Loans

3 Months Ended

Mar. 31, 2024

Loans

Loans

NOTE 7. Loans

The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for credit losses as of March 31, 2024 and December 31, 2023:

(In thousands)	March 31, 2024		December 31, 2023
SBA loans held for investment	$	39,009	$	38,584
SBA PPP loans		2,168		2,318
Commercial loans
SBA 504 loans		38,128		33,669
Commercial & industrial		133,409		128,402
Commercial real estate		977,437		986,230
Commercial real estate construction		142,345		129,159
Residential mortgage loans		627,464		631,506
Consumer loans
Home equity		67,448		67,037
Consumer other		4,827		5,639
Residential construction loans		123,783		131,277
Total loans held for investment	$	2,156,018	$	2,153,821
SBA loans held for sale		18,439		18,242
Total loans	$	2,174,457	$	2,172,063

Loans are made to individuals and commercial entities. Specific loan terms vary as to interest rate, repayment and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Bank. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type. A description of the Company’s different loan segments follows:

SBA Loans: SBA 7(a) loans, on which the SBA has historically provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, business acquisitions, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans are guaranteed by the businesses’ major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

Loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets are recognized in income. All criteria for sale accounting must be met in order for the loan sales to occur.

Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

Serviced loans sold to others are not included in the accompanying Consolidated Balance Sheets. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets.

Commercial Loans: Commercial credit is extended primarily to middle market and small business customers. Commercial loans are generally made in the Company’s marketplace for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. Loans will generally be guaranteed in full or for a meaningful amount by the businesses’ major owners. Commercial loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

Residential Mortgage, Consumer and Residential Construction Loans: The Company originates mortgage and consumer loans including principally residential real estate and home equity lines and loans and residential construction lines. The Company originates qualified mortgages which are generally sold in the secondary market and nonqualified mortgages which are generally held for investment. Each loan type is evaluated on debt to income, type of collateral, loan to collateral value, credit history and Company relationship with the borrower.

Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan. A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans. The Company minimizes its credit risk by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins when the Company initiates contact regarding a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan and other factors, are analyzed before a loan is submitted for approval. The commercial loan portfolio is then subject to on-going internal reviews for credit quality which in part is derived from ongoing collection and review of borrowers’ financial information, as well as independent credit reviews by an outside firm.

The Company’s extension of credit is governed by the Credit Risk Policy which was established to control the quality of the Company’s loans. This policy and the underlying procedures are reviewed and approved by the Board of Directors on a regular basis.

Credit Ratings

The Company places all SBA, commercial and residential construction loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.

The Company uses the following regulatory definitions for criticized and classified risk ratings:

Pass: Risk ratings of 1 through 6 are used for loans that are performing, as they meet, and are expected to continue to meet, all of the terms and conditions set forth in the original loan documentation, and are generally current on principal and interest payments. These performing loans are termed “Pass”.

Special Mention: These loans have a potential weakness that deserves management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard: These loans 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 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.

Loss: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Once a borrower is deemed incapable of repayment of unsecured debt, the loan is termed a “Loss” and charged off immediately, subject to government guarantee.

For residential mortgage and consumer loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. These credit quality indicators are updated on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ultimate ability to collect interest on a loan.

Nonaccrual and Past Due Loans

Nonaccrual loans consist of loans that are not accruing interest as a result of principal or interest being in default, typically for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. When a loan is classified as nonaccrual, interest accruals are discontinued and all past due interest previously recognized as income is reversed and charged against current period earnings. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Loans may be returned to an accrual status when the ability to collect is reasonably assured and when the loan is brought current as to principal and interest. The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors. The Company values its collateral through the use of appraisals, broker price opinions and knowledge of its local market.

The following tables set forth an aging analysis of past due and nonaccrual loans as of March 31, 2024 and December 31, 2023:

	March 31, 2024
					90+ days
	30‑59 days		60‑89 days		and still				Total past
(In thousands)	past due		past due		accruing		Nonaccrual		due		Current		Total loans
SBA loans held for investment	$	169	$	275	$	138	$	3,542	$	4,124	$	34,885	$	39,009
Commercial loans
SBA 504 loans		—		—		—		—		—		38,128		38,128
Commercial & industrial		321		—		—		112		433		132,976		133,409
Commercial real estate		4,324		384		—		2,303		7,011		970,426		977,437
Commercial real estate construction		—		—		—		—		—		142,345		142,345
Residential mortgage loans		12,178		—		—		7,440		19,618		607,846		627,464
Consumer loans
Home equity		—		—		—		366		366		67,082		67,448
Consumer other		52		38		—		—		90		4,737		4,827
Residential construction loans		434		—		—		3,127		3,561		120,222		123,783
Total loans held for investment, excluding SBA PPP		17,478		697		138		16,890		35,203		2,118,647		2,153,850
SBA loans held for sale		508		—		—		—		508		17,931		18,439
Total loans, excluding SBA PPP	$	17,986	$	697	$	138	$	16,890	$	35,711	$	2,136,578	$	2,172,289

	December 31, 2023
					90+ days
	30‑59 days		60‑89 days		and still				Total past
(In thousands)	past due		past due		accruing		Nonaccrual		due		Current		Total loans
SBA loans held for investment	$	551	$	185	$	—	$	3,444	$	4,180	$	34,404	$	38,584
Commercial loans
SBA 504 loans		—		—		—		—		—		33,669		33,669
Commercial & industrial		288		78		—		283		649		127,753		128,402
Commercial real estate		1,732		—		—		1,665		3,397		982,833		986,230
Commercial real estate construction		—		—		—		—		—		129,159		129,159
Residential mortgage loans		8,719		1,378		946		10,326		21,369		610,137		631,506
Consumer loans
Home equity		14		—		—		381		395		66,642		67,037
Consumer other		28		55		—		—		83		5,556		5,639
Residential construction loans		2,580		—		—		2,141		4,721		126,556		131,277
Total loans held for investment, excluding SBA PPP		13,912		1,696		946		18,240		34,794		2,116,709		2,151,503
SBA loans held for sale		—		—		—		—		—		18,242		18,242
Total loans, excluding SBA PPP	$	13,912	$	1,696	$	946	$	18,240	$	34,794	$	2,134,951	$	2,169,745

The Company is using the practical expedient to exclude accrued interest receivable from credit loss measurement. At March 31, 2024, there was $11.3 million of accrued interest on loans.At December 31, 2023, there was $11.7 million of accrued interest on loans.

Individually Evaluated Loans

The Company has defined individually evaluated loans to be all nonperforming loans. Management individually evaluates a loan when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract.

The following tables provide detail on the Company’s loans individually evaluated in the Company’s CECL evaluation with the associated allowance amount, if applicable, as of March 31, 2024 and December 31, 2023:

	March 31, 2024
	Unpaid				Allowance for
	principal		Recorded		Credit Losses
(In thousands)	balance		investment		Allocated
With no related allowance:
SBA loans held for investment	$	2,401	$	2,323	$	—
Commercial loans
Commercial real estate		2,727		1,755		—
Total commercial loans		2,727		1,755		—
Residential mortgage loans		3,706		3,700		—
Consumer loans
Home equity		382		365		—
Residential construction loans		547		547		—
Total individually evaluated loans with no related allowance		9,763		8,690		—
With an allowance:
SBA loans held for investment		1,482		1,357		382
Commercial loans
Commercial & industrial		718		112		112
Commercial real estate		699		548		225
Total commercial loans		1,417		660		337
Residential mortgage loans		3,772		3,740		300
Consumer loans
Home equity		1		1		1
Residential construction loans		2,580		2,580		116
Total individually evaluated loans with a related allowance		9,252		8,338		1,136
Total individually evaluated loans:
SBA loans held for investment		3,883		3,680		382
Commercial loans
Commercial & industrial		718		112		112
Commercial real estate		3,426		2,303		225
Total commercial loans		4,144		2,415		337
Residential mortgage loans		7,478		7,440		300
Consumer loans
Home equity		383		366		1
Residential construction loans		3,127		3,127		116
Total individually evaluated loans	$	19,015	$	17,028	$	1,136

	December 31, 2023
	Unpaid				Allowance for
	principal		Recorded		Credit Losses
(In thousands)	balance		investment		Allocated
With no related allowance:
SBA loans held for investment	$	2,264	$	2,186	$	—
Commercial loans
Commercial real estate		2,734		1,607		—
Total commercial loans		2,734		1,607		—
Residential mortgage loans		7,146		7,121		—
Consumer loans
Home equity		390		388		—
Total consumer loans		390		388		—
Residential construction loans		2,757		2,141		—
Total individually evaluated loans with no related allowance		15,291		13,443		—
With an allowance:
SBA loans held for investment		1,383		1,258		348
Commercial loans
Commercial & industrial		638		283		283
Commercial real estate		209		58		58
Total commercial loans		847		341		341
Residential mortgage loans		4,182		4,151		306
Total individually evaluated loans with a related allowance		6,412		5,750		995
Total individually evaluated loans:
SBA loans held for investment		3,647		3,444		348
Commercial loans
Commercial & industrial		638		283		283
Commercial real estate		2,943		1,665		58
Total commercial loans		3,581		1,948		341
Residential mortgage loans		11,328		11,272		306
Consumer loans
Home equity		390		388		—
Total consumer loans		390		388		—
Residential construction loans		2,757		2,141		—
Total individually evaluated loans	$	21,703	$	19,193	$	995

The following tables show the internal loan classification risk by loan portfolio classification by origination year as of March 31, 2024 and December 31, 2023, respectively:

	Term Loans
	Amortized Cost Basis by Origination Year, March 31, 2024
(In thousands)		2024		2023		2022		2021		2020		2019 and Earlier		Revolving Loans Amortized Cost Basis		Total
SBA loans held for investment
Risk Rating:
Pass	$	964	$	1,878	$	5,241	$	4,843	$	5,778	$	13,240	$	-	$	31,944
Special Mention		-		-		1,836		356		510		170		-		2,872
Substandard		-		-		1,256		2,186		176		575		-		4,193
Total SBA loans held for investment	$	964	$	1,878	$	8,333	$	7,385	$	6,464	$	13,985	$	-	$	39,009
SBA PPP loans
Risk Rating:
Pass	$	-	$	-	$	-	$	2,168	$	-	$	-	$	-	$	2,168
Total SBA PPP loans	$	-	$	-	$	-	$	2,168	$	-	$	-	$	-	$	2,168
Commercial loans
Risk Rating:
Pass	$	14,828	$	152,337	$	336,287	$	180,893	$	126,845	$	365,085	$	103,292	$	1,279,567
Special Mention		-		-		490		1,464		-		6,431		395		8,780
Substandard		-		-		-		137		9		2,826		-		2,972
Total commercial loans	$	14,828	$	152,337	$	336,777	$	182,494	$	126,854	$	374,342	$	103,687	$	1,291,319
Commercial loans
Current-period gross writeoffs	$	-	$	-	$	-	$	-	$	-	$	98	$	-	$	98
Residential mortgage loans
Risk Rating:
Performing	$	23,064	$	85,980	$	249,423	$	70,123	$	48,833	$	142,601	$	-	$	620,024
Nonperforming		-		-		1,665		2,382		259		3,134		-		7,440
Total residential mortgage loans	$	23,064	$	85,980	$	251,088	$	72,505	$	49,092	$	145,735	$	-	$	627,464
Consumer loans
Risk Rating:
Performing	$	693	$	2,973	$	4,400	$	3,035	$	644	$	11,255	$	48,908	$	71,908
Nonperforming		-		-		-		-		109		1		257		367
Total consumer loans	$	693	$	2,973	$	4,400	$	3,035	$	753	$	11,256	$	49,165	$	72,275
Consumer loans
Current-period gross writeoffs	$	-	$	-	$	21	$	49	$	-	$	-	$	-	$	70
Residential construction
Risk Rating:
Pass	$	6,595	$	34,782	$	64,368	$	12,511	$	1,418	$	-	$	-	$	119,674
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		2,580		547		982		-		4,109
Total residential construction loans	$	6,595	$	34,782	$	64,368	$	15,091	$	1,965	$	982	$	-	$	123,783
Residential construction
Current-period gross writeoffs	$	-	$	-	$	-	$	-	$	-	$	277	$	-	$	277
Total loans held for investment	$	46,144	$	277,950	$	664,966	$	282,678	$	185,128	$	546,300	$	152,852	$	2,156,018

	Term Loans
	Amortized Cost Basis by Origination Year, December 31, 2023
(In thousands)		2023		2022		2021		2020		2019		2018 and Earlier		Revolving Loans Amortized Cost Basis		Total
SBA loans held for investment
Risk Rating:
Pass	$	1,938	$	5,339	$	4,723	$	6,083	$	2,634	$	10,996	$	-	$	31,713
Special Mention		-		1,765		356		510		-		31		-		2,662
Substandard		-		1,256		2,186		190		-		577		-		4,209
Total SBA loans held for investment	$	1,938	$	8,360	$	7,265	$	6,783	$	2,634	$	11,604	$	-	$	38,584
SBA loans held for investment
Current-period gross writeoffs	$	-	$	100	$	-	$	-	$	113	$	-	$	-	$	213
SBA PPP loans
Risk Rating:
Pass	$	-	$	-	$	2,318	$	-	$	-	$	-	$	-	$	2,318
Total SBA PPP loans	$	-	$	-	$	2,318	$	-	$	-	$	-	$	-	$	2,318
Commercial loans
Risk Rating:
Pass	$	139,622	$	343,755	$	181,419	$	128,165	$	101,274	$	271,469	$	96,988	$	1,262,692
Special Mention		-		-		1,815		-		1,570		7,423		395		11,203
Substandard		-		-		59		14		288		3,204		-		3,565
Total commercial loans	$	139,622	$	343,755	$	183,293	$	128,179	$	103,132	$	282,096	$	97,383	$	1,277,460
Commercial loans
Current-period gross writeoffs	$	-	$	-	$	150	$	-	$	350	$	252	$	-	$	752
Residential mortgage loans
Risk Rating:
Performing	$	102,892	$	253,919	$	72,586	$	51,999	$	30,482	$	109,302	$	-	$	621,180
Nonperforming		-		2,964		2,714		1,054		945		2,649		-		10,326
Total residential mortgage loans	$	102,892	$	256,883	$	75,300	$	53,053	$	31,427	$	111,951	$	-	$	631,506
Residential mortgage loans
Current-period gross writeoffs	$	-	$	-	$	25	$	-	$	-	$	68	$	-	$	93
Consumer loans
Risk Rating:
Performing	$	3,428	$	4,777	$	3,681	$	670	$	2,481	$	7,507	$	49,751	$	72,295
Nonperforming		-		-		-		125		-		256		-		381
Total consumer loans	$	3,428	$	4,777	$	3,681	$	795	$	2,481	$	7,763	$	49,751	$	72,676
Consumer loans
Current-period gross writeoffs	$	-	$	26	$	552	$	-	$	-	$	-	$	-	$	578
Residential construction
Risk Rating:
Performing	$	28,827	$	72,257	$	25,395	$	1,418	$	491	$	748	$	-	$	129,136
Nonperforming		-		-		-		547		-		1,594		-		2,141
Total residential construction loans	$	28,827	$	72,257	$	25,395	$	1,965	$	491	$	2,342	$	-	$	131,277
Residential construction
Current-period gross writeoffs	$	-	$	-	$	-	$	-	$	-	$	600	$	400	$	1,000
Total loans held for investment	$	276,707	$	686,032	$	297,252	$	190,775	$	140,165	$	415,756	$	147,134	$	2,153,821

Modifications

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for creditlosses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a weighted-average remaining maturity model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Company will modify a certain loan by providing multiple types of concessions. 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 principal forgiveness, may be granted.

The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of gross loans and type of concession granted (numbers in thousands) during the twelve months ended March 31, 2024:

		Principal		Payment		Term
(In thousands)		Forgiveness		Delay		Extension
SBA loans held for investment	$	8	$	99	$	—
Commercial loans
Commercial & industrial		—		—		813
Commercial real estate		—		2,619		—
Consumer loans
Home equity		—		—		2,309
Balance, March 31, 2024	$	8	$	2,718	$	3,122

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or 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. No loans that were modified during the twelve months ended March 31, 2024 had a payment default during the period and all loans were current as of March 31, 2024.