Notes to Consolidated Financial Statements
The First Bancorp, Inc. and Subsidiary
Note 1 – Basis of Presentation
The First Bancorp, Inc. ("the Company") is a financial holding company that owns all of the common stock of First National Bank ("the Bank"). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2023 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2022.
Risks and Uncertainties
In March 2020, the World Health Organization declared a worldwide pandemic as a result of the outbreak of coronavirus disease 2019 ("COVID-19"). To curtail spread of the virus, governments at all levels encouraged social distancing and many imposed restrictions on travel and group meetings, and/or mandated shut-downs of all but essential businesses. Vaccination efforts led to a general re-opening of the economy with few remaining restrictions.
The Company’s business, financial condition, and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole. The Bank's primary market is the State of Maine, which relies upon tourism for a significant percentage of its economic activity. In 2020, COVID-19 adversely impacted the tourism industry to a greater degree than other industries; the tourism industry rebounded to enjoy a strong years in 2021 and 2022, and anecdotal evidence points to a good year for the industry in 2023. Milder variants of COVID-19 have become the dominant strains with outbreaks resulting in modest levels of disruption. The severity of any potential future outbreaks could have an impact on the Company's operating results, though the degree is indeterminable at this time. The U.S. Government has announced that the public health emergency declared in response to COVID-19 will end on May 11, 2023.
Government economic programs intended to backstop and bolster the economy through the pandemic, such as the Payroll Protection Program ("PPP") have ended, and the nation's economy has entered an inflationary phase. The Consumer Price Index has risen at levels not experienced since the 1980s while the labor market remains very tight, contributing to additional inflationary pressure. To address the inflation problem, the Federal Reserve has removed accommodative monetary policies and aggressively increased short-term interest rates. These actions are intended to slow overall economic activity, with a resulting risk of the economy entering into a recession. The ongoing conflict between Russia and Ukraine has exacerbated pandemic-related supply chain issues, upset numerous global markets including energy and certain raw materials, and generally added to economic uncertainty and geopolitical instability. The recent failures of several regional banks in the US further roiled markets and could have a lingering impact. Any or all could have negative downstream effects on the Company's operating results, the extent of which is indeterminable at this time.
Subsequent Events
Events occurring subsequent to March 31, 2023, have been evaluated as to their potential impact to the financial statements.
Note 2 – Investment Securities
The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized
Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value (Estimated) |
| Securities available for sale | | | | | | | |
| U.S. Government-sponsored agencies | $ | 26,027,000 | | | $ | — | | | $ | (6,509,000) | | | $ | 19,518,000 | |
| Mortgage-backed securities | 269,730,000 | | | 72,000 | | | (38,711,000) | | | 231,091,000 | |
| State and political subdivisions | 40,451,000 | | | 12,000 | | | (6,114,000) | | | 34,349,000 | |
| Asset-backed securities | 3,347,000 | | | — | | | (63,000) | | | 3,284,000 | |
| | | | | | | |
| $ | 339,555,000 | | | $ | 84,000 | | | $ | (51,397,000) | | | $ | 288,242,000 | |
| Securities to be held to maturity | | | | | | | |
| U.S. Government-sponsored agencies | $ | 40,100,000 | | | $ | — | | | $ | (10,099,000) | | | $ | 30,001,000 | |
| Mortgage-backed securities | 59,523,000 | | | 75,000 | | | (10,443,000) | | | 49,155,000 | |
| State and political subdivisions | 257,910,000 | | | 365,000 | | | (25,357,000) | | | 232,918,000 | |
| | | | | | | |
| Corporate securities | 34,750,000 | | | — | | | (2,771,000) | | | 31,979,000 | |
| $ | 392,283,000 | | | $ | 440,000 | | | $ | (48,670,000) | | | $ | 344,053,000 | |
| Less allowance for credit losses | (438,000) | | | — | | | — | | | — | |
| Net securities to be held to maturity | $ | 391,845,000 | | | $ | — | | | $ | — | | | $ | — | |
| Restricted equity securities | | | | | | | |
| Federal Home Loan Bank Stock | $ | 2,837,000 | | | $ | — | | | $ | — | | | $ | 2,837,000 | |
| Federal Reserve Bank Stock | 1,037,000 | | | — | | | — | | | 1,037,000 | |
| $ | 3,874,000 | | | $ | — | | | $ | — | | | $ | 3,874,000 | |
Allowance for Credit Losses: The Company adopted Accounting Standards Codification ("ASC") 326, the Current Expected Credit Loss ("CECL") standard in the current reporting period. In conjunction with adoption, holdings of Available for Sale ("AFS") Securities and Held to Maturity ("HTM") securities were evaluated to determine the need to establish an allowance for credit losses, if any.
AFS securities, as shown in the table above, consist of securities issued by U.S. Government Agencies, U.S. Government Sponsored Entities, State or Local Municipal Governments, or are backed by collateral that is guaranteed by the U.S. Government. We monitor the credit quality of these investments through credit ratings issued by major rating providers and through substantial price changes not consistent with general market movements. Each of the AFS securities is deemed to be investment grade, and no allowance for credit loss ("ACL") was established for AFS securities.
Similarly, the agency and mortgage-backed securities in the HTM portfolio were determined to all be investment grade with no ACL required. Municipal securities within HTM include two private activity bonds issued by well-known customers of the Bank with total balances of $20,000,000 as of March 31, 2023. These bonds carry similar risk characteristics to the commercial real estate - owner occupied segment of the Bank's loan portfolio described in Note 3; management has elected to apply a loss rate matching the loan segment to the balance of these bonds for purposes of establishing an ACL. Corporate securities in HTM consist of thirteen individual companies in the banking industry. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, and other performance factors. It was concluded that aggregate credit risk of the corporate securities was very low and a small ACL was established. The total ACL for HTM securities was $438,000 as of March 31, 2023; there was no reserve as of December 31, 2022 and March 31, 2022.
Changes in the allowance for credit losses are recorded as credit loss expense, or reversal. Losses would be charged against the allowance when management believes collection of the full contractual amount due on a security is unlikely.
The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized
Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value (Estimated) |
| Securities available for sale | | | | | | | |
U.S. Government-sponsored agencies
| $ | 26,025,000 | | | $ | — | | | $ | (6,878,000) | | | $ | 19,147,000 | |
| Mortgage-backed securities | 271,068,000 | | | 55,000 | | | (42,447,000) | | | 228,676,000 | |
| State and political subdivisions | 40,472,000 | | | 2,000 | | | (7,283,000) | | | 33,191,000 | |
| Asset-backed securities | 3,548,000 | | | — | | | (53,000) | | | 3,495,000 | |
| | | | | | | |
| $ | 341,113,000 | | | $ | 57,000 | | | $ | (56,661,000) | | | $ | 284,509,000 | |
| Securities to be held to maturity | | | | | | | |
| U.S. Government-sponsored agencies | $ | 40,100,000 | | | $ | 4,000 | | | $ | (10,477,000) | | | $ | 29,627,000 | |
| Mortgage-backed securities | 60,497,000 | | | 42,000 | | | (11,392,000) | | | 49,147,000 | |
| State and political subdivisions | 258,549,000 | | | 154,000 | | | (30,733,000) | | | 227,970,000 | |
| | | | | | | |
| Corporate securities | 34,750,000 | | | — | | | (2,483,000) | | | 32,267,000 | |
| $ | 393,896,000 | | | $ | 200,000 | | | $ | (55,085,000) | | | $ | 339,011,000 | |
| Restricted equity securities | | | | | | | |
| Federal Home Loan Bank Stock | $ | 2,846,000 | | | $ | — | | | $ | — | | | $ | 2,846,000 | |
| Federal Reserve Bank Stock | 1,037,000 | | | — | | | — | | | 1,037,000 | |
| $ | 3,883,000 | | | $ | — | | | $ | — | | | $ | 3,883,000 | |
The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized
Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value (Estimated) |
| Securities available for sale | | | | | | | |
| U.S. Government-sponsored agencies | $ | 26,019,000 | | | $ | — | | | $ | (3,361,000) | | | $ | 22,658,000 | |
| Mortgage-backed securities | 270,624,000 | | | 146,000 | | | (18,586,000) | | | 252,184,000 | |
| State and political subdivisions | 37,407,000 | | | 298,000 | | | (3,872,000) | | | 33,833,000 | |
| Asset-backed securities | 4,358,000 | | | — | | | (18,000) | | | 4,340,000 | |
| | | | | | | |
| $ | 338,408,000 | | | $ | 444,000 | | | $ | (25,837,000) | | | $ | 313,015,000 | |
| Securities to be held to maturity | | | | | | | |
| U.S. Government-sponsored agencies | $ | 38,100,000 | | | $ | — | | | $ | (4,845,000) | | | $ | 33,255,000 | |
| Mortgage-backed securities | 59,648,000 | | | 151,000 | | | (5,469,000) | | | 54,330,000 | |
| State and political subdivisions | 252,185,000 | | | 1,430,000 | | | (15,007,000) | | | 238,608,000 | |
| Corporate securities | 27,250,000 | | | 97,000 | | | (349,000) | | | 26,998,000 | |
| $ | 377,183,000 | | | $ | 1,678,000 | | | $ | (25,670,000) | | | $ | 353,191,000 | |
| Restricted equity securities | | | | | | | |
| Federal Home Loan Bank Stock | $ | 4,365,000 | | | $ | — | | | $ | — | | | $ | 4,365,000 | |
| Federal Reserve Bank Stock | 1,037,000 | | | — | | | — | | | 1,037,000 | |
| $ | 5,402,000 | | | $ | — | | | $ | — | | | $ | 5,402,000 | |
The following table summarizes the contractual maturities of investment securities at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale | | Securities to be held to maturity |
| Amortized
Cost | | Fair Value (Estimated) | | Amortized
Cost | | Fair Value (Estimated) |
| Due in 1 year or less | $ | — | | | $ | — | | | $ | 1,789,000 | | | $ | 1,788,000 | |
| Due in 1 to 5 years | 3,578,000 | | | 3,420,000 | | | 15,029,000 | | | 14,595,000 | |
| Due in 5 to 10 years | 19,142,000 | | | 15,995,000 | | | 90,479,000 | | | 85,444,000 | |
| Due after 10 years | 316,835,000 | | | 268,827,000 | | | 284,986,000 | | | 242,226,000 | |
| | | | | | | |
| $ | 339,555,000 | | | $ | 288,242,000 | | | $ | 392,283,000 | | | $ | 344,053,000 | |
The following table summarizes the contractual maturities of investment securities at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale | | Securities to be held to maturity |
| Amortized
Cost | | Fair Value (Estimated) | | Amortized
Cost | | Fair Value (Estimated) |
| Due in 1 year or less | $ | — | | | $ | — | | | $ | 1,787,000 | | | $ | 1,782,000 | |
| Due in 1 to 5 years | 3,609,000 | | | 3,409,000 | | | 14,998,000 | | | 14,480,000 | |
| Due in 5 to 10 years | 18,591,000 | | | 15,203,000 | | | 86,833,000 | | | 81,443,000 | |
| Due after 10 years | 318,913,000 | | | 265,897,000 | | | 290,278,000 | | | 241,306,000 | |
| | | | | | | |
| $ | 341,113,000 | | | $ | 284,509,000 | | | $ | 393,896,000 | | | $ | 339,011,000 | |
The following table summarizes the contractual maturities of investment securities at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale | | Securities to be held to maturity |
| Amortized
Cost | | Fair Value (Estimated) | | Amortized
Cost | | Fair Value (Estimated) |
| Due in 1 year or less | $ | 25,000 | | | $ | 25,000 | | | $ | 2,388,000 | | | $ | 2,392,000 | |
| Due in 1 to 5 years | 3,723,000 | | | 3,668,000 | | | 12,877,000 | | | 12,831,000 | |
| Due in 5 to 10 years | 16,674,000 | | | 14,939,000 | | | 67,056,000 | | | 65,943,000 | |
| Due after 10 years | 317,986,000 | | | 294,383,000 | | | 294,862,000 | | | 272,025,000 | |
| | | | | | | |
| $ | 338,408,000 | | | $ | 313,015,000 | | | $ | 377,183,000 | | | $ | 353,191,000 | |
At March 31, 2023, securities with a carrying value of $324,716,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a carrying value of $350,411,000 as of December 31, 2022 and $238,761,000 at March 31, 2022, pledged for the same purposes.
Gains and losses on the sale of securities are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. The following table shows securities gains and losses for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | |
| For the three months ended March 31, | | |
| 2023 | 2022 | | | |
| Proceeds from sales of securities | $ | — | | $ | — | | | | |
| Gross realized gains | — | | 2,000 | | | | |
| Gross realized losses | — | | — | | | | |
| Net gain | $ | — | | $ | 2,000 | | | | |
| Related income taxes | $ | — | | $ | — | | | | |
As of March 31, 2023, there were 781 securities with unrealized losses held in the Company's portfolio. The Company has the ability and intent to hold its securities which are in an unrealized loss position until a recovery of their amortized cost, which may be at maturity.
The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at March 31, 2023, aggregated by major security type and length of time in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value (Estimated) | | Unrealized Losses | | Fair Value (Estimated) | | Unrealized Losses | | Fair Value (Estimated) | | Unrealized Losses |
| U.S. Government-sponsored agencies | $ | 1,998,000 | | | $ | (1,000) | | | $ | 47,521,000 | | | $ | (16,607,000) | | | $ | 49,519,000 | | | $ | (16,608,000) | |
| Mortgage-backed securities | 32,434,000 | | | (1,532,000) | | | 240,750,000 | | | (47,622,000) | | | 273,184,000 | | | (49,154,000) | |
| State and political subdivisions | 47,700,000 | | | (845,000) | | | 148,282,000 | | | (30,626,000) | | | 195,982,000 | | | (31,471,000) | |
| Asset-backed securities | — | | | — | | | 3,284,000 | | | (63,000) | | | 3,284,000 | | | (63,000) | |
| Corporate securities | 11,430,000 | | | (1,570,000) | | | 11,299,000 | | | (1,201,000) | | | 22,729,000 | | | (2,771,000) | |
| $ | 93,562,000 | | | $ | (3,948,000) | | | $ | 451,136,000 | | | $ | (96,119,000) | | | $ | 544,698,000 | | | $ | (100,067,000) | |
As of December 31, 2022, there were 869 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 300 had been temporarily impaired for 12 months or more.
Information regarding securities temporarily impaired as of December 31, 2022 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value (Estimated) | | Unrealized Losses | | Fair Value (Estimated) | | Unrealized Losses | | Fair Value (Estimated) | | Unrealized Losses |
| U.S. Government-sponsored agencies | $ | 4,804,000 | | | $ | (675,000) | | | $ | 41,965,000 | | | $ | (16,680,000) | | | $ | 46,769,000 | | | $ | (17,355,000) | |
| Mortgage-backed securities | 73,509,000 | | | (6,486,000) | | | 197,102,000 | | | (47,353,000) | | | 270,611,000 | | | (53,839,000) | |
| State and political subdivisions | 149,517,000 | | | (13,769,000) | | | 67,932,000 | | | (24,247,000) | | | 217,449,000 | | | (38,016,000) | |
| Asset-backed securities | 3,495,000 | | | (53,000) | | | — | | | — | | | 3,495,000 | | | (53,000) | |
| Corporate securities | 19,857,000 | | | (2,143,000) | | | 3,160,000 | | | (340,000) | | | 23,017,000 | | | (2,483,000) | |
| $ | 251,182,000 | | | $ | (23,126,000) | | | $ | 310,159,000 | | | $ | (88,620,000) | | | $ | 561,341,000 | | | $ | (111,746,000) | |
As of March 31, 2022, there were 548 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 72 had been temporarily impaired for 12 months or more.
Information regarding securities temporarily impaired as of March 31, 2022 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value (Estimated) | | Unrealized Losses | | Fair Value (Estimated) | | Unrealized Losses | | Fair Value (Estimated) | | Unrealized Losses |
| U.S. Government-sponsored agencies | $ | 8,266,000 | | | $ | (358,000) | | | $ | 47,647,000 | | | $ | (7,848,000) | | | $ | 55,913,000 | | | $ | (8,206,000) | |
| Mortgage-backed securities | 174,021,000 | | | (11,708,000) | | | 111,954,000 | | | (12,347,000) | | | 285,975,000 | | | (24,055,000) | |
| State and political subdivisions | 141,305,000 | | | (17,850,000) | | | 3,405,000 | | | (1,029,000) | | | 144,710,000 | | | (18,879,000) | |
| Asset-backed securities | 4,340,000 | | | (18,000) | | | — | | | — | | | 4,340,000 | | | (18,000) | |
| Corporate securities | 11,151,000 | | | (349,000) | | | — | | | — | | | 11,151,000 | | | (349,000) | |
| $ | 339,083,000 | | | $ | (30,283,000) | | | $ | 163,006,000 | | | $ | (21,224,000) | | | $ | 502,089,000 | | | $ | (51,507,000) | |
Credit Quality Indicators: Agency-backed and government-sponsored enterprise securities have a long history with no credit losses, including during times of severe stress. The principal and interest payments on agency-guaranteed debt is backed by the U.S. government. Government-sponsored enterprises similarly guarantee principal and interest payments and carry an implicit guarantee from the U.S. Department of the Treasury. Additionally, government-sponsored enterprise securities are exceptionally liquid, readily marketable, and provide a substantial amount of price transparency and price parity, indicating a perception of zero credit losses. HTM municipal debt holdings are comprised primarily of high credit quality (rated A- or higher) state and municipal obligations. High credit quality state and municipal obligations have a history of zero to near-zero credit loss. HTM municipal debt holdings also includes two unrated private activity bonds issued by well known customers of the Bank. These securities are regularly monitored as part of an overall credit relationship with the issuers; both issuers were in good standing as of March 31, 2023. HTM corporate debt holdings consist of thirteen individual companies in the banking industry. Management conducts periodic reviews of the collectability of these securities taking into consideration such factors as the financial condition of the issuers; each were in good standing as of March 31, 2023.
The following table presents the activity in the ACL for held-to-maturity debt securities by major security type for the three months ended March 31, 2023:
| | | | | | | | | | | |
| State and Political Subdivisions | Corporate Securities | Total |
| Allowance for credit losses: | | | |
| Beginning balance | $ | — | | $ | — | | $ | — | |
| Impact of adopting ASC 326 | 229,000 | | 209,000 | | 438,000 | |
| Credit loss expense | — | | — | | — | |
| Securities charged-off | — | | — | | — | |
| Recoveries | — | | — | | — | |
| Total ending allowance balance | $ | 229,000 | | $ | 209,000 | | $ | 438,000 | |
There was no ACL on U.S. government-sponsored enterprise and agency securities as of March 31, 2023.
A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement. As of March 31, 2023, none of the Company’s HTM debt securities were past due or on non-accrual status.
During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 with a corresponding fair value of $89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $15,000. The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $60,000, net of taxes, at March 31, 2023. This compares to $64,000 and $78,000, net of taxes, at December 31, 2022 and March 31, 2022, respectively. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for a portion of its wholesale funding needs. As of March 31, 2023 and 2022, and December 31, 2022, the Bank's investment in FHLB stock totaled $2,837,000, $4,365,000 and $2,846,000, respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value.
The Bank is also a member of the Federal Reserve Bank ("FRB") of Boston. As a requirement for membership in the FRB, the Bank must own a minimum required amount of FRB stock. The Bank uses FRB for certain correspondent banking services and maintains borrowing capacity at its discount window. The Bank's investment in FRB stock totaled $1,037,000 at March 31, 2023 and 2022 and December 31, 2022, respectively.
The Company periodically evaluates its investment in FHLB and FRB stock for impairment based on, among other factors, the capital adequacy of the Banks and their overall financial condition. No impairment losses have been recorded through March 31, 2023. The Bank will continue to monitor its investment in these restricted equity securities.
Note 3 – Loans
Upon adoption of ASU 2016-13/ASC 326, the CECL standard, as described in Notes 4 and 16 of these financial statements, the Company updated the segmentation of its loan portfolio. The updates primarily consist of reporting what had been a single class, commercial real estate loans, as three classes - commercial real estate owner occupied, commercial real estate non-owner occupied, and commercial multi-family. In addition home equity installment loans which had previously been included in the residential term class are now included in the home equity revolving and term class. Loan data as of March 31, 2023 is reported herein with the new class structure while certain prior period data retains the prior class structure.
Loan Portfolio by Class: The following table shows the composition of the Company's loan portfolio by class of financing receivable as of March 31, 2023 and 2022 and at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 | |
| Commercial | | | | | | | | | |
| Real estate owner occupied | $ | 285,224,000 | | 14.4 | | % | $ | 256,623,000 | | 13.4 | | % | $ | 223,881,000 | | 13.1 | | % |
| Real estate non-owner occupied | 384,457,000 | | 19.4 | | % | 363,660,000 | | 19.0 | | % | 292,727,000 | | 17.2 | | % |
| Construction | 72,705,000 | | 3.7 | | % | 93,907,000 | | 4.9 | | % | 102,982,000 | | 6.0 | | % |
| Commercial & Industry ("C&I") | 339,688,000 | | 17.1 | | % | 319,359,000 | | 16.7 | | % | 267,666,000 | | 15.7 | | % |
| Multifamily | 81,089,000 | | 4.1 | | % | 79,057,000 | | 4.1 | | % | 71,693,000 | | 4.2 | | % |
| Municipal | 47,166,000 | | 2.4 | | % | 40,619,000 | | 2.1 | | % | 50,867,000 | | 3.0 | | % |
| Residential | | | | | | | | | |
| Term | 606,849,000 | | 30.5 | | % | 597,404,000 | | 31.2 | | % | 556,681,000 | | 32.6 | | % |
| Construction | 52,712,000 | | 2.7 | | % | 49,907,000 | | 2.6 | | % | 36,272,000 | | 2.1 | | % |
| Home Equity | | | | | | | | | |
| Revolving and term | 93,522,000 | | 4.7 | | % | 93,075,000 | | 4.9 | | % | 82,502,000 | | 4.8 | | % |
| Consumer | 19,435,000 | | 1.0 | | % | 21,063,000 | | 1.1 | | % | 22,077,000 | | 1.3 | | % |
| Total | $ | 1,982,847,000 | | 100.0 | | % | $ | 1,914,674,000 | | 100.0 | | % | $ | 1,707,348,000 | | 100.0 | | % |
Loan balances include net deferred loan costs of $10,315,000 as of March 31, 2023, $10,132,000 as of December 31, 2022, and $9,299,000 as of March 31, 2022. Net deferred loan costs have increased from a year ago and year-to-date due to loan origination unit volume over the period. Unearned fees and deferred costs associated with US Small Business Administration ("SBA") PPP loans originated in 2020 and 2021 were fully recognized as of June 30, 2022. Pursuant to collateral agreements, qualifying first mortgage loans and commercial real estate loans, which totaled $527,949,000 at March 31, 2023, were used to collateralize borrowings from the FHLB. This compares to qualifying loans which totaled $475,233,000 at December 31, 2022, and $455,229,000 at March 31, 2022. In addition, commercial, residential construction and home equity loans totaling $373,791,000 at March 31, 2023, $338,636,000 at December 31, 2022, and $338,463,000 at March 31, 2022, were used to collateralize a standby line of credit at the FRB.
Past Due Loans: For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of March 31, 2023, is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days
Past Due | 60-89 Days
Past Due | 90+ Days
Past Due | All
Past Due | Current | Total | 90+ Days
& Accruing |
| Commercial | | | | | | | |
| Real estate owner occupied | $ | — | | $ | 1,000 | | $ | 151,000 | | $ | 152,000 | | $ | 285,072,000 | | $ | 285,224,000 | | $ | — | |
| Real estate non-owner occupied | — | | — | | — | | — | | 384,457,000 | | 384,457,000 | | — | |
| Construction | — | | — | | — | | — | | 72,705,000 | | 72,705,000 | | — | |
| C&I | 106,000 | | 12,000 | | 182,000 | | 300,000 | | 339,388,000 | | 339,688,000 | | 34,000 | |
| Multifamily | — | | — | | — | | — | | 81,089,000 | | 81,089,000 | | — | |
| Municipal | — | | — | | — | | — | | 47,166,000 | | 47,166,000 | | — | |
| Residential | | | | | | | |
| Term | 260,000 | | 207,000 | | 339,000 | | 806,000 | | 606,043,000 | | 606,849,000 | | 173,000 | |
| Construction | — | | — | | — | | — | | 52,712,000 | | 52,712,000 | | — | |
| Home equity | | | | | | | |
| Revolving and term | 498,000 | | 6,000 | | 64,000 | | 568,000 | | 92,954,000 | | 93,522,000 | | — | |
| Consumer | 104,000 | | 15,000 | | 1,000 | | 120,000 | | 19,315,000 | | 19,435,000 | | 1,000 | |
| Total | $ | 968,000 | | $ | 241,000 | | $ | 737,000 | | $ | 1,946,000 | | $ | 1,980,901,000 | | $ | 1,982,847,000 | | $ | 208,000 | |
On March 22, 2020, banking regulators issued an Interagency Statement on Loan Modifications and Reporting in response to the onset of COVID-19; shortly thereafter, on March 30, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was passed. Both the Interagency Statement and the CARES Act provided an exemption for qualified modifications from Trouble Debt Restructured ("TDR") designation, which was extended by the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020. So long as modified terms were met, loans in an active modification were not included in past due loan totals and continued to accrue interest. As of March 31, 2022, COVID-19 related loan modifications had nearly all been resolved, with $1,100,000 in retail loan balances remaining in modification status. There were no loan modifications remaining as of March 31, 2023, as all were resolved prior to September 30, 2022.
Information on the past-due status of loans by class of financing receivable as of December 31, 2022, is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days
Past Due | 60-89 Days
Past Due | 90+ Days
Past Due | All
Past Due | Current | Total | 90+ Days
& Accruing |
| Commercial | | | | | | | |
| Real estate | $ | — | | $ | 3,000 | | $ | 190,000 | | $ | 193,000 | | $ | 699,147,000 | | $ | 699,340,000 | | $ | — | |
| Construction | — | | — | | — | | — | | 93,907,000 | | 93,907,000 | | — | |
| Other | 118,000 | | 23,000 | | 85,000 | | 226,000 | | 319,133,000 | | 319,359,000 | | 34,000 | |
| Municipal | — | | — | | — | | — | | 40,619,000 | | 40,619,000 | | — | |
| Residential | | | | | | | |
| Term | 135,000 | | 33,000 | | 284,000 | | 452,000 | | 613,467,000 | | 613,919,000 | | 118,000 | |
| Construction | — | | — | | — | | — | | 49,907,000 | | 49,907,000 | | — | |
| Home equity line of credit | 241,000 | | 29,000 | | 151,000 | | 421,000 | | 76,139,000 | | 76,560,000 | | 86,000 | |
| Consumer | 131,000 | | 33,000 | | 3,000 | | 167,000 | | 20,896,000 | | 21,063,000 | | 3,000 | |
| Total | $ | 625,000 | | $ | 121,000 | | $ | 713,000 | | $ | 1,459,000 | | $ | 1,913,215,000 | | $ | 1,914,674,000 | | $ | 241,000 | |
Information on the past-due status of loans by class of financing receivable as of March 31, 2022, is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days
Past Due | 60-89 Days
Past Due | 90+ Days
Past Due | All
Past Due | Current | Total | 90+ Days
& Accruing |
| Commercial | | | | | | | |
| Real estate | $ | 8,000 | | $ | — | | $ | 555,000 | | $ | 563,000 | | $ | 587,738,000 | | $ | 588,301,000 | | $ | — | |
| Construction | 12,000 | | — | | — | | 12,000 | | 102,970,000 | | 102,982,000 | | — | |
| Other | 165,000 | | — | | 104,000 | | 269,000 | | 267,397,000 | | 267,666,000 | | — | |
| Municipal | — | | — | | — | | — | | 50,867,000 | | 50,867,000 | | — | |
| Residential | | | | | | | |
| Term | 1,394,000 | | — | | 1,037,000 | | 2,431,000 | | 563,889,000 | | 566,320,000 | | 26,000 | |
| Construction | — | | — | | — | | — | | 36,272,000 | | 36,272,000 | | — | |
| Home equity line of credit | 653,000 | | — | | 174,000 | | 827,000 | | 72,036,000 | | 72,863,000 | | — | |
| Consumer | 53,000 | | 68,000 | | 15,000 | | 136,000 | | 21,941,000 | | 22,077,000 | | 20,000 | |
| Total | $ | 2,285,000 | | $ | 68,000 | | $ | 1,885,000 | | $ | 4,238,000 | | $ | 1,703,110,000 | | $ | 1,707,348,000 | | $ | 46,000 | |
Non-Accrual Loans: For all classes, loans are placed on non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.
Cash payments received on non-accrual loans, which are included in individually analyzed loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected, or when it otherwise becomes well secured and in the process of collection.
The following table presents the amortized costs basis of loans on nonaccrual status as of March 31, 2023, December 31, 2022 and March 31, 2022:
| | | | | | | | | | | | | | |
| March 31, 2023 | December 31, 2022 | March 31, 2022 |
| Nonaccrual with Allowance for Credit Loss | Nonaccrual with no Allowance for Credit Loss | Total Nonaccrual | Total Nonaccrual |
| Commercial | | | | |
| Real estate owner occupied | $ | — | | $ | 152,000 | | $ | 193,000 | | $ | 604,000 | |
| Real estate non-owner occupied | — | | — | | — | | — | |
| Construction | — | | 23,000 | | 23,000 | | 27,000 | |
| C&I | 530,000 | | 118,000 | | 663,000 | | 1,014,000 | |
| Multifamily | — | | — | | — | | — | |
| Municipal | — | | — | | — | | — | |
| Residential | | | | |
| Term | — | | 443,000 | | 572,000 | | 3,113,000 | |
| Construction | — | | — | | — | | — | |
| Home equity | | | | |
| Revolving and term | — | | 534,000 | | 304,000 | | 291,000 | |
| Consumer | — | | | — | | — | |
| Total | $ | 530,000 | | $ | 1,270,000 | | $ | 1,755,000 | | $ | 5,049,000 | |
Individually Analyzed Loans: Individually analyzed loans include loans that had been reported as TDR loans prior to adoption of ASU 2022-02 and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an individually analyzed loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an individually analyzed loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off.
The following table presents the amortized cost basis of collateral-dependent loans as of March 31, 2023 by collateral type:
| | | | | | | | | | | | | | |
| Commercial Real Estate | Residential Real Estate | Equipment1 | Total |
| Commercial | | | | |
| Real estate owner occupied | $ | 198,000 | | $ | — | | $ | — | | $ | 198,000 | |
| Real estate non-owner occupied | 844,000 | — | — | 844,000 |
| Construction | 23,000 | — | — | 23,000 |
| C&I | 79,000 | — | 192,000 | 271,000 |
| | | | |
| | | | |
| Residential | | | | |
| Term | — | 1,438,000 | — | 1,438,000 |
| | | | |
| Home Equity | | | | |
| Revolving and term | — | 534,000 | — | 534,000 |
| | | | |
| Total | $ | 1,144,000 | | $ | 1,972,000 | | $ | 192,000 | | $ | 3,308,000 | |
1Collateral may consist of a boat, vehicle or other equipment.Collateral-dependent loans are loans for which the repayment is expected to be provided substantially by the underlying collateral and there are no other available and reliable sources of repayment.
A breakdown of Individually Analyzed Loans by class of financing receivable as of and for the period ended March 31, 2023 is presented in the following table:
| | | | | | | | | | | | | | | | | | | |
| | | | For the three months ended March 31, 2023 | |
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Recognized Interest Income | | |
| With No Related Allowance |
| Commercial | | | | | | | |
| Real estate owner occupied | $ | 338,000 | | $ | 550,000 | | $ | — | | $ | 367,000 | | $ | 8,000 | | | |
| Real estate non-owner occupied | 844,000 | | 969,000 | | — | | 846,000 | | 3,000 | | | |
| Construction | 23,000 | | 25,000 | | — | | 462,000 | | — | | | |
| C&I | 118,000 | | 166,000 | | — | | 178,000 | | — | | | |
| Multifamily | — | | — | | — | | — | | — | | | |
| Municipal | — | | — | | — | | — | | — | | | |
| Residential | | | | | | | |
| Term | 1,686,000 | | 1,819,000 | | — | | 1,693,000 | | 13,000 | | | |
| Construction | — | | — | | — | | — | | — | | | |
| Home Equity | | | | | | | |
| Revolving and term | 541,000 | | 661,000 | | — | | 535,000 | | — | | | |
| Consumer | — | | — | | — | | — | | — | | | |
| $ | 3,550,000 | | $ | 4,190,000 | | $ | — | | $ | 4,081,000 | | $ | 24,000 | | | |
| With an Allowance Recorded |
| Commercial | | | | | | | |
| Real estate owner occupied | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | |
| Real estate non-owner occupied | — | | — | | — | | — | | — | | | |
| Construction | — | | — | | — | | — | | — | | | |
| C&I | 706,000 | | 819,000 | | 291,000 | | 659,000 | | 3,000 | | | |
| Multifamily | — | | — | | — | | — | | — | | | |
| Municipal | — | | — | | — | | — | | — | | | |
| Residential | | | | | | | |
| Term | 1,228,000 | | 1,231,000 | | 94,000 | | 1,231,000 | | 15,000 | | | |
| Construction | — | | — | | — | | — | | — | | | |
| Home Equity | | | | | | | |
| Revolving and term | 20,000 | | 20,000 | | 3,000 | | 21,000 | | — | | | |
| Consumer | — | | — | | — | | — | | — | | | |
| $ | 1,954,000 | | $ | 2,070,000 | | $ | 388,000 | | $ | 1,911,000 | | $ | 18,000 | | | |
| Total |
| Commercial | | | | | | | |
| Real estate owner occupied | $ | 338,000 | | $ | 550,000 | | $ | — | | $ | 367,000 | | $ | 8,000 | | | |
| Real estate non-owner occupied | 844,000 | | 969,000 | | — | | 846,000 | | 3,000 | | | |
| Construction | 23,000 | | 25,000 | | — | | 462,000 | | — | | | |
| C&I | 824,000 | | 985,000 | | 291,000 | | 837,000 | | 3,000 | | | |
| Multifamily | — | | — | | — | | — | | — | | | |
| Municipal | — | | — | | — | | — | | — | | | |
| Residential | | | | | | | |
| Term | 2,914,000 | | 3,050,000 | | 94,000 | | 2,924,000 | | 28,000 | | | |
| Construction | — | | — | | — | | — | | — | | | |
| Home Equity | | | | | | | |
| Revolving and term | 561,000 | | 681,000 | | 3,000 | | 556,000 | | — | | | |
| Consumer | — | | — | | — | | — | | — | | | |
| $ | 5,504,000 | | $ | 6,260,000 | | $ | 388,000 | | $ | 5,992,000 | | $ | 42,000 | | | |
Substantially all interest income recognized on individually analyzed loans for all classes of financing receivables was recognized on a cash basis as received.
A breakdown of Individually Analyzed Loans by class of financing receivable as of and for the year ended December 31, 2022 is presented in the following table:
| | | | | | | | | | | | | | | | | |
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Recognized Interest Income |
| With No Related Allowance |
| Commercial | | | | | |
| Real estate | $ | 1,236,000 | | $ | 1,532,000 | | $ | — | | $ | 1,440,000 | | $ | 50,000 | |
| Construction | 685,000 | | 687,000 | | — | | 81,000 | | 35,000 | |
| Other | 301,000 | | 348,000 | | — | | 408,000 | | 13,000 | |
| Municipal | — | | — | | — | | — | | — | |
| Residential | | | | | |
| Term | 1,833,000 | | 2,035,000 | | — | | 4,507,000 | | 56,000 | |
| Construction | — | | — | | — | | — | | — | |
| Home equity line of credit | 304,000 | | 340,000 | | — | | 295,000 | | — | |
| Consumer | — | | — | | — | | 1,000 | | — | |
| $ | 4,359,000 | | $ | 4,942,000 | | $ | — | | $ | 6,732,000 | | $ | 154,000 | |
| With an Allowance Recorded |
| Commercial | | | | | |
| Real estate | $ | — | | $ | — | | $ | — | | $ | 11,000 | | $ | — | |
| Construction | — | | — | | — | | 606,000 | | — | |
| Other | 545,000 | | 647,000 | | 298,000 | | 693,000 | | — | |
| Municipal | — | | — | | — | | — | | — | |
| Residential | | | | | |
| Term | 1,256,000 | | 1,259,000 | | 100,000 | | 1,486,000 | | 50,000 | |
| Construction | — | | — | | — | | — | | — | |
| Home equity line of credit | — | | — | | — | | 8,000 | | — | |
| Consumer | — | | — | | — | | — | | — | |
| $ | 1,801,000 | | $ | 1,906,000 | | $ | 398,000 | | $ | 2,804,000 | | $ | 50,000 | |
| Total |
| Commercial | | | | | |
| Real estate | $ | 1,236,000 | | $ | 1,532,000 | | — | | $ | 1,451,000 | | $ | 50,000 | |
| Construction | 685,000 | | 687,000 | | — | | 687,000 | | 35,000 | |
| Other | 846,000 | | 995,000 | | 298,000 | | 1,101,000 | | 13,000 | |
| Municipal | — | | — | | — | | — | | — | |
| Residential | | | | | |
| Term | 3,089,000 | | 3,294,000 | | 100,000 | | 5,993,000 | | 106,000 | |
| Construction | — | | — | | — | | — | | — | |
| Home equity line of credit | 304,000 | | 340,000 | | — | | 303,000 | | — | |
| Consumer | — | | — | | — | | 1,000 | | — | |
| $ | 6,160,000 | | $ | 6,848,000 | | $ | 398,000 | | $ | 9,536,000 | | $ | 204,000 | |
A breakdown of Individually Analyzed Loans by class of financing receivable as of and for the period ended March 31, 2022 is presented in the following table:
| | | | | | | | | | | | | | | | | | | |
| | | | For the three months ended March 31, 2022 | |
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Recognized Interest Income | | |
| With No Related Allowance |
| Commercial | | | | | | | |
| Real estate | $ | 1,733,000 | | $ | 2,039,000 | | $ | — | | $ | 1,577,000 | | $ | 13,000 | | | |
| Construction | 27,000 | | 28,000 | | — | | 27,000 | | — | | | |
| Other | 452,000 | | 503,000 | | — | | 458,000 | | 4,000 | | | |
| Municipal | — | | — | | — | | — | | — | | | |
| Residential | | | | | | | |
| Term | 5,637,000 | | 6,741,000 | | — | | 5,793,000 | | 23,000 | | | |
| Construction | — | | — | | — | | — | | — | | | |
| Home equity line of credit | 191,000 | | 217,000 | | — | | 320,000 | | — | | | |
| Consumer | 1,000 | | 1,000 | | — | | 2,000 | | — | | | |
| $ | 8,041,000 | | $ | 9,529,000 | | $ | — | | $ | 8,177,000 | | $ | 40,000 | | | |
| With an Allowance Recorded |
| Commercial | | | | | | | |
| Real estate | $ | 42,000 | | $ | 71,000 | | $ | 42,000 | | $ | 42,000 | | — | | | |
| Construction | 661,000 | | 661,000 | | 13,000 | | 661,000 | | 6,000 | | | |
| Other | 781,000 | | 865,000 | | 532,000 | | 794,000 | | — | | | |
| Municipal | — | | — | | — | | — | | — | | | |
| Residential | | | | | | | |
| Term | 1,629,000 | | 1,674,000 | | 118,000 | | 1,735,000 | | 12,000 | | | |
| Construction | — | | — | | — | | — | | — | | | |
| Home equity line of credit | 100,000 | | 100,000 | | 7,000 | | 33,000 | | — | | | |
| Consumer | — | | — | | — | | — | | — | | | |
| $ | 3,213,000 | | $ | 3,371,000 | | $ | 712,000 | | $ | 3,265,000 | | $ | 18,000 | | | |
| Total |
| Commercial | | | | | | | |
| Real estate | $ | 1,775,000 | | $ | 2,110,000 | | $ | 42,000 | | $ | 1,619,000 | | $ | 13,000 | | | |
| Construction | 688,000 | | 689,000 | | 13,000 | | 688,000 | | 6,000 | | | |
| Other | 1,233,000 | | 1,368,000 | | 532,000 | | 1,252,000 | | 4,000 | | | |
| Municipal | — | | — | | — | | — | | — | | | |
| Residential | | | | | | | |
| Term | 7,266,000 | | 8,415,000 | | 118,000 | | 7,528,000 | | 35,000 | | | |
| Construction | — | | — | | — | | — | | — | | | |
| Home equity line of credit | 291,000 | | 317,000 | | 7,000 | | 353,000 | | — | | | |
| Consumer | 1,000 | | 1,000 | | — | | 2,000 | | — | | | |
| $ | 11,254,000 | | $ | 12,900,000 | | $ | 712,000 | | $ | 11,442,000 | | $ | 58,000 | | | |
Loan Modifications: ASU 2022-02 Troubled Debt Restructurings and Vintage Disclosures amends ASC 326 for entities that have adopted ASU 2016-13, the CECL standard, such as the Company. ASU 2022-02 eliminates the accounting guidance for TDR and introduces new guidance for enhanced reporting of certain loan modifications to borrowers experiencing financial difficulty.
The following table represents loan modifications made to borrowers experiencing financial difficulty by modification type and class of financing receivable, during the three months ended March 31, 2023:
| | | | | | | | |
| Term Extension |
| Amortized Cost Basis at March 31, 2023 | % of Total Class of Financing Receivable |
| C&I | $23,000 | 0.01% |
| Total | $23,000 | |
| | |
| Payment Deferral |
| Amortized Cost Basis at March 31, 2023 | % of Total Class of Financing Receivable |
| C&I | $227,000 | 0.07% |
| Total | $227,000 | |
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty for the three months ended March 31, 2023:
| | | | | |
| Term Extension |
| Financial Effect |
| C&I | Extended Term 12 months |
| |
| Payment Deferral |
| Financial Effect |
| C&I | Temporary payment accommodation, payments deferred to end of loan. |
The Company monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified:
| | | | | | | | | | | | | | |
| Payment Status (Amortized Cost Basis) |
| Current | 30-59 Days
Past Due | 60-89 Days
Past Due | 90+ Days
Past Due |
| C&I | $227,000 | $— | $— | $ | 23,000 | |
| Total | $227,000 | $— | $— | $ | 23,000 | |
Troubled Debt Restructured: Prior to adoption of ASU 2022-02, the Company evaluated loan modifications and other transactions to determined if classification as a TDR was necessary. A TDR constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan was to be classified as a TDR, Management evaluated a loan based upon the following criteria:
•The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender; and
•The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.
As of December 31, 2022 and March 31, 2022, the company had 29 loans with a balance of $4,744,000 and 56 loans with a balance of $7,790,000, respectively, that were classified as TDRs . The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the expected cash flows on the loan at the original interest rate, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell.
The following table shows TDRs by class and the specific reserve as of December 31, 2022:
| | | | | | | | | | | | | | | | | |
| Number of Loans | | Balance | | Specific Reserves |
| Commercial | | | | | |
| Real estate | 5 | | | $ | 1,044,000 | | | $ | — | |
| Construction | 1 | | | 661,000 | | | — | |
| Other | 3 | | | 361,000 | | | 81,000 | |
| Municipal | — | | | — | | | — | |
| Residential | | | | | |
| Term | 20 | | | 2,678,000 | | | 100,000 | |
| Construction | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Consumer | — | | | — | | | — | |
| 29 | | | $ | 4,744,000 | | | $ | 181,000 | |
The following table shows TDRs by class and the specific reserve as of March 31, 2022:
| | | | | | | | | | | | | | | | | |
| Number of Loans | | Balance | | Specific Reserves |
| Commercial | | | | | |
| Real estate | 8 | | | $ | 1,212,000 | | | $ | 42,000 | |
| Construction | 1 | | | 661,000 | | | 13,000 | |
| Other | 5 | | | 735,000 | | | 326,000 | |
| Municipal | — | | | — | | | — | |
| Residential | | | | | |
| Term | 41 | | | 5,181,000 | | | 118,000 | |
| Construction | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Consumer | 1 | | | 1,000 | | | — | |
| 56 | | | $ | 7,790,000 | | | $ | 499,000 | |
As of December 31, 2022, one of the loans classified as TDR with a total balance of $97,000 was more than 30 days past due and was not placed on TDR status in the previous 12 months. The following table shows past-due TDRs by class and the associated specific reserves included in the allowance for loan losses as of December 31, 2022:
| | | | | | | | | | | | | | | | | |
| Number of Loans | | Balance | | Specific Reserves |
| Commercial | | | | | |
| Real estate | — | | | $ | — | | | $ | — | |
| Construction | — | | | — | | | — | |
| Other | 1 | | | 97,000 | | | — | |
| Municipal | — | | | — | | | — | |
| Residential | | | | | |
| Term | — | | | — | | | — | |
| Construction | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Consumer | — | | | — | | | — | |
| 1 | | | $ | 97,000 | | | $ | — | |
As of March 31, 2022, five of the loans classified as TDRs with a total balance of $380,000 were more than 30 days past due. Of these loans, one had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of March 31, 2022: | | | | | | | | | | | | | | | | | |
| Number of Loans | | Balance | | Specific Reserves |
| Commercial | | | | | |
| Real estate | — | | | $ | — | | | $ | — | |
| Construction | — | | | — | | | |
| Other | 2 | | | 190,000 | | | — | |
| Municipal | — | | | — | | | |
| Residential | | | | | |
| Term | 3 | | | 190,000 | | | — | |
| Construction | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Consumer | — | | | — | | | — | |
| 5 | | | $ | 380,000 | | | $ | — | |
For the three months ended March 31, 2022, no loans were placed on TDR status.
Residential Mortgage Loans in Process of Foreclosure As of March 31, 2023 and December 31, 2022, there were two mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $166,000. This compares to six mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $714,000 as of March 31, 2022.
Note 4. Allowance for Credit Losses
Upon adoption of ASC 326, the CECL standard, in the first quarter of 2023, the Company replaced the incurred loss model that recognized losses when it became probable that a credit loss would be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The ACL is a valuation amount 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. The ACL consists of three elements: (1) specific reserves for loans individually analyzed; (2) general reserves for each portfolio segment; and, (3) qualitative reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance. Loans are segmented by common risk characteristics as delineated in the paragraph below. Prior to adoption of ASC 326, under the incurred loss methodology, the Company evaluated portfolio risk characteristics largely on loan purpose. The Company provides for loan losses through the allowance for credit losses which represents an estimated reserve for losses in the loan portfolio. To determine an appropriate level for general reserves, a discounted cash flow approach is applied to each portfolio segment implementing a probability of default and loss given default estimate based upon a number of factors including historical losses over an economic cycle, economic forecasts, loan prepayment speeds and curtailment rates. To determine an appropriate level for qualitative reserves, various factors are considered including underwriting policies, credit administration practices, experience, ability and depth of lending management, and economic factors not captured in the general reserve calculation. Adoption of ASC 326 added $6,210,000 to the Allowance for Credit Losses, recorded as a charge to retained earnings at January 1, 2023.
Loan Portfolio Composition & Risk Characteristics: The loan portfolio is segmented into ten classes and credit risk is evaluated separately in each class. Major risk characteristics relevant to each portfolio segment are as follows:
Commercial Real Estate Owner Occupied - commercial real estate owner occupied loans consist of mortgage loans to finance investments in real property such as retail space, offices, industrial buildings, hotels, educational facilities, and other specific or mixed use properties. Loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made, and are primarily paid by the cash flow generated from the real property, typically the operating entity of owner occupant. Risk factors typically include competitive market forces, net operating incomes of the operating entity, and overall economic demand. Loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other types of lending.
Commercial Real Estate Non-Owner Occupied - commercial real estate loans non-owner occupied share many of the purpose, loan structure and risk characteristics of owner-occupied commercial real estate. Repayment is generally reliant upon cash flow generated from tenants with risk factors also influenced by vacancy rates, cap rates, lease renewals, and underlying financial health of lessees.
Commercial Construction - commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Loans typically have construction periods of less than two years, and payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. Commercial construction loans will typically convert to permanent financing from the Company, or loan repayment may come from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans. Commercial construction loans are impacted by factors similar to those for commercial real estate loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Commercial and Industrial ("C&I") - C&I 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. C&I loans may be secured or unsecured; when secured, collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, equipment, and/or other tangible and intangible assets. C&I loans are primarily paid by the operating cash flow of the borrower. A weakened economy, soft consumer spending, and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.
Commercial Multifamily - multifamily loans share structure and risk characteristics with non-owner occupied commercial real estate; underlying collateral is residential in nature rather than commercial, consisting of properties with five or more units.
Municipal Loans - municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects, or tax anticipation notes. All municipal loans are considered either general obligations of the municipality collateralized by the taxing ability of the municipality for repayment of debt or have a pledge of specific revenues. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.
Residential Real Estate Term - residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one-to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.
Residential Real Estate Construction - residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity, and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans. Residential construction loans are impacted by factors similar to those for residential real estate term loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Home Equity Revolving and Term - home equity revolving and term loans 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 line of credit typically has a variable interest 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. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.
Consumer - consumer loans include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as autos, recreational vehicles, debt consolidation, personal expenses, or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured. The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.
Construction, land, and land development ("CLLD"): CLLD loans, both commercial and residential, represented 47.6% of total Bank capital as of March 31, 2023 and remain below the regulatory guidance of 100.0% of total Bank capital. Construction loans and non-owner-occupied commercial real estate loans represented 223.1% of total Bank capital at March 31, 2023 , below the regulatory guidance of 300.0% of total Bank capital.
Composition of the ACL: A breakdown of the allowance for credit losses as of March 31, 2023, by class of financing receivable and allowance element, is presented in the following table:
| | | | | | | | | | | | | | | |
| As of March 31, 2023 | Specific Reserves on Loans Evaluated Individually | General Reserves on Loans Based on Historical Loss Experience | Reserves for Qualitative Factors | | Total Reserves |
| Commercial | | | | | |
| Real estate owner occupied | $ | — | | $ | 3,792,000 | | $ | 678,000 | | | $ | 4,470,000 | |
| Real estate non-owner occupied | — | | 3,914,000 | | 508,000 | | | 4,422,000 | |
| Construction | — | | 1,729,000 | | 55,000 | | | 1,784,000 | |
| C&I | 291,000 | | 3,937,000 | | 610,000 | | | 4,838,000 | |
| Multifamily | — | | 1,146,000 | | 60,000 | | | 1,206,000 | |
| Municipal | — | | 272,000 | | 35,000 | | | 307,000 | |
| Residential | | | | | |
| Term | 94,000 | | 3,786,000 | | 728,000 | | | 4,608,000 | |
| Construction | — | | 939,000 | | 10,000 | | | 949,000 | |
| Home Equity | | | | | |
| Revolving and term | 3,000 | | 457,000 | | 143,000 | | | 603,000 | |
| Consumer | — | | 244,000 | | 27,000 | | | 271,000 | |
| | | | | |
| $ | 388,000 | | $ | 20,216,000 | | $ | 2,854,000 | | | $ | 23,458,000 | |
A breakdown of the allowance for loan losses as of December 31, 2022 under the incurred loss method, by class of financing receivable and allowance element, is presented in the following table:
| | | | | | | | | | | | | | | | | |
| As of December 31, 2022 | Specific Reserves on Loans Evaluated Individually for Impairment | General Reserves on Loans Based on Historical Loss Experience | Reserves for Qualitative Factors | Unallocated
Reserves | Total Reserves |
| Commercial | | | | | |
| Real estate | $ | — | | $ | 974,000 | | $ | 5,142,000 | | $ | — | | $ | 6,116,000 | |
| Construction | — | | 131,000 | | 690,000 | | — | | 821,000 | |
| Other | 298,000 | | 446,000 | | 2,353,000 | | — | | 3,097,000 | |
| Municipal | — | | — | | 162,000 | | — | | 162,000 | |
| Residential | | | | | |
| Term | 100,000 | | 83,000 | | 2,376,000 | | — | | 2,559,000 | |
| Construction | — | | 7,000 | | 192,000 | | — | | 199,000 | |
| Home equity line of credit | — | | 101,000 | | 928,000 | | — | | 1,029,000 | |
| Consumer | — | | 286,000 | | 776,000 | | — | | 1,062,000 | |
| Unallocated | — | | — | | — | | 1,678,000 | | 1,678,000 | |
| $ | 398,000 | | $ | 2,028,000 | | $ | 12,619,000 | | $ | 1,678,000 | | $ | 16,723,000 | |
A breakdown of the allowance for loan losses as of March 31, 2022 under the incurred loss method, by class of financing receivable and allowance element, is presented in the following table:
| | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | Specific Reserves on Loans Evaluated Individually for Impairment | General Reserves on Loans Based on Historical Loss Experience | Reserves for Qualitative Factors | Unallocated
Reserves | Total Reserves |
| Commercial | | | | | |
| Real estate | $ | 42,000 | | $ | 824,000 | | $ | 4,503,000 | | $ | — | | $ | 5,369,000 | |
| Construction | 13,000 | | 143,000 | | 783,000 | | — | | 939,000 | |
| Other | 532,000 | | 375,000 | | 2,049,000 | | — | | 2,956,000 | |
| Municipal | — | | — | | 156,000 | | — | | 156,000 | |
| Residential | | | | | |
| Term | 118,000 | | 167,000 | | 2,363,000 | | — | | 2,648,000 | |
| Construction | — | | 11,000 | | 150,000 | | — | | 161,000 | |
| Home equity line of credit | 7,000 | | 103,000 | | 829,000 | | — | | 939,000 | |
| Consumer | — | | 255,000 | | 611,000 | | — | | 866,000 | |
| Unallocated | — | | — | | — | | 1,732,000 | | 1,732,000 | |
| $ | 712,000 | | $ | 1,878,000 | | $ | 11,444,000 | | $ | 1,732,000 | | $ | 15,766,000 | |
The allowance for credit losses as a percent of total loans stood at 1.18% as of March 31, 2023, 0.94% at December 31, 2022 and 0.92% as of March 31, 2022.
Off-Balance Sheet Credit Exposures: In the ordinary course of business, the Company enters into commitments to extend credit, including commercial letters of credit and standby letters of credit. Such financial instruments are recorded as loans when they are funded.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted through credit loss expense and any adjustment is recognized in net income. To appropriately measure expected credit losses, management disaggregates the loan portfolio into similar risk characteristics, identical to those determined for the loan portfolio. An estimated funding rate is then applied to the qualifying unfunded loan commitments and letters of credit using the Company’s own historical experience to estimate the expected funded amount for each loan segment as of the reporting date. Once the expected funded amount for each loan segment is determined, the loss rate, which is the calculated expected loan loss as a percent of the amortized cost basis for each loan segment, is applied to calculate the ACL on off-balance sheet credit exposures as of the reporting date. The Company’s allowance for credit losses on unfunded commitments is recognized as a liability, included within other liabilities on the consolidated balance sheet.
The following table presents the activity in the ACL for off-balance sheet credit exposures:
| | | | | |
| For the three months ended March 31, 2023 |
| Allowance for credit losses: | |
| Beginning balance, prior to adoption of ASC 326 | $ | 100,000 | |
| Impact of adopting ASC 326 | 1,297,000 | |
| Credit loss expense | — | |
| Total ending allowance balance | $ | 1,397,000 | |
Credit Quality Indicators: To monitor the credit quality of its loan portfolio, management applies an internal risk rating system to categorize commercial loans; most residential real estate, home equity, and consumer loans are not assigned ratings. Approximately 60% of commercial loan outstanding balances are subject to review and validation annually by an independent consulting firm. Additionally, commercial loan relationships with exposure greater than or equal to $750,000 are subject to review annually by the Company's internal credit review function.
The risk rating system has eight levels, defined as follows:
1 Strong
Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral.
2 Above Average
Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings, and/or cash flow with a consistent record of solid financial performance.
3 Satisfactory
Credits rated "3" are characterized by borrowers with favorable liquidity, profitability, and financial condition with adequate cash flow to pay debt service.
4 Average
Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements.
5 Watch
Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors.
6 Other Assets Especially Mentioned ("OAEM")
Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Company's credit position at some future date.
7 Substandard
Loans in this category are inadequately protected by the paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.
8 Doubtful
Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. 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 asset, its classification as an estimated loss is deferred until its more exact status may be determined.
The following table summarizes the credit quality for the Company's portfolio by risk category of loans and by class by vintage as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year |
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
| Commercial | | | | | | | |
| Real estate owner occupied | | | | | | | |
| Pass (risk rating 1-5) | $ | 15,632,000 | | $ | 77,722,000 | | $ | 43,127,000 | | $ | 30,277,000 | | $ | 39,979,000 | | $ | 78,184,000 | | $ | 284,921,000 | |
| Special Mention (risk rating 6) | 25,000 | | — | | — | | — | | — | | — | | 25,000 | |
| Substandard (risk rating 7) | — | | — | | — | | — | | — | | 278,000 | | 278,000 | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total Real Estate Owner Occupied | 15,657,000 | | 77,722,000 | | 43,127,000 | | 30,277,000 | | 39,979,000 | | 78,462,000 | | 285,224,000 | |
| Real estate owner occupied | | | | | | | |
| Current period gross write-offs | — | | — | | — | | — | | — | | 39,000 | | 39,000 | |
| Real estate non-owner occupied | | | | | | | |
| Pass (risk rating 1-5) | 12,167,000 | | 72,434,000 | | 132,514,000 | | 49,921,000 | | 28,367,000 | | 88,991,000 | | 384,394,000 | |
| Special Mention (risk rating 6) | — | | — | | — | | — | | — | | — | | — | |
| Substandard (risk rating 7) | — | | — | | — | | — | | — | | 63,000 | | 63,000 | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total Real Estate Non-Owner Occupied | 12,167,000 | | 72,434,000 | | 132,514,000 | | 49,921,000 | | 28,367,000 | | 89,054,000 | | 384,457,000 | |
| Construction | | | | | | | |
| Pass (risk rating 1-5) | 3,205,000 | | 46,630,000 | | 7,796,000 | | 421,000 | | 234,000 | | 834,000 | | 59,120,000 | |
| Special Mention (risk rating 6) | — | | — | | — | | — | | — | | — | | — | |
| Substandard (risk rating 7) | — | | — | | — | | — | | — | | — | | — | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total Construction | 3,205,000 | | 46,630,000 | | 7,796,000 | | 421,000 | | 234,000 | | 834,000 | | 59,120,000 | |
| C&I | | | | | | | |
| Pass (risk rating 1-5) | 25,052,000 | | 112,238,000 | | 78,357,000 | | 59,431,000 | | 9,229,000 | | 47,179,000 | | 331,486,000 | |
| Special Mention (risk rating 6) | — | | 41,000 | | 268,000 | | 400,000 | | — | | 12,000 | | 721,000 | |
| Substandard (risk rating 7) | — | | 378,000 | | 35,000 | | 13,000 | | 218,000 | | 684,000 | | 1,328,000 | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total C&I | 25,052,000 | | 112,657,000 | | 78,660,000 | | 59,844,000 | | 9,447,000 | | 47,875,000 | | 333,535,000 | |
| Multifamily | | | | | | | |
| Pass (risk rating 1-5) | 3,496,000 | | 21,254,000 | | 22,160,000 | | 16,333,000 | | 5,972,000 | | 11,874,000 | | 81,089,000 | |
| Special Mention (risk rating 6) | — | | — | | — | | — | | — | | — | | — | |
| Substandard (risk rating 7) | — | | — | | — | | — | | — | | — | | — | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total Multifamily | 3,496,000 | | 21,254,000 | | 22,160,000 | | 16,333,000 | | 5,972,000 | | 11,874,000 | | 81,089,000 | |
| Municipal | | | | | | | |
| Pass (risk rating 1-5) | 6,785,000 | | 7,186,000 | | 6,518,000 | | 11,063,000 | | 5,732,000 | | 9,882,000 | | 47,166,000 | |
| Special Mention (risk rating 6) | — | | — | | — | | — | | — | | — | | — | |
| Substandard (risk rating 7) | — | | — | | — | | — | | — | | — | | — | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total Municipal | 6,785,000 | | 7,186,000 | | 6,518,000 | | 11,063,000 | | 5,732,000 | | 9,882,000 | | 47,166,000 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year |
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
| Residential | | | | | | | |
| Term | | | | | | | |
| Pass (risk rating 1-5) | 6,640,000 | | 51,206,000 | | 34,748,000 | | 16,901,000 | | 6,777,000 | | 18,211,000 | | 134,483,000 | |
| Special Mention (risk rating 6) | — | | — | | — | | — | | — | | — | | — | |
| Substandard (risk rating 7) | — | | — | | — | | — | | — | | 59,000 | | 59,000 | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total Term | 6,640,000 | | 51,206,000 | | 34,748,000 | | 16,901,000 | | 6,777,000 | | 18,270,000 | | 134,542,000 | |
| Construction | | | | | | | |
| Pass (risk rating 1-5) | 1,310,000 | | 5,915,000 | | 3,219,000 | | 1,046,000 | | — | | — | | 11,490,000 | |
| Special Mention (risk rating 6) | — | | — | | — | | — | | — | | — | | — | |
| Substandard (risk rating 7) | — | | — | | — | | — | | — | | — | | — | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total Construction | 1,310,000 | | 5,915,000 | | 3,219,000 | | 1,046,000 | | — | | — | | 11,490,000 | |
| Home Equity Revolving and Term | | | | | | | |
| Pass (risk rating 1-5) | 1,472,000 | | 10,440,000 | | 2,194,000 | | 1,453,000 | | 445,000 | | 1,735,000 | | 17,739,000 | |
| Special Mention (risk rating 6) | — | | — | | — | | — | | — | | — | | — | |
| Substandard (risk rating 7) | — | | — | | — | | — | | — | | 185,000 | | 185,000 | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total Home Equity Revolving and Term | 1,472,000 | | 10,440,000 | | 2,194,000 | | 1,453,000 | | 445,000 | | 1,920,000 | | 17,924,000 | |
| Consumer | | | | | | | |
| Pass (risk rating 1-5) | 190,000 | | — | | — | | — | | — | | 1,000 | | 191,000 | |
| Special Mention (risk rating 6) | — | | — | | — | | — | | — | | — | | — | |
| Substandard (risk rating 7) | — | | — | | — | | — | | — | | — | | — | |
| Doubtful (risk rating 8) | — | | — | | — | | — | | — | | — | | — | |
| Total Consumer | 190,000 | | — | | — | | — | | — | | 1,000 | | 191,000 | |
| Consumer | | | | | | | |
| Current period gross write-offs | — | | 6,000 | | 7,000 | | 11,000 | | 2,000 | | 11,000 | | 37,000 | |
| Total risk-rated loans | $ | 75,974,000 | | $ | 405,444,000 | | $ | 330,936,000 | | $ | 187,259,000 | | $ | 96,953,000 | | $ | 258,172,000 | | $ | 1,354,738,000 | |
Loss Recognition: Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral, and other factors as applicable. Consumer loans greater than 120 days past due are generally charged off. Residential loans 90 days or more past due are placed on non-accrual status unless the loans are both well secured and in the process of collection. One- to four-family residential real estate loans and home equity loans are written down or charged-off no later than 180 days past due, or for residential real estate secured loans having a borrower in bankruptcy, within 60 days of receipt of notification of filing from the bankruptcy court, whichever is sooner. This is subject to completion of a current assessment of the value of the collateral with any outstanding loan balance in excess of the fair value of the property, less costs to sell, written down or charged-off.
The following table presents allowance for credit losses activity by class for the three months ended March 31, 2023:
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| Dollars in thousands | Commercial | Municipal | Residential | Home Equity | Consumer | Unallocated | Total |
| Real Estate Owner Occupied | Real Estate Non-Owner Occupied | Construction | C&I | Multifamily | | Term | Construction | Revolving and term | | | |
| For the three months ended March 31, 2023 |
| Beginning balance, prior to adoption of ASC 326 | $ | 6,116 | | $ | — | | $ | 821 | | $ | 3,097 | | $ | — | | $ | 162 | | $ | 2,559 | | $ | 199 | | $ | 1,029 | | $ | 1,062 | | $ | 1,678 | | $ | 16,723 | |
| Charge offs | 39 | | — | | — | | — | | — | | — | | — | | — | | — | | 37 | | — | | 76 | |
| Recoveries | — | | — | | — | | 2 | | — | | — | | 2 | | — | | 4 | | 43 | | — | | 51 | |
| Provision | 79 | | 107 | | 20 | | 94 | | 22 | | 13 | | 169 | | 15 | | 26 | | 5 | | — | | 550 | |
| Impact of adopting ASC 326 | $ | (1,686) | | $ | 4,315 | | $ | 943 | | $ | 1,645 | | $ | 1,184 | | $ | 132 | | $ | 1,878 | | $ | 735 | | $ | (456) | | $ | (802) | | $ | (1,678) | | $ | 6,210 | |
| Ending balance | $ | 4,470 | | $ | 4,422 | | $ | 1,784 | | $ | 4,838 | | $ | 1,206 | | $ | 307 | | $ | 4,608 | | $ | 949 | | $ | 603 | | $ | 271 | | $ | — | | $ | 23,458 | |
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As of March 31, 2023, the significant model inputs and assumptions used within the discounted cash flow model for purposes of estimating the ACL on loans were:
Macroeconomic (loss) drivers: The following loss drivers for each loan segment were used to calculate the expected Probability of Default over the forecast and reversion period:
•Commercial Real Estate Owner Occupied: Federal Open Market Committee ("FOMC") median forecasts of national unemployment and change in national GDP
•Commercial Real Estate Non-Owner Occupied: FOMC median forecasts of national unemployment and change in national GDP
•Commercial Construction: FOMC median forecasts of national unemployment and change in national GDP
•Commercial & Industrial: FOMC median forecasts of national unemployment and change in national GDP
•Commercial Multifamily: FOMC median forecast of national unemployment and Case-Shiller National Home Price Index
•Municipal: FOMC median forecasts of national unemployment and change in national GDP
•Residential Real Estate Term: FOMC median forecasts of national unemployment and change in national GDP
•Residential Real Estate Construction: FOMC median forecast of national unemployment
•Home Equity Revolving & Term: FOMC median forecasts of national unemployment and change in national GDP
•Consumer: FOMC median forecasts of national unemployment and change in national GDP
Reasonable and supportable forecast period: The ACL on loans estimate used a reasonable and supportable forecast period of one year.
Reversion period: The ACL on loans estimate used a reversion period of one year.
Prepayment speeds: The estimate of prepayment speed for each loan segment was derived using internally sourced prepayment data.
Qualitative factors: The ACL on loans estimate incorporated various qualitative factors into the calculation such as changes in lending policies, changes in the nature and volume and terms of loans, changes in the experience, depth and ability of lending management, and economic factors not captured in the quantitative model.
The following table presents allowance for loan losses activity by class for the year ended December 31, 2022:
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| Dollars in thousands | Commercial | Municipal | Residential | Home Equity Line of Credit | Consumer | Unallocated | Total |
| Real Estate | Construction | Other | | Term | Construction | | | | |
For the year ended December 31, 2022 |
| Beginning balance | $ | 5,367 | | $ | 746 | | $ | 2,830 | | $ | 157 | | $ | 2,733 | | $ | 148 | | $ | 925 | | $ | 833 | | $ | 1,782 | | $ | 15,521 | |
| Charge offs | — | | — | | 309 | | — | | 8 | | — | | 29 | | 412 | | — | | 758 | |
| Recoveries | 20 | | — | | 13 | | — | | 29 | | — | | 4 | | 144 | | — | | 210 | |
| Provision (credit) | 729 | | 75 | | 563 | | 5 | | (195) | | 51 | | 129 | | 497 | | (104) | | 1,750 | |
| Ending balance | $ | 6,116 | | $ | 821 | | $ | 3,097 | | $ | 162 | | $ | 2,559 | | $ | 199 | | $ | 1,029 | | $ | 1,062 | | $ | 1,678 | | $ | 16,723 | |
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The following table presents allowance for loan losses activity by class for the three months ended March 31, 2022:
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| Dollars in thousands | Commercial | Municipal | Residential | Home Equity Line of Credit | Consumer | Unallocated | Total |
| Real Estate | Construction | Other | | Term | Construction | | | | |
| For the three months ended March 31, 2022 |
| Beginning balance | $ | 5,367 | | $ | 746 | | $ | 2,830 | | $ | 157 | | $ | 2,733 | | $ | 148 | | $ | 925 | | $ | 833 | | $ | 1,782 | | $ | 15,521 | |
| Charge offs | — | | — | | 1 | | — | | — | | — | | 29 | | 217 | | — | | 247 | |
| Recoveries | 16 | | — | | 1 | | — | | 8 | | — | | 1 | | 16 | | — | | 42 | |
| Provision (credit) | (14) | | 193 | | 126 | | (1) | | (93) | | 13 | | 42 | | 234 | | (50) | | 450 | |
| Ending balance | $ | 5,369 | | $ | 939 | | $ | 2,956 | | $ | 156 | | $ | 2,648 | | $ | 161 | | $ | 939 | | $ | 866 | | $ | 1,732 | | $ | 15,766 | |
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Note 5 – Stock-Based Compensation
At the 2010 Annual Meeting, shareholders approved the 2010 Equity Incentive Plan (the "2010 Plan"). The 2010 Plan expired on April 28, 2020, leaving 215,513 shares not issued. At the 2020 Annual Meeting, shareholders approved the 2020 Equity Incentive Plan (the "2020 Plan"). The 2020 Plan reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards, and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees, and non-employee Directors, and promote the success of the Company. Such grants and awards will be structured in a manner that does not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2020 Plan qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2020 Plan qualifies as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and satisfies NASDAQ guidelines relating to equity compensation.
As of March 31, 2023, 184,487 shares of restricted stock had been granted under the 2010 Plan and 98,810 shares under the 2020 Plan, of which 85,127 shares remain restricted as of March 31, 2023 as detailed in the following table:
| | | | | | | | | | | |
Year
Granted | Vesting Term
(In Years) | Shares | Remaining Term
(In Years) |
| 2020 | 3.0 | 1,750 | | 0.1 |
| 2021 | 3.0 | 25,968 | | 0.8 |
| 2022 | 3.0 | 23,904 | | 1.8 |
| 2022 | 2.5 | 1,250 | | 1.8 |
| 2023 | 3.0 | 27,559 | | 2.8 |
| 2023 | 2.0 | 2,946 | | 1.8 |
| 2023 | 1.0 | 1,750 | | 0.8 |
| | 85,127 | | 1.8 |
The compensation cost related to these non-vested restricted stock grants is $2,434,000 and is recognized over the vesting terms of each grant. In the three months ended March 31, 2023, $184,000 of expense was recognized for these restricted shares, leaving $1,501,000 in unrecognized expense as of March 31, 2023. In the three months ended March 31, 2022, $217,000 of expense was recognized for restricted shares, leaving $1,350,000 in unrecognized expense as of March 31, 2022.
Note 6 – Common Stock
Proceeds from sale of common stock totaled $212,000 and $199,000 for the three months ended March 31, 2023 and 2022, respectively.
Note 7 – Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS) for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| Income (Numerator) | | Shares (Denominator) | | Per-Share Amount |
| For the three months ended March 31, 2023 | | | | | |
| Net income as reported | $ | 7,971,000 | | | | | |
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| Basic EPS: Income available to common shareholders | 7,971,000 | | | 10,948,513 | | | $ | 0.73 | |
| Effect of dilutive securities: restricted stock | | | 117,734 | | | |
| Diluted EPS: Income available to common shareholders plus assumed conversions | $ | 7,971,000 | | | 11,066,247 | | | $ | 0.72 | |
| For the three months ended March 31, 2022 | | | | | |
| Net income as reported | $ | 9,705,000 | | | | | |
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| Basic EPS: Income available to common shareholders | 9,705,000 | | | 10,931,863 | | | $ | 0.89 | |
| Effect of dilutive securities: restricted stock | | | 94,844 | | | |
| Diluted EPS: Income available to common shareholders plus assumed conversions | $ | 9,705,000 | | | 11,026,707 | | | $ | 0.88 | |
Note 8 – Employee Benefit Plans
401(k) Plan
The Bank has a defined contribution plan available to substantially all employees who have completed three months of service. Employees may contribute up to Internal Revenue Service ("IRS") determined limits and the Bank may match employee contributions not to exceed 3.0% of compensation depending on contribution level. The Plan is a safe harbor plan whereby the Bank also contributes a minimum 3.0% of annual compensation to the plan for all eligible employees. The expense related to the 401(k) plan was $326,000 and $324,000 for the three months ended March 31, 2023 and 2022, respectively.
Deferred Compensation and Supplemental Retirement Benefits
The Bank also provides unfunded supplemental retirement benefits for certain officers, payable in installments over 20 years upon retirement or death. The agreements consist of individual contracts with differing characteristics that, when taken together, do not constitute a postretirement plan. There are no active officers eligible for these benefits. The costs for these benefits are recognized over the service periods of the participating officers in accordance with Financial Accounting Standards Board ("FASB") ASC Topic 712 "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental retirement benefits was $41,000 and $77,000 for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, the associated accrued liability included in other liabilities in the balance sheet was $2,862,000 compared to $2,893,000 and $2,877,000 at December 31, 2022 and March 31, 2022, respectively.
Postretirement Benefit Plans
The Bank sponsors two postretirement benefit plans. One plan currently provides a subsidy for health insurance premiums to certain retired employees; these subsidies are based on years of service and range between $40 and $1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are prefunded. The Company utilizes FASB ASC Topic 712 to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income (loss).
The following table sets forth the accumulated postretirement benefit obligation and funded status:
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| At or for the three months ended March 31, |
| 2023 | | 2022 |
| Change in benefit obligation | | | |
| Benefit obligation at beginning of year | $ | 1,050,000 | | | $ | 1,353,000 | |
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| Interest cost | 5,000 | | | 8,000 | |
| Benefits paid | (22,000) | | | (22,000) | |
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| Benefit obligation at end of period | $ | 1,033,000 | | | $ | 1,339,000 | |
| Funded status | | | |
| Benefit obligation at end of period | $ | (1,033,000) | | | $ | (1,339,000) | |
| Unamortized gain | (345,000) | | | (133,000) | |
| Accrued benefit cost at end of period | $ | (1,378,000) | | | $ | (1,472,000) | |
The following table sets forth the net periodic pension cost:
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| For the three months ended March 31, | |
| 2023 | | 2022 | | | |
| Components of net periodic benefit cost | | | | | | |
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| Interest cost | $ | 5,000 | | | $ | 8,000 | | | | |
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| Net periodic benefit cost | $ | 5,000 | | | $ | 8,000 | | | | |
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income are as follows:
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| March 31,
2023 | | December 31, 2022 | | March 31,
2022 |
| Unamortized net actuarial gain | $ | 345,000 | | | $ | 345,000 | | | $ | 133,000 | |
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| Deferred tax expense | (72,000) | | | (72,000) | | | (28,000) | |
| Net unrecognized postretirement benefits included in accumulated other comprehensive income | $ | 273,000 | | | $ | 273,000 | | | $ | 105,000 | |
A weighted average discount rate of 4.75% was used in determining the accumulated benefit obligation and the net periodic benefit cost. The assumed health care cost trend rate is 7.00%. The measurement date for benefit obligations was as of year-end for prior years presented. The expected benefit payments for all of 2023 are $88,000. Plan expense for 2023 is estimated to be $19,000. A 1.00% change in trend assumptions would create an approximate change in the same direction of $100,000 in the accumulated benefit obligation, $7,000 in the interest cost, and $1,000 in the service cost.
Note 9 - Other Comprehensive Income (Loss)
The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income (loss) for the three months ended March 31, 2023 and 2022.
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| For the three months ended March 31, | |
| 2023 | 2022 | | |
| Balance at beginning of period | $ | (44,718,000) | | $ | (1,718,000) | | | |
| Unrealized gains (losses) arising during the period | 5,292,000 | | (23,217,000) | | | |
| Reclassification of net realized gains during the period | — | | (2,000) | | | |
| Related deferred taxes | (1,111,000) | | 4,876,000 | | | |
| Net change | 4,181,000 | | (18,343,000) | | | |
| Balance at end of period | $ | (40,537,000) | | $ | (20,061,000) | | | |
The reclassification of realized gains is included in the net securities gains line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement.
The following table summarizes activity in the unrealized loss on securities transferred from available for sale to held to maturity included in other comprehensive income (loss) for the three months ended March 31, 2023 and 2022.
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| For the three months ended March 31, | |
| 2023 | 2022 | | |
| Balance at beginning of period | $ | (64,000) | | $ | (87,000) | | | |
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| Amortization of net unrealized gains | 5,000 | | 12,000 | | | |
| Related deferred taxes | (1,000) | | (3,000) | | | |
| Net change | 4,000 | | 9,000 | | | |
| Balance at end of period | $ | (60,000) | | $ | (78,000) | | | |
The following table presents the effect of the Company's derivative financial instruments included in other comprehensive income (loss) for the three months ended March 31, 2023 and 2022.
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| For the three months ended March 31, | |
| 2023 | 2022 | | |
| Balance at beginning of period | $ | 544,000 | | $ | — | | | |
| Unrealized losses on cash flow hedging derivatives arising during the period | (3,463,000) | | — | | | |
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| Related deferred taxes | 727,000 | | — | | | |
| Net change | (2,736,000) | | — | | | |
| Balance at end of period | $ | (2,192,000) | | $ | — | | | |
There was no activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the three months ended March 31, 2023 and 2022.
Note 10 - Financial Derivative Instruments
The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize
significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.
The Bank recognizes its derivative instruments in the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income (loss). Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.
The details of the interest rate swap agreements are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | March 31, 2023 | December 31, 2022 | March 31, 2022 |
| Effective Date | Maturity Date | Variable Index Received | Fixed Rate Paid | Presentation on Consolidated Balance Sheet | Notional Amount | Fair Value | Notional Amount | Fair Value | Notional Amount | Fair Value |
| 04/27/2022 | 10/27/2023 | USD-SOFR-COMPOUND | 2.498% | Other Assets | $10,000,000 | $133,000 | $10,000,000 | $187,000 | $— | $— |
| 04/27/2022 | 01/27/2024 | USD-SOFR-COMPOUND | 2.576% | Other Assets | 10,000,000 | 176,000 | 10,000,000 | 233,000 | — | — |
| 04/27/2022 | 04/27/2024 | USD-SOFR-COMPOUND | 2.619% | Other Assets | 10,000,000 | 209,000 | 10,000,000 | 269,000 | — | — |
| 01/10/2023 | 01/01/2026 | USD-SOFR-OIS COMPOUND | 3.836% | Other Liabilities | 75,000,000 | (196,000) | — | — | — | — |
| 03/08/2023 | 03/01/2026 | USD-SOFR-OIS COMPOUND | 4.712% | Other Liabilities | 40,000,000 | (1,062,000) | — | — | — | — |
| 03/08/2023 | 03/01/2027 | USD-SOFR-OIS COMPOUND | 4.402% | Other Liabilities | 30,000,000 | (958,000) | — | — | — | — |
| 03/08/2023 | 03/01/2028 | USD-SOFR-OIS COMPOUND | 4.189% | Other Liabilities | 30,000,000 | (1,076,000) | — | — | — | — |
| | | | | $205,000,000 | $(2,774,000) | $30,000,000 | $689,000 | $— | $— |
The Company would reclassify unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate. Amounts paid or received under the swaps are reported in interest expense in the consolidated statement of income, and in interest paid in the consolidated statement of cash flows.
Customer loan derivatives
The Bank will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheet.
At March 31, 2023 and 2022, and December 31, 2022, there were six customer loan swap arrangements in place, detailed below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | December 31, 2022 | March 31, 2022 |
| Presentation on Consolidated Balance Sheet | Number of Positions | Notional Amount | Fair Value | Number of Positions | Notional Amount | Fair Value | Number of Positions | Notional Amount | Fair Value |
| Pay Fixed, Receive Variable | Other Assets | 6 | $ | 37,129,000 | | $ | 4,098,000 | | 6 | $ | 37,411,000 | | $ | 4,910,000 | | 5 | | $ | 26,864,000 | | $ | 2,099,000 | |
| Pay Fixed, Receive Variable | Other Liabilities | — | — | | — | | — | — | | — | | 1 | | 12,310,000 | | (566,000) | |
| | 6 | 37,129,000 | | 4,098,000 | | 6 | 37,411,000 | | 4,910,000 | | 6 | | 39,174,000 | | 1,533,000 | |
| Receive Fixed, Pay Variable | Other Assets | — | — | | — | | — | — | | — | | 1 | | 12,310,000 | | 566,000 | |
| Receive Fixed, Pay Variable | Other Liabilities | 6 | 37,129,000 | | (4,098,000) | | 6 | 37,411,000 | | (4,910,000) | | 5 | | 26,864,000 | | (2,099,000) | |
| | 6 | 37,129,000 | | (4,098,000) | | 6 | 37,411,000 | | (4,910,000) | | 6 | | 39,174,000 | | (1,533,000) | |
| Total | | 12 | $ | 74,258,000 | | $ | — | | 12 | $ | 74,822,000 | | $ | — | | 12 | | $ | 78,348,000 | | $ | — | |
Derivative collateral
The Bank has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its various loan swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At March 31, 2023, there was no collateral posted on its swap contracts or required amount to be pledged.
Cessation of LIBOR
The Company is aware that 1) certain tenors of US Dollar ("USD") denominated London Interbank Offering Rate ("LIBOR") indices ceased to be published after December 31, 2021, while other tenors are expected to continue being published until June 30, 2023, and 2) no new contracts referencing LIBOR are to be written after December 31, 2021. The Federal Reserve formed the Alternative Reference Rates Committee ("ARRC") to guide the transition process in the United States. ARRC has issued a number of recommendations including the adoption of the Secured Overnight Financing Rate ("SOFR") as a replacement for LIBOR. The International Swap and Derivatives Association ("ISDA"), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and has issued a voluntary fallback protocol for market participants. The Company has adopted SOFR as its replacement reference rate index for new transactions. Each of the customer loan interest rate swap contracts the Company has in place as of March 31, 2023 is tied to a LIBOR tenor expected to be published until June 2023. The six contracts shown in the table immediately above have maturity dates of December 19, 2029, August 21, 2030, April 1, 2031, July 1, 2035, October 1, 2035 and October 1, 2039. It is anticipated that necessary actions to amend these legacy contracts to incorporate the new replacement reference rate index will be undertaken prior to June 30, 2023.
Note 11 – Mortgage Servicing Rights
FASB ASC Topic 860 "Transfers and Servicing", requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type, and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-months moving average of weekly prepayment data published by the Public Securities Association ("PSA") and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of March 31, 2023, the prepayment assumption using the PSA model was 130, which translates into an anticipated prepayment rate of 6.24%. The discount rate is 9.00%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income.
For the three months ended March 31, 2023 and 2022, servicing rights capitalized totaled $7,000 and $169,000, respectively. Servicing rights amortized for the three-month periods ended March 31, 2023 and 2022 were $98,000 and $183,000, respectively. The fair value of servicing rights was $3,505,000, $3,734,000, and $3,435,000 at March 31, 2023, December 31, 2022 and March 31, 2022, respectively. The Bank serviced loans for others totaling $337,585,000, $342,870,000, and $357,494,000 at March 31, 2023, December 31, 2022, and March 31, 2022, respectively.
The Bank recorded an impairment reserve as of March 31, 2022 for strata with a fair value lower than cost. There was no impairment reserve as of March 31, 2023 and December 31, 2022. Mortgage servicing rights are included in other assets and detailed in the following table:
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| Mortgage servicing rights | $ | 8,661,000 | | | $ | 8,654,000 | | | $ | 8,511,000 | |
| Accumulated amortization | (6,259,000) | | | (6,161,000) | | | (5,827,000) | |
| Amortized cost | 2,402,000 | | | 2,493,000 | | | 2,684,000 | |
| Impairment reserve | — | | | — | | | (8,000) | |
| Carrying value | $ | 2,402,000 | | | $ | 2,493,000 | | | $ | 2,676,000 | |
Note 12 – Income Taxes
FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2019 through 2022.
Note 13 - Certificates of Deposit
The following table represents the breakdown of certificates of deposit at March 31, 2023 and 2022, and at December 31, 2022:
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| Certificates of deposit < $100,000 | $ | 592,052,000 | | | $ | 489,793,000 | | | $ | 225,304,000 | |
| Certificates $100,000 to $250,000 | 278,151,000 | | | 259,614,000 | | | 329,790,000 | |
| Certificates $250,000 and over | 139,464,000 | | | 118,264,000 | | | 54,853,000 | |
| $ | 1,009,667,000 | | | $ | 867,671,000 | | | $ | 609,947,000 | |
Note 14 – Reclassifications
Certain items from the prior year were reclassified in the consolidated financial statements to conform with the current year presentation. These do not have a material impact on the consolidated balance sheet or statement of income and comprehensive income presentations.
Note 15 – Fair Value
Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as other real estate owned and individually analyzed loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities, which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:
Level 1 - Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.
The fair value methods and assumptions for the Company's financial instruments and other assets measured at fair value are set forth below.
Investment Securities
The fair values of investment securities are estimated by independent providers using a market approach with observable inputs, including matrix pricing and recent transactions. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values. As such, the Company classifies investment securities as Level 2.
Loans
Fair values are estimated for portfolios of loans are based on an exit pricing notion. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as Level 3, except for certain individually analyzed loans. Fair values of individually analyzed loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral as determined by reference to sale prices of similar properties, less costs to sell. As such, the Company classifies individually analyzed loans for which a specific reserve results in a fair value measure as Level 2. All other individually analyzed loans are classified as Level 3.
Other Real Estate Owned
Real estate acquired through foreclosure is initially recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2.
Mortgage Servicing Rights
Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type, and term of the underlying loans. As such, the Company classifies mortgage servicing rights as Level 2.
Time Deposits
The fair value of maturity deposits is based on the discounted value of contractual cash flows using a replacement cost of funds approach. The discount rate is estimated using the cost of funds borrowing rate in the market. As such, the Company classifies time deposits as Level 2.
Borrowed Funds
The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2.
Derivatives
The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of March 31, 2023 and 2022, and December 31, 2022, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.
Customer Loan Derivatives
The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present the balances of assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2023, December 31, 2022 and March 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Securities available for sale | | | | | | | |
| U.S. Government-sponsored agencies | $ | — | | | $ | 19,518,000 | | | $ | — | | | $ | 19,518,000 | |
| Mortgage-backed securities | — | | | 231,091,000 | | | — | | | 231,091,000 | |
| State and political subdivisions | — | | | 34,349,000 | | | — | | | 34,349,000 | |
| Asset-backed securities | — | | | 3,284,000 | | | — | | | 3,284,000 | |
| | | | | | | |
| Total securities available for sale | — | | | 288,242,000 | | | — | | | 288,242,000 | |
| Interest rate swap agreements | — | | | 518,000 | | | — | | | 518,000 | |
| Customer loan interest swap agreements | — | | | 4,098,000 | | | — | | | 4,098,000 | |
| Total interest rate swap agreements | — | | | 4,616,000 | | | — | | | 4,616,000 | |
| Total assets | $ | — | | | $ | 292,858,000 | | | $ | — | | | $ | 292,858,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Interest rate swap agreements | $ | — | | | $ | 3,293,000 | | | $ | — | | | $ | 3,293,000 | |
| Customer loan interest swap agreements | $ | — | | | $ | 4,098,000 | | | $ | — | | | $ | 4,098,000 | |
| Total liabilities | $ | — | | | $ | 7,391,000 | | | $ | — | | | $ | 7,391,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Securities available for sale | | | | | | | |
| U.S. Government-sponsored agencies | $ | — | | | $ | 19,147,000 | | | $ | — | | | $ | 19,147,000 | |
| Mortgage-backed securities | — | | | 228,676,000 | | | — | | | 228,676,000 | |
| State and political subdivisions | — | | | 33,191,000 | | | — | | | 33,191,000 | |
| Asset-backed securities | — | | | 3,495,000 | | | — | | | 3,495,000 | |
| | | | | | | |
| Total securities available for sale | — | | | 284,509,000 | | | — | | | 284,509,000 | |
| Interest rate swap agreements | — | | | 689,000 | | | — | | | 689,000 | |
| Customer loan interest swap agreements | — | | | 4,910,000 | | | — | | | 4,910,000 | |
| Total interest rate swap agreements | — | | | 5,599,000 | | | — | | | 5,599,000 | |
| Total assets | $ | — | | | $ | 290,108,000 | | | $ | — | | | $ | 290,108,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | |
| Customer loan interest swap agreements | $ | — | | | $ | 4,910,000 | | | $ | — | | | $ | 4,910,000 | |
| Total liabilities | $ | — | | | $ | 4,910,000 | | | $ | — | | | $ | 4,910,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Securities available for sale | | | | | | | |
| U.S. Government-sponsored agencies | $ | — | | | $ | 22,658,000 | | | $ | — | | | $ | 22,658,000 | |
| Mortgage-backed securities | — | | | 252,184,000 | | | — | | | 252,184,000 | |
| State and political subdivisions | — | | | 33,833,000 | | | — | | | 33,833,000 | |
| Asset-backed securities | — | | | 4,340,000 | | | — | | | 4,340,000 | |
| | | | | | | |
| Total securities available for sale | — | | | 313,015,000 | | | — | | | 313,015,000 | |
| | | | | | | |
| Customer loan interest swap agreements | — | | | 2,665,000 | | | — | | | 2,665,000 | |
| | | | | | | |
| Total assets | $ | — | | | $ | 315,680,000 | | | $ | — | | | $ | 315,680,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | |
| Customer loan interest swap agreements | $ | — | | | $ | 2,665,000 | | | $ | — | | | $ | 2,665,000 | |
| Total liabilities | $ | — | | | $ | 2,665,000 | | | $ | — | | | $ | 2,665,000 | |
Assets Recorded at Fair Value on a Non-Recurring Basis
The following tables include assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Mortgage servicing rights are presented net of an impairment reserve of $8,000 at March 31, 2022. There was no impairment reserve as of March 31, 2023 and December 31, 2022. The Company had no other real estate owned or related allowance at March 31, 2023, 2022 and December 31, 2022. Only collateral-dependent individually analyzed loans with a related specific allowance for credit losses or a partial charge off are included in individually analyzed loans for purposes of fair value disclosures.
Individually analyzed loans below are presented net of specific allowances of $132,000, $135,000 and $417,000 at March 31, 2023, December 31, 2022, and March 31, 2022, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Mortgage servicing rights | $ | — | | | $ | 3,505,000 | | | $ | — | | | $ | 3,505,000 | |
| | | | | | | |
| | | | | | | |
| Individually analyzed loans | — | | | 20,000 | | | — | | | 20,000 | |
| Total assets | $ | — | | | $ | 3,525,000 | | | $ | — | | | $ | 3,525,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Mortgage servicing rights | $ | — | | | $ | 3,734,000 | | | $ | — | | | $ | 3,734,000 | |
| | | | | | | |
| Individually analyzed loans | — | | | 20,000 | | | — | | | 20,000 | |
| Total assets | $ | — | | | $ | 3,754,000 | | | $ | — | | | $ | 3,754,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Mortgage servicing rights | $ | — | | | $ | 3,435,000 | | | $ | — | | | $ | 3,435,000 | |
| | | | | | | |
| | | | | | | |
| Individually analyzed loans | — | | | 200,000 | | | — | | | 200,000 | |
| Total assets | $ | — | | | $ | 3,635,000 | | | $ | — | | | $ | 3,635,000 | |
Fair Value of Financial Instruments
FASB ASC Topic 825 "Financial Instruments" requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
This summary excludes financial assets and liabilities for which carrying value approximates fair values and financial instruments that are recorded at fair value on a recurring basis. Financial instruments for which carrying values approximate fair value include cash equivalents, interest-bearing deposits in other banks, demand, NOW, savings, and money market deposits. The estimated fair value of demand, NOW, savings, and money market deposits is the amount payable on demand at the reporting date. Carrying value is used because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately.
The carrying amount and estimated fair values for financial instruments as of March 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying value | | Estimated fair value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Securities to be held to maturity (net of allowance for credit losses) | $ | 391,845,000 | | | $ | 344,053,000 | | | $ | — | | | $ | 344,053,000 | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
| Loans (net of allowance for credit losses) | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate owner occupied | 280,754,000 | | | 272,879,000 | | | — | | | — | | | 272,879,000 | |
| Real estate non-owner occupied | 380,035,000 | | | 358,065,000 | | | — | | | — | | | 358,065,000 | |
| Construction | 70,921,000 | | | 67,440,000 | | | — | | | — | | | 67,440,000 | |
| C&I | 334,850,000 | | | 323,318,000 | | | — | | | 20,000 | | | 323,298,000 | |
| Multifamily | 79,883,000 | | | 76,234,000 | | | — | | | — | | | 76,234,000 | |
| Municipal | 46,859,000 | | | 44,635,000 | | | — | | | — | | | 44,635,000 | |
| Residential | | | | | | | | | |
| Term | 602,241,000 | | | 549,823,000 | | | — | | | — | | | 549,823,000 | |
| Construction | 51,763,000 | | | 44,686,000 | | | — | | | — | | | 44,686,000 | |
| Home Equity | | | | | | | | | |
| Revolving and term | 92,919,000 | | | 94,010,000 | | | — | | | — | | | 94,010,000 | |
| Consumer | 19,164,000 | | | 17,360,000 | | | — | | | — | | | 17,360,000 | |
| Total loans | 1,959,389,000 | | | 1,848,450,000 | | | — | | | 20,000 | | | 1,848,430,000 | |
| Mortgage servicing rights | 2,402,000 | | | 3,505,000 | | | — | | | 3,505,000 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Financial liabilities | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Local certificates of deposit | $ | 336,449,000 | | | $ | 308,631,000 | | | $ | — | | | $ | 308,631,000 | | | $ | — | |
| National certificates of deposit | 673,218,000 | | | 681,961,000 | | | — | | | 681,961,000 | | | — | |
| Total certificates of deposit | 1,009,667,000 | | | 990,592,000 | | | — | | | 990,592,000 | | | — | |
| Repurchase agreements | 51,500,000 | | | 51,392,000 | | | — | | | 51,392,000 | | | — | |
| Federal Home Loan Bank advances | 32,381,000 | | | 32,376,000 | | | — | | | 32,376,000 | | | — | |
| Total borrowed funds | 83,881,000 | | | 83,768,000 | | | — | | | 83,768,000 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
The carrying amounts and estimated fair values for financial instruments as of December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying value | | Estimated fair value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Securities to be held to maturity | $ | 393,896,000 | | | $ | 339,011,000 | | | $ | — | | | $ | 339,011,000 | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
| Loans (net of allowance for loan losses) | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | 692,541,000 | | | 669,752,000 | | | — | | | — | | | 669,752,000 | |
| Construction | 92,994,000 | | | 89,934,000 | | | — | | | — | | | 89,934,000 | |
| Other | 315,917,000 | | | 312,219,000 | | | — | | | 20,000 | | | 312,199,000 | |
| Municipal | 40,439,000 | | | 38,069,000 | | | — | | | — | | | 38,069,000 | |
| Residential | | | | | | | | | |
| Term | 611,350,000 | | | 558,274,000 | | | — | | | — | | | 558,274,000 | |
| Construction | 49,686,000 | | | 44,410,000 | | | — | | | — | | | 44,410,000 | |
| Home equity line of credit | 75,416,000 | | | 78,878,000 | | | — | | | — | | | 78,878,000 | |
| Consumer | 19,883,000 | | | 18,142,000 | | | — | | | — | | | 18,142,000 | |
| Total loans | 1,898,226,000 | | | 1,809,678,000 | | | — | | | 20,000 | | | 1,809,658,000 | |
| Mortgage servicing rights | 2,493,000 | | | 3,734,000 | | | — | | | 3,734,000 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Financial liabilities | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Local certificates of deposit | $ | 291,152,000 | | | $ | 275,658,000 | | | $ | — | | | $ | 275,658,000 | | | $ | — | |
| National certificates of deposit | 576,519,000 | | | 569,883,000 | | | — | | | 569,883,000 | | | — | |
| Total certificates of deposit | 867,671,000 | | | 845,541,000 | | | — | | | 845,541,000 | | | — | |
| Repurchase agreements | 64,409,000 | | | 64,289,000 | | | — | | | 64,289,000 | | | — | |
| Federal Home Loan Bank advances | 39,074,000 | | | 39,064,000 | | | — | | | 39,064,000 | | | — | |
| Total borrowed funds | 103,483,000 | | | 103,353,000 | | | — | | | 103,353,000 | | | — | |
| | | | | | | | | |
The carrying amount and estimated fair values for financial instruments as of March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying value | | Estimated fair value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Securities to be held to maturity | $ | 377,183,000 | | | $ | 353,191,000 | | | $ | — | | | $ | 353,191,000 | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
| Loans (net of allowance for loan losses) | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | 582,270,000 | | | 580,407,000 | | | — | | | — | | | 580,407,000 | |
| Construction | 101,927,000 | | | 101,601,000 | | | — | | | — | | | 101,601,000 | |
| Other | 264,345,000 | | | 263,502,000 | | | — | | | 5,000 | | | 263,497,000 | |
| Municipal | 50,692,000 | | | 51,015,000 | | | — | | | — | | | 51,015,000 | |
| Residential | | | | | | | | | |
| Term | 563,745,000 | | | 547,611,000 | | | — | | | 102,000 | | | 547,509,000 | |
| Construction | 36,091,000 | | | 34,873,000 | | | — | | | — | | | 34,873,000 | |
| Home equity line of credit | 71,808,000 | | | 70,029,000 | | | — | | | 93,000 | | | 69,936,000 | |
| Consumer | 21,104,000 | | | 19,493,000 | | | — | | | — | | | 19,493,000 | |
| Total loans | 1,691,982,000 | | | 1,668,531,000 | | | — | | | 200,000 | | | 1,668,331,000 | |
| Mortgage servicing rights | 2,676,000 | | | 3,435,000 | | | — | | | 3,435,000 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Financial liabilities | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Local certificates of deposit | $ | 229,055,000 | | | $ | 239,239,000 | | | $ | — | | | $ | 239,239,000 | | | $ | — | |
| National certificates of deposit | 380,892,000 | | | 279,653,000 | | | — | | | 279,653,000 | | | — | |
| Total certificates of deposit | 609,947,000 | | | 518,892,000 | | | — | | | 518,892,000 | | | — | |
| Repurchase agreements | 78,623,000 | | | 72,990,000 | | | — | | | 72,990,000 | | | — | |
| Federal Home Loan Bank advances | 55,089,000 | | | 55,399,000 | | | — | | | 55,399,000 | | | — | |
| Total borrowed funds | 133,712,000 | | | 128,389,000 | | | — | | | 128,389,000 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
Note 16 – Impact of Recently Issued Accounting Standards
Adoption of New Accounting Standards: On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as loans, such as loan commitments, standby letters of credit, certain lines of credit. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
The Company adopted ASC 326 using the modified retrospective method for all financial assets, measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. On adoption, the Company recognized an increase in the allowance for credit losses on held to maturity securities of $438,000, an increase to the allowance for credit losses on loans of $6,210,000, and an increase to the reserve for off-balance sheet commitments of $1,297,000. The net, after-tax impact of the increases of the allowances for credit losses and reserve for off-balance sheet commitments was a net decrease to retained earnings of $6,277,000 shown in the Consolidated Statements of Changes in Stockholders Equity. Additional details can be found in Notes 3 and 4.
In March 2022, the FASB issued ASU No. 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method. This ASU expands upon hedge accounting concepts introduced in ASU 2017-12 by allowing multiple hedged layers to be designated for a single closed portfolio of financial assets which may allow a greater proportion of interest rate risk inherent in the assets to be hedged. The last of layer method outlined in ASU 2017-12 is renamed the portfolio layer method in ASU 2022-01. ASU 2022-01 also allows, upon adoption, the reclassification of debt securities classified as held to maturity to the available for sale category provided the reclassification takes place within thirty days of adoption and the same debt securities are included in a portfolio layer method hedge within the thirty day period. ASU 2022-01 is effective for fiscal years beginning after December 15, 2022. Adoption of ASU 2017-12 has not had a material impact on the consolidated financial statements of the Company.