in both 2022 and 2021. There was no interest earned on nonaccrual loans with a principal balance during 2022 or 2021. However, the Company recognized interest income of $2.2 million, $1.6 million, and $924,000 in 2022, 2021, and 2020, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero. Loans are classified as collateral dependent when it it probable that the Company will be unable to collect the scheduled payments of principal and interest when due, and repayment is expected to be provided substantially through the sale of the collateral. As of December 31, 2022 and 2021, there are no collateral dependent loans for which foreclosure is probable. Troubled Debt Restructurings Loans classified as TDRs totaled $5.1 million and $10.6 million at December 31, 2022 and 2021, respectively. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise. The provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company has elected to adopt these provisions of the CARES Act. As of December 31, 2022 and 2021, the Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs with principal balance outstanding of: Loan Modifications due to COVID-19 as of December 31, 2022 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $999 $— $999 Number of modifications 1 — 1 Loan Modifications due to COVID-19 as of December 31, 2021 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $49,219 $— $49,219 Number of modifications 16 — 16 The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories: Rate Modification : A modification in which the interest rate is changed. Term Modification : A modification in which the maturity date, timing of payments, or frequency of payments is changed. Payment Modification : A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category. Combination Modification : Any other type of modification, including the use of multiple categories above. There were no newly restructured loans that occurred in 2022. The below disclosed restructurings were not related to COVID-19 modifications: Accrual Status Nonaccrual Status Total Modifications (In Thousands) Troubled Debt Restructurings $291 $4,844 $5,135 Total $291 $4,844 $5,135 The following tables present newly restructured loans that occurred during 2021, by concession (terms modified): December 31, 2021 (In Thousands) Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications Pre-Modification Outstanding Recorded Investment: Commercial & industrial loans 2 $— $3,792 $— $— $3,792 Commercial real estate: Owner occupied properties 1 — 360 — — 360 Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 1 — — 139 — 139 Other construction, land development and raw land loans 1 — 577 — — 577 Total 5 $— $4,729 $139 $— $4,868 Post-Modification Outstanding Recorded Investment: Commercial & industrial loans 1 $— $3,118 $— $— $3,118 Commercial real estate: Owner occupied properties 1 — 350 — — 350 Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 1 — — 139 — 139 Other construction, land development and raw land loans 1 — 577 — — 577 Total 4 $— $4,045 $139 $— $4,184 The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs at December 31, 2022. There were zero charge-offs in 2022 and 2021 on loans that were later classified as a TDR. There were no loans that were restructured during 2022, 2021, or 2020 that also subsequently defaulted within the first twelve months of restructure in those same periods. Loans to Related Parties Certain directors, and companies of which directors are principal owners, have loans with the Company. Such transactions are made on substantially the same terms, including interest rates and collateral required, as those prevailing for similar transactions of unrelated parties. An analysis of the loan transactions for the years indicated follows: (In Thousands) 2022 2021 2020 Balance, beginning of the year $191 $217 $309 Loans made 1,886 — — Repayments 81 26 92 Balance, end of year $1,996 $191 $217 The Company had $110,000 of unfunded loan commitments to these directors or their related interests on December 31, 2022 and $115,000 of unfunded loan commitments on December 31, 2021. Pledged Loans At December 31, 2022 and 2021, there were no loans pledged as collateral to secure public deposits. |