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Loans and Allowance for Credit Losses on Loans
 3 Months Ended
Mar. 31, 2023
Receivables [Abstract]  
Loans and Allowance for Credit Losses on Loans Loans and Allowance for Credit Losses on Loans
Loans Receivable

The following table presents the composition of the loan portfolio as of March 31, 2023 and December 31, 2022:

($ in thousands)March 31, 2023December 31, 2022
Commercial real estate$833,615 $842,208 
SBA—real estate225,719 221,340 
SBA—non-real estate13,275 13,377 
C&I117,841 116,951 
Home mortgage500,635 482,949 
Consumer1,400 1,467 
Gross loans receivable1,692,485 1,678,292 
Allowance for credit losses(20,814)(19,241)
Loans receivable, net (1)
$1,671,671 $1,659,051 
(1)Includes net deferred loan fees or costs, unamortized premiums and unaccreted discounts of $70 thousand and $160 thousand as of March 31, 2023 and December 31, 2022, respectively.
No loans were outstanding to related parties as of March 31, 2023 and December 31, 2022.

Allowance for Credit Losses on Loans

The Company employs a modeled approach that takes into account current and future economic conditions to estimate lifetime expected losses on a collective basis. With the adoption of CECL, the Company elected not to consider accrued interest receivable in its estimated credit losses because the Company writes off uncollectible accrued interest receivable in a timely manner. The Company considers writing off accrued interest amounts once the amounts become 90 days past due to be considered within a timely manner. The Company has elected to write off accrued interest receivable by reversing interest income. The Company uses transition matrices to develop the Probability of Default ("PD") and Loss Given Default ("LGD") approach, incorporating quantitative factors and qualitative considerations in the calculation of the allowance for credit losses for collectively assessed loans. The model provides forecasts of PD and LGD based on national unemployment rates using regression analysis. The Company incorporates future economic conditions using a weighted multiple scenario approach: baseline and adverse. The Company applies a reasonable and supportable period of one year for the baseline scenario and two years for the adverse scenario, after which loss assumptions revert to historical loss information through a one-year reversion period for the baseline scenario and a two-year reversion period for the adverse scenario.
In order to quantify the credit risk impact of other trends and changes within the loan portfolio, the Company utilizes qualitative adjustments to the modeled estimated loss approaches. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors listed below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the loss rates. This matrix considers the following nine factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council Interagency Policy Statement on the Allowance for Credit Losses, updated to reflect the adoption of CECL:

•    Changes in lending policies and procedures, including changes in underwriting standards and practices for collection, charge-offs, and recoveries;
•    Actual and expected changes in national and local economic and business conditions and developments in which the institution operates that affect the collectivity of loans;
•    Changes in the nature and volume of the loan portfolio;
•    Changes in the experience, ability, and depth of lending management and staff;
•    Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;
•    Changes in the quality of the credit review function;
•    Changes in the value of the underlying collateral for loans that are not collateral-dependent;
•    The existence, growth, and effect of any concentrations of credit, and
•    The effect of other external factors, such as the regulatory, legal and technological environments; competition; and events such as natural disasters.

For loans that do not share similar risk characteristics such as nonaccrual loans above $250 thousand, the Company evaluates these loans on an individual basis in accordance with ASC 326. Such nonaccrual loans are considered to have different risk profiles than performing loans and are therefore evaluated individually. The Company elected to collectively assess nonaccrual loans with balances below $250 thousand along with the performing and accrual loans, in order to reduce the operational burden of individually assessing small nonaccrual loans with immaterial balances. For individually assessed loans, the allowance for credit losses is measured using either 1) the present value of future cash flows discounted at the loan’s effective interest rate; or 2) the fair value of the collateral, if the loan is collateral-dependent. For the collateral-dependent loans, the Company obtains a new appraisal to determine the fair value of collateral. The appraisals are based on an “as-is” valuation. To ensure that appraised values remain current, the Company obtains updated appraisals every twelve months from a qualified independent appraiser. If the fair value of the collateral is less than the amortized balance of the loan, the Company recognizes an allowance for credit losses with a corresponding charge to the provision for credit losses.

The Company maintains a separate allowance for credit losses for its off-balance sheet commitments. The Company uses an estimated funding rate to allocate an allowance to undrawn exposures. This funding rate is used as a credit conversion factor to capture how much undrawn lines of credit can potentially become drawn at any point. The funding rate is determined based on a look-back period of 8 quarters. Credit loss is not estimated for off-balance sheet commitments that are unconditionally cancellable by the Company.
The following table summarizes the activity in the allowance for credit losses on loans by portfolio segment for the three months ended March 31, 2023 and 2022:

($ in thousands)
Commercial
Real Estate
SBA—
Real Estate
SBA —Non-
Real Estate
C&I
Home
Mortgage
ConsumerTotal
Three Months Ended March 31, 2023
Beginning balance$6,951 $1,607 $207 $1,643 $8,826 $7 $19,241 
Impact of CECL adoption875 (238)(142)(320)1,753 (4)1,924 
(Reversal of) provision for credit losses(951)(140)(7)(53)893 — (258)
Charge-offs(91)(11)(14)— — — (116)
Recoveries— — 23 — — — 23 
Ending balance$6,784 $1,218 $67 $1,270 $11,472 $3 $20,814 
Three Months Ended March 31, 2022
Beginning balance$8,150 $2,022 $199 $2,848 $2,891 $13 $16,123 
(Reversal of) provision for credit losses (1)
(1,670)(258)(47)644 1,877 — 546 
Charge-offs— (14)— — — — (14)
Recoveries— — 17 — — — 17 
Ending balance$6,480 $1,750 $169 $3,492 $4,768 $13 $16,672 
(1)Excludes reversal of uncollectible accrued interest receivable of $205 thousand for the three months ended March 31, 2022.

The following table presents a composition of (reversal of) provision for credit losses for the period presented:

($ in thousands)
Three Months Ended March 31, 2023
Reversal of credit losses on loans$(258)
Reversal of credit losses on off-balance sheet commitments(80)
Total reversal of credit losses$(338)
The following table presents the allowance for credit losses on loans and recorded investment (not including accrued interest receivable) by portfolio segment and impairment methodology as of March 31, 2023 and December 31, 2022:

($ in thousands)
Individually
Evaluated
for Impairment
Collectively
Evaluated
for Impairment
Total
As of March 31, 2023
Allowance for credit losses:
Commercial real estate$— $6,784 $6,784 
SBA—real estate34 1,184 1,218 
SBA—non-real estate— 67 67 
C&I259 1,011 1,270 
Home mortgage— 11,472 11,472 
Consumer— 3 3 
Total$293 $20,521 $20,814 
Loans (1):
Commercial real estate$— $833,615 $833,615 
SBA—real estate806 224,913 225,719 
SBA—non-real estate— 13,275 13,275 
C&I270 117,571 117,841 
Home mortgage1,133 499,502 500,635 
Consumer— 1,400 1,400 
Total$2,209 $1,690,276 $1,692,485 
As of December 31, 2022
Allowance for credit losses:
Commercial real estate$— $6,951 $6,951 
SBA—real estate— 1,607 1,607 
SBA—non-real estate— 207 207 
C&I279 1,364 1,643 
Home mortgage— 8,826 8,826 
Consumer— 7 7 
Total$279 $18,962 $19,241 
Loans (1):
Commercial real estate$— $842,208 $842,208 
SBA—real estate423 220,917 221,340 
SBA—non-real estate— 13,377 13,377 
C&I279 116,672 116,951 
Home mortgage— 482,949 482,949 
Consumer— 1,467 1,467 
Total$702 $1,677,590 $1,678,292 
(1)Excludes accrued interest receivables of $6.4 million both as of March 31, 2023 and December 31, 2022.

The following table presents the recorded investment in impaired loans and the specific allowance for loan losses as of December 31, 2022.
December 31, 2022 (1)
($ in thousands)Unpaid Principal BalanceRecorded
Investment
With No
Allowance		Recorded
Investment
With
Allowance		Related
Allowance
SBA—real estate$423 $423 $— $— 
C&I279 — 279 279 
Total$702 $423 $279 $279 
(1) The difference between the unpaid principal balance (net of partial charge-offs) and the recorded investment in the loans was not considered to be material

The following table presents the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans by portfolio segment for the years ended December 31, 2022. The difference between interest income recognized and cash basis interest recognized was immaterial.

Three Months Ended March 31, 2022
($ in thousands)Average
Recorded
Investment		Interest
Income
Recognized
SBA—real estate$818 $— 
C&I309 — 
Home mortgage— — 
Total$1,127 $— 

Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. The estimated credit losses for these loans are based on the collateral’s fair value less selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less selling costs at the time of foreclosure. As of March 31, 2023, there were $1.9 million of collateral-dependent loans which are primarily secured by residential and commercial real estate, as well as equipment. The allowance for credit losses allocated to these loans as of March 31, 2023 was $259 thousand.

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2023, for which repayment is expected to be obtained through the sale of the underlying collateral.

($ in thousands)Hotel / MotelGas StationSingle-Family ResidentialTotal
As of March 31, 2023
SBA—real estate$424 $381 $— $805 
Home mortgage— — 1,133 1,133 
Total$424 $381 $1,133 $1,938 
The following table presents the recorded investment in nonaccrual loans and loans past due 90 or more days and still accruing interest, by portfolio as of March 31, 2023 and December 31, 2022:

($ in thousands)Nonaccrual Loans with a Related Allowance for Credit LossesNonaccrual Loans without a Related Allowance for Credit LossesTotal Nonaccrual Loans
90 or More
Days
Past Due &
Still Accruing
Total
As of March 31, 2023
SBA—real estate$1,500 $424 $1,924 $— $1,924 
SBA—non-real estate653 — 653 246 899 
C&I270 — 270 — 270 
Home mortgage132 1,133 1,265 — 1,265 
Total$2,555 $1,557 $4,112 $246 $4,358 
As of December 31, 2022
SBA—real estate$423 $— $423 
SBA—non-real estate657 442 1,099 
C&I279 — 279 
Home mortgage1,280 — 1,280 
Total$2,639 $442 $3,081 
Nonaccrual loans and loans past due 90 or more days and still accruing interest include both homogeneous loans that are collectively and individually evaluated for impairment and individually classified impaired loans.

The following table represents the aging analysis of the recorded investment in past due loans as of March 31, 2023 and December 31, 2022:

($ in thousands)
30-59
Days
Past Due
60-89
Days
Past Due
> 90 Days
Past Due
Total
Past Due
Loans Not
Past Due
Total (1)
As of March 31, 2023
Commercial real estate$— $— $— $— $833,615 $833,615 
SBA—real estate430 — 1,500 1,930 221,859 225,719 
SBA—non-real estate95 — 691 786 11,703 13,275 
C&I— — — — 117,841 117,841 
Home mortgage5,227 — 342 5,569 489,497 500,635 
Consumer— — — — 1,400 1,400 
Total$5,752 $— $2,533 $8,285 $1,675,915 $1,692,485 
As of December 31, 2022
Commercial real estate$— $— $— $— $842,208 $842,208 
SBA—real estate199 175 — 374 220,592 221,340 
SBA—non-real estate117 49 381 547 12,283 13,377 
C&I— — 441 441 116,069 116,951 
Home mortgage1,707 1,522 342 3,571 475,807 482,949 
Consumer— — — — 1,467 1,467 
Total$2,023 $1,746 $1,164 $4,933 $1,668,426 $1,678,292 
(1)Excludes accrued interest receivables of $6.4 million both as of March 31, 2023 and December 31, 2022.

Loan Modifications to Borrowers Experiencing Financial Difficult: On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing
financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty, unless those loans do not share the same risk characteristics with other loans in the portfolio. Provided that is not the case, these modifications are included in their respective cohort and the allowance for credit losses is estimated on a pooled basis consistent with the other loans with similar risk characteristics.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, other than insignificant payment deferrals, other than insignificant term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. No loan modifications were made to borrowers experiencing financial difficulty during the three months ended March 31, 2023. No charge-offs of previously modified loans were recorded during the three months ended March 31, 2023.
Credit Quality Indicators: 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, among other factors. For consumer loans, a credit grade is established at inception, and generally only adjusted based on performance. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
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 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.
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.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following table presents the loan portfolio's amortized cost by loan type, risk rating and year of origination as of as of March 31, 2023:

March 31, 2023
Term Loans by Origination YearRevolving Loans
Total (1)
($ in thousands)2023
2022
202120202019Prior
Commercial real estate
Pass$17,774 $216,444 $150,672 $101,254 $147,925 $187,802 $11,184 $833,055 
Special mention— — — — — 560 — 560 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Subtotal$17,774 $216,444 $150,672 $101,254 $147,925 $188,362 $11,184 $833,615 
Current period charge-offs$— $— $— $— $91 $— $— $91 
SBA— real estate
Pass$2,686 $49,259 $32,031 $29,056 $32,328 $75,815 $— $221,175 
Special mention— — — — 936 1,121 — 2,057 
Substandard— — 1,500 — — 987 — 2,487 
Doubtful— — — — — — — — 
Subtotal$2,686 $49,259 $33,531 $29,056 $33,264 $77,923 $— $225,719 
Current period charge-offs$— $— $11 $— $— $— $— $11 
SBA—non-real estate
Pass$1,235 $2,958 $539 $2,146 $1,070 $4,586 $— $12,534 
Special mention— — — — — — — — 
Substandard— — — — — 396 — 396 
Doubtful— — — — — 345 — 345 
Subtotal$1,235 $2,958 $539 $2,146 $1,070 $5,327 $— $13,275 
Current period charge-offs$— $— $— $— $— $14 $— $14 
C&I
Pass$4,054 $24,304 $26,764 $6,533 $5,564 $2,841 $47,511 $117,571 
Special mention— — — — — — — — 
Substandard— — — — — 270 — 270 
Doubtful— — — — — — — — 
Subtotal$4,054 $24,304 $26,764 $6,533 $5,564 $3,111 $47,511 $117,841 
Current period charge-offs$— $— $— $— $— $— $— $— 
Home mortgage
Pass$26,513 $325,326 $82,729 $20,196 $9,858 $34,748 $— $499,370 
Special mention— — — — — — — — 
Substandard— — 342 791 — 132 — 1,265 
Doubtful— — — — — — — — 
Subtotal$26,513 $325,326 $83,071 $20,987 $9,858 $34,880 $— $500,635 
Current period charge-offs$— $— $— $— $— $— $— $— 
Consumer
Pass$53 $— $— $— $149 $200 $998 $1,400 
Special mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Subtotal$53 $— $— $— $149 $200 $998 $1,400 
Current period charge-offs$— $— $— $— $— $— $— $— 
Total loans
Pass$52,315 $618,291 $292,735 $159,185 $196,894 $305,992 $59,693 $1,685,105 
Special mention— — — — 936 1,681 — 2,617 
Substandard— — 1,842 791 — 1,785 — 4,418 
Doubtful— — — — — 345 — 345 
Subtotal$52,315 $618,291 $294,577 $159,976 $197,830 $309,803 $59,693 $1,692,485 
Current period charge-offs$— —$— $11 $— $91 $14 $— $116 
(1)Excludes accrued interest receivables of $6.4 million as of March 31, 2023.
The following table presents the loan portfolio's amortized cost by loan type and risk rating of as of December 31, 2022:

($ in thousands)Pass
Special
Mention
SubstandardDoubtful
Total (1)
As of December 31, 2022
Commercial real estate$841,645 $563 $— $— $842,208 
SBA—real estate220,348 — 992 — 221,340 
SBA—non-real estate12,621 — 480 276 13,377 
C&I116,672 — 279 — 116,951 
Home mortgage481,669 — 1,280 — 482,949 
Consumer1,467 — — — 1,467 
Total$1,674,422 $563 $3,031 $276 $1,678,292 
(1)Excludes accrued interest receivables of $6.4 million as of December 31, 2022.