LOANS AND ALLOWANCE FOR CREDIT LOSSES

12 Months Ended

Dec. 31, 2023

LOANS AND ALLOWANCE FOR CREDIT LOSSES

LOANS AND ALLOWANCE FOR CREDIT LOSSES

NOTE 3.           LOANS AND ALLOWANCE FOR CREDIT LOSSES

We evaluate risk characteristics of loans based on regulatory call report code with segmentation based on the underlying collateral for certain loan types. The following is a summary of total loans by regulatory call report code segmentation based on underlying collateral for certain loan types:

	December 31,		December 31,
(in thousands)	2023		2022
Commercial construction	$	154,048	$	117,577
Commercial real estate owner occupied		310,015		244,814
Commercial real estate non-owner occupied		1,144,566		1,146,674
Tax exempt		43,688		42,879
Commercial and industrial		310,883		297,112
Residential real estate		940,334		954,968
Home equity		87,683		90,865
Consumer other		7,832		7,801
Total loans		2,999,049		2,902,690
Allowance for credit losses		28,142		25,860
Net loans	$	2,970,907	$	2,876,830

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

	December 31,		December 31,
(in thousands)	2023		2022
Net unamortized loan origination costs	$	3,039	$	3,184
Net unamortized fair value discount on acquired loans		(2,891)		(3,506)
Total	$	148	$	(322)

We exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of December 31, 2023 and 2022, accrued interest receivable for loans totaled $11.9 million and $10.7 million, respectively, and is included in the “other assets” line item on the Company’s consolidated balance sheets.

Characteristics of each loan portfolio segment are as follows:

Commercial construction - Loans in this segment primarily include raw land, land development and construction of commercial and multifamily residential properties.  Collateral values are determined based upon appraisals and evaluations of the completed structure in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy guidelines that are more restrictive than on stabilized commercial real estate transactions.  Construction loans are primarily paid by the cash flow generated from the completed structure, such as operating leases, rents, or other operating cash flows from the borrower.

Commercial real estate owner occupied and non-owner occupied - Loans in these segments are primarily owner-occupied or income-producing properties.  Loans to Real Estate Investment Trusts and unsecured loans to developers that closely correlate to the inherent risk in commercial real estate markets are also included.  Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines.  Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.

Tax Exempt - Loans in this segment primarily include loans to various state and municipal government entities. Loans made to these borrowers may provide us with tax-exempt income. While governed and underwritten similar to commercial loans they do have unique requirements based on established polices. Almost all state and municipal loans are considered a general obligation of the issuing entity. Given the size of many municipal borrowers, borrowings are normally not rated by major rating agencies.

Commercial and industrial loans - Loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment in this segment.  Generally loans are secured by assets of the business such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other business assets.  Some loans in this category may be unsecured or guaranteed by government agencies such as the U.S. Small Business Administration.  Loans are primarily paid by the operating cash flow of the borrower.

Residential real estate - All loans in this segment are collateralized by one-to-four family homes.  Residential real estate loans held in the loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to various underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Home equity - All loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Consumer other - Loans in this segment include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto loans, recreational equipment, overdraft protection or other consumer loans. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines, as applicable.

Allowance for Credit Losses

The Allowance for Credit Losses (“ACL”) is comprised of the allowance for loan losses and the allowance for unfunded commitments which is accounted for as a separate liability in other liabilities on our consolidated balance sheet. The level of the ACL represents management’s estimate of expected credit losses over the expected life of the loans at the consolidated balance sheet date.

The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off.  The ACL is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.

The activity in the allowance for credit losses for the periods ended are as follows:

	At or for the Year Ended December 31, 2023
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,579	$	—	$	—	$	1,682	$	4,261
Commercial real estate owner occupied		2,189		—		142		532		2,863
Commercial real estate non-owner occupied		9,341		—		—		102		9,443
Tax exempt		93		—		—		26		119
Commercial and industrial		3,493		(664)		149		281		3,259
Residential real estate		7,274		(8)		31		55		7,352
Home equity		811		(12)		6		(38)		767
Consumer other		80		(289)		19		268		78
Total	$	25,860	$	(973)	$	347	$	2,908	$	28,142

	At or for the Year Ended December 31, 2022
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,111	$	—	$	—	$	468	$	2,579
Commercial real estate owner occupied		2,751		—		120		(682)		2,189
Commercial real estate non-owner occupied		5,650		—		—		3,691		9,341
Tax exempt		86		—		—		7		93
Commercial and industrial		5,369		(8)		341		(2,209)		3,493
Residential real estate		5,862		(84)		106		1,390		7,274
Home equity		814		(7)		25		(21)		811
Consumer other		75		(267)		12		260		80
Total	$	22,718	$	(366)	$	604	$	2,904	$	25,860

	At or for the Year Ended December 31, 2021
	Balance at
	Beginning of		Impact of ASC								Balance at
(in thousands)	Period		326		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	824	$	1,196	$	—	$	18	$	73	$	2,111
Commercial real estate owner occupied		1,783		708		(403)		290		373		2,751
Commercial real estate non-owner occupied		7,864		(2,008)		—		4		(210)		5,650
Tax exempt		58		40		—		—		(12)		86
Commercial and industrial		3,137		2,996		(59)		77		(782)		5,369
Residential real estate		5,010		1,732		(77)		159		(962)		5,862
Home equity		285		603		(154)		51		29		814
Consumer other		121		(39)		(205)		9		189		75
Total	$	19,082	$	5,228	$	(898)	$	608	$	(1,302)	$	22,718

Unfunded Commitments

The allowance for credit losses on unfunded commitments is recognized as a liability (other liabilities on the consolidated balance sheet), with adjustments to the reserve recognized in other non-interest expense in the consolidated statement of operations. The activity in the allowance for credit losses on unfunded commitments for the periods ended was as follows:

	At or for the Years Ended December 31,
(in thousands)	2023		2022		2021
Beginning Balance	$	3,910	$	2,152	$	359
Impact of ASC 326		—		—		1,616
Provision for credit losses		(85)		1,758		177
Ending Balance	$	3,825	$	3,910	$	2,152

Loan Origination/Risk Management: We have certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. Our Board of Directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Board of Directors with frequent reports related to loan production, loan quality, and concentration of credit, loan delinquencies, non-performing loans and potential problem loans. We seek to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.

Credit Quality Indicators:  In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss.  Consistent with regulatory guidelines, the Company provides for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss (i.e. risk-rated 6, 7, 8 and 9, respectively).

The following are the definitions of our credit quality indicators:

Pass: Loans we consider in the commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low risk of loss related to these loans considered pass-rated.

Special Mention: Loans considered having some potential weaknesses, but are deemed to not carry levels of risk inherent in one of the subsequent categories, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans that may require a higher level of supervision or internal reporting because of: (i) declining industry trends; (ii) increasing reliance on secondary sources of repayment; (iii) the poor condition of or lack of control over collateral; or (iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose us to sufficient risks to warrant classification.

Substandard: Loans we consider as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans we consider as doubtful have all of the weaknesses inherent in those loans that are classified as substandard. These loans have the added characteristic of a well-defined weakness which is inadequately protected by the current sound worth and paying capacity of borrower or of the collateral pledged, if any, and calls into question the collectability of the full balance of the loan. The possibility of loss is high but because of certain important and reasonably

specific pending factors, which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).

Loss: Loans we consider as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.

The following table presents our loans by year of origination, loan segmentation and risk indicator as of  December 31, 2023:

(in thousands)	2023		2022		2021		2020		2019		Prior		Total
Commercial construction
Risk rating:
Pass	$	14,040	$	99,115	$	35,978	$	3,992	$	—	$	923	$	154,048
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	14,040	$	99,115	$	35,978	$	3,992	$	—	$	923	$	154,048
Current period gross write-offs		—		—		—		—		—		—		—
Commercial real estate owner occupied
Risk rating:
Pass	$	57,603	$	61,015	$	43,228	$	20,209	$	20,462	$	91,187	$	293,704
Special mention		160		387		7,488		1,596		—		3,066		12,697
Substandard		—		—		—		—		—		3,497		3,497
Doubtful		—		—		—		—		—		117		117
Total	$	57,763	$	61,402	$	50,716	$	21,805	$	20,462	$	97,867	$	310,015
Current period gross write-offs		—		—		—		—		—		—		—
Commercial real estate non-owner occupied
Risk rating:
Pass	$	41,270	$	353,613	$	199,311	$	127,231	$	78,759	$	238,973	$	1,039,157
Special mention		7,809		—		14,134		37,249		15,246		17,108		91,546
Substandard		—		—		—		—		—		13,863		13,863
Doubtful		—		—		—		—		—		—		—
Total	$	49,079	$	353,613	$	213,445	$	164,480	$	94,005	$	269,944	$	1,144,566
Current period gross write-offs		—		—		—		—		—		—		—
Tax exempt
Risk rating:
Pass	$	6,340	$	8,468	$	787	$	208	$	590	$	27,295	$	43,688
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	6,340	$	8,468	$	787	$	208	$	590	$	27,295	$	43,688
Current period gross write-offs		—		—		—		—		—		—		—
Commercial and industrial
Risk rating:
Pass	$	80,942	$	69,402	$	22,205	$	38,824	$	14,739	$	77,273	$	303,385
Special mention		364		1,446		—		776		28		3,588		6,202
Substandard		58		94		186		109		95		532		1,074
Doubtful		—		—		—		—		87		135		222
Total	$	81,364	$	70,942	$	22,391	$	39,709	$	14,949	$	81,528	$	310,883
Current period gross write-offs		—		—		—		—		5		659		664

(in thousands)	2023		2022		2021		2020		2019		Prior		Total
Residential real estate
Performing	$	72,395	$	194,109	$	165,434	$	96,016	$	62,648	$	345,823	$	936,425
Nonperforming		—		—		41		—		234		3,634		3,909
Total	$	72,395	$	194,109	$	165,475	$	96,016	$	62,882	$	349,457	$	940,334
Current period gross write-offs		—		—		—		—		—		8		8
Home equity
Performing	$	15,582	$	15,334	$	7,873	$	6,633	$	4,800	$	36,652	$	86,874
Nonperforming		—		—		—		—		—		809		809
Total	$	15,582	$	15,334	$	7,873	$	6,633	$	4,800	$	37,461	$	87,683
Current period gross write-offs		—		—		—		—		—		12		12
Consumer other
Performing	$	4,128	$	1,787	$	696	$	301	$	51	$	864	$	7,827
Nonperforming		—		—		4		1		—		—		5
Total	$	4,128	$	1,787	$	700	$	302	$	51	$	864	$	7,832
Current period gross write-offs		—		52		18		5		—		214		289
Total Loans	$	300,691	$	804,770	$	497,365	$	333,145	$	197,739	$	865,339	$	2,999,049

The following table presents our loans by year of origination, loan segmentation and risk indicator as of December 31, 2022:

(in thousands)	2022		2021		2020		2019		2018		Prior		Total
Commercial construction
Risk rating:
Pass	$	49,722	$	38,837	$	2,865	$	1,011	$	964	$	—	$	93,399
Special mention		—		—		24,178		—		—		—		24,178
Substandard		—		—		—		—		—		—		—
Total	$	49,722	$	38,837	$	27,043	$	1,011	$	964	$	—	$	117,577
Commercial real estate owner occupied
Risk rating:
Pass	$	22,371	$	11,290	$	23,014	$	31,352	$	46,398	$	103,295	$	237,720
Special mention		—		—		243		666		173		1,870		2,952
Substandard		—		—		—		—		77		3,924		4,001
Doubtful		—		—		—		—		—		141		141
Total	$	22,371	$	11,290	$	23,257	$	32,018	$	46,648	$	109,230	$	244,814
Commercial real estate non-owner occupied
Risk rating:
Pass	$	370,856	$	228,414	$	145,096	$	88,111	$	35,213	$	238,395	$	1,106,085
Special mention		—		21,390		—		127		911		16,612		39,040
Substandard		—		—		—		—		—		1,404		1,404
Doubtful		—		—		—		—		—		145		145
Total	$	370,856	$	249,804	$	145,096	$	88,238	$	36,124	$	256,556	$	1,146,674
Tax exempt
Risk rating:
Pass	$	8,686	$	1,020	$	252	$	772	$	13,231	$	18,918	$	42,879
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	8,686	$	1,020	$	252	$	772	$	13,231	$	18,918	$	42,879
Commercial and industrial
Risk rating:
Pass	$	83,151	$	26,948	$	62,835	$	27,491	$	9,511	$	81,316	$	291,252
Special mention		1,450		—		53		803		201		619		3,126
Substandard		—		113		111		65		299		2,106		2,694
Doubtful		—		—		—		—		—		40		40
Total	$	84,601	$	27,061	$	62,999	$	28,359	$	10,011	$	84,081	$	297,112

(in thousands)	2022		2021		2020		2019		2018		Prior		Total
Residential real estate
Performing	$	195,320	$	177,480	$	111,021	$	69,170	$	47,797	$	349,795	$	950,583
Nonperforming		—		45		—		49		641		3,650		4,385
Total	$	195,320	$	177,525	$	111,021	$	69,219	$	48,438	$	353,445	$	954,968
Home equity
Performing	$	17,107	$	10,638	$	8,139	$	6,830	$	6,997	$	40,191	$	89,902
Nonperforming		—		—		—		—		—		963		963
Total	$	17,107	$	10,638	$	8,139	$	6,830	$	6,997	$	41,154	$	90,865
Consumer other
Performing	$	4,321	$	1,341	$	863	$	265	$	64	$	942	$	7,796
Nonperforming		—		—		5		—		—		—		5
Total	$	4,321	$	1,341	$	868	$	265	$	64	$	942	$	7,801
Total Loans	$	752,984	$	517,516	$	378,675	$	226,712	$	162,477	$	864,326	$	2,902,690

Past Dues

The following is a summary of past due loans for the periods ended:

	December 31, 2023
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	154,048	$	154,048
Commercial real estate owner occupied		—		—		—		—		310,015		310,015
Commercial real estate non-owner occupied		—		—		103		103		1,144,463		1,144,566
Tax exempt		—		—		—		—		43,688		43,688
Commercial and industrial		465		59		330		854		310,029		310,883
Residential real estate		1,520		627		1,999		4,146		936,188		940,334
Home equity		600		—		337		937		86,746		87,683
Consumer other		10		2		—		12		7,820		7,832
Total	$	2,595	$	688	$	2,769	$	6,052	$	2,992,997	$	2,999,049

	December 31, 2022
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	117,577	$	117,577
Commercial real estate owner occupied		385		—		—		385		244,429		244,814
Commercial real estate non-owner occupied		45		145		139		329		1,146,345		1,146,674
Tax exempt		—		—		—		—		42,879		42,879
Commercial and industrial		169		—		9		178		296,934		297,112
Residential real estate		803		348		2,029		3,180		951,788		954,968
Home equity		216		160		246		622		90,243		90,865
Consumer other		41		8		—		49		7,752		7,801
Total	$	1,659	$	661	$	2,423	$	4,743	$	2,897,947	$	2,902,690

Non-Accrual Loans

The following is a summary of non-accrual loans for the periods ended:

	December 31, 2023
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		103		44		—
Commercial real estate non-owner occupied		340		224		—
Tax exempt		—		—		—
Commercial and industrial		363		6		—
Residential real estate		3,908		1,131		118
Home equity		809		1		22
Consumer other		5		—		—
Total	$	5,528	$	1,406	$	140

	December 31, 2022
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		439		360		—
Commercial real estate non-owner occupied		550		411		—
Tax exempt		—		—		—
Commercial and industrial		207		145		—
Residential real estate		4,385		1,361		202
Home equity		963		57		14
Consumer other		5		—		—
Total	$	6,549	$	2,334	$	216

Our policy is to reverse previously recorded interest income when a loan is placed on non-accrual, as such, the Company did not record any interest income on its non-accrual for the year ended December 31, 2023 and 2022.

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 amortized cost basis of collateral-dependent loans by loan portfolio segment for the periods ended.

	December 31, 2023				December 31, 2022
(in thousands)	Real Estate		Other		Real Estate		Other
Commercial construction	$	—	$	—	$	—	$	—
Commercial real estate owner occupied		104		—		439		—
Commercial real estate non-owner occupied		340		—		550		—
Tax exempt		—		—		—		—
Commercial and industrial		229		134		91		116
Residential real estate		3,908		—		4,385		—
Home equity		808		—		963		—
Consumer other		5		—		5		—
Total	$	5,394	$	134	$	6,433	$	116

Loan Modifications to Borrowers Experiencing Financial Difficulty

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” which eliminated the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, we are no longer required to establish a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective category and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the ACL.

These modifications typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. There were no qualifying modifications for the twelve months ended December 31, 2022.

The following table presents the amortized cost basis of loans that were both experiencing financial difficulty and modified during the twelve months ended December 31, 2023, by class and by type of modification.

(in thousands)	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Interest Rate Reduction and Term Extension		% of Total Class of Loans
Twelve Months Ended December 31, 2023
Commercial construction	$	—	$	—	$	—	$	—	$	—	—	%
Commercial real estate owner occupied		—		—		—		—		—	—
Commercial real estate non-owner occupied		—		—		—		—		—	—
Tax exempt		—		—		—		—		—	—
Commercial and industrial		—		65		184		—		—	0.08
Residential real estate		—		—		—		99		—	0.01
Home equity		—		—		—		—		—	—
Consumer other		—		—		—		—		—	—
Total	$	—	$	65	$	184	$	99	$	—	0.01	%

The following table presents the financial effect of loan modifications made to borrowers experiencing financial difficulty during the twelve months ended December 31, 2023.

(in thousands)	Weighted-Average Months of Payment Delay		Weighted-Average Months of Term Extension		Weighted-Average Interest Rate Reduction
Twelve Months Ended December 31, 2023
Commercial construction		—		—	—	%
Commercial real estate owner occupied		—		—	—
Commercial real estate non-owner occupied		—		—	—
Tax exempt		—		—	—
Commercial and industrial		3.00		13.45	—
Residential real estate		—		—	1.38
Home equity		—		—	—
Consumer other		—		—	—
Total		3.00		13.45	1.38	%

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of December 31, 2023 and December 31, 2022 totaled $430 thousand and $253 thousand, respectively.

Loan Concentrations

Loan concentrations in specific industries may occasionally emerge as a result of economic conditions, changes in local demands, natural loan growth and runoff. At December 31, 2023, the largest industry concentration outside of commercial real estate was the hospitality industry which represents 11% or $334.8 million of the Company’s total loan portfolio, compared with 12% or $336.4 million at December 31, 2022.

Loans to Related Parties

In the ordinary course of business, the Bank has made loans at prevailing rates and terms to directors, officers and other related parties. In management’s opinion, such loans do not present more than the normal risk of collectability or incorporate other unfavorable features, and were made under terms that are consistent with the Bank’s lending policies.

Loan to related parties at December 31, 2023 and December 31, 2022 are summarized below:

(in thousands)	2023		2022
Beginning balance	$	4,763	$	3,379
Changes in composition(1)		—		112
New loans		—		1,576
Less: repayments		(718)		(304)
Ending balance	$	4,045	$	4,763

(1) Adjustments to reflect changes in status of directors and officers for each year presented.

Mortgage Banking

Loans sold

For the years ended December 31, 2023 and 2022, we sold $38.8 million and $38.6 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $192 thousand and $161 thousand, respectively.

Loans Held for Sale

We had $2.2 million of loans held for sale as of December 31, 2023, there no loans held for sale as of December 31, 2022. Loans held for sale at December 31, 2023 had an unpaid principal balance of $2.1 million, respectively. The interest rate exposure on loans held for sale is mitigated through forward delivery commitments with certain approved secondary market investors. Forward sale commitments had a notional amount of $5.0 million at December 31, 2023, and we had no open forward sale commitments at December 31, 2022. Refer to Note 10 for further discussion of forward delivery commitments.

Servicing Assets

The Bank sells loans in the secondary market and retains the ability to service many of these loans. The Bank earns fees for the servicing provided. At year end 2023 and 2022, the Bank was servicing loans for participants totaling $595.2 million and $616.0 million, respectively. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates. Contractually-specified servicing fees were $1.6 million for the year ended 2023 and 2022, and are included as a component of other income within non-interest income.

Servicing rights activity during 2023 and 2022, included in other assets, was as follows:

	At or for the Twelve Months Ended
	December 31,
(in thousands)	2023		2022
Balance at beginning of year	$	3,383	$	3,673
Additions		338		421
Amortization		(560)		(711)
Balance at end of year	$	3,161	$	3,383