Loans and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2023

Loans and Allowance for Credit Losses

Loans and Allowance for Credit Losses

3.    Loans and Allowance for Credit Losses

As of and prior to December 31, 2022, loans receivable was accounted for under the incurred loss model. As of January 1, 2023, portfolio loans are accounted for under the current expected credit loss model. Accordingly, some of the information presented is not comparable from period to period.

A summary of the Company’s loan portfolio is as follows:

	September 30,		December 31,
	2023		2022
Commercial real estate loans:
Construction	$	28,231	$	20,329
Non-residential		305,752		282,422
Multi-family		84,033		67,777
Residential real estate loans		70,019		53,720
Commercial and industrial loans(1)		87,421		87,982
Consumer loans:
Indirect automobile		406,585		457,223
Home equity		11,654		11,507
Other consumer		8,872		9,479
Total gross loans		1,002,567		990,439
Net deferred loan costs		9,696		11,872
Allowance for credit losses		(8,497)		(7,943)
Total net loans	$	1,003,766	$	994,368

⁽¹⁾ Includes $321 and $537 in U.S. Small Business Administration (“SBA”), paycheck protection program (“PPP”) loans at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023 and December 31, 2022, the unpaid principal balances of loans held for sale included in the residential real estate category above were $107 and $247, respectively.

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans:

	September 30, 2023
							Greater Than
			30-59 Days		60-89 Days		90 Days Past		Total Loans
	Current		Past Due		Past Due		Due		Receivable		Non-accrual
Commercial real estate:
Construction	$	28,231	$	—	$	—	$	—	$	28,231	$	—
Non-residential		299,723		—		3,768		2,261		305,752		2,261
Multifamily		83,673		—		360		—		84,033		—
Residential real estate		69,157		235		122		505		70,019		1,630
Commercial and industrial		86,997		188		78		158		87,421		158
Consumer:
Indirect automobile		395,521		8,772		1,771		521		406,585		567
Home equity		11,436		14		29		175		11,654		175
Other consumer		8,681		129		25		37		8,872		37
Total	$	983,419	$	9,338	$	6,153	$	3,657	$	1,002,567	$	4,828

	December 31, 2022
							Greater Than
			30-59 Days		60-89 Days		90 Days Past		Total Loans
	Current		Past Due		Past Due		Due		Receivable		Non-accrual
Commercial real estate:
Construction	$	20,329	$	—	$	—	$	—	$	20,329	$	—
Non-residential		275,860		4,701		479		1,382		282,422		1,382
Multifamily		67,413		364		—		—		67,777		—
Residential real estate		51,476		1,417		246		581		53,720		1,794
Commercial and industrial		87,742		57		—		183		87,982		183
Consumer:
Indirect automobile		444,418		10,714		1,389		702		457,223		797
Home equity		11,279		51		58		119		11,507		217
Other consumer		9,208		149		71		51		9,479		51
Total	$	967,725	$	17,453	$	2,243	$	3,018	$	990,439	$	4,424

All of our non-accrual loans are individually analyzed. The Company has one individually analyzed home equity loan of $98 that was accruing interest at September 30, 2023.

The following table presents the Company’s amortized cost basis of individually analyzed loans for which there is no  related ACL at September 30, 2023:

	September 30, 2023
Commercial real estate:
Non-residential	$	1,364
Residential real estate		1,629
Commercial and industrial		158
Consumer:
Indirect automobile		278
Home equity		273
Other consumer		35
Total	$	3,737

Effective January 1, 2023, the Company has modified its accounting policy for the ACL on loans as described below.

The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date. The ACL on loans is increased through a provision for credit losses recognized in the Consolidated Statements of Income and by recoveries of amounts previously charged off. The ACL on loans is reduced by charge-offs on loans. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. Full or partial charge-offs on individually analyzed loans are generally recognized when the collateral or future cash flows are deemed to be insufficient to support the carrying value of the loan.

The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable economic forecasts. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency levels, or terms, as well as for changes in environmental conditions, that may not be reflected in historical loss rates.

Management employs a process and methodology to estimate the ACL on loans that evaluate both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. Pooled loan portfolio segments include commercial construction, commercial real estate, multi-family, commercial and industrial, residential real estate (including homeowner construction), home equity, indirect automobile and other consumer loans. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments or are determined for foreclosure.

For loans that are individually analyzed, the ACL is measured using a discounted cash flow (“DCF”) methodology based upon the loan’s contractual effective interest rate, or, if the loan is collateral-dependent, at the fair value of the collateral. Factors management considers when measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. For collateral-dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the collateral.

For pooled loans, the Company utilizes a DCF methodology to estimate credit losses over the expected life of the loans. The life of the loan excludes expected extensions, renewals and modifications. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to the historical mean of its macroeconomic assumption in order to estimate the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived.

Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable economic forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans. In addition, various regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate.

The Company made an accounting policy election to exclude accrued interest from the amortized cost basis of loans. In addition, the Company elected not to measure an allowance for credit losses for accrued interest receivable, because a timely write-off policy exists. The policy generally requires loans to be placed on non-accrual when principal or interest is 90 days or more past due unless the loan is well-secured and in the process of collection. When a loan is placed on non-accrual, accrued interest is reversed against interest income. For the nine months ended September 30, 2023, $42 in accrued interest was reversed during the period for non-accrual loans. Total accrued interest receivable associated with loans totaled $2,925 and $3,723, at September 30, 2023 and December 31, 2022, respectively, and was reported in accrued interest receivable on the consolidated statements of financial condition.

Impaired loans disclosures presented below as of December 31, 2022 represent requirements prior to the adoption of CECL on January 1, 2023. The following table summarizes information regarding impaired loans by loan portfolio class:

	December 31, 2022
	Recorded		Unpaid Principal		Related		Average Recorded
	Investment		Balance		Allowance		Investment
With no related allowance recorded:
Commercial real estate:
Non-residential	$	1,382	$	2,472	$	—	$	1,967
Residential real estate		1,794		2,445		—		1,890
Commercial and industrial		183		242		—		309
Consumer:
Indirect automobile		371		439		—		336
Home equity		217		219		—		146
Other consumer		49		53		—		38
Total	$	3,996	$	5,870	$	—	$	4,686
With an allowance recorded:
Commercial real estate:
Commercial and industrial	$	—	$	—	$	—	$	114
Consumer:
Indirect automobile		426		435		107		293
Other consumer		2		2		2		11
Total	$	428	$	437	$	109	$	418
Total:
Commercial real estate:
Non-residential	$	1,382	$	2,472	$	—	$	1,967
Residential real estate		1,794		2,445		—		1,890
Commercial and industrial		183		242		—		423
Consumer:
Indirect automobile		797		874		107		629
Home equity		217		219		—		146
Other consumer		51		55		2		49
Total	$	4,424	$	6,307	$	109	$	5,104

The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying statements of financial condition. The Company and participating lenders share ratably in any gains or losses that may result from a loan’s performance under its contractual terms. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At September 30, 2023 and December 31, 2022, the Company was servicing loans for participants aggregating $41,506 and $8,466, respectively.

Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $415 and $625 at September 30, 2023 and December 31, 2022, respectively, and are all individually analyzed.

As a result of the adoption of ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” on January 1, 2023, the Company had no reportable balances related to TDRs as of and for the nine months ended September 30, 2023.

The Company services certain loans that it has sold to third parties. The aggregate balances of loans serviced for others were $287,036 and $301,235 as of September 30, 2023 and December 31, 2022, respectively.  Included in these loans serviced for others are loans serviced for the Federal Home Loan Mortgage Corporation with a recourse provision whereby the Company is obligated to bear all costs when a default, including foreclosure, occurs. At September 30, 2023 and December 31, 2022, the maximum contingent liability associated with loans sold with recourse was $1,075 and $276, respectively, which is not recorded in the consolidated financial statements. Losses are borne in priority order by the borrower, private mortgage insurance and the Company. The Company has never repurchased any loans or incurred any losses under these recourse provisions.

The balances of capitalized servicing rights, included in other assets at September 30, 2023 and December 31, 2022, were $2,081 and $2,409, respectively. Fair value exceeds carrying value, and thus, no impairment charges related to servicing rights were recognized during the nine month period ended September 30, 2023 or the year ended December 31, 2022.

Activity in the Company’s ACL for loans for the three and nine months ended September 30, 2023 is summarized in the table below. The Adoption of the CECL Standard row presents adjustments recorded on January 1, 2023 through retained earnings.

	Commercial				Commercial
	Real Estate		Residential		and Industrial		Indirect		Consumer		Totals
	Three months ended September 30, 2023
Allowance for credit losses:
Beginning balance	$	2,294	$	179	$	454	$	4,968	$	108	$	8,003
Provision for (reversal of) credit losses		517		13		13		341		(5)		879
Loans charged-off		—		—		—		(1,098)		—		(1,098)
Recoveries		—	$	49	$	69	$	588	$	7		713
Ending balance	$	2,811	$	241	$	536	$	4,799	$	110	$	8,497

	Commercial		Residential		Commercial
	Real Estate		Real Estate		and Industrial		Indirect		Consumer		Totals
	Nine months ended September 30, 2023
Allowance for credit losses:
Beginning balance	$	3,031	$	103	$	881	$	3,868	$	60	$	7,943
Adoption of CECL standard		(860)		54		(383)		1,710		59		580
Provision for (reversal of) credit losses		640		32		639		118		(35)		1,394
Loans charged-off		—		—		(710)		(2,584)		(25)		(3,319)
Recoveries		—		52		109		1,687		51		1,899
Ending balance	$	2,811	$	241	$	536	$	4,799	$	110	$	8,497
Ending balance:
Loans individually analyzed	$	126	$	—	$	—	$	87	$	2	$	215
Loans collectively analyzed	$	2,685	$	241	$	536	$	4,712	$	108	$	8,282
Loan receivables:
Ending balance	$	418,016	$	70,019	$	87,421	$	406,585	$	20,526	$	1,002,567
Ending balance:
Loans individually analyzed	$	2,259	$	1,629	$	158	$	573	$	310	$	4,929
Loans collectively analyzed	$	415,757	$	68,390	$	87,263	$	406,012	$	20,216	$	997,638

Activity in the Company’s allowance for loan losses for the three and nine months ended September 30, 2022 and December 31, 2022 is summarized in the tables below.

	Commercial		Residential		Commercial
	Real Estate		Real Estate		and Industrial			Indirect	Consumer		Totals
	Three months ended September 30, 2022
Allowance for loan losses:
Beginning balance	$	3,440	$	59	$	859	$	3,738	$	73	$	8,169
(Reversal of) provision for loan losses		(86)		26		344		238		23		545
Loans charged-off		—		—		(6)		(736)		(39)		(781)
Recoveries		117		1		—		430		11		559
Ending balance	$	3,471	$	86	$	1,197	$	3,670	$	68	$	8,492

	Commercial		Residential		Commercial
	Real Estate		Real Estate		and Industrial			Indirect	Consumer		Totals
	Nine months ended September 30, 2022
Allowance for loan losses:
Beginning balance	$	3,317	$	54	$	725	$	3,416	$	47	$	7,559
Provision for (reversal of) loan losses		37		(79)		477		593		84		1,112
Loans charged-off		—		(44)		(6)		(1,790)		(100)		(1,940)
Recoveries		117		155		1		1,451		37		1,761
Ending balance	$	3,471	$	86	$	1,197	$	3,670	$	68	$	8,492

	Commercial		Residential		Commercial
	Real Estate		Real Estate		and Industrial		Indirect		Consumer		Totals
	December 31, 2022
Allowance for loan losses:
Ending balance:
Loans deemed impaired	$	—	$	—	$	—	$	107	$	2	$	109
Loans not deemed impaired	$	3,031	$	103	$	881	$	3,761	$	58	$	7,834
Loan receivables:
Ending balance	$	370,528	$	53,720	$	87,982	$	457,223	$	20,986	$	990,439
Ending balance:
Loans deemed impaired	$	1,382	$	1,794	$	183	$	797	$	268	$	4,424
Loans not deemed impaired	$	369,146	$	51,926	$	87,799	$	456,426	$	20,718	$	986,015

The Company has also recorded an ACL for unfunded commitments, which was recorded in other liabilities; see Note 9 to the consolidated financial statements. The provision is recorded within the provision for credit losses on the Company’s income statement.

The following table summarizes the provision for credit losses for the three months and nine months ended September 30, 2023 and 2022:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Provision for credit losses - loans	$	879	$	545	$	1,394	$	1,112
Provision for credit losses - unfunded commitments		31		—		78		—
Provision for credit losses	$	910	$	545	$	1,472	$	1,112

In the normal course of business, the Company grants loans to officers, directors and other related parties. Balances and activity of such loans during the periods presented were not material.  

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, multifamily, construction and commercial loans. To assist in the review process, the Company engages an independent third-party to review a significant portion of loans within these segments. Consumer loans are rated as performing or non-performing based on payment status in accordance with regulatory retail credit guidance. Management uses the results of these reviews as part of its annual review process. In addition, management utilizes delinquency reports, the watch list and other loan reports to monitor credit quality of other loan segments.

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. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination and is updated on a quarterly basis for loans risk rated Watch, Special Mention, Substandard, or Doubtful.

The Company uses the following definitions for risk ratings:

Watch – Loans classified as watch exhibit weaknesses that require more than usual monitoring. Issues may include deteriorating financial condition, payments made after due date but within 30 days, adverse industry conditions or management problems.

Special Mention – Loans classified as special mention exhibit signs of further deterioration but still generally make payments within 30 days. This is a transitional rating and loans should typically not be rated Special Mention for more than 12 months.

Substandard – Loans classified as substandard possess weaknesses that jeopardize the ultimate collection of the principal and interest outstanding. These loans exhibit continued financial losses, ongoing delinquency, overall poor financial condition, and/or insufficient collateral. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as non-performing have all the weaknesses of substandard loans, and have deteriorated to the level that there is a high probability of substantial loss.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered Pass rated loans.

The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category, as well as gross write-offs for the nine months ended September 30, 2023, and by fiscal year of origination as of September 30, 2023.

													Revolving
	Loans by Origination Year												Loans
	2023		2022		2021		2020		2019		Prior		Amortized Cost		Total
Commercial construction
Pass	$	-	$	6,531	$	-	$	-	$	-	$	-	$	-	$	6,531
Watch		4,213		11,725		5,762		-		-		-		-		21,700
Total commercial construction		4,213		18,256		5,762		-		-		-		-		28,231
Commercial non-residential
Pass	$	25,475	$	43,949	$	26,855	$	16,876	$	40,433	$	47,220	$	-	$	200,808
Watch		16,669		9,402		8,526		13,024		8,515		38,255		-		94,391
Special mention		-		-		-		-		5,927		1,445		-		7,372
Substandard		-		-		-		-		480		2,701		-		3,181
Total commercial non-residential		42,144		53,351		35,381		29,900		55,355		89,621		-		305,752
Multifamily
Pass	$	816	$	18,854	$	30,614	$	2,120	$	1,555	$	4,396	$	-	$	58,355
Watch		1,000		6,785		7,007		-		1,284		9,602		-		25,678
Total multifamily		1,816		25,639		37,621		2,120		2,839		13,998		-		84,033
Residential
Performing	$	19,934	$	26,280	$	2,172	$	2,745	$	2,638	$	14,620	$	-	$	68,389
Non-performing		-		-		-		-		-		1,630		-		1,630
Total residential		19,934		26,280		2,172		2,745		2,638		16,250		-		70,019
Commercial and industrial
Pass	$	9,577	$	27,242	$	11,561	$	1,671	$	1,160	$	1,449	$	11,171	$	63,831
Watch		1,223		1,425		344		674		592		1,687		16,011		21,956
Special mention		224		-		326		7		39		28		-		624
Substandard		-		-		-		-		112		854		44		1,010
Total commercial and industrial		11,024		28,667		12,231		2,352		1,903		4,018		27,226		87,421
Current-period gross write-offs		-		-		710		-		-		-		-		710
Indirect automobile
Performing	$	78,575	$	174,314	$	81,424	$	39,927	$	23,396	$	8,382	$	-	$	406,018
Non-performing		54		155		199		40		114		5		-		567
Total indirect automobile		78,629		174,469		81,623		39,967		23,510		8,387		-		406,585
Current-period gross write-offs		92		1,083		716		324		259		110		-		2,584
Home equity
Performing	$	-	$	-	$	-	$	-	$	34	$	3,991	$	7,454	$	11,479
Non-performing		-		-		-		-		-		175		-		175
Total home equity		-		-		-		-		34		4,166		7,454		11,654
Other consumer
Performing	$	2,697	$	4,034	$	1,032	$	520	$	170	$	157	$	225	$	8,835
Non-performing		2		1		10		24		-		-		-		37
Total other consumer		2,699		4,035		1,042		544		170		157		225		8,872
Current-period gross write-offs		-		13		-		11		-		1		-		25
Total Loans
Pass/performing	$	137,074	$	301,204	$	153,658	$	63,859	$	69,386	$	80,215	$	18,850	$	824,246
Watch		23,105		29,337		21,639		13,698		10,391		49,544		16,011		163,725
Special mention		224		-		326		7		5,966		1,473		-		7,996
Substandard		-		-		-		-		592		3,555		44		4,191
Non-performing		56		156		209		64		114		1,810		-		2,409
Total Loans	$	160,459	$	330,697	$	175,832	$	77,628	$	86,449	$	136,597	$	34,905	$	1,002,567
Total Current-period gross write-offs	$	92	$	1,096	$	1,426	$	335	$	259	$	111	$	-	$	3,319

The following table presents the classes of the loan portfolio summarized by the pass category and the criticized categories of special mention and substandard within the internal risk system:

	December 31, 2022
	Pass		Special Mention		Substandard		Total
Commercial real estate:
Construction	$	20,329	$	—	$	—	$	20,329
Non-residential		271,491		7,904		3,027		282,422
Multifamily		67,777		—		—		67,777
Residential real estate		52,265		—		1,455		53,720
Commercial and industrial		83,680		3,825		477		87,982
Consumer:
Indirect automobile		456,112		—		1,111		457,223
Home equity		11,290		—		217		11,507
Other consumer		9,428		—		51		9,479
Total	$	972,372	$	11,729	$	6,338	$	990,439