Loans and Allowance for Credit Losses on Loans

12 Months Ended

Dec. 31, 2022

Loans and Allowance for Credit Losses on Loans

Loans and Allowance for Credit Losses on Loans

4) Loans and Allowance for Credit Losses on Loans

The allowance for credit losses on loans was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The loan portfolio is classified into eight segments of loans - commercial, commercial real estate – owner occupied, commercial real estate – non-owner occupied, land and construction, home equity, multifamily, residential mortgage and consumer and other. See Note 1 – Summary of Significant Accounting Polices - Allowance for Credit Losses on Loans for the summary of risk characteristics of each loan segment.

Loans by portfolio segment and the allowance for credit losses on loans were as follows for the periods indicated:

	December 31,		December 31,
	2022		2021
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	533,915	$	682,834
Real estate:
CRE - owner occupied		614,663		595,934
CRE - non-owner occupied		1,066,368		902,326
Land and construction		163,577		147,855
Home equity		120,724		109,579
Multifamily		244,882		218,856
Residential mortgages		537,905		416,660
Consumer and other		17,033		16,744
Loans		3,299,067		3,090,788
Deferred loan fees, net		(517)		(3,462)
Loans, net of deferred fees		3,298,550		3,087,326
Allowance for credit losses on loans		(47,512)		(43,290)
Loans, net	$	3,251,038	$	3,044,036

Changes in the allowance for credit losses on loans were as follows:

	Year Ended December 31, 2022
			CRE		CRE
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgage		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	8,414	$	7,954	$	17,125	$	1,831	$	864	$	2,796	$	4,132	$	174	$	43,290
Charge-offs		(434)		—		—		—		—		—		—		—		(434)
Recoveries		427		15		—		—		105		—		—		3,343		3,890
Net recoveries		(7)		15		—		—		105		—		—		3,343		3,456
Provision for (recapture of) credit losses on loans		(1,790)		(2,218)		5,010		1,110		(303)		570		1,775		(3,388)		766
End of period balance	$	6,617	$	5,751	$	22,135	$	2,941	$	666	$	3,366	$	5,907	$	129	$	47,512

	Year Ended December 31, 2021
			CRE		CRE
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgage		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	11,587	$	8,560	$	16,416	$	2,509	$	1,297	$	2,804	$	943	$	284	$	44,400
Charge-offs		(520)		—		—		—		—		—		—		—		(520)
Recoveries		1,354		16		—		884		93		—		—		197		2,544
Net (charge-offs) recoveries		834		16		—		884		93		—		—		197		2,024
Provision for (recapture of) credit losses on loans		(4,007)		(622)		709		(1,562)		(526)		(8)		3,189		(307)		(3,134)
End of period balance	$	8,414	$	7,954	$	17,125	$	1,831	$	864	$	2,796	$	4,132	$	174	$	43,290

	Year Ended December 31, 2020
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgage		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	10,453	$	3,825	$	3,760	$	2,621	$	2,244	$	57	$	243	$	82	$	23,285
Adoption of Topic 326		(3,663)		3,169		7,912		(1,163)		(923)		1,196		435		1,607		8,570
Balance at adoption on January 1, 2020		6,790		6,994		11,672		1,458		1,321		1,253		678		1,689		31,855
Charge-offs		(1,776)		—		—		—		—		—		—		(104)		(1,880)
Recoveries		998		1		—		70		93		—		—		30		1,192
Net (charge-offs) recoveries		(778)		1		—		70		93		—		—		(74)		(688)
Provision for (recapture of) credit losses on loans		5,575		1,565		4,744		981		(117)		1,551		265		(1,331)		13,233
End of period balance	$	11,587	$	8,560	$	16,416	$	2,509	$	1,297	$	2,804	$	943	$	284	$	44,400

The following table presents the amortized cost basis of nonaccrual loans and loans past due over 90 days and still accruing at the periods indicated:

	December 31, 2022
						Restructured
	Nonaccrual		Nonaccrual			and Loans
	with no Specific		with Specific			over 90 Days
	Allowance for		Allowance for			Past Due
	Credit		Credit			and Still
	Losses		Losses			Accruing	Total
	(Dollars in thousands)
Commercial	$	318	$	324	$	349	$	991
Real estate:
CRE - Non-Owner Occupied		—		—		1,336		1,336
Home equity		98		—		—		98
Total	$	416	$	324	$	1,685	$	2,425

	December 31, 2021
					Restructured
	Nonaccrual		Nonaccrual		and Loans
	with no Specific		with no Specific		over 90 Days
	Allowance for		Allowance for		Past Due
	Credit		Credit		and Still
	Losses		Losses		Accruing		Total
	(Dollars in thousands)
Commercial	$	94	$	1,028	$	278	$	1,400
Real estate:
CRE - Owner Occupied		1,126		—		—		1,126
Home equity		84		—		—		84
Multifamily		1,128		—		—		1,128
Total	$	2,432	$	1,028	$	278	$	3,738

The following tables presents the aging of past due loans by class for the periods indicated:

	December 31, 2022
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total
	(Dollars in thousands)
Commercial	$	7,236	$	2,519	$	703	$	10,458	$	523,457	$	533,915
Real estate:
CRE - Owner Occupied		252		—		—		252		614,411		614,663
CRE - Non-Owner Occupied		—		—		1,336		1,336		1,065,032		1,066,368
Land and construction		—		—		—		—		163,577		163,577
Home equity		—		98		—		98		120,626		120,724
Multifamily		—		—		—		—		244,882		244,882
Residential mortgages		4,202		720		—		4,922		532,983		537,905
Consumer and other				—		—		—		17,033		17,033
Total	$	11,690	$	3,337	$	2,039	$	17,066	$	3,282,001	$	3,299,067

	December 31, 2021
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total
	(Dollars in thousands)
Commercial	$	2,714	$	168	$	408	$	3,290	$	679,544	$	682,834
Real estate:
CRE - Owner Occupied		—		—		1,126		1,126		594,808		595,934
CRE - Non-Owner Occupied		—		—		—		—		902,326		902,326
Land and construction		—		—		—		—		147,855		147,855
Home equity		—		—		—		—		109,579		109,579
Multifamily		—		—		—		—		218,856		218,856
Residential mortgages		599		—		—		599		416,061		416,660
Consumer and other		—		—		—		—		16,744		16,744
Total	$	3,313	$	168	$	1,534	$	5,015	$	3,085,773	$	3,090,788

Past due loans 30 days or greater totaled $17,066,000 and $5,015,000 at December 31, 2022 and December 31, 2021, respectively, of which $479,000 and $1,258,000 were on nonaccrual. At December 31, 2022, there were also $261,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2021, there were also $2,202,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt.

Credit Quality Indicators

Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company’s loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the remaining balance in consumer loans. While no specific industry concentration is considered significant, the Company’s lending operations are located in the Company’s market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company’s borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers’ ability to repay their loans.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, and other factors. The Company analyzes loans individually by classifying the

loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with their contractual loan terms. Loans categorized as special mention have potential weaknesses that may, if not checked or corrected, weaken the credit or inadequately protect the Company’s position at some future date.  These loans pose elevated risk, but their weaknesses do not yet justify a substandard classification. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

Special Mention. A Special Mention asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the credit position at some future date.  Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that will jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Substandard-Nonaccrual.  Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any, and it is probable that the Company will not receive payment of the full contractual principal and interest. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.

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

Loss.  Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for credit losses on loans. Therefore, there is no balance to report as of December 31, 2022 and December 31, 2021.

Loans may be reviewed at any time throughout a loan’s duration.  If new information is provided, a new risk assessment may be performed if warranted.

The following tables present term loans amortized cost by vintage and loan grade classification, and revolving loans amortized cost by loan grade classification at December 31, 2022 and December 31, 2021. The loan grade classifications are based on the Bank’s internal loan grading methodology. Loan grade categories for doubtful and loss rated loans are not included on the tables below as there are no loans with those grades at December 31, 2022 and December 31, 2021. The vintage year represents the period the loan was originated or in the case of renewed loans, the period last renewed.  The amortized balance is the loan balance less any purchase discounts, and plus any loan purchase premiums.  The loan categories are based on the loan segmentation in the Company's CECL reserve methodology based on loan purpose and type. 

														Revolving
														Loans
		Term Loans Amortized Cost Basis by Originated Period as of December 31, 2022												Amortized
														Cost
	2022		2021		2020		2019		2018		Prior Periods			Basis		Total
	(Dollars in thousands)
Commercial:
Pass	$	102,969	$	36,752	$	24,406	$	19,272	$	12,089	$	21,127	$	293,546	$	510,161
Special Mention		3,408		1,060		192		1,123		-		6,031		5,551		17,365
Substandard		4		-		-		145		-		102		5,496		5,747
Substandard-Nonaccrual		-		279		-		-		330		33		-		642
Total		106,381		38,091		24,598		20,540		12,419		27,293		304,593		533,915
CRE - Owner Occupied:
Pass		92,689		116,266		75,007		59,887		58,180		194,584		8,758		605,371
Special Mention		-		2,033		867		1,120		-		4,410		-		8,430
Substandard		-		660		-		-		193		9		-		862
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		92,689		118,959		75,874		61,007		58,373		199,003		8,758		614,663
CRE - Non-Owner Occupied:
Pass		239,556		278,051		31,848		101,854		63,905		337,048		3,245		1,055,507
Special Mention		-		-		-		-		-		4,883		-		4,883
Substandard		-		-		-		-		-		5,978		-		5,978
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		239,556		278,051		31,848		101,854		63,905		347,909		3,245		1,066,368
Land and construction:
Pass		62,241		72,847		22,459		6,030		-		-		-		163,577
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		62,241		72,847		22,459		6,030		-		-		-		163,577
Home equity:
Pass		-		-		-		-		-		44		117,950		117,994
Special Mention		-		-		-		-		-		-		2,346		2,346
Substandard		-		-		-		-		-		144		142		286
Substandard-Nonaccrual		-		98		-		-		-		-				98
Total		-		98		-		-		-		188		120,438		120,724
Multifamily:
Pass		42,111		69,824		4,871		42,412		15,356		66,380		180		241,134
Special Mention		-		-		657		771		-		2,320		-		3,748
Substandard		-		-		-		-		-		-		-		-
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		42,111		69,824		5,528		43,183		15,356		68,700		180		244,882
Residential mortgage:
Pass		191,907		296,270		1,068		6,788		2,724		33,290		-		532,047
Special Mention		-		-		-		1,058		1,482		2,387		-		4,927
Substandard		-		-		-		-		-		931		-		931
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		191,907		296,270		1,068		7,846		4,206		36,608		-		537,905
Consumer and other:
Pass		389		13		-		-		1,364		1,283		13,647		16,696
Special Mention		-		82		-		6		-		-		249		337
Substandard		-		-		-		-		-		-		-		-
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		389		95		-		6		1,364		1,283		13,896		17,033
Total loans	$	735,274	$	874,235	$	161,375	$	240,466	$	155,623	$	680,984	$	451,110	$	3,299,067
Risk Grades:
Pass	$	731,862	$	870,023	$	159,659	$	236,243	$	153,618	$	653,756	$	437,326	$	3,242,487
Special Mention		3,408		3,175		1,716		4,078		1,482		20,031		8,146		42,036
Substandard		4		660		-		145		193		7,164		5,638		13,804
Substandard-Nonaccrual		-		377		-		-		330		33		-		740
Grand Total	$	735,274	$	874,235	$	161,375	$	240,466	$	155,623	$	680,984	$	451,110	$	3,299,067

													Revolving
													Loans
		Term Loans Amortized Cost Basis by Originated Period as of December 31, 2021											Amortized
													Cost
		2021	2020		2019		2018		2017		Prior Periods		Basis		Total
	(Dollars in thousands)
Commercial:
Pass	$	208,645	65,257	$	15,086	$	12,281	$	7,311	$	5,507	$	349,717	$	663,804
Special Mention		2,210	512		219		764		243		204		4,024		8,176
Substandard		3,709	930		-		13		302		2		4,776		9,732
Substandard-Nonaccrual		595	442		37		-		-		48		-		1,122
Total		215,159	67,141		15,342		13,058		7,856		5,761		358,517		682,834
CRE - Owner Occupied:
Pass		170,504	135,103		65,596		57,017		31,657		107,203		14,486		581,566
Special Mention		568	2,254		672		-		-		355		-		3,849
Substandard		985	6,042		-		1,477		-		889		-		9,393
Substandard-Nonaccrual		-	1,100		-		-		-		26		-		1,126
Total		172,057	144,499		66,268		58,494		31,657		108,473		14,486		595,934
CRE - Non-Owner Occupied:
Pass		374,470	141,404		115,170		45,959		68,125		134,454		2,068		881,650
Special Mention		-	5,388		-		-		1,133		3,816		-		10,337
Substandard		-	5,842		-		-		-		4,497		-		10,339
Substandard-Nonaccrual		-	-		-		-		-		-		-		-
Total		374,470	152,634		115,170		45,959		69,258		142,767		2,068		902,326
Land and construction:
Pass		125,844	11,401		4,385		-		-		1,300		3,566		146,496
Special Mention		1,359	-		-		-		-		-		-		1,359
Substandard		-	-		-		-		-		-		-		-
Substandard-Nonaccrual		-	-		-		-		-		-		-		-
Total		127,203	11,401		4,385		-		-		1,300		3,566		147,855
Home equity:
Pass		-	-		-		46		-		-		106,738		106,784
Special Mention		-	-		-		-		-		-		1,931		1,931
Substandard		-	-		-		-		-		54		726		780
Substandard-Nonaccrual		-	84		-		-		-		-		-		84
Total		-	84		-		46		-		54		109,395		109,579
Multifamily:
Pass		102,535	27,955		30,820		16,151		16,261		13,895		-		207,617
Special Mention		5,804	-		4,307		-		-		-		-		10,111
Substandard		-	-		-		-		-		-		-		-
Substandard-Nonaccrual		1,128	-		-		-		-		-		-		1,128
Total		109,467	27,955		35,127		16,151		16,261		13,895		-		218,856
Residential mortgage:
Pass		360,424	17,875		8,065		3,070		6,015		19,967		-		415,416
Special Mention		-	-		-		-		-		1,244		-		1,244
Substandard		-	-		-		-		-		-		-		-
Substandard-Nonaccrual		-	-		-		-		-		-		-		-
Total		360,424	17,875		8,065		3,070		6,015		21,211		-		416,660
Consumer and other:
Pass		491	2		40		1,426		14		1,000		13,756		16,729
Special Mention		-	-		-		-		-		-		-		-
Substandard		15	-		-		-		-		-		-		15
Substandard-Nonaccrual		-	-		-		-		-		-		-		-
Total		506	2		40		1,426		14		1,000		13,756		16,744
Total loans	$	1,359,286	421,591	$	244,397	$	138,204	$	131,061	$	294,461	$	501,788	$	3,090,788
Risk Grades:.
Pass	$	1,342,913	398,997	$	239,162	$	135,950	$	129,383	$	283,326	$	490,331	$	3,020,062
Special Mention		9,941	8,154		5,198		764		1,376		5,619		5,955		37,007
Substandard		4,709	12,814		-		1,490		302		5,442		5,502		30,259
Substandard-Nonaccrual		1,723	1,626		37		-		-		74		-		3,460
Grand Total	$	1,359,286	421,591	$	244,397	$	138,204	$	131,061	$	294,461	$	501,788	$	3,090,788

The amortized cost basis of collateral-dependent loans at December 31, 2022 and December 31, 2021 was $324,000 and $1,028,000, respectively, and were secured by business assets.

When management determines that foreclosures are probable, expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. For loans which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty, management has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, adjusted for selling costs as appropriate. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value.

The book balance of troubled debt restructurings at December 31, 2022 was less than $1,000. The book balance of troubled debt restructurings at December 31, 2021 was $500,000, which included $372,000 of nonaccrual loans and $128,000 of accruing loans. There were no specific reserves established with respect to these loans as of December 31, 2022, and approximately $290,000 in specific reserves were established with respect to these loans as of December 31, 2021. As of December 31, 2022 and December 31, 2021 respectively, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.

There were no loans modified as a troubled debt restructuring during the year ended December 31, 2022.  There was one new loan with total recorded investment of $3,000 that was modified as a troubled debt restructuring during the year ended December 31, 2021.

The following table presents loans by class modified as troubled debt restructurings for the periods indicated:

	During the Year Ended
		December 31, 2021
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		1	$	3	$	3
Total		1	$	3	$	3

A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the years ended December 31, 2022 and 2021.

A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.