LOANS AND ALLOWANCE FOR CREDIT LOSSES

9 Months Ended

Sep. 30, 2022

LOANS AND ALLOWANCE FOR CREDIT LOSSES

LOANS AND ALLOWANCE FOR CREDIT LOSSES

NOTE 3.           LOANS AND ALLOWANCE FOR CREDIT LOSSES

We evaluate risk characteristics of loans based on regulatory call report code with segmentation based on the underlying collateral for certain loan types. The following is a summary of total loans by regulatory call report code segmentation based on underlying collateral for certain loan types:

	September 30,		December 31,
(in thousands)	2022		2021
Commercial construction	$	97,156	$	56,263
Commercial real estate owner occupied		256,475		257,122
Commercial real estate non-owner occupied		1,081,924		887,092
Tax exempt		41,622		41,280
Commercial and industrial		319,645		307,112
Residential real estate		953,113		888,263
Home equity		92,296		86,657
Consumer other		8,133		8,121
Total loans		2,850,364		2,531,910
Allowance for credit losses		25,018		22,718
Net loans	$	2,825,346	$	2,509,192

Total unamortized net costs and premiums included in loan totals were as follows:

	September 30,		December 31,
(in thousands)	2022		2021
Net unamortized loan origination costs	$	3,367	$	3,014
Net unamortized fair value discount on acquired loans		(3,898)		(4,758)
Total	$	(531)	$	(1,744)

We exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, 2022 and December 31, 2021, accrued interest receivable for loans totaled $8.8 million and $6.3 million, respectively, and is included in the “other assets” line item on the consolidated balance sheets.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent legislation established the Payroll Protection Program (“PPP”) are administered directly by the Small Business Administration (“SBA”).  As of September 30, 2022, we had no remaining PPP loans and as of December 31, 2021, we had 61 PPP loans outstanding, with an outstanding principal balance of  $6.7 million.  PPP loans are included in the commercial and industrial portfolio segment.

Characteristics of each loan portfolio segment are as follows:

Commercial construction - Loans in this segment primarily include raw land, land development and construction of commercial and multifamily residential properties.  Collateral values are determined based upon appraisals and evaluations of the completed structure in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy guidelines that are more restrictive than on stabilized commercial real estate transactions.  Construction loans are primarily paid by the cash flow generated from the completed structure, such as operating leases, rents, or other operating cash flows from the borrower.

Commercial real estate owner occupied and non-owner occupied - Loans in these segments are primarily owner-occupied or income-producing properties.  Loans to Real Estate Investment Trusts (REITs) and unsecured loans to developers that closely correlate to the inherent risk in commercial real estate markets are also included.  Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines.  Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.

Tax Exempt - Loans in this segment primarily include loans to various state and municipal government entities. Loans made in these borrowers may provide us with tax-exempt income. While governed and underwritten similar to commercial loans they do have unique requirements based on established polices. Almost all state and municipal loans are considered a general obligation of the issuing entity. Given the size of many municipal borrowers, borrowings are normally not rated by major rating agencies.

Commercial and industrial loans - Loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment in this segment.  Generally loans are secured by assets of the business such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other business assets.  Some loans in this category may be unsecured or guaranteed by government agencies such as the SBA.  Loans are primarily paid by the operating cash flow of the borrower.

Residential real estate - All loans in this segment are collateralized by one-to-four family homes.  Residential real estate loans held in the loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to various underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Home equity - All loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Consumer other - Loans in this segment include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto loans, recreational equipment, overdraft protection or other consumer loans. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines, as applicable.

Allowance for Credit Losses

The Allowance for Credit Losses (“ACL”) is comprised of the allowance for loan losses and the allowance for unfunded commitments which is accounted for as a separate liability in other liabilities on the balance sheet. The level of the ACL represents management’s estimate of expected credit losses over the expected life of the loans at the balance sheet date.

The allowance for credit losses 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. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off.  The ACL 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 and TDRs.

The activity in the allowance for credit losses for the periods ended are as follows:

	At or for the Three Months Ended September 30, 2022
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	1,010	$	—	$	—	$	213	$	1,223
Commercial real estate owner occupied		2,722		—		7		132		2,861
Commercial real estate non-owner occupied		7,361		—		—		610		7,971
Tax exempt		105		—		—		(11)		94
Commercial and industrial		4,820		(8)		20		290		5,122
Residential real estate		6,806		(11)		6		85		6,886
Home equity		865		—		2		(76)		791
Consumer other		67		(66)		6		63		70
Total	$	23,756	$	(85)	$	41	$	1,306	$	25,018

	At or for the Nine Months Ended September 30, 2022
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,111	$	—	$	—	$	(888)	$	1,223
Commercial real estate owner occupied		2,751		—		120		(10)		2,861
Commercial real estate non-owner occupied		5,650		—		—		2,321		7,971
Tax exempt		86		—		—		8		94
Commercial and industrial		5,369		(14)		56		(289)		5,122
Residential real estate		5,862		(26)		103		947		6,886
Home equity		814		(6)		22		(39)		791
Consumer other		75		(181)		9		167		70
Total	$	22,718	$	(227)	$	310	$	2,217	$	25,018

	At or for the Three Months Ended September 30, 2021
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,372	$	—	$	—	$	(286)	$	2,086
Commercial real estate owner occupied		2,552		(142)		72		237		2,719
Commercial real estate non-owner occupied		5,604		—		—		(22)		5,582
Tax exempt		91		—		—		(6)		85
Commercial and industrial		5,225		(24)		—		105		5,306
Residential real estate		6,069		(6)		19		(290)		5,792
Home equity		822		(49)		1		30		804
Consumer other		80		(65)		1		58		74
Total	$	22,815	$	(286)	$	93	$	(174)	$	22,448

	At or for the Nine Months Ended September 30, 2021
	Balance at
	Beginning of		Impact of ASC								Balance at
(in thousands)	Period		326		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	824	$	1,196	$	—	$	18	$	48	$	2,086
Commercial real estate owner occupied		1,783		708		(403)		72		559		2,719
Commercial real estate non-owner occupied		7,864		(2,008)		—		4		(278)		5,582
Tax exempt		58		40		—		—		(13)		85
Commercial and industrial		3,137		2,996		(44)		14		(797)		5,306
Residential real estate		5,010		1,732		(67)		141		(1,024)		5,792
Home equity		285		603		(108)		48		(24)		804
Consumer other		121		(39)		(119)		10		101		74
Total	$	19,082	$	5,228	$	(741)	$	307	$	(1,428)	$	22,448

Unfunded Commitments

The allowance for credit losses on unfunded commitments is recognized as a liability (other liabilities on the consolidated balance sheet), with adjustments to the reserve recognized in other non-interest expense in the consolidated statement of operations. The activity in the allowance for credit losses on unfunded commitments for the periods ended was as follows:

(in thousands)	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Beginning Balance	$	2,523	$	2,152
Provision for credit losses		(26)		345
Ending Balance	$	2,497	$	2,497

(in thousands)	Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021
Beginning Balance	$	1,921	$	359
Impact of ASC 326		—		1,616
Provision for credit losses		280		226
Ending Balance	$	2,201	$	2,201

Loan Origination/Risk Management: We have certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. Our Board of Directors review and approve these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Board of Directors with frequent reports related to loan production, loan quality, and concentration of credit, loan delinquencies, non-performing loans and potential problem loans. We seek to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.

Credit Quality Indicators:  In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss.  Consistent with regulatory guidelines, the Company provides for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss (i.e. risk-rated 6, 7, 8 and 9, respectively).

The following are the definitions of our credit quality indicators:

Pass: Loans we consider in the commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low risk of loss related to these loans considered pass-rated.

Special Mention: Loans considered having some potential weaknesses, but are deemed to not carry levels of risk inherent in one of the subsequent categories, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which may require a higher level of supervision or internal reporting because of: (i) declining industry trends; (ii) increasing reliance on secondary sources of repayment; (iii) the poor condition of or lack of control over collateral; or (iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose us to sufficient risks to warrant classification.

Substandard: Loans we consider as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes

liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans we consider as doubtful have all of the weaknesses inherent in those loans that are classified as substandard. These loans have the added characteristic of a well-defined weakness which is inadequately protected by the current sound worth and paying capacity of borrower or of the collateral pledged, if any, and calls into question the collectability of the full balance of the loan. The possibility of loss is high but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).

Loss: Loans we consider as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.

The following table presents our loans by year of origination, loan segmentation and risk indicator as of September 30, 2022:

(in thousands)	2022		2021		2020		2019		2018		Prior		Total
Commercial construction
Risk rating:
Pass	$	34,032	$	32,179	$	5,928	$	1,011	$	973	$	—	$	74,123
Special mention		—		—		23,033		—		—		—		23,033
Substandard		—		—		—		—		—		—		—
Total	$	34,032	$	32,179	$	28,961	$	1,011	$	973	$	—	$	97,156
Commercial real estate owner occupied
Risk rating:
Pass	$	20,248	$	12,973	$	23,785	$	31,795	$	47,090	$	110,306	$	246,197
Special mention		—		—		245		672		1,145		1,711		3,773
Substandard		—		—		—		—		931		5,276		6,207
Doubtful		—		—		—		—		151		147		298
Total	$	20,248	$	12,973	$	24,030	$	32,467	$	49,317	$	117,440	$	256,475
Commercial real estate non-owner occupied
Risk rating:
Pass	$	283,316	$	249,574	$	146,764	$	89,252	$	35,671	$	259,250	$	1,063,827
Special mention		—		—		—		139		918		14,665		15,722
Substandard		—		—		—		173		—		2,048		2,221
Doubtful		—		—		—		—		—		154		154
Total	$	283,316	$	249,574	$	146,764	$	89,564	$	36,589	$	276,117	$	1,081,924
Tax exempt
Risk rating:
Pass	$	6,944	$	1,044	$	256	$	778	$	13,276	$	19,324	$	41,622
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	6,944	$	1,044	$	256	$	778	$	13,276	$	19,324	$	41,622
Commercial and industrial
Risk rating:
Pass	$	56,222	$	70,975	$	60,338	$	29,867	$	11,053	$	84,792	$	313,247
Special mention		1,497		—		155		1,083		516		2,432		5,683
Substandard		—		55		12		70		—		514		651
Doubtful		—		—		—		—		—		64		64
Total	$	57,719	$	71,030	$	60,505	$	31,020	$	11,569	$	87,802	$	319,645
Residential real estate
Performing	$	170,291	$	178,875	$	113,573	$	71,869	$	51,588	$	361,823	$	948,019
Nonperforming		—		48		—		50		643		4,353		5,094
Total	$	170,291	$	178,923	$	113,573	$	71,919	$	52,231	$	366,176	$	953,113
Home equity
Performing	$	11,839	$	12,152	$	8,965	$	7,796	$	7,326	$	43,173	$	91,251
Nonperforming		—		—		—		—		—		1,045		1,045
Total	$	11,839	$	12,152	$	8,965	$	7,796	$	7,326	$	44,218	$	92,296
Consumer other
Performing	$	3,833	$	1,596	$	1,029	$	362	$	328	$	980	$	8,128
Nonperforming		—		—		5		—		—		—		5
Total	$	3,833	$	1,596	$	1,034	$	362	$	328	$	980	$	8,133
Total Loans	$	588,222	$	559,471	$	384,088	$	234,917	$	171,609	$	912,057	$	2,850,364

The following table presents our loans by year of origination, loan segmentation and risk indicator as of December 31, 2021:

(in thousands)	2021		2020		2019		2018		2017		Prior		Total
Commercial construction
Risk rating:
Pass	$	22,866	$	4,787	$	19,211	$	9,399	$	—	$	—	$	56,263
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	22,866	$	4,787	$	19,211	$	9,399	$	—	$	—	$	56,263
Commercial real estate owner occupied
Risk rating:
Pass	$	12,940	$	25,240	$	34,782	$	49,136	$	19,292	$	103,144	$	244,534
Special mention		—		—		760		—		—		2,659		3,419
Substandard		—		—		1		853		247		7,737		8,838
Doubtful		—		—		—		167		—		164		331
Total	$	12,940	$	25,240	$	35,543	$	50,156	$	19,539	$	113,704	$	257,122
Commercial real estate non-owner occupied
Risk rating:
Pass	$	235,646	$	172,785	$	119,326	$	39,663	$	136,120	$	165,329	$	868,869
Special mention		—		—		174		—		—		14,789		14,963
Substandard		—		—		—		—		—		3,097		3,097
Doubtful		—		—		—		—		—		163		163
Total	$	235,646	$	172,785	$	119,500	$	39,663	$	136,120	$	183,378	$	887,092
Tax exempt
Risk rating:
Pass	$	1,249	$	299	$	968	$	14,408	$	5,329	$	19,027	$	41,280
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	1,249	$	299	$	968	$	14,408	$	5,329	$	19,027	$	41,280
Commercial and industrial
Risk rating:
Pass	$	77,608	$	80,569	$	33,405	$	16,457	$	33,413	$	61,594	$	303,046
Special mention		—		—		584		468		172		1,396		2,620
Substandard		58		3		512		—		48		578		1,199
Doubtful		—		—		—		—		92		155		247
Total	$	77,666	$	80,572	$	34,501	$	16,925	$	33,725	$	63,723	$	307,112
Residential real estate
Performing	$	191,466	$	120,495	$	83,044	$	62,299	$	59,642	$	364,482	$	881,428
Nonperforming		—		—		—		286		178		6,371		6,835
Total	$	191,466	$	120,495	$	83,044	$	62,585	$	59,820	$	370,853	$	888,263
Home equity
Performing	$	12,770	$	10,461	$	9,005	$	7,855	$	6,474	$	38,823	$	85,388
Nonperforming		—		—		—		—		—		1,269		1,269
Total	$	12,770	$	10,461	$	9,005	$	7,855	$	6,474	$	40,092	$	86,657
Consumer other
Performing	$	2,525	$	1,659	$	792	$	669	$	92	$	2,379	$	8,116
Nonperforming		—		—		—		—		—		5		5
Total	$	2,525	$	1,659	$	792	$	669	$	92	$	2,384	$	8,121
Total Loans	$	557,128	$	416,298	$	302,564	$	201,660	$	261,099	$	793,161	$	2,531,910

Past Dues

The following is a summary of past due loans for the periods ended:

	September 30, 2022
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	97,156	$	97,156
Commercial real estate owner occupied		84		—		—		84		256,391		256,475
Commercial real estate non-owner occupied		298		—		173		471		1,081,453		1,081,924
Tax exempt		—		—		—		—		41,622		41,622
Commercial and industrial		200		100		12		312		319,333		319,645
Residential real estate		565		928		1,882		3,375		949,738		953,113
Home equity		269		236		204		709		91,587		92,296
Consumer other		11		4		—		15		8,118		8,133
Total	$	1,427	$	1,268	$	2,271	$	4,966	$	2,845,398	$	2,850,364

	December 31, 2021
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	56,263	$	56,263
Commercial real estate owner occupied		1,190		7		1		1,198		255,924		257,122
Commercial real estate non-owner occupied		—		—		—		—		887,092		887,092
Tax exempt		—		—		—		—		41,280		41,280
Commercial and industrial		31		318		185		534		306,578		307,112
Residential real estate		5,010		1,238		1,416		7,664		880,599		888,263
Home equity		699		149		101		949		85,708		86,657
Consumer other		29		—		2		31		8,090		8,121
Total	$	6,959	$	1,712	$	1,705	$	10,376	$	2,521,534	$	2,531,910

Non-Accrual Loans

The following is a summary of non-accrual loans for the periods ended:

	September 30, 2022
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		604		371		—
Commercial real estate non-owner occupied		747		430		—
Tax exempt		—		—		—
Commercial and industrial		279		187		2
Residential real estate		5,094		1,539		242
Home equity		1,044		70		15
Consumer other		5		—		—
Total	$	7,773	$	2,597	$	259

	December 31, 2021
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		783		424		—
Commercial real estate non-owner occupied		622		459		—
Tax exempt		—		—		—
Commercial and industrial		677		542		30
Residential real estate		6,835		2,537		41
Home equity		1,269		305		63
Consumer other		5		—		—
Total	$	10,191	$	4,267	$	134

Collateral Dependent Loans

Loans that do not share risk characteristics are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent, financial loans where we have determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and we expect repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.

The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment for the periods ended.

	September 30, 2022				December 31, 2021
(in thousands)	Real Estate		Other		Real Estate		Other
Commercial construction	$	—	$	—	$	—	$	—
Commercial real estate owner occupied		604		—		783		—
Commercial real estate non-owner occupied		747		—		622		—
Tax exempt		—		—		—		—
Commercial and industrial		122		157		385		292
Residential real estate		5,094		—		6,835		—
Home equity		1,044		—		1,269		—
Consumer other		5		—		5		—
Total	$	7,616	$	157	$	9,899	$	292

Troubled Debt Restructuring Loans

The loan portfolio also includes certain loans that have been modified in a TDR, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as non-performing at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan. There were no modifications qualifying as TDR’s for the three and nine months ended September 30, 2022 and 2021.

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of September 30, 2022 and December 31, 2021 totaled $249 thousand and $574 thousand, respectively.

Mortgage Banking

Loans held for sale had at September 30, 2022 and December 31, 2021 had an unpaid principal balance of $987 thousand and $5.4 million, respectively.  The interest rate exposure on loans held for sale are mitigated through forward delivery commitments with certain approved secondary market investors. Forward delivery commitments had a notional amount

of $200 thousand, and $14.8 million at September 30, 2022 and December 31, 2021, respectively.  Refer to Note 8 for further discussion of forward delivery commitments.

For the three months ended September 30, 2022 and 2021, we sold $5.2 million and $28.5 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net loss on sale of loans (net of costs, including direct and indirect origination costs) of $52 thousand and a gain of $682 thousand, respectively. For the nine months ended September 30, 2022 and 2021, we sold $38.2 million and $153.8 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $281 thousand and $3.6 million, respectively.

We sell residential loans on the secondary market while primarily retaining the servicing of these loans.  Servicing sold loans helps to maintain customer relationships and earn fees over the servicing period. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to level of prepayments that result from shifts in interest rates.  We obtain third-party valuations of our servicing assets portfolio quarterly, and the assumptions are reflected in Fair Value disclosures.