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Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures
 6 Months Ended
Jun. 30, 2023
Credit Loss [Abstract]  
Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures
Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported under the incurred loss model in accordance with previously applicable GAAP as described in the 2022 Annual Report.
The level of the ACL on loans represents management's estimate of expected credit losses over the expected life of the loans at the balance sheet date. For all loan classes, loan losses are charged against the ACL on loans when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the ACL on loans.
Upon adoption of CECL on January 1, 2023, the Company replaced the incurred loss model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The ACL on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.

Risk characteristics relevant to each portfolio segment are as follows:
•Residential real estate - Loans in this segment are collateralized by owner-occupied 1-4 family residential real estate, second and vacation homes, 1-4 family investment properties, home equity and second mortgage loans. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, could have an effect on the credit quality of this segment.
•Construction real estate - Loans in this segment include residential and commercial construction properties, commercial real estate development loans (while in the construction phase of the projects), land and land development loans.
Repayment is dependent on the credit quality of the individual borrower and/or the underlying cash flows generated by the properties being constructed. The overall health of the economy, including unemployment rates, housing prices, vacancy rates and material costs, could have an effect on the credit quality of this segment.
•Commercial real estate - Loans in this segment are primarily properties occupied by businesses or income-producing properties. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by a general slowdown in business or increased vacancy rates which, in turn, could have an effect on the credit quality of this segment. Management requests business financial statements at least annually and monitors the cash flows of these loans.
•Commercial - Loans in this segment are made to businesses and are generally secured by non-real estate assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer or business spending, could have an effect on the credit quality of this segment.
•Consumer - Loans in this segment are made to individuals for personal expenditures, such as an automobile purchase, and include unsecured loans. Repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment, could have an effect on the credit quality of this segment.
•Municipal - Loans in this segment are made to municipalities located within the Company's service area. Repayment is primarily dependent on taxes or other funds collected by the municipalities. Management considers there to be minimal risk surrounding the credit quality of this segment.

Changes in the ACL on loans, by class of loans, for the three and six months ended June 30, 2023 were as follows:
For The Three Months
Ended June 30, 2023		Balance, March 31, 2023Charge-OffsRecoveriesCredit Loss Expense (Benefit)Balance, June 30, 2023
(Dollars in thousands)
Non-revolving residential real estate$2,071 $— $— $121 $2,192 
Revolving residential real estate143 — — 1 144 
Residential real estate2,214 — — 122 2,336 
Commercial construction real estate1,713 — — (188)1,525 
Residential construction real estate148 — — 1 149 
Construction real estate1,861 — — (187)1,674 
Non-residential commercial real estate2,186 — — (34)2,152 
Multi-family residential real estate221 — — 11 232 
Commercial real estate2,407 — — (23)2,384 
Commercial368 — — (14)354 
Consumer5 (4)1 3 5 
Municipal79 — — (52)27 
Total$6,934 $(4)$1 $(151)$6,780 
For the Six Months
Ended June 30, 2023		Balance, December 31, 2022Impact of Adoption of ASU No. 2016-13Charge-OffsRecoveriesCredit Loss Expense (Benefit)Balance, June 30, 2023
(Dollars in thousands)
Non-revolving residential real estate$2,294 $(270)$— $— $168 $2,192 
Revolving residential real estate123 25 — — (4)144 
Residential real estate2,417 (245)— — 164 2,336 
Commercial construction real estate611 982 — — (68)1,525 
Residential construction real estate421 (290)— — 18 149 
Construction real estate1,032 692 — — (50)1,674 
Non-residential commercial real estate2,931 (757)— — (22)2,152 
Multi-family residential real estate1,004 (780)— — 8 232 
Commercial real estate3,935 (1,537)— — (14)2,384 
Commercial301 191 — — (138)354 
Consumer10 (5)(4)1 3 5 
Municipal95 (42)— — (26)27 
Unallocated549 (549)— — — — 
Total$8,339 $(1,495)$(4)$1 $(61)$6,780 
Changes in the ACL on loans, by class of loans under the incurred loss methodology, for the three and six months ended June 30, 2022 were as follows:
For The Three Months
Ended June 30, 2022		Balance, March 31, 2022Charge-OffsRecoveriesCredit Loss Expense (Benefit)Balance, June 30, 2022
(Dollars in thousands
Residential real estate$2,224 $— $— $15 $2,239 
Construction real estate843 — — 114 957 
Commercial real estate3,997 — — 7 4,004 
Commercial289 (1)2 28 318 
Consumer10 — 3 (3)10 
Municipal88 — — (61)27 
Unallocated885 — — (100)785 
Total$8,336 $(1)$5 $— $8,340 
For the Six Months
Ended June 30, 2022		Balance, December 31, 2021Charge-OffsRecoveriesCredit Loss Expense (Benefit)Balance, June 30, 2022
(Dollars in thousands
Residential real estate$2,068 $— $— $171 $2,239 
Construction real estate837 — — 120 957 
Commercial real estate4,122 — — (118)4,004 
Commercial275 (1)2 42 318 
Consumer11 (1)4 (4)10 
Municipal86 — — (59)27 
Unallocated937 — — (152)785 
Total$8,336 $(2)$6 $— $8,340 
The Company's ACL on off-balance sheet credit exposures is recognized as a liability within Accrued interest and other liabilities on the consolidated balance sheet, with adjustments to the ACL recognized in Credit loss expense in the consolidated statement of income. In accordance with previously applicable GAAP, there was no ACL on off-balance sheet credit exposures required during the three and six months ended June 30, 2022. The Company's activity in the ACL on off-balance sheet credit exposures for the three and six months ended June 30, 2023 was as follows:
For The Three Months Ended June 30,For the Six Months Ended June 30,
20232023
ACL on Off-Balance Sheet Credit Exposures(Dollars in thousands)
Balance, Beginning of Period$1,442 $— 
Impact of adoption of ASU No. 2016-13— 1,458 
Credit loss expense55 39 
Balance, June 30, 2023$1,497 $1,497 

Risk and collateral ratings are assigned to loans and are subject to ongoing monitoring by lending and credit personnel, with such ratings updated annually or more frequently if warranted. The following is an overview of the Company's loan rating system:
1-3 Rating - Pass
Risk-rating grades "1" through "3" comprise those loans ranging from those with lower than average credit risk, defined as borrowers with high liquidity, excellent financial condition, strong management, favorable industry trends or loans secured by highly liquid assets, through those with marginal credit risk, defined as borrowers that, while creditworthy, exhibit some characteristics requiring special attention by the account officer.
4-4.5 Rating - Satisfactory/Monitor
Borrowers exhibit potential credit weaknesses or downward trends warranting management's attention. While potentially weak, these borrowers are currently marginally acceptable; no loss of principal or interest is envisioned. When warranted, these credits may be monitored on the watch list.
5-7 Rating - Substandard
Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. The loan may be inadequately protected by the net worth and paying capacity of the obligor and/or the underlying collateral is inadequate.
The following table summarizes the Company's loans by year of origination and by loan ratings applied by management to the Company's loans by class as of June 30, 2023:
20232022202120202019PriorRevolvingTotal
Residential Real Estate(Dollars in thousands)
Pass$41,719 $116,020 $87,138 $30,491 $9,311 $56,951 $— $341,630 
Satisfactory/Monitor654 7,073 5,782 2,328 251 5,752 — 21,840 
Substandard— — — 35 — 386 — 421 
Non-revolving residential real estate42,373 123,093 92,920 32,854 9,562 63,089 — 363,891 
Pass— — — — — — 15,282 15,282 
Satisfactory/Monitor— — — — — — 1,490 1,490 
Substandard— — — — — — 63 63 
Revolving residential real estate— — — — — — 16,835 16,835 
Construction Real Estate
Pass2,052 5,801 2,936 676 1,976 1,064 — 14,505 
Satisfactory/Monitor5,146 10,975 22,449 292 283 234 — 39,379 
Substandard— — — — — — — — 
Commercial construction real estate7,198 16,776 25,385 968 2,259 1,298 — 53,884 
Pass7,687 25,180 3,613 — — — — 36,480 
Satisfactory/Monitor106 5,012 3,997 1,009 — — — 10,124 
Substandard— — — — — — — — 
Residential construction real estate7,793 30,192 7,610 1,009 — — — 46,604 
Commercial Real Estate
Pass1,808 40,628 37,853 17,945 24,368 63,187 16,256 202,045 
Satisfactory/Monitor10,062 34,564 2,613 6,469 6,957 20,776 1,462 82,903 
Substandard— — — 1,837 — 2,474 120 4,431 
Non-residential commercial real estate11,870 75,192 40,466 26,251 31,325 86,437 17,838 289,379 
Pass256 4,348 10,490 2,131 8,358 35,109 — 60,692 
Satisfactory/Monitor852 6,435 10,889 5,725 10,121 2,922 — 36,944 
Substandard— — — — — 1,378 — 1,378 
Multi-family residential real estate1,108 10,783 21,379 7,856 18,479 39,409 — 99,014 
Pass2,154 6,857 4,648 974 3,355 14,497 3,437 35,922 
Satisfactory/Monitor1,102 1,470 439 563 196 558 752 5,080 
Substandard— — — — — 5 245 250 
Commercial3,256 8,327 5,087 1,537 3,551 15,060 4,434 41,252 
Pass1,088 521 195 173 243 236 26 2,482 
Satisfactory/Monitor86 4 — — — — — 90 
Substandard— — — — — — — — 
Consumer1,174 525 195 173 243 236 26 2,572 
Pass5,546 3,500 1,164 6,769 191 4,935 — 22,105 
Satisfactory/Monitor— — — — — — — — 
Substandard— — — — — — — — 
Municipal5,546 3,500 1,164 6,769 191 4,935 — 22,105 
Total Loans$80,318 $268,388 $194,206 $77,417 $65,610 $210,464 $39,133 $935,536 

Gross charge-offs for the three and six months ended June 30, 2023 consisted of a $4 thousand consumer loan that was originated in 2022.
The following table summarizes the loan ratings applied by management to the Company's loans by class, under the incurred loss methodology, as of December 31, 2022:
December 31, 2022Residential Real EstateConstruction Real EstateCommercial Real EstateCommercialConsumerMunicipalTotal
(Dollars in thousands)
Pass$328,885 $47,356 $258,175 $36,338 $2,197 $87,980 $760,931 
Satisfactory/Monitor21,429 49,206 111,077 4,368 7 — 186,087 
Substandard2,119 58 8,695 267 — — 11,139 
Total$352,433 $96,620 $377,947 $40,973 $2,204 $87,980 $958,157 

A summary of current and past due loans as of June 30, 2023 follows:
June 30, 202330-59 Days60-89 Days90 Days and OverTotal Past DueCurrentTotal
(Dollars in thousands)
Residential real estate
Non-revolving residential real estate$— $283 $48 $331 $363,560 $363,891 
Revolving residential real estate— — 16 16 16,819 16,835 
Construction real estate
Commercial construction real estate— — — — 53,884 53,884 
Residential construction real estate— — — — 46,604 46,604 
Commercial real estate
Non-residential commercial real estate— — 120 120 289,259 289,379 
Multi-family residential real estate— — — — 99,014 99,014 
Commercial— — — — 41,252 41,252 
Consumer— 3 — 3 2,569 2,572 
Municipal— — — — 22,105 22,105 
Total$— $286 $184 $470 $935,066 $935,536 

A summary of current and past due loans as of December 31, 2022, under the incurred loss methodology, follows:
December 31, 202230-59 Days60-89 Days90 Days and OverTotal Past DueCurrentTotal
(Dollars in thousands)
Residential real estate$1,724 $79 $289 $2,092 $350,341 $352,433 
Construction real estate535 — — 535 96,085 96,620 
Commercial real estate515 2,087 34 2,636 375,311 377,947 
Commercial7 160 — 167 40,806 40,973 
Consumer7 — — 7 2,197 2,204 
Municipal— — — — 87,980 87,980 
Total$2,788 $2,326 $323 $5,437 $952,720 $958,157 
A summary of nonaccrual loans as of June 30, 2023 follows:
June 30, 2023NonaccrualNonaccrual With No Allowance for Credit Losses90 Days and Over and Accruing
Residential real estate(Dollars in thousands)
Non-revolving residential real estate$— $— $48 
Revolving residential real estate— — 16 
Commercial real estate
Non-residential commercial real estate1,957 1,957 — 
Total$1,957 $1,957 $64 

A summary of nonaccrual loans as of December 31, 2022, under the incurred loss methodology, follows:
December 31, 2022NonaccrualNonaccrual With No Allowance for Credit Losses90 Days and Over and Accruing
(Dollars in thousands)
Residential real estate$103 $— $186 
Construction real estate6 6 — 
Commercial real estate2,102 — — 
Total$2,211 $6 $186 

There was one residential real estate loan totaling $40 thousand in process of foreclosure at June 30, 2023 and one residential real estate loan totaling $28 thousand in process of foreclosure at December 31, 2022. Aggregate interest on nonaccrual loans not recognized was $95 thousand as of June 30, 2023 and $59 thousand as of December 31, 2022.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans that are individually evaluated and collateral dependent represent loans that the Company has determined foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the sale of the collateral. For these loans, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan at the measurement date.
The following table presents collateral dependent loans by loan class and collateral type as of the balance sheet dates:
June 30, 2023December 31, 2022
Real EstateReal Estate
(Dollars in thousands)
Non-residential commercial real estate$1,957 $2,068 

For periods prior to the adoption of CECL, loans were evaluated for impairment and may have been classified as impaired when management believed it was probable that the Company would not collect all the contractual interest and principal payments as scheduled in the loan agreement. Under previously applicable GAAP, a specific reserve amount was allocated to the ACL for individual loans that had been classified as impaired based on management's estimate of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. The Company accounted for the change in present value attributable to the passage of time in the ACL. Large groups of smaller balance homogeneous loans were collectively evaluated for impairment. Accordingly, the Company did not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans were subject to a restructuring agreement or had been identified as impaired as part of a larger customer relationship. Based on an evaluation of the Company's historical loss experience on substandard commercial loans, management established the commercial loan threshold for individual impairment evaluation as commercial loan relationships with aggregate balances greater than $500 thousand.
The following table provides information with respect to impaired loans by class of loan as of and for the year ended December 31, 2022, prior to the adoption of CECL:
December 31, 2022For The Year Ended
December 31, 2022
Recorded Investment
(1)		Principal Balance
(1)		Related AllowanceAverage Recorded InvestmentInterest Income Recognized
(Dollars in thousands)
Residential real estate$190 $200 $21 
Commercial real estate2,068 2,068 9 
With an allowance recorded2,258 2,268 30 
Residential real estate1,283 1,787 — 
Construction real estate58 83 — 
Commercial real estate5,865 6,403 — 
Commercial7 7 — 
With no allowance recorded7,213 8,280 — 
Residential real estate1,473 1,987 21 1,570 101 
Construction real estate58 83 — 116 27 
Commercial real estate7,933 8,471 9 5,822 185 
Commercial7 7 — 8 1 
Total$9,471 $10,548 $30 $7,516 $314 
____________________
(1)Does not reflect government guaranties on impaired loans as of December 31, 2022 totaling $423 thousand.

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing interest rate reductions, term extensions, payment deferrals or principal forgiveness. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL on loans. The following tables summarize loan modifications to borrowers experiencing financial difficulty by loan class, type of modification and the financial effect of the modifications as of and for the three and six months ended June 30, 2023:
Interest Rate Reduction
Three Months Ended
June 30, 2023		Six Months Ended
June 30, 2023
Amortized Cost Basis% of Loan ClassAmortized Cost Basis% of Loan ClassFinancial Effect
(Dollars in thousands)
Non-residential commercial real estate$— — %$413 0.14 %
Reduced weighted average contractual interest rate from 8.75% to 6.85%
Multi-family residential real estate— — %446 0.45 %
Reduced weighted average contractual interest rate from 9.25% to 7.75%

Payment Delay
Three Months Ended
June 30, 2023		Six Months Ended
June 30, 2023
Amortized Cost Basis% of Loan ClassAmortized Cost Basis% of Loan ClassFinancial Effect
(Dollars in thousands)
Non-residential commercial real estate$3,383 1.17 %$3,383 1.17 %
Modification allowed for 7 months of interest only payments with remaining balances due at maturity.
The following table presents the performance of loans as of June 30, 2023 that have been modified in the last twelve months:
June 30, 2023CurrentPast Due
30-89 Days		Past Due 90 Days and Over
(Dollars in thousands)
Non-residential commercial real estate$3,796 $— $— 
Multi-family residential real estate446 — — 

There were no loans to borrowers experiencing financial difficulty that were modified within the previous twelve months that had subsequently defaulted during the three and six months ended June 30, 2023. Loans are considered defaulted at 90 days past due.

At June 30, 2023, the Company was not committed to lend any additional funds to borrowers experiencing financial difficulty for which the Company modified the terms of the loans in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension.