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LOANS

9 Months Ended

Sep. 30, 2023

NOTE 5 – LOANS

The Company’s loan portfolio at the dates indicated is summarized below:


	September 30,		December 31,
	2023		2022
Commercial and industrial (1)	$	170,943	$	188,538
Construction and land		8,404		13,163
Commercial real estate		1,701,145		1,704,716
Residential		87,599		110,606
Consumer		639		4,183
Total loans		1,968,730		2,021,206
Net deferred loan costs (fees)		74		(82)
Allowance for credit losses (2)		(19,800)		(18,900)
Net loans	$	1,949,004	$	2,002,224

(1)

Includes $4.3 million and $11.1 million of U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans as of September 30, 2023 and December 31, 2022, respectively.

(2)

Allowance for credit losses at September 30, 2023 is estimated under CECL whereas at December 31, 2022, the allowance for loan losses is estimated under the incurred loss methodology.

Net loans exclude accrued interest receivable of $6.3 million and $6.2 million at September 30, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the condensed consolidated balance sheets.

The Company’s total individually evaluated loans, including nonaccrual loans, modified loans to borrowers experiencing financial difficulty, and accreting purchase credit deteriorated (“PCD”) loans that have experienced post-acquisition declines in cash flows expected to be collected are summarized as follows:


	Commercial		Construction		Commercial
	and industrial		and land		real estate		Residential		Consumer		Total
September 30, 2023
Recorded investment in loans individually evaluated:
With no specific allowance recorded	$	—	$	366	$	7,802	$	1,401	$	—	$	9,569
With a specific allowance recorded		1,944		—		2,655		153		—		4,752
Total recorded investment in loans individually evaluated	$	1,944	$	366	$	10,457	$	1,554	$	—	$	14,321
Specific allowance on loans individually evaluated	$	1,572	$	—	$	309	$	2	$	—	$	1,883

December 31, 2022
Recorded investment in loans individually evaluated:
With no specific allowance recorded	$	89	$	—	$	11,706	$	1,991	$	—	$	13,786
With a specific allowance recorded		789		—		259		214		—		1,262
Total recorded investment in loans individually evaluated	$	878	$	—	$	11,965	$	2,205	$	—	$	15,048
Specific allowance on loans individually evaluated	$	687	$	—	$	259	$	222	$	—	$	1,168

From time to time, the Company may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. Prior to 2023, a modified loan was classified as a troubled debt restructuring (TDR) if the borrower was experiencing financial difficulties and a concession was made at the time of the modification. TDR loans were generally placed on nonaccrual status at the time of restructuring. These loans were returned to accrual status after the borrower demonstrated performance with the modified terms for a sustained period of time (generally six months) and the capacity to continue to perform in accordance with the modified terms of the restructured debt.

Effective January 1, 2023, the Company adopted ASU No. 2022-02, which eliminated the accounting guidance for TDR loans while enhancing disclosure requirements for certain loan modifications by creditors when a borrower is experiencing financial difficulty. The Company adopted ASU No. 2022-02 using the prospective transition method. At the date of adoption, the Company was no longer required to utilize a loan-level discounted cash flow approach for determining the allowance for certain modified loans previously classified as TDR loans. The ACL on a modified loan to a borrower experiencing financial difficulty is measured using the same method as individually evaluated loans. There was no material impact upon adopting this standard as the Company elected to not change how it measured credit losses on TDRs.

During the three and nine months ended September 30, 2023, there were no modifications of loans to borrowers experiencing financial difficulty. During the three and nine months ended September 30, 2022, there were no loans and four total modifications of loans to borrowers experiencing financial difficulty, consisting of two commercial real estate loans, one residential real estate loan, and one commercial and industrial loan, respectively. The type of modification for the two commercial real estate loans and the one residential real estate loan was a term extension, with no change to the pre-modification and post modification amortized cost balance, which for these three loans totaled $4.1 million. The type of modification for the commercial and industrial loan was a suspension of interest payments with principal payments designated payments-in-kind, with no change to the pre-modification and post modification amortized cost balance of $4.9 million.

The Company closely monitors the performance of modified loans to borrowers experiencing financial difficulty to understand the effectiveness of modification efforts. There were no commitments to lend additional amounts for modified loans to borrowers experiencing financial difficulty at September 30, 2023.

A summary of modified loans to borrowers experiencing financial difficulty by type of concession and type of loan, as of the dates indicated, is set forth below (number of loans not in thousands):


	Number of	Rate		Term		Rate & term				% of Total
	loans	modification		modification		modification		Total		loans outstanding
September 30, 2023
Commercial and industrial	3	$	—	$	142	$	—	$	142		0.08	%
Construction and land	—		—		—		—		—		—
Commercial real estate	5		—		4,241		—		4,241		0.25
Residential	1		—		803		—		803		0.92
Consumer	—		—		—		—		—		—
Total	9	$	—	$	5,186	$	—	$	5,186		0.26	%


	Number of	Rate		Term		Rate & term				% of Total
	loans	modification		modification		modification		Total		loans outstanding
September 30, 2022
Commercial and industrial	3	$	—	$	1,699	$	—	$	1,699		0.77	%
Construction and land	—		—		—		—		—		—
Commercial real estate	6		—		5,345		—		5,345		0.32
Residential	2		—		974		—		974		1.10
Consumer	—		—		—		—		—		—
Total	11	$	—	$	8,018	$	—	$	8,018		0.40	%

For the three and nine months ended September 30, 2023, the Company recorded no charge-offs for modified loans to borrowers experiencing financial difficulty. During the three and nine months ended September 30, 2022, the Company recorded a $2.4 million charge-off related to one modified loan to a borrower experiencing financial difficulty and no charge-offs related to modified loans to borrowers experiencing financial difficulty, respectively. During the three and nine months ended September 30, 2023 and 2022, there were no modified loans to borrowers experiencing financial difficulty for which there was a payment default within the first 12 months of the modification.

As of September 30, 2023 and December 31, 2022, individually evaluated modified loans to borrowers experiencing financial difficulty had a related allowance of $342,000 and $393,000, respectively. As of September 30, 2023 and December 31, 2022, none and $759,000 of modified loans to borrowers experiencing financial difficulty were performing in accordance with their modified terms, respectively. Accruing modified loans to borrowers experiencing financial difficulty are included in the loans individually evaluated as part of the calculation of the allowance for credit losses for loans.

Risk Rating System

The Company evaluates and assigns a risk grade to each loan based on certain criteria to assess the credit quality of the loan. The assignment of a risk rating is done for each individual loan. Loans are graded from inception and on a continuing basis until the debt is repaid. Any adverse or beneficial trends will trigger a review of the loan risk rating. Each loan is assigned a risk grade based on its characteristics. Loans with low to average credit risk are assigned a lower risk grade than those with higher credit risk as determined by the individual loan characteristics.

The Company’s Pass loans include loans with acceptable business or individual credit risk where the borrower’s operations, cash flow or financial condition provides evidence of low to average levels of risk.

Loans that are assigned higher risk grades are loans that exhibit the following characteristics:

Special Mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. A Special Mention rating is a temporary rating, pending the occurrence of an event that would cause the risk rating either to improve or to be downgraded.

Loans in this category would be characterized by any of the following situations:

●

Credit that is currently protected but is potentially a weak asset;

●

Credit that is difficult to manage because of an inadequate loan agreement, the condition of and/or control over collateral, failure to obtain proper documentation, or any other deviation from product lending practices; and

●

Adverse financial trends.

Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans classified substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. The potential loss does not have to be recognizable in an individual credit for that credit to be risk rated Substandard. A loan can be fully and adequately secured and still be considered Substandard.

Some characteristics of Substandard loans are:

●

Inability to service debt from ordinary and recurring cash flow;

●

Chronic delinquency;

●

Reliance upon alternative sources of repayment;

●

Term loans that are granted on liberal terms because the borrower cannot service normal payments for that type of debt;

●

Repayment dependent upon the liquidation of collateral;

●

Inability to perform as agreed, but adequately protected by collateral;

●

Necessity to renegotiate payments to a non-standard level to ensure performance; and

●

The borrower is bankrupt, or for any other reason, future repayment is dependent on court action.

Doubtful loans have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and value, highly questionable and improbable. Doubtful loans have a high probability of loss, yet certain important and reasonably specific pending factors may work toward the strengthening of the credit.

Losses are recognized as charges to the allowance when the loan or portion of the loan is considered uncollectible or at the time of foreclosure. Recoveries on loans previously charged off are credited to the allowance for credit losses.

The following tables present the internally assigned risk grade by class of loans at the dates indicated:


													Revolving
		Term loans - amortized cost by origination year											loans
	2023		2022		2021		2020		2019		Prior		amortized cost		Total
September 30, 2023
Commercial and industrial:
Pass	$	23,283	$	27,432	$	21,522	$	24,532	$	27,434	$	18,876	$	18,144	$	161,223
Special mention		—		—		—		1,375		977		3,302		1,701		7,355
Substandard		—		—		—		192		237		910		1,026		2,365
Total commercial and industrial	$	23,283	$	27,432	$	21,522	$	26,099	$	28,648	$	23,088	$	20,871	$	170,943
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	27	$	282	$	—	$	309
Construction and land:
Pass	$	448	$	5,487	$	—	$	1,193	$	144	$	710	$	—	$	7,982
Special mention		—		—		—		—		—		56		—		56
Substandard		—		—		—		366		—		—		—		366
Total construction and land	$	448	$	5,487	$	—	$	1,559	$	144	$	766	$	—	$	8,404
Commercial real estate:
Pass	$	74,308	$	409,040	$	378,185	$	150,881	$	183,877	$	400,607	$	8,085	$	1,604,983
Special mention		—		3,448		4,667		8,582		15,437		38,990		—		71,124
Substandard		—		—		89		—		11,583		13,366		—		25,038
Total commercial real estate	$	74,308	$	412,488	$	382,941	$	159,463	$	210,897	$	452,963	$	8,085	$	1,701,145
Residential:
Pass	$	—	$	—	$	2,449	$	4,370	$	8,553	$	38,243	$	32,406	$	86,021
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		1,578		—		1,578
Total residential	$	—	$	—	$	2,449	$	4,370	$	8,553	$	39,821	$	32,406	$	87,599
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	172	$	3	$	175
Consumer:
Pass	$	164	$	77	$	—	$	8	$	21	$	78	$	271	$	619
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		20		—		—		20
Total consumer	$	164	$	77	$	—	$	8	$	41	$	78	$	271	$	639
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	3	$	3
Total loans outstanding
Risk ratings
Pass	$	98,203	$	442,036	$	402,156	$	180,984	$	220,029	$	458,514	$	58,906	$	1,860,828
Special mention		—		3,448		4,667		9,957		16,414		42,348		1,701		78,535
Substandard		—		—		89		558		11,840		15,854		1,026		29,367
Doubtful		—		—		—		—		—		—		—		—
Total loans outstanding	$	98,203	$	445,484	$	406,912	$	191,499	$	248,283	$	516,716	$	61,633	$	1,968,730
YTD gross charge-offs	$	—	$	—	$	—	$	—	$	27	$	454	$	6	$	487


													Revolving
		Term loans - amortized cost by origination year											loans
	2022		2021		2020		2019		2018		Prior		amortized cost		Total
December 31, 2022
Commercial and industrial:
Pass	$	31,599	$	34,584	$	35,173	$	30,632	$	4,731	$	25,147	$	19,962	$	181,828
Special mention		—		—		—		863		1,149		1,866		1,467		5,345
Substandard		—		—		40		166		388		762		9		1,365
Total commercial and industrial	$	31,599	$	34,584	$	35,213	$	31,661	$	6,268	$	27,775	$	21,438	$	188,538
Construction and land:
Pass	$	1,381	$	533	$	1,586	$	557	$	4,363	$	4,681	$	—	$	13,101
Special mention		—		—		—		—		62		—		—		62
Substandard		—		—		—		—		—		—		—		—
Total construction and land	$	1,381	$	533	$	1,586	$	557	$	4,425	$	4,681	$	—	$	13,163
Commercial real estate:
Pass	$	409,014	$	392,449	$	159,744	$	201,561	$	110,143	$	355,795	$	992	$	1,629,698
Special mention		—		—		3,591		17,210		7,919		29,561		—		58,281
Substandard		—		—		—		5,184		241		11,312		—		16,737
Total commercial real estate	$	409,014	$	392,449	$	163,335	$	223,955	$	118,303	$	396,668	$	992	$	1,704,716
Residential:
Pass	$	423	$	4,536	$	6,343	$	10,229	$	14,537	$	37,170	$	34,889	$	108,127
Special mention		—		—		—		244		—		—		3		247
Substandard		—		—		203		—		1,184		845		—		2,232
Total residential	$	423	$	4,536	$	6,546	$	10,473	$	15,721	$	38,015	$	34,892	$	110,606
Consumer:
Pass	$	539	$	10	$	1,691	$	61	$	40	$	131	$	1,690	$	4,162
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		21		—		—		—		21
Total consumer	$	539	$	10	$	1,691	$	82	$	40	$	131	$	1,690	$	4,183
Total loans outstanding
Risk ratings
Pass	$	442,956	$	432,112	$	204,536	$	243,040	$	133,816	$	422,924	$	57,532	$	1,936,916
Special mention		—		—		3,590		18,317		9,130		31,428		1,470		63,935
Substandard		—		—		243		5,371		1,814		12,918		9		20,355
Doubtful		—		—		—		—		—		—		—		—
Total loans outstanding	$	442,956	$	432,112	$	208,369	$	266,728	$	144,760	$	467,270	$	59,011	$	2,021,206

The following tables provide an aging of the Company’s loans receivable as of the dates indicated:


															Recorded
					90 Days										investment >
	30–59 Days		60–89 Days		or more		Total						Total loans		90 days and
	past due		past due		past due		past due		Current		PCD loans		receivable		accruing
September 30, 2023
Commercial and industrial	$	685	$	1,036	$	788	$	2,509	$	168,229	$	205	$	170,943	$	—
Construction and land		72		—		366		438		7,966		—		8,404		—
Commercial real estate		3,057		—		8,013		11,070		1,664,009		26,066		1,701,145		—
Residential		15		—		298		313		86,790		496		87,599		—
Consumer		—		—		—		—		639		—		639		—
Total	$	3,829	$	1,036	$	9,465	$	14,330	$	1,927,633	$	26,767	$	1,968,730	$	—


															Recorded
					90 Days										investment >
	30–59 Days		60–89 Days		or more		Total						Total loans		90 days and
	past due		past due		past due		past due		Current		PCD loans		receivable		accruing
December 31, 2022
Commercial and industrial	$	471	$	81	$	858	$	1,410	$	183,111	$	4,017	$	188,538	$	—
Construction and land		—		—		—		—		9,109		4,054		13,163		—
Commercial real estate		1,064		2,213		7,075		10,352		1,674,327		20,037		1,704,716		934
Residential		101		3		847		951		108,976		679		110,606		—
Consumer		—		—		—		—		4,183		—		4,183		—
Total	$	1,636	$	2,297	$	8,780	$	12,713	$	1,979,706	$	28,787	$	2,021,206	$	934

Nonaccrual loans totaled $14.3 million at both September 30, 2023 and December 31, 2022. Nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, were $801,000 at September 30, 2023 compared to $839,000 at December 31, 2022. At September 30, 2023, nonaccrual loans included $2.3 million of loans 30-89 days past due and $2.6 million of loans less than 30 days past due. At December 31, 2022, nonaccrual loans included $2.5 million of loans 30-89 days past due and $4.0 million of loans less than 30 days past due. At September 30, 2023, nonaccrual loans 30-89 days past due of $2.3 million was comprised of six loans and the $2.6 million of loans less than 30 days past due was comprised of 15 loans. All these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers. There were no loans that were 90 days or more past due and still accruing at September 30, 2023 compared to one such loan at December 31, 2022, which had a balance of $934,000 as of that date. Interest foregone on nonaccrual loans was approximately $173,000 and $593,000 for the three and nine months ended September 30, 2023 compared to $230,000 and $388,000 for the three and nine months ended September 30, 2022.

Purchased Credit Deteriorated Loans

In connection with the Company's acquisitions, the contractual amount and timing of undiscounted principal and interest payments and the estimated amount and timing of undiscounted expected principal and interest payments were used to estimate the fair value of PCD loans at the acquisition date. The difference between these two amounts represented the nonaccretable difference. On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represented the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. For PCD loans the accretable yield is accreted into interest income over the life of the estimated remaining cash flows. At each financial reporting date, the carrying value of each PCD loan is compared to an updated estimate of expected principal payment or recovery on each loan. To the extent that the loan carrying amount exceeds the updated expected principal payment or recovery, a provision for credit loss would be recorded as a charge to income and an allowance for credit losses for loans established.