Loans and Allowance for Credit Losses on Loans

12 Months Ended

Dec. 31, 2023

Loans and Allowance for Credit Losses on Loans

Loans and Allowance for Credit Losses on Loans

4) Loans and Allowance for Credit Losses on Loans

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

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

	December 31,		December 31,
	2023		2022
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	463,778	$	533,915
Real estate:
CRE - owner occupied		583,253		614,663
CRE - non-owner occupied		1,256,590		1,066,368
Land and construction		140,513		163,577
Home equity		119,125		120,724
Multifamily		269,734		244,882
Residential mortgages		496,961		537,905
Consumer and other		20,919		17,033
Loans		3,350,873		3,299,067
Deferred loan fees, net		(495)		(517)
Loans, net of deferred fees		3,350,378		3,298,550
Allowance for credit losses on loans		(47,958)		(47,512)
Loans, net	$	3,302,420	$	3,251,038

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

	Year Ended December 31, 2023
			CRE		CRE
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgages		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	6,617	$	5,751	$	22,135	$	2,941	$	666	$	3,366	$	5,907	$	129	$	47,512
Charge-offs		(750)		—		—		—		(246)		—		—		(15)		(1,011)
Recoveries		346		11		—		—		351		—		—		—		708
Net (charge-offs) recoveries		(404)		11		—		—		105		—		—		(15)		(303)
Provision for (recapture of) credit losses on loans		(360)		(641)		3,188		(589)		(127)		1,687		(2,482)		73		749
End of period balance	$	5,853	$	5,121	$	25,323	$	2,352	$	644	$	5,053	$	3,425	$	187	$	47,958
	Year Ended December 31, 2022
			CRE		CRE
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgages		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	8,414	$	7,954	$	17,125	$	1,831	$	864	$	2,796	$	4,132	$	174	$	43,290
Charge-offs		(434)		—		—		—		—		—		—		—		(434)
Recoveries		427		15		—		—		105		—		—		3,343		3,890
Net (charge-offs) recoveries		(7)		15		—		—		105		—		—		3,343		3,456
Provision for (recapture of) credit losses on loans		(1,790)		(2,218)		5,010		1,110		(303)		570		1,775		(3,388)		766
End of period balance	$	6,617	$	5,751	$	22,135	$	2,941	$	666	$	3,366	$	5,907	$	129	$	47,512
	Year Ended December 31, 2021
			CRE		CRE
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgages		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	11,587	$	8,560	$	16,416	$	2,509	$	1,297	$	2,804	$	943	$	284	$	44,400
Charge-offs		(520)		—		—		—		—		—		—		—		(520)
Recoveries		1,354		16		—		884		93		—		—		197		2,544
Net (charge-offs) recoveries		834		16		—		884		93		—		—		197		2,024
Provision for (recapture of) credit losses on loans		(4,007)		(622)		709		(1,562)		(526)		(8)		3,189		(307)		(3,134)
End of period balance	$	8,414	$	7,954	$	17,125	$	1,831	$	864	$	2,796	$	4,132	$	174	$	43,290

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

	December 31, 2023
	Nonaccrual		Nonaccrual			Loans
	with no Specific		with Specific			over 90 Days
	Allowance for		Allowance for			Past Due
	Credit		Credit			and Still
	Losses		Losses			Accruing	Total
	(Dollars in thousands)
Commercial	$	946	$	290	$	889	$	2,125
Real estate:
CRE - Owner Occupied		—		—		—		—
CRE - Non-Owner Occupied		—		—		—		—
Land and construction		4,661		—		—		4,661
Home equity		142		—		—		142
Residential mortgages		779		—		—		779
Total	$	6,528	$	290	$	889	$	7,707

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

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

	December 31, 2023
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total
	(Dollars in thousands)
Commercial	$	6,688	$	2,030	$	1,264	$	9,982	$	453,796	$	463,778
Real estate:
CRE - Owner Occupied		—		—		—		—		583,253		583,253
CRE - Non-Owner Occupied		1,289		—		—		1,289		1,255,301		1,256,590
Land and construction		955		—		3,706		4,661		135,852		140,513
Home equity		—		—		142		142		118,983		119,125
Multifamily		—		—		—		—		269,734		269,734
Residential mortgages		3,794		510		779		5,083		491,878		496,961
Consumer and other		—		—		—		—		20,919		20,919
Total	$	12,726	$	2,540	$	5,891	$	21,157	$	3,329,716	$	3,350,873

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

Past due loans 30 days or greater totaled $21,157,000 and $17,066,000 at December 31, 2023 and December 31, 2022, respectively, of which $6,100,000 and $479,000 were on nonaccrual. At December 31, 2023, there were also $718,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2022, there were also $261,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company resumes recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt.

Credit Quality Indicators

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

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, and other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with their contractual loan terms. Loans categorized as special mention have potential weaknesses that may, if not checked or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weaknesses do not yet justify a substandard classification. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

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

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

Substandard-Nonaccrual.  Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any, and it is probable that the Company will

not receive payment of the full contractual principal and interest. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.

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

Loss.  Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for credit losses on loans. Therefore, there is no balance to report as of December 31, 2023 and December 31, 2022.

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

The following tables present term loans amortized cost by vintage and loan grade classification, and revolving loans amortized cost by loan grade classification at December 31, 2023 and December 31, 2022. The loan grade classifications are based on the Bank’s internal loan grading methodology. Loan grade categories for doubtful and loss rated loans are not included on the tables below as there are no loans with those grades at December 31, 2023 and December 31, 2022. The vintage year represents the period the loan was originated or in the case of renewed loans, the period last renewed. The amortized balance is the loan balance less any purchase discounts, and plus any loan purchase premiums. The loan categories are based on the loan segmentation in the Company's CECL reserve methodology based on loan purpose and type. 

														Revolving
														Loans
		Term Loans Amortized Cost Basis by Originated Period as of December 31, 2023												Amortized
	2023		2022		2021		2020		2019		Prior Periods			Cost Basis		Total
	(Dollars in thousands)
Commercial:
Pass	$	99,387	$	25,250	$	19,732	$	14,929	$	11,893	$	22,134	$	258,461	$	451,786
Special Mention		2,107		1,092		41		—		133		1,134		467		4,974
Substandard		4		1,516		—		100		185		3,835		142		5,782
Substandard-Nonaccrual		—		—		349		—		116		771		—		1,236
Total		101,498		27,858		20,122		15,029		12,327		27,874		259,070		463,778
CRE - Owner Occupied:
Pass		32,993		86,688		110,613		68,184		52,885		214,729		10,302		576,394
Special Mention		—		250		3,241		462		—		1,802		—		5,755
Substandard		—		—		—		—		1,100		4		—		1,104
Substandard-Nonaccrual		—		—		—		—		—		—		—		—
Total		32,993		86,938		113,854		68,646		53,985		216,535		10,302		583,253
CRE - Non-Owner Occupied:
Pass		225,505		243,080		267,870		28,315		92,648		370,552		3,199		1,231,169
Special Mention		—		—		—		—		7,493		10,040		—		17,533
Substandard		—		—		—		—		—		7,614		274		7,888
Substandard-Nonaccrual		—		—		—		—		—		—		—		—
Total		225,505		243,080		267,870		28,315		100,141		388,206		3,473		1,256,590
Land and construction:
Pass		40,142		52,862		27,419		9,273		1,864		—		—		131,560
Special Mention		2,163		—		—		—		—		—		—		2,163
Substandard		2,129		—		—		—		—		—		—		2,129
Substandard-Nonaccrual		—		—		3,706		955		—		—		—		4,661
Total		44,434		52,862		31,125		10,228		1,864		—		—		140,513
Home equity:
Pass		—		—		—		—		—		1,463		111,250		112,713
Special Mention		—		—		—		—		—		—		2,110		2,110
Substandard		—		—		—		—		—		—		4,160		4,160
Substandard-Nonaccrual		—		—		—		—		—		—		142		142
Total		—		—		—		—		—		1,463		117,662		119,125
Multifamily:
Pass		47,089		41,112		55,557		5,394		42,129		75,890		355		267,526
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		2,208		—		2,208
Substandard-Nonaccrual		—		—		—		—		—		—		—		—
Total		47,089		41,112		55,557		5,394		42,129		78,098		355		269,734
Residential mortgage:
Pass		1,684		187,417		268,617		1,037		6,861		28,892		—		494,508
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		973		—		—		—		701		—		1,674
Substandard-Nonaccrual		—		779		—		—		—		—		—		779
Total		1,684		189,169		268,617		1,037		6,861		29,593		—		496,961
Consumer and other:
Pass		2,332		1,376		3		—		—		2,089		14,961		20,761
Special Mention		—		—		62		—		—		96		—		158
Substandard		—		—		—		—		—		—		—		—
Substandard-Nonaccrual		—		—		—		—		—		—		—		—
Total		2,332		1,376		65		—		—		2,185		14,961		20,919
Total loans	$	455,535	$	642,395	$	757,210	$	128,649	$	217,307	$	743,954	$	405,823	$	3,350,873
Risk Grades:
Pass	$	449,132	$	637,785	$	749,811	$	127,132	$	208,280	$	715,749	$	398,528	$	3,286,417
Special Mention		4,270		1,342		3,344		462		7,626		13,072		2,577		32,693
Substandard		2,133		2,489		—		100		1,285		14,362		4,576		24,945
Substandard-Nonaccrual		—		779		4,055		955		116		771		142		6,818
Grand Total	$	455,535	$	642,395	$	757,210	$	128,649	$	217,307	$	743,954	$	405,823	$	3,350,873

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

The following table presents the gross charge-offs by class of loans and year of origination for the year ended December 31, 2023:

		Gross Charge-offs by Originated Period for the Year Ended December 31, 2023												Revolving
	2023		2022		2021		2020		2019		Prior Periods			Loans		Total
	(Dollars in thousands)
Commercial	$	35	$	95	$	—	$	—	$	339	$	281	$	—	$	750
Real estate:
CRE - Owner Occupied		—		—		—		—		—		—		—		—
CRE - Non-Owner Occupied		—		—		—		—		—		—		—		—
Land and construction		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		246		246
Multifamily		—		—		—		—		—		—		—		—
Residential mortgages		—		—		—		—		—		—		—		—
Consumer and other		—		—		—		—		15		—		—		15
Total	$	35	$	95	$	—	$	—	$	354	$	281	$	246	$	1,011

The amortized cost basis of collateral-dependent loans at December 31, 2023 and December 31, 2022 was $290,000 and $324,000, respectively, and were secured by business assets.

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

Loan Modifications

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, payment delay, or interest reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

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 principal forgiveness, 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 combination is at least two of the following: a term extension, principal forgiveness, payment delay, and/or interest rate reduction.

The following tables present the amortized cost basis of loans at December 31, 2023 that were both experiencing financial difficulty and modified through the year ended September 30, 2023, by segment and type of modification. The percentage of the amortized cost basis of the loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below.

	Year Ended December 31, 2023
									Combination		Combination
									Term		Term
									Extension		Extension		Total
							Interest		and		and		Class of
	Principal		Payment		Term		Rate		Principal		Interest Rate		Financing
	Forgiveness		Delay		Extension		Reduction		Forgiveness		Reduction		Receivables
	(Dollars in thousands)
Commercial	$	—	$	63	$	—	$	—	$	—	$	3	0.01	%
Total	$	—	$	63	$	—	$	—	$	—	$	3	0.01	%

The Company has committed to lend no additional amounts to the borrowers included in the previous table.

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following tables present the performance of such loans that have been modified for the periods indicated.

	Year Ended December 31, 2023
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due
	(Dollars in thousands)
Commercial	$	45	$	1	$	—	$	46
Total	$	45	$	1	$	—	$	46

The following tables presents the financial effect of the loan modification presented above to borrowers experiencing financial difficulty for the year ended December 31, 2023:

	Year Ended December 31, 2023
			Weighted		Weighted
			Average		Average
			Interest		Term
	Principal		Rate		Extension
	Forgiveness		Reduction		(Months)
	(Dollars in thousands)
Commercial	$	7	0.25	%	14
Total	$	7	0.25	%	14

There were no loans modified in the last twelve months that had a payment default.