Loans and Allowance for Credit Losses on Loans

9 Months Ended

Sep. 30, 2024

Loans and Allowance for Credit Losses on Loans

Loans and Allowance for Credit Losses on Loans

5) Loans and Allowance for Credit Losses on Loans

In accordance with Accounting Standards Codification (“ASC”) 326, the Company is required to measure the allowance for credit losses of financial assets with similar risk characteristics on a collective or pooled basis. In considering the segmentation of financial assets measured at amortized cost into pools, the Company considered various risk characteristics in its analysis. Generally, the segmentation utilized represents the level at which the Company develops and documents its systematic methodology to determine the allowance for credit losses for the financial assets held at amortized cost, specifically the Company's loan portfolio and debt securities classified as held-to-maturity. Descriptions of the Company’s loan portfolio segments are included in Note 1 “Summary of Significant Accounting Policies” of the 2023 Form 10-K.

Loan Distribution

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

	September 30,		December 31,
	2024		2023
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	481,266	$	463,778
Real estate:
CRE - owner occupied		602,062		583,253
CRE - non-owner occupied		1,310,578		1,256,590
Land and construction		125,761		140,513
Home equity		124,090		119,125
Multifamily		273,103		269,734
Residential mortgages		479,524		496,961
Consumer and other		14,179		20,919
Loans		3,410,563		3,350,873
Deferred loan fees, net		(327)		(495)
Loans, net of deferred fees		3,410,236		3,350,378
Allowance for credit losses on loans		(47,819)		(47,958)
Loans, net	$	3,362,417	$	3,302,420

The allowance for credit losses is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

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

	Three Months Ended September 30, 2024
			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	$	5,010	$	5,344	$	26,847	$	1,523	$	814	$	4,269	$	3,960	$	187	$	47,954
Charge-offs		(174)		—		—		—		—		—		—		(300)		(474)
Recoveries		154		14		—		—		18		—		—		—		186
Net (charge-offs) recoveries		(20)		14		—		—		18		—		—		(300)		(288)
Provision for (recapture of)
credit losses on loans		(273)		62		603		(195)		(72)		86		(291)		233		153
End of period balance	$	4,717	$	5,420	$	27,450	$	1,328	$	760	$	4,355	$	3,669	$	120	$	47,819

	Three Months Ended September 30, 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	$	6,550	$	5,463	$	23,523	$	2,870	$	730	$	4,383	$	4,129	$	155	$	47,803
Charge-offs		(447)		—		—		—		—		—		—		—		(447)
Recoveries		59		2		—		—		117		—		—		—		178
Net (charge-offs) recoveries		(388)		2		—		—		117		—		—		—		(269)
Provision for (recapture of)
credit losses on loans		(557)		(120)		1,396		(126)		(140)		331		(635)		19		168
End of period balance	$	5,605	$	5,345	$	24,919	$	2,744	$	707	$	4,714	$	3,494	$	174	$	47,702

	Nine Months Ended September 30, 2024
			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	$	5,853	$	5,121	$	25,323	$	2,352	$	644	$	5,053	$	3,425	$	187	$	47,958
Charge-offs		(1,042)		—		—		—		—		—		—		(300)		(1,342)
Recoveries		300		24		—		—		71		—		—		—		395
Net (charge-offs) recoveries		(742)		24		—		—		71		—		—		(300)		(947)
Provision for (recapture of)
credit losses on loans		(394)		275		2,127		(1,024)		45		(698)		244		233		808
End of period balance	$	4,717	$	5,420	$	27,450	$	1,328	$	760	$	4,355	$	3,669	$	120	$	47,819

	Nine Months Ended September 30, 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		(605)		—		—		—		(246)		—		—		—		(851)
Recoveries		247		10		—		—		324		—		—		—		581
Net (charge-offs) recoveries		(358)		10		—		—		78		—		—		—		(270)
Provision for (recapture of)
credit losses on loans		(654)		(416)		2,784		(197)		(37)		1,348		(2,413)		45		460
End of period balance	$	5,605	$	5,345	$	24,919	$	2,744	$	707	$	4,714	$	3,494	$	174	$	47,702

The following tables present the amortized cost basis of nonperforming loans and loans past due over 90 days and still accruing at the dates indicated:

	September 30, 2024
	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	$	620	$	132	$	460	$	1,212
Real estate:
CRE - Owner Occupied		—		—		—		—
CRE - Non-Owner Occupied		—		—		—		—
Land and construction		5,862		—		—		5,862
Home equity		84		—		—		84
Total	$	6,566	$	132	$	460	$	7,158

	December 31, 2023
	Nonaccrual		Nonaccrual		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	$	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

The following tables present the aging of past due loans by class at the dates indicated:

	September 30, 2024
	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	$	4,390	$	1,755	$	1,082	$	7,227	$	474,039	$	481,266
Real estate:
CRE - Owner Occupied		—		—		—		—		602,062		602,062
CRE - Non-Owner Occupied		4,513		—		—		4,513		1,306,065		1,310,578
Land and construction		—		—		5,862		5,862		119,899		125,761
Home equity		659		—		—		659		123,431		124,090
Multifamily		—		—		—		—		273,103		273,103
Residential mortgages		—		—		—		—		479,524		479,524
Consumer and other		—		—		—		—		14,179		14,179
Total	$	9,562	$	1,755	$	6,944	$	18,261	$	3,392,302	$	3,410,563

	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

The following table presents the past due loans on nonaccrual and current loans on nonaccrual at the dates indicated:

	September 30,		December 31,
	2024		2023
	(Dollars in thousands)
Past due nonaccrual loans	$	6,484	$	6,100
Current nonaccrual loans		214		718
Total nonaccrual loans	$	6,698	$	6,818

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

Credit quality indicators, specifically the Company's internal risk rating systems, reflect how the Company monitors credit losses and represents factors used by the Company when measuring the allowance for credit losses. Descriptions of the Company’s credit quality indicators by financial asset are included in Note 4 “Loans and Allowance for Credit Losses on Loans” of the 2023 Form 10-K.

The following tables show the Company’s loan portfolio by credit quality indicator and year of origination at September 30, 2024 and December 31, 2023. The loan categories are based on the loan segmentation in the Company's

current expected credit loss (“CECL”) reserve methodology for the calculation of the allowance for credit losses on loans based on loan purpose and type. 

														Revolving
														Loans
		Term Loans Amortized Cost Basis by Originated Period as of September 30, 2024												Amortized
	2024		2023		2022		2021		2020		Prior Periods			Cost Basis		Total
	(Dollars in thousands)
Commercial:
Pass	$	89,567	$	27,960	$	18,909	$	17,627	$	11,351	$	30,452	$	275,491	$	471,357
Special Mention		3,029		—		358		131		—		185		200		3,903
Substandard		—		147		592		—		—		4,415		100		5,254
Substandard-Nonaccrual		—		—		—		223		—		529		—		752
Total		92,596		28,107		19,859		17,981		11,351		35,581		275,791		481,266
CRE - Owner Occupied:
Pass		42,069		31,845		83,140		102,419		66,720		253,342		9,407		588,942
Special Mention		—		—		—		8,282		447		1,217		—		9,946
Substandard		—		—		—		—		3,174		—		—		3,174
Substandard-Nonaccrual		—		—		—		—		—		—		—		—
Total		42,069		31,845		83,140		110,701		70,341		254,559		9,407		602,062
CRE - Non-Owner Occupied:
Pass		97,037		223,427		232,175		255,074		27,272		446,572		3,833		1,285,390
Special Mention		—		—		4,841		2,201		—		1,279		—		8,321
Substandard		—		—		—		4,514		—		11,753		600		16,867
Substandard-Nonaccrual		—		—		—		—		—		—		—		—
Total		97,037		223,427		237,016		261,789		27,272		459,604		4,433		1,310,578
Land and construction:
Pass		26,745		43,646		30,987		15,984		214		—		—		117,576
Special Mention		—		—		—		—		—		2,323		—		2,323
Substandard		—		—		—		—		—		—		—		—
Substandard-Nonaccrual		—		—		—		3,815		966		1,081		—		5,862
Total		26,745		43,646		30,987		19,799		1,180		3,404		—		125,761
Home equity:
Pass		—		—		—		—		—		2,098		119,357		121,455
Special Mention		—		—		—		—		—		—		2,110		2,110
Substandard		—		—		—		—		—		—		441		441
Substandard-Nonaccrual		—		—		—		—		—		84		—		84
Total		—		—		—		—		—		2,182		121,908		124,090
Multifamily:
Pass		13,397		46,528		39,833		54,067		5,286		113,429		563		273,103
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Substandard-Nonaccrual		—		—		—		—		—		—		—		—
Total		13,397		46,528		39,833		54,067		5,286		113,429		563		273,103
Residential mortgage:
Pass		3,937		1,665		184,031		255,131		1,014		33,570		—		479,348
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		176		—		176
Substandard-Nonaccrual		—		—		—		—		—		—		—		—
Total		3,937		1,665		184,031		255,131		1,014		33,746		—		479,524
Consumer and other:
Pass		175		674		1,339		48		—		1,998		9,871		14,105
Special Mention		—		—		—		—		—		74		—		74
Substandard		—		—		—		—		—		—		—		—
Substandard-Nonaccrual		—		—		—		—		—		—		—		—
Total		175		674		1,339		48		—		2,072		9,871		14,179
Total loans	$	275,956	$	375,892	$	596,205	$	719,516	$	116,444	$	904,577	$	421,973	$	3,410,563
Risk Grades:
Pass	$	272,927	$	375,745	$	590,414	$	700,350	$	111,857	$	881,461	$	418,522	$	3,351,276
Special Mention		3,029		—		5,199		10,614		447		5,078		2,310		26,677
Substandard		—		147		592		4,514		3,174		16,344		1,141		25,912
Substandard-Nonaccrual		—		—		—		4,038		966		1,694		—		6,698
Grand Total	$	275,956	$	375,892	$	596,205	$	719,516	$	116,444	$	904,577	$	421,973	$	3,410,563

														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

The following tables present the gross charge-offs by class of loans and year of origination for the periods indicated:

		Gross Charge-offs by Originated Period for the Three Months Ended September 30, 2024
											Prior			Revolving
	2024		2023		2022		2021		2020		Periods			Loans		Total
	(Dollars in thousands)
Commercial	$	—	$	—	$	—	$	—	$	—	$	25	$	149	$	174
Real estate:
CRE - Owner Occupied		—		—		—		—		—		—		—		—
CRE - Non-Owner Occupied		—		—		—		—		—		—		—		—
Land and construction		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—
Multifamily		—		—		—		—		—		—		—		—
Residential mortgages		—		—		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—		300		300
Total	$	—	$	—	$	—	$	—	$	—	$	25	$	449	$	474

		Gross Charge-offs by Originated Period for the Three Months Ended September 30, 2023
											Prior			Revolving
	2023		2022		2021		2020		2019		Periods			Loans		Total
	(Dollars in thousands)
Commercial	$	1	$	45	$	—	$	—	$	229	$	172	$	—	$	447
Real estate:
CRE - Owner Occupied		—		—		—		—		—		—		—		—
CRE - Non-Owner Occupied		—		—		—		—		—		—		—		—
Land and construction		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—
Multifamily		—		—		—		—		—		—		—		—
Residential mortgages		—		—		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—		—		—
Total	$	1	$	45	$	—	$	—	$	229	$	172	$	—	$	447

		Gross Charge-offs by Originated Period for the Nine Months Ended September 30, 2024
											Prior			Revolving
	2024		2023		2022		2021		2020		Periods			Loans		Total
	(Dollars in thousands)
Commercial	$	—	$	416	$	—	$	—	$	—	$	477	$	149	$	1,042
Real estate:
CRE - Owner Occupied		—		—		—		—		—		—		—		—
CRE - Non-Owner Occupied		—		—		—		—		—		—		—		—
Land and construction		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—
Multifamily		—		—		—		—		—		—		—		—
Residential mortgages		—		—		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—		300		300
Total	$	—	$	416	$	—	$	—	$	—	$	477	$	449	$	1,342

		Gross Charge-offs by Originated Period for the Nine Months Ended September 30, 2023
											Prior			Revolving
	2023		2022		2021		2020		2019		Periods			Loans		Total
	(Dollars in thousands)
Commercial	$	1	$	49	$	—	$	—	$	278	$	277	$	—	$	605
Real estate:
CRE - Owner Occupied		—		—		—		—		—		—		—		—
CRE - Non-Owner Occupied		—		—		—		—		—		—		—		—
Land and construction		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		246		246
Multifamily		—		—		—		—		—		—		—		—
Residential mortgages		—		—		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—		—		—
Total	$	1	$	49	$	—	$	—	$	278	$	277	$	246	$	851

The amortized cost basis of collateral-dependent loans at September 30, 2024 and December 31, 2023 was $132,000 and $290,000, 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 for 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 method 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.

During the three months ended September 30, 2024, there were no loan modifications to borrowers experiencing financial difficulty. During the three months ended September 30, 2023, there were commercial loan modifications with a payment delay totaling $25,000, representing 0.01% of the total class of financing receivables. During the nine months ended September 30, 2024, there were commercial loan modifications with a term extension totaling $15,000, representing 0.00% of the total class of financing receivables, and included a weighted average term extension of 12 months. During the nine months ended September 30, 2023, there were commercial loan modifications with a payment delay totaling $79,000, a combination term extension and interest rate reduction totaling $2,000, representing 0.02% of the total class of financing receivables, and included principal forgiveness totaling $3,000, a weighted average interest rate reduction of 0.25%, and a weighted average term extension of 14 months.

The Company has not committed to lend any additional amounts to these borrowers. There were no payment defaults for loans modified for the three and nine months ended September 30, 2024 and September 30, 2023.