Loans and Allowance for Credit Losses

12 Months Ended

Dec. 31, 2022

Loans Held for Sale

Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of December 31, 2022 and 2021.

Loans Held for Investment

The following table presents amortized cost and unpaid principal balance of loans for the periods indicated:


	December 31, 2022			December 31, 2021
(In Thousands)	Amortized Cost	Unpaid Principal	Difference	Amortized Cost	Unpaid Principal	Difference
Commercial & industrial loans	$358,128	$359,900	($1,772)	$448,338	$454,106	($5,768)
Commercial real estate:
Owner occupied properties	349,973	351,580	(1,607)	300,200	301,623	(1,423)
Non-owner occupied and multifamily properties	482,270	486,021	(3,751)	435,311	438,631	(3,320)
Residential real estate:
1-4 family residential properties secured by first liens	73,381	73,674	(293)	32,542	32,602	(60)
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	20,259	20,103	156	19,610	19,489	121
1-4 family residential construction loans	44,000	44,314	(314)	36,222	36,542	(320)
Other construction, land development and raw land loans	99,182	100,075	(893)	88,094	88,604	(510)
Obligations of states and political subdivisions in the US	32,539	32,540	(1)	16,403	16,565	(162)
Agricultural production, including commercial fishing	34,099	34,263	(164)	27,959	28,082	(123)
Consumer loans	4,335	4,293	42	4,801	4,763	38
Other loans	3,619	3,632	(13)	4,406	4,422	(16)
Total	1,501,785	1,510,395	(8,610)	1,413,886	1,425,429	(11,543)
Allowance for credit losses	(13,838)			(11,739)
	$1,487,947	$1,510,395	($8,610)	$1,402,147	$1,425,429	($11,543)

The difference between the amortized cost and unpaid principal balance is primarily net deferred origination fees totaling $8.6 million and $11.5 million at December 31, 2022 and 2021, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $5.5 million at both December 31, 2022 and 2021, and was included in other assets in the Consolidated Balance Sheets.

Amortized cost in the above table includes $7.1 million and $118.2 million as of December 31, 2022 and 2021, respectively, in PPP loans administered by the U.S. Small Business Administration (“SBA”) within the Commercial & industrial loan segment.

At December 31, 2022, approximately 69% of the Company’s loans, excluding PPP loans, are secured by real estate and 1% are unsecured. Approximately 30% are for general commercial uses, including professional, retail, and small businesses. Repayment is expected from the borrowers’ cash flow or, secondarily, the collateral. The Company’s exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is determined to be of no value.

Allowance for Credit Losses

The activity in the ACL related to loans held for investment for the periods indicated is as follows:


	Beginning Balance	Credit Loss Expense (Benefit)	Charge-offs	Recoveries	Ending Balance
	(In Thousands)
2022
Commercial & industrial loans	$3,027	($1,124)	($506)	$1,517	$2,914
Commercial real estate:
Owner occupied properties	3,176	(137)	—	55	3,094
Non-owner occupied and multifamily properties	2,930	685	—	—	3,615
Residential real estate:
1-4 family residential properties secured by first liens	439	969	—	5	1,413
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	215	134	—	40	389
1-4 family residential construction loans	120	192	—	—	312
Other construction, land development and raw land loans	1,635	168	—	—	1,803
Obligations of states and political subdivisions in the US	32	47	—	—	79
Agricultural production, including commercial fishing	91	39	—	15	145
Consumer loans	67	—	(3)	4	68
Other loans	7	(1)	—	—	6
Total	$11,739	$972	($509)	$1,636	$13,838


	Beginning Balance	Credit Loss Expense (Benefit)	Charge-offs	Recoveries	Ending Balance
	(In Thousands)
2021
Commercial & industrial loans	$4,348	($122)	($1,452)	$253	$3,027
Commercial real estate:					—
Owner occupied properties	3,579	(412)	—	9	3,176
Non-owner occupied and multifamily properties	4,944	(2,014)	—	—	2,930
Residential real estate:
1-4 family residential properties secured by first liens	673	(234)	—	—	439
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	419	(242)	—	38	215
1-4 family residential construction loans	454	(334)	—	—	120
Other construction, land development and raw land loans	1,994	(359)	—	—	1,635
Obligations of states and political subdivisions in the US	44	(12)	—	—	32
Agricultural production, including commercial fishing	49	11	—	31	91
Consumer loans	118	(65)	—	14	67
Other loans	3	4	—	—	7
Total	$16,625	($3,779)	($1,452)	$345	$11,739

As of December 31, 2022 the ACL increased to $13.8 million, or 0.92% of portfolio loans and 0.99% of portfolio loans, net of government guarantees from $11.7 million, or 0.83% of portfolio loans and 0.97% of portfolio loans, net of government guarantees at December 31, 2021. The Company primarily uses a DCF method to estimate the ACL for loans and generally does not record an ACL for the government guaranteed portion of loans. The increase in the ACL for loans at December 31, 2022, as compared to December 31, 2021 is primarily due to an increase in non-government guaranteed loan balances. Additionally, the Company forecasted a slight increase in future unemployment rates as of December 31, 2022 as compared to the forecast at December 31, 2021.

Credit Quality Information

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. Loans graded 7 or higher are considered "classified" loans. A description of the general characteristics of the AQR risk classifications are as follows:

Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The Company has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses.

Classified loans:

Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.

Substandard – 8: A "substandard" credit is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – 9: An asset classified "doubtful" has all the weaknesses inherent in one that is classified "substandard-8" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety.

Loss – 10: An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future.

The following tables present the Company's portfolio of risk-rated loans by grade and by year of origination. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below.


December 31, 2022	2022	2021	2020	2019	2018	Prior	Total
	(In Thousands)
Commercial & industrial loans
Pass	$157,555	$86,543	$37,147	$17,881	$9,844	$40,571	$349,541
Classified	137	4,879	397	91	2,737	346	8,587
Total commercial & industrial loans	$157,692	$91,422	$37,544	$17,972	$12,581	$40,917	$358,128

Commercial real estate:
Owner occupied properties
Pass	$66,955	$70,777	$90,496	$32,564	$13,233	$69,701	$343,726
Classified	—	—	—	—	165	6,082	6,247
Total commercial real estate owner occupied properties	$66,955	$70,777	$90,496	$32,564	$13,398	$75,783	$349,973



Non-owner occupied and multifamily properties
Pass	$94,412	$82,352	$71,407	$58,033	$16,905	$149,223	$472,332
Classified	—	—	—	274	3	9,661	9,938
Total commercial real estate non-owner occupied and multifamily properties	$94,412	$82,352	$71,407	$58,307	$16,908	$158,884	$482,270

Residential real estate:
1-4 family residential properties secured by first liens
Pass	$52,117	$5,088	$6,001	$2,535	$462	$6,968	$73,171
Classified	—		—	—	79	131	210
Total residential real estate 1-4 family residential properties secured by first liens	$52,117	$5,088	$6,001	$2,535	$541	$7,099	$73,381

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens
Pass	$6,992	$3,376	$2,041	$2,763	$2,781	$2,060	$20,013
Classified	—	—	—	—	239	7	246
Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	$6,992	$3,376	$2,041	$2,763	$3,020	$2,067	$20,259

1-4 family residential construction loans
Pass	$26,860	$3,897	$61	$—	$—	$13,073	$43,891
Classified	—	—	—	—	—	109	109
Total residential real estate 1-4 family residential construction loans	$26,860	$3,897	$61	$—	$—	$13,182	$44,000

Other construction, land development and raw land loans
Pass	$38,673	$42,448	$5,740	$1,713	$3,675	$5,112	$97,361
Classified	—	—	—	—	369	1,452	1,821
Total other construction, land development and raw land loans	$38,673	$42,448	$5,740	$1,713	$4,044	$6,564	$99,182

Obligations of states and political subdivisions in the US
Pass	$32,319	$—	$—	$—	$219	$1	$32,539
Classified	—	—	—	—	—	—	—
Total obligations of states and political subdivisions in the US	$32,319	$—	$—	$—	$219	$1	$32,539

Agricultural production, including commercial fishing
Pass	$9,748	$17,692	$3,740	$604	$879	$1,436	$34,099
Classified	—	—	—	—	—	—	—
Total agricultural production, including commercial fishing	$9,748	$17,692	$3,740	$604	$879	$1,436	$34,099

Consumer loans
Pass	$1,513	$363	$481	$345	$235	$1,391	$4,328
Classified	—	—	—	—	—	7	7
Total consumer loans	$1,513	$363	$481	$345	$235	$1,398	$4,335

Other loans
Pass	$1,291	$330	$1,547	$384	$—	$67	$3,619
Classified	—	—	—	—	—	—	—
Total other loans	$1,291	$330	$1,547	$384	$—	$67	$3,619

Total loans
Pass	$488,435	$312,866	$218,661	$116,822	$48,233	$289,603	$1,474,620
Classified	137	4,879	397	365	3,592	17,795	27,165
Total loans	$488,572	$317,745	$219,058	$117,187	$51,825	$307,398	$1,501,785

Total pass loans	$488,435	$312,866	$218,661	$116,822	$48,233	$289,603	$1,474,620
Government guarantees	(25,172)	(36,531)	(9,751)	(12,885)	(2,964)	(5,314)	(92,617)
Total pass loans, net of government guarantees	$463,263	$276,335	$208,910	$103,937	$45,269	$284,289	$1,382,003

Total classified loans	$137	$4,879	$397	$365	$3,592	$17,795	$27,165


Government guarantees	—	(4,396)	(1,135)	—	—	(9,293)	(14,824)
Total classified loans, net government guarantees	$137	$483	($738)	$365	$3,592	$8,502	$12,341


December 31, 2021	2021	2020	2019	2018	2017	Prior	Total
	(In Thousands)
Commercial & industrial loans
Pass	$227,376	$54,478	$29,846	$37,339	$23,205	$44,554	$416,798
Classified	18,853	714	3,564	3,118	517	4,774	31,540
Total commercial & industrial loans	$246,229	$55,192	$33,410	$40,457	$23,722	$49,328	$448,338

Commercial real estate:
Owner occupied properties
Pass	$81,533	$83,975	$39,254	$14,841	$14,452	$57,717	$291,772
Classified	—	1,399	—	522	—	6,507	8,428
Total commercial real estate owner occupied properties	$81,533	$85,374	$39,254	$15,363	$14,452	$64,224	$300,200

Non-owner occupied and multifamily properties
Pass	$77,205	$77,961	$61,147	$34,307	$19,833	$154,561	$425,014
Classified	—	—	—	10	10,286	1	10,297
Total commercial real estate non-owner occupied and multifamily properties	$77,205	$77,961	$61,147	$34,317	$30,119	$154,562	$435,311

Residential real estate:
1-4 family residential properties secured by first liens
Pass	$7,756	$8,023	$3,689	$531	$1,466	$8,812	$30,277
Classified	417	1,077	472	90	—	209	2,265
Total residential real estate 1-4 family residential properties secured by first liens	$8,173	$9,100	$4,161	$621	$1,466	$9,021	$32,542

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens
Pass	$5,806	$2,535	$3,229	$3,464	$259	$4,046	$19,339
Classified	—	—	—	259	—	12	271
Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	$5,806	$2,535	$3,229	$3,723	$259	$4,058	$19,610

1-4 family residential construction loans
Pass	$21,409	$1,056	$1,707	$62	$—	$11,879	$36,113
Classified	—	—	—	—	109	—	109
Total residential real estate 1-4 family residential construction loans	$21,409	$1,056	$1,707	$62	$109	$11,879	$36,222

Other construction, land development and raw land loans
Pass	$39,624	$26,458	$11,044	$3,315	$139	$5,544	$86,124
Classified	—	—	—	460	—	1,510	1,970
Total other construction, land development and raw land loans	$39,624	$26,458	$11,044	$3,775	$139	$7,054	$88,094

Obligations of states and political subdivisions in the US
Pass	$4,120	$812	$1,875	$343	$2,733	$6,520	$16,403
Classified	—	—	—	—	—	—	—
Total obligations of states and political subdivisions in the US	$4,120	$812	$1,875	$343	$2,733	$6,520	$16,403

Agricultural production, including commercial fishing
Pass	$19,970	$3,929	$810	$1,118	$741	$1,391	$27,959
Classified	—	—	—	—	—	—	—
Total agricultural production, including commercial fishing	$19,970	$3,929	$810	$1,118	$741	$1,391	$27,959

Consumer loans
Pass	$873	$815	$653	$403	$291	$1,766	$4,801
Classified	—	—	—	—	—	—	—


Total consumer loans	$873	$815	$653	$403	$291	$1,766	$4,801

Other loans
Pass	$2,028	$1,645	$430	$95	$—	$208	$4,406
Classified	—	—	—	—	—	—	—
Total other loans	$2,028	$1,645	$430	$95	$—	$208	$4,406

Total loans
Pass	$487,700	$261,687	$153,684	$95,818	$63,119	$296,998	$1,359,006
Classified	19,270	3,190	4,036	4,459	10,912	13,013	54,880
Total loans	$506,970	$264,877	$157,720	$100,277	$74,031	$310,011	$1,413,886

Total pass loans	$487,700	$261,687	$153,684	$95,818	$63,119	$296,998	$1,359,006
Government guarantees	(145,713)	(12,725)	(14,429)	(3,299)	(306)	(6,562)	(183,034)
Total pass loans, net of government guarantees	$341,987	$248,962	$139,255	$92,519	$62,813	$290,436	$1,175,972

Total classified loans	$19,270	$3,190	$4,036	$4,459	$10,912	$13,013	$54,880
Government guarantees	(7,201)	(1,259)	—	—	—	(10,571)	(19,031)
Total classified loans, net government guarantees	$12,069	$1,931	$4,036	$4,459	$10,912	$2,442	$35,849

Past Due Loans

The following tables present an aging of contractually past due loans as of the periods indicated:


(In Thousands)	30-59 Days Past Due	60-89 Days Past Due	Greater Than 90 Days Past Due	Total Past Due	Current	Total	Greater Than 90 Days Past Due Still Accruing
December 31, 2022
Commercial & industrial loans	$37	$521	$56	$614	$357,514	$358,128	$—
Commercial real estate:
Owner occupied properties	—	—	798	798	349,175	349,973	—
Non-owner occupied and multifamily properties	—	—	274	274	481,996	482,270	—
Residential real estate:
1-4 family residential properties secured by first liens	60	79	72	211	73,170	73,381	—
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	112	—	127	239	20,020	20,259	—
1-4 family residential construction loans	—	—	109	109	43,891	44,000	—
Other construction, land development and raw land loans	—	—	1,545	1,545	97,637	99,182	—
Obligations of states and political subdivisions in the US	—	—	—	—	32,539	32,539	—
Agricultural production, including commercial fishing	—	—	—	—	34,099	34,099	—
Consumer loans	6	80	—	86	4,249	4,335	—
Other loans	—	—	—	—	3,619	3,619	—
Total	$215	$680	$2,981	$3,876	$1,497,909	$1,501,785	$—
December 31, 2021
Commercial & industrial loans	$206	$51	$469	$726	$447,612	$448,338	$—
Commercial real estate:
Owner occupied properties	12	—	1,176	1,188	299,012	300,200	—
Non-owner occupied and multifamily properties	—	—	—	—	435,311	435,311	—
Residential real estate:
1-4 family residential properties secured by first liens	—	—	90	90	32,452	32,542	—
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	—	—	139	139	19,471	19,610	—
1-4 family residential construction loans	—	—	109	109	36,113	36,222	—
Other construction, land development and raw land loans	—	—	1,636	1,636	86,458	88,094	—
Obligations of states and political subdivisions in the US	—	—	—	—	16,403	16,403	—
Agricultural production, including commercial fishing	—	—	—	—	27,959	27,959	—
Consumer loans	—	—	—	—	4,801	4,801	—
Other loans	—	—	—	—	4,406	4,406	—
Total	$218	$51	$3,619	$3,888	$1,409,998	$1,413,886	$—

Nonaccrual Loans

Nonaccrual loans net of government guarantees totaled $6.4 million and $10.7 million at December 31, 2022 and December 31, 2021, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual status for which there was no related ACL:


	December 31, 2022		December 31, 2021
(In Thousands)	Nonaccrual	Nonaccrual With No ACL	Nonaccrual	Nonaccrual With No ACL

Commercial & industrial loans	$3,294	$3,287	$4,350	$4,298
Commercial real estate:
Owner occupied properties	1,457	1,457	3,506	3,506

Residential real estate:
1-4 family residential properties secured by first liens	151	144	1,778	1,778
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	246	198	271	215
1-4 family residential construction loans	109	109	109	109
Other construction, land development and raw land loans	1,545	1,545	1,636	1,636


Consumer loans	—	—	—	—

Total nonaccrual loans	7,076	7,014	11,650	11,542
Government guarantees on nonaccrual loans	(646)	(646)	(978)	(978)
Net nonaccrual loans	$6,430	$6,368	$10,672	$10,564

Interest income which would have been earned on nonaccrual loans for 2022, 2021, and 2020 amounted to $434,000, $744,000, and $856,000, respectively.

There was $10,000 in interest on nonaccrual loans reversed through interest income in both 2022 and 2021. There was no interest earned on nonaccrual loans with a principal balance during 2022 or 2021. However, the Company recognized interest income of $2.2 million, $1.6 million, and $924,000 in 2022, 2021, and 2020, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero.

Loans are classified as collateral dependent when it it probable that the Company will be unable to collect the scheduled payments of principal and interest when due, and repayment is expected to be provided substantially through the sale of the collateral. As of December 31, 2022 and 2021, there are no collateral dependent loans for which foreclosure is probable.

Troubled Debt Restructurings

Loans classified as TDRs totaled $5.1 million and $10.6 million at December 31, 2022 and 2021, respectively. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise.

The provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company has elected to adopt these provisions of the CARES Act. As of December 31, 2022 and 2021, the Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs with principal balance outstanding of:


Loan Modifications due to COVID-19 as of December 31, 2022
(Dollars in thousands)	Interest Only	Full Payment Deferral	Total
Portfolio loans	$999	$—	$999
Number of modifications	1	—	1


Loan Modifications due to COVID-19 as of December 31, 2021
(Dollars in thousands)	Interest Only	Full Payment Deferral	Total
Portfolio loans	$49,219	$—	$49,219
Number of modifications	16	—	16

The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Payment Modification: A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category.

Combination Modification: Any other type of modification, including the use of multiple categories above.

There were no newly restructured loans that occurred in 2022. The below disclosed restructurings were not related to COVID-19 modifications:


	Accrual Status	Nonaccrual Status	Total Modifications
(In Thousands)















Troubled Debt Restructurings	$291	$4,844	$5,135
Total	$291	$4,844	$5,135

The following tables present newly restructured loans that occurred during 2021, by concession (terms modified):


	December 31, 2021
(In Thousands)	Number of Contracts	Rate Modification	Term Modification	Payment Modification	Combination Modification	Total Modifications
Pre-Modification Outstanding Recorded Investment:
Commercial & industrial loans	2	$—	$3,792	$—	$—	$3,792
Commercial real estate:
Owner occupied properties	1	—	360	—	—	360
Residential real estate:
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	1	—	—	139	—	139
Other construction, land development and raw land loans	1	—	577	—	—	577
Total	5	$—	$4,729	$139	$—	$4,868
Post-Modification Outstanding Recorded Investment:
Commercial & industrial loans	1	$—	$3,118	$—	$—	$3,118
Commercial real estate:
Owner occupied properties	1	—	350	—	—	350
Residential real estate:
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	1	—	—	139	—	139
Other construction, land development and raw land loans	1	—	577	—	—	577
Total	4	$—	$4,045	$139	$—	$4,184

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs at December 31, 2022. There were zero charge-offs in 2022 and 2021 on loans that were later classified as a TDR.

There were no loans that were restructured during 2022, 2021, or 2020 that also subsequently defaulted within the first twelve months of restructure in those same periods.

Loans to Related Parties

Certain directors, and companies of which directors are principal owners, have loans with the Company. Such transactions are made on substantially the same terms, including interest rates and collateral required, as those prevailing for similar transactions of unrelated parties. An analysis of the loan transactions for the years indicated follows:


(In Thousands)	2022	2021	2020
Balance, beginning of the year	$191	$217	$309
Loans made	1,886	—	—
Repayments	81	26	92
Balance, end of year	$1,996	$191	$217

The Company had $110,000 of unfunded loan commitments to these directors or their related interests on December 31, 2022 and $115,000 of unfunded loan commitments on December 31, 2021.

Pledged Loans

At December 31, 2022 and 2021, there were no loans pledged as collateral to secure public deposits.