| LOANS | NOTE 5 – LOANS The Company’s loan portfolio at the dates indicated is summarized below: June 30, December 31, 2023 2022 Commercial and industrial (1) $ 180,852 $ 188,538 Construction and land 9,999 13,163 Commercial real estate 1,731,515 1,704,716 Residential 90,015 110,606 Consumer 916 4,183 Total loans 2,013,297 2,021,206 Net deferred loan costs (fees) 10 (82) Allowance for credit losses (2) (19,100) (18,900) Net loans $ 1,994,207 $ 2,002,224 (1) During the first quarter of 2023, the Bank continued its participation in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), by processing applications for PPP loan forgiveness. Total loans include $4.9 million and $11.1 million of PPP loans as of June 30, 2023 and December 31, 2022, respectively. (2) Allowance for credit losses at June 30, 2023 is estimated under CECL whereas at December 31, 2022, the allowance for loan losses is estimated under the incurred loss methodology. Net loans exclude accrued interest receivable of $6.1 million and $6.2 million at June 30, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the condensed consolidated balance sheets. The Company’s total individually evaluated loans, including nonaccrual loans, modified loans to borrowers experiencing financial difficulty, and accreting purchase credit deteriorated (“PCD”) loans that have experienced post-acquisition declines in cash flows expected to be collected are summarized as follows: Commercial Construction Commercial and industrial and land real estate Residential Consumer Total June 30, 2023 Recorded investment in loans individually evaluated: With no specific allowance recorded $ — $ — $ 10,866 $ 1,538 $ — $ 12,404 With a specific allowance recorded 656 — 385 160 — 1,201 Total recorded investment in loans individually evaluated $ 656 $ — $ 11,251 $ 1,698 $ — $ 13,605 Specific allowance on loans individually evaluated $ 433 $ — $ 259 $ 2 $ — $ 694 December 31, 2022 Recorded investment in loans individually evaluated: With no specific allowance recorded $ 89 $ — $ 11,706 $ 1,991 $ — $ 13,786 With a specific allowance recorded 789 — 259 214 — 1,262 Total recorded investment in loans individually evaluated $ 878 $ — $ 11,965 $ 2,205 $ — $ 15,048 Specific allowance on loans individually evaluated $ 687 $ — $ 259 $ 222 $ — $ 1,168 From time to time, the Company may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. Prior to 2023, a modified loan was classified as a troubled debt restructuring (TDR) if the borrower was experiencing financial difficulties and a concession was made at the time of the modification. TDR loans were generally placed on nonaccrual status at the time of restructuring. These loans were returned to accrual status after the borrower demonstrated performance with the modified terms for a sustained period of time (generally six months) and the capacity to continue to perform in accordance with the modified terms of the restructured debt. Effective January 1, 2023, the Company adopted ASU No. 2022-02, which eliminated the accounting guidance for TDR loans while enhancing disclosure requirements for certain loan modifications by creditors when a borrower is experiencing financial difficulty. The Company adopted ASU No. 2022-02 using the prospective transition method. At the date of adoption, the Company was no longer required to utilize a loan-level discounted cash flow approach for determining the allowance for certain modified loans previously classified as TDR loans. The ACL on a is measured using the same method as individually evaluated loans. the Company elected to not change how it measured credit losses on TDRs. million. The Company closely monitors the performance of modified loans to borrowers experiencing financial difficulty to understand the effectiveness of modification efforts. There were no commitments to lend additional amounts for modified loans to borrowers experiencing financial difficulty at June 30, 2023. A summary of modified loans to borrowers experiencing financial difficulty by type of concession and type of loan, as of the dates indicated, is set forth below (number of loans not in thousands): Number of Rate Term Rate & term % of Total loans modification modification modification Total loans outstanding June 30, 2023 Commercial and industrial 3 $ — $ 149 $ — $ 149 0.08 % Construction and land — — — — — — Commercial real estate 6 — 5,074 — 5,074 0.29 Residential 1 — 814 — 814 0.90 Consumer — — — — — — Total 10 $ — $ 6,037 $ — $ 6,037 0.30 % Number of Rate Term Rate & term % of Total loans modification modification modification Total loans outstanding June 30, 2022 Commercial and industrial 3 $ — $ 2,450 $ — $ 2,450 1.30 % Construction and land — — — — — — Commercial real estate 4 — 2,155 — 2,155 0.13 Residential 1 — 125 — 125 0.11 Consumer — — — — — — Total 8 $ — $ 4,730 $ — $ 4,730 0.23 % For the three and six months ended June 30, 2023, the Company recorded no charge-offs for modified loans to borrowers experiencing financial difficulty. During the three and six months ended June 30, 2022, the Company recorded a $2.4 million charge-off related to one modified loan to a borrower experiencing financial difficulty and no charge-offs related to modified loans to borrowers experiencing financial difficulty, respectively. During the three and six months ended June 30, 2023, there were no modified loans to borrowers experiencing financial difficulty for which there was a payment default within the first 12 months of the modification. During the three and six months ended June 30, 2022, there were no modified loans to borrowers experiencing financial difficulty for which there was a payment default within the first 12 months of the modification. As of June 30, 2023 and December 31, 2022, individually evaluated modified loans to borrowers experiencing financial difficulty had a related allowance of $296,000 and $393,000, respectively. As of June 30, 2023 and December 31, 2022, $774,000 and $759,000 of modified loans to borrowers experiencing financial difficulty were performing in accordance with their modified terms, respectively. Accruing modified loans to borrowers experiencing financial difficulty are included in the loans individually evaluated as part of the calculation of the allowance for credit losses for loans. Risk Rating System The Company evaluates and assigns a risk grade to each loan based on certain criteria to assess the credit quality of the loan. The assignment of a risk rating is done for each individual loan. Loans are graded from inception and on a continuing basis until the debt is repaid. Any adverse or beneficial trends will trigger a review of the loan risk rating. Each loan is assigned a risk grade based on its characteristics. Loans with low to average credit risk are assigned a lower risk grade than those with higher credit risk as determined by the individual loan characteristics. The Company’s Pass loans include loans with acceptable business or individual credit risk where the borrower’s operations, cash flow or financial condition provides evidence of low to average levels of risk. Loans that are assigned higher risk grades are loans that exhibit the following characteristics: Special Mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. A Special Mention rating is a temporary rating, pending the occurrence of an event that would cause the risk rating either to improve or to be downgraded. Loans in this category would be characterized by any of the following situations: ● Credit that is currently protected but is potentially a weak asset; ● Credit that is difficult to manage because of an inadequate loan agreement, the condition of and/or control over collateral, failure to obtain proper documentation, or any other deviation from product lending practices; and ● Adverse financial trends. Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans classified substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. The potential loss does not have to be recognizable in an individual credit for that credit to be risk rated Substandard. A loan can be fully and adequately secured and still be considered Substandard. Some characteristics of Substandard loans are: ● Inability to service debt from ordinary and recurring cash flow; ● Chronic delinquency; ● Reliance upon alternative sources of repayment; ● Term loans that are granted on liberal terms because the borrower cannot service normal payments for that type of debt; ● Repayment dependent upon the liquidation of collateral; ● Inability to perform as agreed, but adequately protected by collateral; ● Necessity to renegotiate payments to a non-standard level to ensure performance; and ● The borrower is bankrupt, or for any other reason, future repayment is dependent on court action. Doubtful loans have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and value, highly questionable and improbable. Doubtful loans have a high probability of loss, yet certain important and reasonably specific pending factors may work toward the strengthening of the credit. Losses are recognized as charges to the allowance when the loan or portion of the loan is considered uncollectible or at the time of foreclosure. Recoveries on loans previously charged off are credited to the allowance for credit losses. The following tables present the internally assigned risk grade by class of loans at the dates indicated: Revolving Term loans - amortized cost by origination year loans 2023 2022 2021 2020 2019 Prior amortized cost Total June 30, 2023 Commercial and industrial: Pass $ 18,248 $ 28,341 $ 23,701 $ 30,550 $ 29,050 $ 23,918 $ 20,952 $ 174,760 Special mention — — — — 1,034 2,671 1,300 5,005 Substandard — — — 38 191 852 6 1,087 Total commercial and industrial $ 18,248 $ 28,341 $ 23,701 $ 30,588 $ 30,275 $ 27,441 $ 22,258 $ 180,852 YTD gross charge-offs $ — $ — $ 1 $ — $ — $ 282 $ — $ 283 Construction and land: Pass $ — $ 4,216 $ — $ 1,575 $ 152 $ 3,999 $ — $ 9,942 Special mention — — — — — 57 — 57 Substandard — — — — — — — — Total construction and land $ — $ 4,216 $ — $ 1,575 $ 152 $ 4,056 $ — $ 9,999 Commercial real estate: Pass $ 70,801 $ 414,327 $ 386,375 $ 152,561 $ 190,842 $ 434,963 $ 2,925 $ 1,652,794 Special mention — — 276 8,646 17,024 34,064 — 60,010 Substandard — — — — 5,184 13,527 — 18,711 Total commercial real estate $ 70,801 $ 414,327 $ 386,651 $ 161,207 $ 213,050 $ 482,554 $ 2,925 $ 1,731,515 Residential: Pass $ — $ — $ 2,469 $ 4,419 $ 8,649 $ 40,467 $ 32,275 $ 88,279 Special mention — — — — — 16 — 16 Substandard — — — — — 1,720 — 1,720 Total residential $ — $ — $ 2,469 $ 4,419 $ 8,649 $ 42,203 $ 32,275 $ 90,015 YTD gross charge-offs $ — $ — $ — $ — $ — $ 172 $ 3 $ 175 Consumer: Pass $ 156 $ 83 $ — $ 12 $ 43 $ 89 $ 513 $ 896 Special mention — — — — — — — — Substandard — — — — 20 — — 20 Total consumer $ 156 $ 83 $ — $ 12 $ 63 $ 89 $ 513 $ 916 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ 3 $ 3 Total loans outstanding Risk ratings Pass $ 89,205 $ 446,967 $ 412,545 $ 189,117 $ 228,736 $ 503,436 $ 56,665 $ 1,926,671 Special mention — — 276 8,646 18,058 36,808 1,300 65,088 Substandard — — — 38 5,395 16,099 6 21,538 Doubtful — — — — — — — — Total loans outstanding $ 89,205 $ 446,967 $ 412,821 $ 197,801 $ 252,189 $ 556,343 $ 57,971 $ 2,013,297 YTD gross charge-offs $ — $ — $ 1 $ — $ — $ 454 $ 6 $ 461 Revolving Term loans - amortized cost by origination year loans 2022 2021 2020 2019 2018 Prior amortized cost Total December 31, 2022 Commercial and industrial: Pass $ 31,599 $ 34,584 $ 35,173 $ 30,632 $ 4,731 $ 25,147 $ 19,962 $ 181,828 Special mention — — — 863 1,149 1,866 1,467 5,345 Substandard — — 40 166 388 762 9 1,365 Total commercial and industrial $ 31,599 $ 34,584 $ 35,213 $ 31,661 $ 6,268 $ 27,775 $ 21,438 $ 188,538 Construction and land: Pass $ 1,381 $ 533 $ 1,586 $ 557 $ 4,363 $ 4,681 $ — $ 13,101 Special mention — — — — 62 — — 62 Substandard — — — — — — — — Total construction and land $ 1,381 $ 533 $ 1,586 $ 557 $ 4,425 $ 4,681 $ — $ 13,163 Commercial real estate: Pass $ 409,014 $ 392,449 $ 159,744 $ 201,561 $ 110,143 $ 355,795 $ 992 $ 1,629,698 Special mention — — 3,591 17,210 7,919 29,561 — 58,281 Substandard — — — 5,184 241 11,312 — 16,737 Total commercial real estate $ 409,014 $ 392,449 $ 163,335 $ 223,955 $ 118,303 $ 396,668 $ 992 $ 1,704,716 Residential: Pass $ 423 $ 4,536 $ 6,343 $ 10,229 $ 14,537 $ 37,170 $ 34,889 $ 108,127 Special mention — — — 244 — — 3 247 Substandard — — 203 — 1,184 845 — 2,232 Total residential $ 423 $ 4,536 $ 6,546 $ 10,473 $ 15,721 $ 38,015 $ 34,892 $ 110,606 Consumer: Pass $ 539 $ 10 $ 1,691 $ 61 $ 40 $ 131 $ 1,690 $ 4,162 Special mention — — — — — — — — Substandard — — — 21 — — — 21 Total consumer $ 539 $ 10 $ 1,691 $ 82 $ 40 $ 131 $ 1,690 $ 4,183 Total loans outstanding Risk ratings Pass $ 442,956 $ 432,112 $ 204,536 $ 243,040 $ 133,816 $ 422,924 $ 57,532 $ 1,936,916 Special mention — — 3,590 18,317 9,130 31,428 1,470 63,935 Substandard — — 243 5,371 1,814 12,918 9 20,355 Doubtful — — — — — — — — Total loans outstanding $ 442,956 $ 432,112 $ 208,369 $ 266,728 $ 144,760 $ 467,270 $ 59,011 $ 2,021,206 The following tables provide an aging of the Company’s loans receivable as of the dates indicated: Recorded 90 Days investment > 30–59 Days 60–89 Days or more Total Total loans 90 days and past due past due past due past due Current PCD loans receivable Accruing June 30, 2023 Commercial and industrial $ 459 $ 4 $ 517 $ 980 $ 179,653 $ 219 $ 180,852 $ — Construction and land — — — — 9,999 — 9,999 — Commercial real estate 839 1,250 8,020 10,109 1,694,214 27,192 1,731,515 — Residential 16 164 412 592 88,873 550 90,015 — Consumer — — — — 916 — 916 — Total $ 1,314 $ 1,418 $ 8,949 $ 11,681 $ 1,973,655 $ 27,961 $ 2,013,297 $ — Recorded 90 Days investment > 30–59 Days 60–89 Days or more Total Total loans 90 days and past due past due past due past due Current PCD loans receivable accruing December 31, 2022 Commercial and industrial $ 471 $ 81 $ 858 $ 1,410 $ 183,111 $ 4,017 $ 188,538 $ — Construction and land — — — — 9,109 4,054 13,163 — Commercial real estate 1,064 2,213 7,075 10,352 1,674,327 20,037 1,704,716 934 Residential 101 3 847 951 108,976 679 110,606 — Consumer — — — — 4,183 — 4,183 — Total $ 1,636 $ 2,297 $ 8,780 $ 12,713 $ 1,979,706 $ 28,787 $ 2,021,206 $ 934 Nonaccrual loans totaled $12.8 million at June 30, 2023 and $14.3 million at December 31, 2022. Nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, were $801,000 at June 30, 2023 compared to $839,000 at December 31, 2022. At June 30, 2023, nonaccrual loans included $1.1 million of loans 30-89 days past due and $2.8 million of loans less than 30 days past due. At December 31, 2022, nonaccrual loans included $2.5 million of loans 30-89 days past due and $4.0 million of loans less than 30 days past due. At June 30, 2023, nonaccrual loans 30-89 days past due of $1.1 million was comprised of two loans and the $2.8 million of loans less than 30 days past due was comprised of 15 loans. All these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers. There were no loans that were 90 days or more past due and still accruing at June 30, 2023 compared to one such loan at December 31, 2022, which had a balance of $934,000 as of that date. Interest foregone on nonaccrual loans was approximately $185,000 and $420,000 for the three and six months ended June 30, 2023 compared to $72,700 and $157,000 for the three and six months ended June 30, 2022. Purchased Credit Deteriorated Loans In connection with the Company's acquisitions, the contractual amount and timing of undiscounted principal and interest payments and the estimated amount and timing of undiscounted expected principal and interest payments were used to estimate the fair value of PCD loans at the acquisition date. The difference between these two amounts represented the nonaccretable difference. On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represented the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. For PCD loans the accretable yield is accreted into interest income over the life of the estimated remaining cash flows. At each financial reporting date, the carrying value of each PCD loan is compared to an updated estimate of expected principal payment or recovery on each loan. To the extent that the loan carrying amount exceeds the updated expected principal payment or recovery, a provision for credit loss would be recorded as a charge to income and an allowance for credit losses for loans established. |
