Loans and Allowance For Credit Losses

3 Months Ended

Mar. 31, 2024

Receivables [Abstract]

Loans and Allowance For Credit Losses

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Outstanding loans as of March 31, 2024 and December 31, 2023 are summarized below. Certain loans have been pledged to secure borrowing arrangements (see Note 4).

(Dollars in thousands)	March 31, 2024			December 31, 2023
Commercial and industrial	$	610,459		$	626,615
Real estate - other		834,143			849,306
Real estate - construction and land		35,886			44,186
SBA		3,919			4,032
Other		36,484			35,394
Total loans, gross		1,520,891			1,559,533
Deferred loan origination costs, net		1,223			1,107
Allowance for credit losses		(15,981	)		(16,028	)
Total loans, net	$	1,506,133		$	1,544,612

The Company categorizes its loan portfolio 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 to classify the loans as to credit risk. The Company uses the following definitions for risk ratings:

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

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

Doubtful: A Doubtful credit has all the weaknesses inherent in Substandard, 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.

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 reflects the Company’s recorded investment in loans by credit quality indicators and by year of origination as of March 31, 2024.

	Term Loans by Year of Origination
(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving		Total
Commercial and industrial
Pass	$	2,575	$	79,677	$	131,880	$	51,887	$	14,380	$	58,129	$	212,976	$	551,504
Special mention		—		117		250		1,815		442		937		22,159		25,720
Substandard		—		751		10,173		2,445		57		431		19,378		33,235
Total	$	2,575	$	80,545	$	142,303	$	56,147	$	14,879	$	59,497	$	254,513	$	610,459
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate - other
Pass	$	6,979	$	41,701	$	186,703	$	187,023	$	83,281	$	210,914	$	69,193	$	785,794
Special mention		—		—		4,267		33,165		—		4,137		—		41,569
Substandard		—		—		—		1,638		—		5,142		—		6,780
Total	$	6,979	$	41,701	$	190,970	$	221,826	$	83,281	$	220,193	$	69,193	$	834,143
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate - construction and land
Pass	$	—	$	4,786	$	3,535	$	8,806	$	—	$	—	$	—	$	17,127
Special mention		—		—		—		14,227		—		—		—		14,227
Substandard		—		2,889		—		—		—		1,643		—		4,532
Total	$	—	$	7,675	$	3,535	$	23,033	$	—	$	1,643	$	—	$	35,886
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
SBA
Pass	$	—	$	—	$	734	$	—	$	—	$	2,243	$	102	$	3,079
Special mention		—		—		—		—		—		88		—		88
Substandard		—		—		—		—		—		752		—		752
Total	$	—	$	—	$	734	$	—	$	—	$	3,083	$	102	$	3,919
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	309	$	—	$	309
Other
Pass	$	33	$	28	$	1,372	$	—	$	148	$	32,451	$	2,452	$	36,484
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	33	$	28	$	1,372	$	—	$	148	$	32,451	$	2,452	$	36,484
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	130	$	—	$	130
Total
Pass	$	9,587	$	126,192	$	324,224	$	247,716	$	97,809	$	303,737	$	284,723	$	1,393,988
Special mention		—		117		4,517		49,207		442		5,162		22,159		81,604
Substandard		—		3,640		10,173		4,083		57		7,968		19,378		45,299
Total	$	9,587	$	129,949	$	338,914	$	301,006	$	98,308	$	316,867	$	326,260	$	1,520,891
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	439	$	—	$	439

The following table reflects the Company’s recorded investment in loans by credit quality indicators and by year of origination as of December 31, 2023.

	Term Loans by Year of Origination
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial and industrial
Pass	$	86,292	$	136,525	$	55,779	$	15,517	$	27,484	$	35,217	$	206,037	$	562,851
Special mention		124		3,700		1,940		502		730		336		24,048		31,380
Substandard		751		10,888		1,319		111		443		—		18,872		32,384
Total	$	87,167	$	151,113	$	59,038	$	16,130	$	28,657	$	35,553	$	248,957	$	626,615
Current period gross charge-offs	$	—	$	136	$	—	$	—	$	—	$	20	$	247	$	403
Real estate - other
Pass	$	44,570	$	181,849	$	186,142	$	84,708	$	58,419	$	160,252	$	83,755	$	799,695
Special mention		—		4,293		33,356		—		1,575		3,575		—		42,799
Substandard		—		—		1,649		—		587		4,576		—		6,812
Total	$	44,570	$	186,142	$	221,147	$	84,708	$	60,581	$	168,403	$	83,755	$	849,306
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate - construction and land
Pass	$	3,982	$	10,134	$	25,544	$	—	$	—	$	—	$	—	$	39,660
Special mention		2,871		—		—		—		—		—		—		2,871
Substandard		—		—		—		—		—		1,655		—		1,655
Total	$	6,853	$	10,134	$	25,544	$	—	$	—	$	1,655	$	—	$	44,186
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
SBA
Pass	$	—	$	747	$	17	$	—	$	570	$	1,721	$	108	$	3,163
Special mention		—		—		—		—		—		102		—		102
Substandard		—		—		—		—		398		369		—		767
Total	$	—	$	747	$	17	$	—	$	968	$	2,192	$	108	$	4,032
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other
Pass	$	—	$	1,511	$	—	$	169	$	—	$	33,329	$	385	$	35,394
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	—	$	1,511	$	—	$	169	$	—	$	33,329	$	385	$	35,394
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total
Pass	$	134,844	$	330,766	$	267,482	$	100,394	$	86,473	$	230,519	$	290,285	$	1,440,763
Special mention		2,995		7,993		35,296		502		2,305		4,013		24,048		77,152
Substandard		751		10,888		2,968		111		1,428		6,600		18,872		41,618
Total	$	138,590	$	349,647	$	305,746	$	101,007	$	90,206	$	241,132	$	333,205	$	1,559,533
Current period gross charge-offs	$	—	$	136	$	—	$	—	$	—	$	20	$	247	$	403

The following table reflects an aging analysis of the loan portfolio by the time past due at March 31, 2024 and December 31, 2023.

(Dollars in thousands)	30 Days		60 Days		90+ Days		Nonaccrual		Current		Total
As of March 31, 2024:
Commercial and industrial	$	4,933	$	—	$	—	$	1,159	$	604,367	$	610,459
Real estate - other		5,044		—		—		—		829,099		834,143
Real estate - construction and land		—		16,793		—		—		19,093		35,886
SBA		—		398		—		53		3,468		3,919
Other		241		169		240		—		35,834		36,484
Total loans, gross	$	10,218	$	17,360	$	240	$	1,212	$	1,491,861	$	1,520,891
As of December 31, 2023:
Commercial and industrial	$	—	$	—	$	—	$	3,728	$	622,887	$	626,615
Real estate - other		1,824		—		—		—		847,482		849,306
Real estate - construction and land		—		—		—		—		44,186		44,186
SBA		—		—		—		53		3,979		4,032
Other		—		—		—		—		35,394		35,394
Total loans, gross	$	1,824	$	—	$	—	$	3,781	$	1,553,928	$	1,559,533

The increase in past due loans during the first quarter of 2024 was primarily due to one construction loan that was paid off in full during April 2024.

The following table reflects nonaccrual loans by portfolio segment as of March 31, 2024 and December 31, 2023.

(Dollars in thousands)	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans
As of March 31, 2024:
Commercial and industrial	$	1,159	$	—	$	1,159
SBA		53		—		53
Total nonaccrual loans	$	1,212	$	—	$	1,212
As of December 31, 2023:
Commercial and industrial	$	3,708	$	20	$	3,728
SBA		53		—		53
Total nonaccrual loans	$	3,761	$	20	$	3,781

Interest forgone on nonaccrual loans totaled $62,000 and $42,000 for the three months ended March 31, 2024 and 2023, respectively. There was no interest recognized on a cash-basis on loans individually evaluated for expected credit losses/impairment during the three months ended March 31, 2024 and 2023.

The Company measures expected credit losses on a pooled basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis.

The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management designates as having higher risk. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. For collateral dependent loans, the Company has adopted the practical expedient under the ASC 326 to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

The following table reflects the Company’s collateral dependent loans by portfolio segment and by type of collateral as of March 31, 2024 and December 31, 2023.

(Dollars in thousands)	Residential Property		Business Assets		Total Collateral Dependent Loans
As of March 31, 2024:
Commercial and industrial	$	—	$	8,785	$	8,785
SBA		451		—		451
Total collateral dependent loans	$	451	$	8,785	$	9,236
As of December 31, 2023:
Commercial and industrial	$	—	$	3,728	$	3,728
SBA		53		—		53
Total collateral dependent loans	$	53	$	3,728	$	3,781

The following table reflects the changes in, and allocation of, the allowance for credit losses and allowance for loan losses by portfolio segment for the three months ended March 31, 2024 and 2023.

(Dollars in thousands)	Commercial and Industrial			Real Estate Other			Real Estate Construction and Land			SBA			Other			Total
Three months ended March 31, 2024:
Beginning balance	$	10,853		$	3,218		$	492		$	521		$	944		$	16,028
Provision for credit losses		231			(120	)		50			(7	)		147			301
Charge-offs		—			—			—			(309	)		(130	)		(439	)
Recoveries		91			—			—			—			—			91
Ending balance	$	11,175		$	3,098		$	542		$	205		$	961		$	15,981
Allowance for credit losses / gross loans		1.83	%		0.37	%		1.51	%		5.23	%		2.63	%		1.05	%
Net recoveries (charge-offs) / gross loans		0.01	%		0.00	%		0.00	%		-7.88	%		-0.36	%		-0.02	%
Three months ended March 31, 2023:
Beginning balance	$	10,620		$	5,322		$	884		$	132		$	47		$	17,005
Adoption of new accounting standard		(1,566	)		(1,725	)		1			(91	)		1,541			(1,840	)
Provision for credit losses		1,912			(654	)		(142	)		1			(653	)		464
Charge-offs		(247	)		—			—			—			—			(247	)
Recoveries		—			—			—			—			—			—
Ending balance	$	10,719		$	2,943		$	743		$	42		$	935		$	15,382
Allowance for loan losses / gross loans		1.63	%		0.34	%		1.16	%		0.75	%		2.48	%		0.95	%
Net recoveries (charge-offs) / gross loans		-0.04	%		0.00	%		0.00	%		0.00	%		0.00	%		-0.02	%

Modifications Made to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, therefore a change to the allowance for credit losses is generally not recorded upon modification.

In some cases, the Company will modify a certain loan by providing multiple types of concessions. 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 an interest rate reduction or principal forgiveness, may be granted. Upon the Company’s determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of that loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

During the three months ended March 31, 2024, the Company had two loans with a recorded investment or commitment with terms that had been modified due to the borrower experiencing financial difficulties. These loans had no payments that were considered past due as of the reporting date. During the three months ended March 31, 2023, the Company had no loans with a recorded investment or commitment with terms that had been modified due to the borrower experiencing financial difficulties. The following table reflects the type of concession granted and the financial effect of the modifications for the three months ended March 31, 2024.

(Dollars in thousands)	Amortized Cost		% of Total Portfolio Segment			Financial Effect
Commercial and industrial	$	11,065		1.81	%	Term Extension - maturity date extended from March 15, 2024 to December 15, 2024
Commercial and industrial		3,641		0.60	%	Term Extension - maturity date extended from January 31, 2024 to April 30, 2024
Total modified loans	$	14,706

The Company had no loan modifications resulting from a borrower experiencing financial difficulties with a subsequent payment default within twelve months following the modification during the three months ended March 31, 2024.