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Note 5 - Loans and Leases

3 Months Ended

Mar. 31, 2023

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

5. Loans and leases

The classifications of loans and leases at March 31, 2023 and December 31, 2022 are summarized as follows:

(dollars in thousands)	*March 31, 2023*			December 31, 2022
Commercial and industrial:
Commercial	$	136,966		$	166,491
Municipal		110,092			67,987
Commercial real estate:
Non-owner occupied		310,289			316,867
Owner occupied		282,200			270,810
Construction		33,192			18,941
Consumer:
Home equity installment		59,461			59,118
Home equity line of credit		49,928			52,568
Auto loans - Recourse		12,207			12,929
Auto loans - Non-recourse		125,051			114,909
Direct finance leases		33,905			33,223
Other		13,181			11,709
Residential:
Real estate		417,026			398,136
Construction		45,322			42,232
Total		1,628,820			1,565,920
Less:
Allowance for credit losses on loans		(17,910	)		(17,149	)
Unearned lease revenue		(1,821	)		(1,746	)
Loans and leases, net	$	1,609,089		$	1,547,025

Total unamortized net costs and premiums included in loan totals were as follows:

(dollars in thousands)	*March 31, 2023*			December 31, 2022
Net unamortized fair value mark discount on acquired loans	$	(8,037	)	$	(9,064	)
Net unamortized deferred loan origination costs		4,775			4,630
Total	$	(3,262	)	$	(4,434	)

Based on the adoption of ASU 2016-13, the Company updated the segmentation of its loan and lease portfolio to ensure that the risk characteristics within these segments were as similar as possible with financial asset type and collateral type as the primary factors used in this evaluation. Consequently, management decided to create a new segment called “Municipal”, which are loans and leases to states and political subdivisions in the U.S. based on the unique risk characteristics of this segment as expected credit losses are minimal. Additionally, the previous segment of “Auto Loans”, which included direct auto loans, indirect non-recourse auto loans, and indirect recourse auto loans, was broken out between “Auto Loans-Recourse” and “Auto Loans-Non-recourse” as substantially all the recourse portfolio is to a high credit quality dealer with the guaranty of the dealership and high net worth principal. Direct auto loans were included in the “Consumer Other” segment. The classifications of loans and leases at December 31, 2022 were modified retroactively to enhance comparability between periods.

The Company excludes accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of March 31, 2023 and December 31, 2022, accrued interest receivable for loans totaled $5.3 million and $4.5 million, respectively, and is included in accrued interest receivable line in the consolidated balance sheets and is excluded from the estimate of credit losses.

Direct finance leases include the lease receivable and the guaranteed lease residual. Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease. Unearned revenue is accrued over the life of the lease using the effective interest method.

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced for others amounted to $467.7 million as of March 31, 2023 and $465.7 million as of December 31, 2022. Mortgage servicing rights amounted to $1.5 million and $1.6 million as of March 31, 2023 and December 31, 2022, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Non-accrual loans

Non-accrual loans and loans past due over 89 days still accruing, segregated by class, at March 31, 2023 and December 31, 2022, were as follows:

(dollars in thousands)	Nonaccrual With No Allowance for Credit Loss		Nonaccrual With Allowance for Credit Loss		Total Nonaccrual		Loans Past Due Over 89 Days Still Accruing
At March 31, 2023
Commercial and industrial:
Commercial	$	620	$	119	$	739	$	-
Municipal		-		-		-		-
Commercial real estate:
Non-owner occupied		143		168		311		-
Owner occupied		1,472		476		1,948		-
Consumer:
Home equity installment		-		-		-		-
Home equity line of credit		75		-		75		-
Auto loans - Recourse		11		-		11		-
Auto loans - Non-recourse		120		50		170		-
Direct finance leases		-		-		-		17
Other		2		-		2		-
Residential:
Real estate		86		-		86		-
Total	$	2,529	$	813	$	3,342	$	17

(dollars in thousands)	Nonaccrual With No Allowance for Credit Loss		Nonaccrual With Allowance for Credit Loss		Total Nonaccrual		Loans Past Due Over 89 Days Still Accruing
At December 31, 2022
Commercial and industrial:
Commercial	$	580	$	139	$	719	$	-
Municipal		-		-		-		-
Commercial real estate:
Non-owner occupied		168		215		383		-
Owner occupied		716		350		1,066		-
Consumer:
Home equity installment		-		-		-		-
Home equity line of credit		211		-		211		-
Auto loans - Recourse		135		18		153		-
Auto loans - Non-recourse		-		-		-		16
Direct finance leases		-		-		-		17
Other		-		-		-		-
Residential:
Real estate		3		-		3		-
Total	$	1,813	$	722	$	2,535	$	33

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. C&I and CRE loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 90 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

Loan modifications to borrowers experiencing financial difficulty

Occasionally, the Company modifies loans to borrowers in financial distress by providing lower interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically does not forgive principal when modifying loans.

In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as lowering the interest rate, may be granted. For the loans included in the "combination" columns below, multiple types of modifications have been made on the same loan within the current reporting period.

The following table presents the amortized cost basis of loans at March 31, 2023 that were both experiencing financial difficulty and modified during the three months ended March 31, 2023, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below:

	Loans modified for the three months ended:
(dollars in thousands)	March 31, 2023
	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Principal Forgiveness		Combination Term Extension Interest Rate Reduction		Total Class of Financing Receivable
Commercial real estate:
Non-owner occupied	$	-	$	-	$	65	$	3,261	$	-	$	-		1.07	%
Total	$	-	$	-	$	65	$	3,261	$	-	$	-

The Company has not committed to lend additional amounts to the borrowers included in the previous table.

Loans modified to borrowers experiencing financial difficulty are closely monitored to understand the effectiveness of its modification efforts. None of the loans that have been modified in the last 12 months to borrowers experiencing financial difficulty were past due at March 31, 2023.

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three months ended March 31, 2023:

(dollars in thousands)	*March 31, 2023*
	Principal Forgiveness		Weighted-Average Interest Rate Reduction			Weighted-Average Term Extension (Months)

Commercial real estate:
Non-owner occupied	$	-		6.13	%		6
Total	$	-		6.13	%		6

There were no loans that had a payment default during the three months ended March 31, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty.

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loans (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. The allowance for credit losses (ACL) may be increased, adjustments may be made in the allocation of the ACL or partial charge-offs may be taken to further write-down the carrying value of the loan.

Past due loans

Loans are considered past due when the contractual principal and/or interest is not received by the due date. For loans reported 30-59 days past due, certain categories of loans are reported past due as and when the loan is in arrears for two payments or billing cycles. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
March 31, 2023	past due		past due		or more (1)		past due		Current		loans (3)			and accruing

Commercial and industrial:
Commercial	$	30		10		739	$	779	$	136,187	$	136,966		$	-
Municipal		-		-		-		-		110,092		110,092
Commercial real estate:
Non-owner occupied		-		-		311		311		309,978		310,289			-
Owner occupied		-		-		1,948		1,948		280,252		282,200			-
Construction		-		-		-		-		33,192		33,192			-
Consumer:
Home equity installment		167		55		-		222		59,239		59,461			-
Home equity line of credit		16		-		75		91		49,837		49,928			-
Auto loans - Recourse		46		5		11		62		12,145		12,207			-
Auto loans - Non-recourse		341		43		170		554		124,497		125,051			-
Direct finance leases		102		-		17		119		31,965		32,084	*(2)*		17
Other		7		5		2		14		13,167		13,181			-
Residential:
Real estate		22		-		86		108		416,918		417,026			-
Construction		-		-		-		-		45,322		45,322			-
Total	$	731	$	118	$	3,359	$	4,208	$	1,622,791	$	1,626,999		$	17

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of $1.8 million. ⁽³⁾ Includes net deferred loan costs of $4.8 million.

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2022	past due		past due		or more ⁽¹⁾		past due		Current		loans⁽³⁾			and accruing

Commercial and industrial
Commercial	$	-	$	-	$	719	$	719	$	165,772	$	166,491		$	-
Municipal		-		-		-		-		67,987		67,987			-
Commercial real estate:
Non-owner occupied		-		-		383		383		316,484		316,867			-
Owner occupied		42		-		1,066		1,108		269,702		270,810			-
Construction		-		-		-		-		18,941		18,941			-
Consumer:
Home equity installment		239		-		-		239		58,879		59,118			-
Home equity line of credit		110		151		211		472		52,096		52,568			-
Auto loans - Recourse		152		115		11		278		12,651		12,929			-
Auto loans - Non-recourse		411		86		158		655		114,254		114,909			16
Direct finance leases		186		-		17		203		31,274		31,477	(2)		17
Other		12		7		-		19		11,690		11,709			-
Residential:
Real estate		-		327		3		330		397,806		398,136			-
Construction		-		-		-		-		42,232		42,232			-
Total	$	1,152	$	686	$	2,568	$	4,406	$	1,559,768	$	1,564,174		$	33

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of $1.7 million. ⁽³⁾ Includes net deferred loan costs of $4.6 million.

Pre-Adoption of ASC 326 - Impaired loans

For periods prior to the adoption of CECL, loans were considered impaired when, based on current information and events; it was probable that the Company would be unable to collect the payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls was determined on a case-by-case basis. All circumstances surrounding the loan were considered. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment was measured on these loans on a loan-by-loan basis. Impaired loans included non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

Impaired loans, segregated by class, as of December 31, 2022 prior to the adoption of CECL are detailed below:

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
December 31, 2022
Commercial and industrial	$	942	$	139	$	580	$	719	$	48
Commercial real estate:
Non-owner occupied		762		215		547		762		42
Owner occupied		2,347		1,304		716		2,020		70
Consumer:
Home equity installment		33		-		-		-		-
Home equity line of credit		255		-		211		211		-
Auto loans		213		18		135		153		1
Residential:
Real estate		50		-		3		3		-
Total	$	4,602	$	1,676	$	2,192	$	3,868	$	161

At December 31, 2022, impaired loans totaled $3.9 million consisting of $1.4 million in accruing TDRs and $2.5 million in non-accrual loans. The non-accrual loans included one TDR totaling $0.2 million as of December 31, 2022.

The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below. The average balances are calculated based on the quarter-end balances of impaired loans. Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.

Average recorded investment refers to the two quarter average of impaired loans preceding the reporting period.

	March 31, 2022
					Cash basis
	Average		Interest		interest
	recorded		income		income
(dollars in thousands)	investment		recognized		recognized

Commercial and industrial	$	272	$	-	$	-
Commercial real estate:
Non-owner occupied		2,302		46		-
Owner occupied		2,001		27		-
Construction		-		-		-
Consumer:
Home equity installment		16		-		-
Home equity line of credit		157		-		-
Auto loans		70		1		-
Direct finance leases		-		-		-
Other		-		-		-
Residential:
Real estate		564		25		-
Construction		-		-		-
Total	$	5,382	$	99	$	-

Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.

These loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted.

The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans:

Pass

Loans in this category have an acceptable level of risk and are graded in a range of one to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is competent, and a reasonable succession plan is evident. Payment experience on the loans has been good with minor or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality.

Special Mention

Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow may not be sufficient to support total debt service requirements.

Substandard

Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is weak. There is a distinct possibility that the Company may sustain a loss. All loans on non-accrual are rated substandard. Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due. Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as modifications experiencing financial difficulty can be graded substandard.

Doubtful

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than an eight is considered to be uncollectible and charged-off.

Consumer and residential

The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated. For these portfolios, the Company utilizes payment activity and history in assessing performance. Non-performing loans are comprised of non-accrual loans and loans past due 90 days or more and accruing. All loans not classified as non-performing are considered performing.

The following tables present loans including $4.8 million and $4.6 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category as of March 31, 2023 and December 31, 2022, respectively:

Commercial credit exposure

Credit risk profile by creditworthiness category

As of March 31, 2023

(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Commercial and industrial
Risk Rating
Pass	$	3,619	$	25,468	$	27,091	$	9,752	$	9,257	$	14,888	$	44,165	$	-	$	134,240
Special Mention		-		124		-		-		-		-		68		-		192
Substandard		-		188		17		-		74		334		1,921		-		2,534
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial and industrial	$	3,619	$	25,780	$	27,108	$	9,752	$	9,331	$	15,222	$	46,154	$	-	$	136,966
Commercial and industrial:
Current period gross write-offs	$	-	$	-	$	150	$	20	$	-	$	-	$	-	$	-	$	170
Commercial and industrial - municipal
Risk Rating
Pass	$	36,815	$	20,553	$	17,295	$	13,568	$	1,453	$	20,408	$	-	$	-	$	110,092
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial and industrial - municipal	$	36,815	$	20,553	$	17,295	$	13,568	$	1,453	$	20,408	$	-	$	-	$	110,092
Commercial and industrial - municipal:
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied
Risk Rating
Pass	$	3,134	$	36,530	$	78,399	$	47,199	$	19,616	$	102,174	$	8,950	$	-	$	296,002
Special Mention		-		65		1,076		335		497		2,207		40		-		4,220
Substandard		-		-		-		278		87		9,702		-		-		10,067
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate - non-owner occupied	$	3,134	$	36,595	$	79,475	$	47,812	$	20,200	$	114,083	$	8,990	$	-	$	310,289
Commercial real estate - non-owner occupied:
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	32	$	-	$	-	$	32
Commercial real estate - owner occupied
Risk Rating
Pass	$	4,028	$	54,840	$	49,269	$	30,495	$	25,025	$	89,390	$	14,588	$	-	$	267,635
Special Mention		-		29		899		28		-		308		125		-		1,389
Substandard		1,412		-		350		-		-		10,779		635		-		13,176
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate - owner occupied	$	5,440	$	54,869	$	50,518	$	30,523	$	25,025	$	100,477	$	15,348	$	-	$	282,200
Commercial real estate - owner occupied:
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - construction
Risk Rating
Pass	$	699	$	23,405	$	3,743	$	-	$	-	$	2,335	$	3,010	$	-	$	33,192
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate - construction	$	699	$	23,405	$	3,743	$	-	$	-	$	2,335	$	3,010	$	-	$	33,192
Commercial real estate - construction:
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

As of March 31, 2023

(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Home equity installment
Payment performance
Performing	$	3,077	$	20,132	$	11,323	$	9,740	$	4,370	$	10,819	$	-	$	-	$	59,461
Non-performing		-		-		-		-		-		-		-		-		-
Total home equity installment	$	3,077	$	20,132	$	11,323	$	9,740	$	4,370	$	10,819	$	-	$	-	$	59,461
Home equity installment
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Home equity line of credit
Payment performance
Performing	$	-	$	-	$	-	$	-	$	-	$	-	$	39,325	$	10,528	$	49,853
Non-performing		-		-		-		-		-		-		75		-		75
Total home equity line of credit	$	-	$	-	$	-	$	-	$	-	$	-	$	39,400	$	10,528	$	49,928
Home equity line of credit
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Auto loans - recourse
Payment performance
Performing	$	914	$	2,778	$	4,045	$	2,763	$	1,254	$	442	$	-	$	-	$	12,196
Non-performing		-		-		-		-		-		11		-		-		11
Total auto loans - recourse	$	914	$	2,778	$	4,045	$	2,763	$	1,254	$	453	$	-	$	-	$	12,207
Auto loans - recourse
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Auto loans - non-recourse
Payment performance
Performing	$	21,786	$	54,393	$	23,818	$	12,427	$	7,654	$	4,803	$	-	$	-	$	124,881
Non-performing		-		-		75		65		22		8		-		-		170
Total auto loans - non-recourse	$	21,786	$	54,393	$	23,893	$	12,492	$	7,676	$	4,811	$	-	$	-	$	125,051
Auto loans - non-recourse
Current period gross write-offs	$	-	$	-	$	25	$	14	$	10	$	-	$	-	$	-	$	49
Direct finance leases ⁽¹⁾
Payment performance
Performing	$	3,804	$	15,952	$	10,157	$	3,465	$	454	$	56	$	-	$	-	$	33,888
Non-performing		-		-		17		-		-		-		-		-		17
Total direct finance leases	$	3,804	$	15,952	$	10,174	$	3,465	$	454	$	56	$	-	$	-	$	33,905
Direct finance leases
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Consumer - other
Payment performance
Performing	$	2,874	$	4,102	$	2,078	$	1,045	$	792	$	1,034	$	1,254	$	-	$	13,179
Non-performing		-		-		-		-		-		2		-		-		2
Total consumer - other	$	2,874	$	4,102	$	2,078	$	1,045	$	792	$	1,036	$	1,254	$	-	$	13,181
Consumer - other
Current period gross write-offs	$	3	$	30	$	3	$	3	$	8	$	5					$	52
Residential real estate
Payment performance
Performing	$	17,499	$	61,113	$	132,880	$	52,928	$	31,437	$	121,083	$	-	$	-	$	416,940
Non-performing		-		-		-		-		-		86		-		-		86
Total residential real estate	$	17,499	$	61,113	$	132,880	$	52,928	$	31,437	$	121,169	$	-	$	-	$	417,026
Residential real estate
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Residential - construction
Payment performance
Performing	$	742	$	24,663	$	14,576	$	4,471	$	428	$	442	$	-	$	-	$	45,322
Non-performing		-		-		-		-		-		-		-		-		-
Total residential - construction	$	742	$	24,663	$	14,576	$	4,471	$	428	$	442	$	-	$	-	$	45,322
Residential - construction
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

⁽¹⁾Net of unearned lease revenue of $1.8 million.

Commercial credit exposure

Credit risk profile by creditworthiness category

	December 31, 2022
(dollars in thousands)		Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	231,614	$	229	$	2,635	$	-	$	234,478
Commercial real estate - non-owner occupied		301,386		4,227		11,254		-		316,867
Commercial real estate - owner occupied		255,921		803		14,086		-		270,810
Commercial real estate - construction		18,941		-		-		-		18,941
Total commercial	$	807,862	$	5,259	$	27,975	$	-	$	841,096

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	December 31, 2022
(dollars in thousands)	Performing		Non-performing		Total

Consumer
Home equity installment	$	59,118	$	-	$	59,118
Home equity line of credit		52,357		211		52,568
Auto loans		131,767		169		131,936
Direct finance leases ⁽²⁾		31,460		17		31,477
Other		7,611		-		7,611
Total consumer		282,313		397		282,710
Residential
Real estate		398,133		3		398,136
Construction		42,232		-		42,232
Total residential		440,365		3		440,368
Total consumer & residential	$	722,678	$	400	$	723,078

⁽²⁾Net of unearned lease revenue of $1.7 million.

Collateral dependent loans

Loans that do not share risk characteristics are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent, financial loans where we have determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and we expect repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. The following table presents the individually evaluated, collateral dependent loans as of March 31, 2023:

(dollars in thousands)	Real Estate		Other		Total Collateral-Dependent Non-Accrual Loans
At March 31, 2023
Commercial and industrial:
Commercial	$	-	$	739	$	739
Municipal		-		-		-
Commercial real estate:
Non-owner occupied		310		-		310
Owner occupied		1,948		-		1,948
Consumer:
Home equity installment		-		-		-
Home equity line of credit		75		-		75
Auto loans - Recourse		-		11		11
Auto loans - Non-recourse		-		171		171
Direct finance leases		-		-		-
Other		-		2		2
Residential:
Real estate		86		-		86
Total	$	2,419	$	923	$	3,342

Allowance for credit losses

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for credit losses (ACL) on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. When estimating the net amount expected to be collected, management considers the effects of past events, current conditions, and reasonable and supportable forecasts of the collectability of the Company’s financial assets. Those estimates may be susceptible to significant change. Credit losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.

The methodology to analyze the adequacy of the ACL is based on seven primary components:

●

Data: The quality of the Company’s data is critically important as a foundation on which the ACL estimate is generated. For its estimate, the Company uses both internal and external data with a preference toward internal data where possible. Data is complete, accurate, and relevant, and subjected to appropriate governance and controls.

●

Segmentation: Financial assets are segmented based on similar risk characteristics.

●

Contractual term of financial assets: The contractual term of financial assets is a significant driver of ACL estimates. Financial assets or pools of financial assets with shorter contractual maturities typically result in a lower reserve than those with longer contractual maturities. As the average life of a financial asset or pool of assets increases, there generally is a corresponding increase to the ACL estimate because the likelihood of default is considered over a longer time frame. As such, pool-based assumptions for a pool’s contractual term (i.e., average life) are based on the contractual maturity of the financial assets within the pool and adjusted in accordance with GAAP, if appropriate.

●

Credit loss measurement method: Multiple measurement methods for estimating ACLs are allowable per ASC Topic 326. The Company applies different estimation methods to different groups of financial assets. The discounted cash flow method is used for the Commercial & Industrial, Commercial Real Estate Non Owner Occupied, Commercial Real Estate Owner Occupied, Commercial Construction, Home Equity Installment Loan, Home Equity Line of Credit, Residential Real Estate, and Residential Construction pools. The weighted average remaining maturity (WARM) method is used for the Municipal, Non-Recourse Auto, Recourse Auto, Direct Finance Lease, and Consumer Other pools.

●

Reasonable and supportable forecasts: ASC Topic 326 requires Management to consider reasonable and supportable forecasts that affect expected collectability of financial assets. As such, the Company’s forecasts incorporate anticipated changes in the economic environment that may affect credit loss estimates over a time horizon when Management can reasonably support and document expectations. Forward-looking information may reflect positive or negative expectations relative to the current environment. As of the reporting date, management is using the median Federal Open Market Committee (FOMC) National Gross Domestic Product (GDP) and Unemployment Rate forecasts as well as the Federal Housing Finance Agency (FHFA) House Price Index (HPI) for its reasonable and supportable forecasts. The Company currently uses a 12 month (4 quarter) reasonable and supportable forecast period.

	●	Reversion period: ASC Topic 326 does not require Management to estimate a reasonable and supportable forecast for the entire contractual life of financial assets. Management may apply reversion techniques for the contractual life remaining after considering the reasonable and supportable forecast period, which allows Management to apply a historical loss rate to latter periods of the financial asset’s life. The Company currently uses a 12 month (4 quarter) straight-line reversion period.
	●	Qualitative factor adjustments: The Company’s ACL estimate considers all significant factors relevant to the expected collectability of its financial assets as of the reporting date; Qualitative factors reflect the impact of conditions not captured elsewhere, such as the historical loss data or within the economic forecast. The qualitative considerations can be captured directly within measurement models or as additional components in the overall ACL methodologies. Currently, the Company uses the following qualitative factors:

	o	levels of and trends in delinquencies and non-accrual loans;
	o	levels of and trends in charge-offs and recoveries;
	o	trends in volume and terms of loans;
	o	changes in risk selection and underwriting standards;
	o	changes in lending policies and legal and regulatory requirements;
	o	experience, ability and depth of lending management;
	o	national and local economic trends and conditions;
	o	changes in credit concentrations; and
	o	changes in underlying collateral.

Assets are evaluated on a collective (or pool) basis or individually, as applicable consistent with ASC Topic 326. In accordance with ASC Topic 326, the Company will evaluate individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. In contrast to legacy accounting standards, this criterion is broader than the “impairment” concept as management may evaluate assets individually even when no specific expectation of collectability is in place. Instruments will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope.

For individually evaluated assets, an ACL is determined separately for each financial asset. Management therefore measures the expected credit losses based on an appropriate method per ASC Subtopic 326-20, similar to collectively evaluated financial assets. As of the reporting date, the Company is using the collateral and cash flow methods.

ASC Topic 326 defines a collateral-dependent asset as a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower, based on Management’s assessment, is experiencing financial difficulty. The ACL for a collateral-dependent loan is measured using the fair value of collateral, regardless of whether foreclosure is probable. The fair value of collateral must be adjusted for estimated costs to sell if repayment or satisfaction of the asset depends on the sale of the collateral. If repayment is dependent only on the operation of the collateral, and not on the sale of the collateral, the fair value of the collateral would not be adjusted for estimated costs to sell. If the fair value of the collateral, adjusted for costs to sell if applicable, is less than the amortized cost basis of the collateral-dependent asset, the difference is recorded as an ACL.

The Company’s policy is to charge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

If the individually evaluated asset is determined to not be collateral dependent, the ACL is measured based on the expected cash flows. This measurement is based on the amount and timing of cash flows; the effective interest rate (EIR) used to discount the cash flows; and the basis for the determination of cash flows, including consideration of past events, current conditions, and reasonable and supportable forecasts about the future. These cash flows are discounted back by the EIR and compared to the amortized cost basis of the asset. If the present value of cash flows is less than the amortized cost, an ACL is recorded. When the present value of cash flows is equal to or greater than the amortized cost, no ACL is recorded.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies.

A key control related to the allowance is the Company’s Special Assets Committee. This committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.

Information related to the change in the allowance and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows:

*As of and for the three months ended March 31, 2023*
	Commercial &			Commercial							Residential
(dollars in thousands)	industrial			real estate			Consumer				real estate		Unallocated			Total
Allowance for Credit Losses:
Beginning balance	$	2,924		$	7,162		$	2,827			$	4,169	$	67		$	17,149
Impact of adopting ASC 326		278			756			(547	)			198		(67	)		618
Initial allowance on loans purchased with credit deterioration		-			126			-				-		-			126
Charge-offs		(170	)		(32	)		(101	)			-		-			(303	)
Recoveries		20			39			72				9		-			140
Provision (credit) for loan losses		(502	)		106			197				307		72			180
Ending balance	$	2,550		$	8,157		$	2,448			$	4,683	$	72		$	17,910
Ending balance: individually evaluated	$	42		$	202		$	5			$	-	$	-		$	249
Ending balance: collectively evaluated	$	2,508		$	7,955		$	2,443			$	4,683	$	72		$	17,661
Loans Receivables:
Ending balance ⁽²⁾	$	247,057		$	625,682		$	291,912		*(1)*	$	462,348	$	-		$	1,626,999
Ending balance: individually evaluated	$	772		$	7,198		$	259			$	474	$	-		$	8,703
Ending balance: collectively evaluated	$	246,285		$	618,484		$	291,653			$	461,874	$	-		$	1,618,296

⁽¹⁾ Net of unearned lease revenue of $1.8 million. ⁽²⁾ Includes $4.8 million of net deferred loan costs.

As of and for the year ended December 31, 2022
	Commercial &			Commercial							Residential
(dollars in thousands)	industrial			real estate			Consumer				real estate		Unallocated			Total
Allowance for Loan Losses:
Beginning balance	$	2,204		$	7,422		$	2,404			$	3,508	$	86		$	15,624
Charge-offs		(371	)		(67	)		(377	)			-		-			(815	)
Recoveries		11			153			74				2		-			240
Provision		1,080			(346	)		726				659		(19	)		2,100
Ending balance	$	2,924		$	7,162		$	2,827			$	4,169	$	67		$	17,149
Ending balance: individually evaluated for impairment	$	48		$	112		$	1			$	-	$	-		$	161
Ending balance: collectively evaluated for impairment	$	2,876		$	7,050		$	2,826			$	4,169	$	67		$	16,988
Loans Receivables:
Ending balance ⁽²⁾	$	234,478		$	606,618		$	282,710		(1)	$	440,368	$	-		$	1,564,174
Ending balance: individually evaluated for impairment	$	719		$	2,782		$	364			$	3	$	-		$	3,868
Ending balance: collectively evaluated for impairment	$	233,759		$	603,836		$	282,346			$	440,365	$	-		$	1,560,306

⁽¹⁾ Net of unearned lease revenue of $1.7 million. ⁽²⁾ Includes $4.6 million of net deferred loan costs.

As of and for the three months ended March 31, 2022
	Commercial &		Commercial						Residential
(dollars in thousands)	industrial		real estate			Consumer			real estate		Unallocated			Total
Allowance for Loan Losses:
Beginning balance	$	2,204	$	7,422		$	2,404		$	3,508	$	86		$	15,624
Charge-offs		-		(1	)		(94	)		-		-			(95	)
Recoveries		2		9			14			2		-			27
Provision		574		(608	)		223			341		(5	)		525
Ending balance	$	2,780	$	6,822		$	2,547		$	3,851	$	81		$	16,081

Unfunded commitments

In accordance with ASC Topic 326, the Company estimates expected credit losses for off-balance-sheet credit exposures over the contractual period during which the Company is exposed to credit risk. The estimate of expected credit losses takes into consideration the likelihood that funding will occur (i.e., funding rate) as well as the amount expected to be collected over the estimated remaining contractual term of the off-balance-sheet credit exposures (i.e., loss rate). The Company does not record an estimate of expected credit losses for off-balance-sheet exposures that are unconditionally cancellable. On a quarterly basis, Management evaluates expected credit losses for off-balance-sheet credit exposures.

The Company's allowance for credit losses on unfunded commitments is recognized as a liability on the consolidated balance sheets, with adjustments to the reserve recognized in the provision for credit losses on unfunded commitments on the consolidated statements of income. The Company's activity in the allowance for credit losses on unfunded commitments for the period was as follows:

(dollars in thousands)	For the Three Months Ended March 31, 2023		For the Three Months Ended March 31, 2022
Beginning balance	$	49	$	63
Impact of adopting ASC 326		1,060		-
Provision (credit) for loan losses		225		(11	)
Ending balance	$	1,334	$	52

Direct finance leases

The Company originates direct finance leases through two automobile dealerships. The carrying amount of the Company’s lease receivables, net of unearned income, was $7.5 million and $7.9 million as of March 31, 2023 and December 31, 2022, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to $24.5 million and $23.6 million at March 31, 2023 and December 31, 2022, respectively, and are included in the carrying value of direct finance leases.

The undiscounted cash flows to be received on an annual basis for the direct finance leases are as follows:

(dollars in thousands)	Amount

2023	$	8,830
2024		10,916
2025		11,117
2026		2,750
2027		208
2028 and thereafter		27
Total future minimum lease payments receivable		33,848
Less: Unearned income		(1,821	)
Undiscounted cash flows to be received	$	32,027