Loans and ACL

3 Months Ended

Mar. 31, 2024

Note 3 – Loans and ACL

The following table presents the amortized cost of loans held for investment as of the dates stated.


(Dollars in thousands)	March 31, 2024		December 31, 2023
Commercial and industrial	$	489,972	$	508,944
Real estate – construction, commercial		156,943		180,052
Real estate – construction, residential		62,947		75,832
Real estate – commercial		881,798		870,540
Real estate – residential		740,249		730,110
Real estate – farmland		5,673		5,470
Consumer		55,782		59,169
Gross loans		2,393,364		2,430,117
Deferred loan fees, net of costs		725		830
Total	$	2,394,089	$	2,430,947

The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $815.2 million and $767.1 million were pledged as of March 31, 2024 and December 31, 2023, respectively. The Company has pledged certain commercial and industrial loans totaling $101.8 million and $161.0 million as collateral for borrowings with the FRB Discount Window as of March 31, 2024 and December 31, 2023, respectively. The decline in availability at the FRB Discount Window during the first quarter of 2024 was primarily due to changes in eligibility of certain collateral.

The following tables present the aging of the amortized cost of loans held for investment by loan category as of the dates stated.


	March 31, 2024
(Dollars in thousands)	Current Loans		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Nonaccrual		Total Loans
Commercial and industrial	$	448,156	$	4,357	$	1,609	$	1,904	$	33,946	$	489,972
Real estate – construction, commercial		154,710		—		—		—		2,233		156,943
Real estate – construction, residential		62,947		—		—		—		—		62,947
Real estate – commercial		872,060		2,297		—		—		7,441		881,798
Real estate – residential		727,010		6,356		419		—		6,464		740,249
Real estate – farmland		5,673		—		—		—		—		5,673
Consumer		47,151		6,966		470		405		790		55,782
Less: Deferred loan fees, net of costs		725		—		—		—		—		725
Total Loans	$	2,318,432	$	19,976	$	2,498	$	2,309	$	50,874	$	2,394,089


	December 31, 2023
(Dollars in thousands)	Current Loans		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Nonaccrual		Total Loans
Commercial and industrial	$	464,939	$	2,235	$	632	$	1,709	$	39,429	$	508,944
Real estate – construction, commercial		177,653		2,016		—		—		383		180,052
Real estate – construction, residential		75,309		523		—		—		—		75,832
Real estate – commercial		855,263		2,109		714		574		11,880		870,540
Real estate – residential		717,141		5,101		288		—		7,580		730,110
Real estate – farmland		5,470		—		—		—		—		5,470
Consumer		55,084		2,298		279		754		754		59,169
Deferred loan fees, net of costs		830		—		—		—		—		830
Total Loans	$	2,351,689	$	14,282	$	1,913	$	3,037	$	60,026	$	2,430,947

The following tables present the amortized cost of nonaccrual loans held for investment with and without an ACL by loan category as of the dates stated.


	March 31, 2024
(Dollars in thousands)	Nonaccrual Loans with No ACL		Nonaccrual Loans with an ACL		Total Nonaccrual Loans
Commercial and industrial	$	—	$	33,946	$	33,946
Real estate – construction, commercial		1,863		370		2,233
Real estate – commercial		—		7,441		7,441
Real estate – residential		565		5,899		6,464
Consumer		—		790		790
Total	$	2,428	$	48,446	$	50,874


	December 31, 2023
(Dollars in thousands)	Nonaccrual Loans with No ACL		Nonaccrual Loans with an ACL		Total Nonaccrual Loans
Commercial and industrial	$	1,487	$	37,942	$	39,429
Real estate – construction, commercial		—		383		383
Real estate – commercial		2,024		9,856		11,880
Real estate – residential		577		7,003		7,580
Consumer		—		754		754
Total	$	4,088	$	55,938	$	60,026

The Company recognized $65 thousand and $89 thousand of interest income on nonaccrual loans during the three months ended March 31, 2024 and March 31, 2023, respectively.

The following table presents accrued interest receivable by loan type reversed from interest income associated with loans held for investment that were placed on nonaccrual status for the periods stated.


	For the three months ended March 31,
(Dollars in thousands)	2024		2023
Commercial and industrial	$	57	$	11
Real estate – construction, commercial		25		1
Real estate – commercial		51		20
Real estate – residential		10		245
Consumer		5		49
Total	$	148	$	326

Credit Quality Indicators

The Company segments loans held for investment into risk categories based on relevant information about the expected ability of borrowers to repay debt, such as current financial information, historical payment performance, experience, collateral adequacy, credit documentation, and current economic trends, among other factors. Management assigns loan risk grades by a numerical system as an indication of credit quality of its portfolio of loans held for

investment. The Company uses the following definitions for loan risk ratings and periodically evaluates the appropriateness of these ratings across its loan portfolio. Independent third-party loan reviews are periodically performed on the Company's loan portfolio and such reviews are used to validate management's determination of loan risk grades. Bank regulatory agencies also periodically review the Company's loan portfolio, including loan risk grades and may change a grade based on their judgment of the facts at the time of review.

Risk Grade 1 – Strong: This grade is reserved for loans to the strongest of borrowers. These loans are to individuals or businesses where the probability of default is extremely low to the Bank and are secured with collateral where the loss given default is unlikely because of the source of repayment such as a lien on a deposit account held at the Bank. Character, credit history, and ability of individuals or company principals are excellent. High liquidity, minimum risk, strong ratios, and low servicing cost are present.

Risk Grade 2 – Minimal: This grade is reserved for loans to borrowers who are deemed exceptionally strong. These loans are within established guidelines and where the borrowers have documented significant overall financial strength with consistent and predictable cash flows. These loans have excellent sources of repayment, significant balance sheet liquidity, no significant identifiable risk of collection, and conform in all respects to policy, underwriting standards, and federal and state regulations (no exceptions of any kind). In addition, guarantor support, when provided, is viewed as excellent.

Risk Grade 3 – Acceptable: This grade is reserved for loans to borrowers who are deemed strong. These loans have adequate sources of repayment, with minimal identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: (1) conformity in all respects with policy, guidelines, underwriting standards, and federal and state regulations (no exceptions of any kind), (2) documented historical cash flow that meets or exceeds required minimum guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt. In addition, guarantor support, when provided, is viewed as strong.

Risk Grade 4 – Satisfactory: This grade is given to satisfactory loans containing more, but deemed acceptable, risk and where the borrower is assessed as sound. These loans have adequate sources of repayment, with minimal identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics: (1) general conformity to the Bank's underwriting requirements, with limited exceptions to policy, product, or underwriting guidelines. All exceptions noted have documented mitigating factors that offset any additional risk associated with the exceptions noted, (2) documented historical cash flow that meets or exceeds required minimum guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt. In addition, guarantor support, when provided, is viewed as satisfactory.

Risk Grade 5 – Watch: This grade is for satisfactory loans containing acceptable but elevated risk. These loans are characterized by borrowers who exhibit signs of financial distress or experience unstable or unfavorable change(s) adversely impacting their current or expected financial condition. The borrower's management is deemed to be satisfactory, the collateral securing the loan may have decreased in value, the debt service coverage ratio is inconsistent or breakeven but mostly positive, and/or guarantor support, if any, is limited or marginal. Loans classified as Watch warrant additional monitoring by management.

Risk Grade 6 – Special Mention: This grade is for loans that have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the Bank's credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special mention credits typically do not conform to underwriting guidelines and/or exceptions without mitigating factors, or have emerging weaknesses that may or may not be cured with the passage of time.

Risk Grade 7 – Substandard: A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. The probability of default is likely and may have occurred. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: (1) current or expected unprofitable operations, (2) inadequate debt service coverage, (3) declining or inadequate liquidity, (4) improper loan structure, (5) questionable or weak repayment sources, and (6) lack of well-defined secondary repayment source. There is a distinct possibility of loss and the Bank will sustain some loss if the deficiencies are not corrected.

Risk Grade 8 – Doubtful: Loans classified doubtful have all the weaknesses inherent in loans classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the Bank's position, which can include, but is not limited to (1) an injection of capital, (2) alternative financing, and (3) liquidation of assets or the pledging of additional collateral. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off against the allowance for credit losses.

Risk Grade 9 – Loss: Loans classified loss are considered uncollectible and of such little value that continuance as assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer charging off the worthless loan, even though partial recovery may be effected in the future. Probable loss portions deemed uncollectible are charged off promptly against the allowance for credit losses.

The following table presents the amortized cost of loans held for investment by internal loan risk grade by year of origination as of March 31, 2024. Also presented are current period gross charge-offs by loan type for the three months ended March 31, 2024.


	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving Loans		Total
Commercial and industrial
Risk Grades 1 - 4	$	2,491	$	14,949	$	109,129	$	25,875	$	23,954	$	20,635	$	136,887	$	333,920
Risk Grades 5 - 6		68		27,159		37,715		13,637		6,044		2,338		20,977		107,938
Risk Grade 7		—		77		324		6,135		803		752		7,716		15,807
Risk Grade 8		—		—		29,750		2,557		—		—		—		32,307
Total		2,559		42,185		176,918		48,204		30,801		23,725		165,580		489,972
Current period gross charge-offs		—		447		1,364		138		3		5		—		1,957

Real estate – construction, commercial
Risk Grades 1 - 4		115		9,397		85,565		17,534		13,531		7,463		1,537		135,142
Risk Grades 5 - 6		—		1,101		5,529		1,513		194		5,684		3,632		17,653
Risk Grade 7		—		118		3,630		36		—		364		—		4,148
Total		115		10,616		94,724		19,083		13,725		13,511		5,169		156,943
Current period gross charge-offs		—		—		—		—		—		—		—		—

Real estate – construction, residential
Risk Grades 1 - 4		5,952		27,017		8,063		6,740		26		64		10,729		58,591
Risk Grades 5 - 6		—		2,281		1,362		—		165		—		—		3,808
Risk Grade 7		—		393		155		—		—		—		—		548
Total		5,952		29,691		9,580		6,740		191		64		10,729		62,947
Current period gross charge-offs		—		—		—		—		—		—		—		—

Real estate – commercial
Risk Grades 1 - 4		5,053		18,197		269,429		122,861		147,005		168,496		21,967		753,011
Risk Grades 5 - 6		—		452		43,469		15,779		17,641		33,312		4,214		114,867
Risk Grade 7		—		—		1,104		6,977		3,835		2,007		—		13,923
Total		5,053		18,649		314,002		145,617		168,481		203,815		26,181		881,798
Current period gross charge-offs		—		—		—		—		—		—		—		—

Real estate – residential
Risk Grades 1 - 4		145		52,894		230,577		118,789		68,096		157,871		55,377		683,749
Risk Grades 5 - 6		229		12,509		10,066		3,659		2,278		13,796		3,341		45,878
Risk Grade 7		—		—		2,160		1,266		1,455		5,465		276		10,622
Total		374		65,403		242,803		123,714		71,829		177,132		58,994		740,249
Current period gross charge-offs		—		—		—		—		—				—		—

Real estate – farmland
Risk Grades 1 - 4		—		—		1,004		1,383		—		2,956		186		5,529
Risk Grades 5 - 6		—		144		—		—		—		—		—		144
Total		—		144		1,004		1,383		—		2,956		186		5,673
Current period gross charge-offs		—		—		—		—		—		—		—		—

Consumer
Risk Grades 1 - 4		3,566		23,334		12,661		3,001		2,303		1,179		8,098		54,142
Risk Grades 5 - 6		—		58		40		8		6		60		495		667
Risk Grade 7		—		195		377		193		123		85		—		973
Total		3,566		23,587		13,078		3,202		2,432		1,324		8,593		55,782
Current period gross charge-offs		523		75		119		10		16		2		—		745

Total Loans
Risk Grades 1 - 4	$	17,322	$	145,788	$	716,428	$	296,183	$	254,915	$	358,664	$	234,781	$	2,024,081
Risk Grades 5 - 6		297		43,704		98,181		34,596		26,328		55,190		32,659		290,955
Risk Grade 7		—		783		7,750		14,607		6,216		8,673		7,992		46,021
Risk Grade 8		—		—		29,750		2,557		—		—		—		32,307
Total	$	17,619	$	190,275	$	852,109	$	347,943	$	287,459	$	422,527	$	275,432	$	2,393,364
Total current period gross charge-offs	$	523	$	522	$	1,483	$	148	$	19	$	7	$	—	$	2,702

Of the $32.3 million of commercial and industrial loans classified as doubtful (risk grade 8) as of March 31, 2024, $29.8 million was attributable to a specialty finance loan with a specific reserve, a component of the ACL, of $9.6 million as of the same date. There were no loans classified as loss (risk grade 9) as of March 31, 2024.

The following table presents the amortized cost of loans held for investment by internal loan risk grade by year of origination as of December 31, 2023.


	Term Loans Recorded Investment Basis by Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Commercial and industrial
Risk Grades 1 - 4	$	15,830	$	114,291	$	32,273	$	25,429	$	8,217	$	14,200	$	138,267	$	348,507
Risk Grades 5 - 6		26,563		40,399		12,759		6,305		819		1,537		19,722		108,104
Risk Grade 7		—		877		3,623		829		543		134		9,191		15,197
Risk Grade 8		—		34,203		2,554		—		—		379		—		37,136
Total		42,393		189,770		51,209		32,563		9,579		16,250		167,180		508,944

Real estate – construction, commercial
Risk Grades 1 - 4		8,533		85,687		33,344		14,690		6,358		5,589		4,367		158,568
Risk Grades 5 - 6		4,213		11,072		760		293		—		738		3,827		20,903
Risk Grade 7		119		46		40		—		—		376		—		581
Total		12,865		96,805		34,144		14,983		6,358		6,703		8,194		180,052

Real estate – construction, residential
Risk Grades 1 - 4		31,611		22,734		3,867		59		741		67		10,656		69,735
Risk Grades 5 - 6		1,486		2,672		—		167		200		—		—		4,525
Risk Grade 7		367		1,205		—		—		—		—		—		1,572
Total		33,464		26,611		3,867		226		941		67		10,656		75,832

Real estate – commercial
Risk Grades 1 - 4		14,671		280,479		121,257		144,498		42,226		123,774		20,332		747,237
Risk Grades 5 - 6		2,841		25,075		9,038		19,597		12,921		27,778		4,214		101,464
Risk Grade 7		323		—		8,202		4,938		111		8,265		—		21,839
Total		17,835		305,554		138,497		169,033		55,258		159,817		24,546		870,540

Real estate – residential
Risk Grades 1 - 4		51,042		218,375		121,872		69,165		27,877		132,986		55,327		676,644
Risk Grades 5 - 6		12,014		9,339		677		1,944		2,122		7,281		3,255		36,632
Risk Grade 7		—		2,240		2,446		1,812		943		9,307		85		16,833
Risk Grade 8		—		—		—		—		—		1		—		1
Total		63,056		229,954		124,995		72,921		30,942		149,575		58,667		730,110

Real estate – farmland
Risk Grades 1 - 4		—		729		1,397		—		1,520		1,562		115		5,323
Risk Grades 5 - 6		147		—		—		—		—		—		—		147
Total		147		729		1,397		—		1,520		1,562		115		5,470

Consumer
Risk Grades 1 - 4		26,535		14,215		3,598		2,724		1,137		466		8,766		57,441
Risk Grades 5 - 6		61		42		12		12		8		433		495		1,063
Risk Grade 7		14		259		115		131		44		102		—		665
Total		26,610		14,516		3,725		2,867		1,189		1,001		9,261		59,169

Total Loans
Risk Grades 1 - 4	$	148,222	$	736,510	$	317,608	$	256,565	$	88,076	$	278,644	$	237,830	$	2,063,455
Risk Grades 5 - 6		47,325		88,599		23,246		28,318		16,070		37,767		31,513		272,838
Risk Grade 7		823		4,627		14,426		7,710		1,641		18,184		9,276		56,687
Risk Grade 8		—		34,203		2,554		—		—		380		—		37,137
Total	$	196,370	$	863,939	$	357,834	$	292,593	$	105,787	$	334,975	$	278,619	$	2,430,117

The following tables present an analysis of the change in the ACL by major loan segment for the periods stated. Loan segments are presented as either commercial or consumer as follows:

•

Commercial – commercial and industrial; real estate – construction, commercial; real estate – commercial; and real estate – farmland; and

•

Consumer – real estate – construction, residential; real estate – residential; and consumer.


	For the three months ended March 31, 2024
(Dollars in thousands)	Commercial			Consumer			Total
Balance, beginning of period	$	27,491		$	8,402		$	35,893
Charge-offs		(1,957	)		(745	)		(2,702	)
Recoveries		1,531			303			1,834
Net charge-offs		(426	)		(442	)		(868	)
Balance, end of period	$	27,065		$	7,960		$	35,025


	For the three months ended March 31, 2023
(Dollars in thousands)	Commercial			Consumer			Total
Balance, beginning of period	$	27,070		$	3,670		$	30,740
Impact of ASC 326 adoption		2,926			4,492			7,418
Charge-offs		(799	)		(510	)		(1,309	)
Recoveries		118			104			222
Net charge-offs		(681	)		(406	)		(1,087	)
(Recovery of) provision for credit losses - loans		(2,049	)		939			(1,110	)
Balance, end of period	$	27,266		$	8,695		$	35,961

There were no material changes to the assumptions, loss factors (both quantitative and qualitative), or reasonable and supportable forecasts used in the estimation of the ACL and the provision for credit losses for loans held for investment as of and for the three months ended March 31, 2024.

Excluded from the ACL as of March 31, 2024 and December 31, 2023 was $12.9 million and $13.2 million of accrued interest attributable to loans held for investment, respectively, which is included in accrued interest receivable on the consolidated balance sheet.

The following table presents the amortized cost of collateral-dependent loans as of the dates stated.


(Dollars in thousands)	March 31, 2024		December 31, 2023
Commercial and industrial	$	62,905	$	67,555
Real estate – construction, commercial		5,719		6,309
Real estate – construction, residential		—		2,303
Real estate – commercial		14,285		13,401
Real estate – residential		8,690		7,337
Total collateral-dependent loans	$	91,599	$	96,905

Acquired Loans

As of both March 31, 2024 and December 31, 2023, the amortized cost of purchased credit deteriorated ("PCD") loans totaled $51.0 million, with estimated ACL of $522 thousand and $529 thousand, respectively. The remaining non-credit discount on PCD loans was $3.7 million and $3.8 million as of March 31, 2024 and December 31, 2023, respectively.

Modified Loans

The Company closely monitors the performance of borrowers experiencing financial difficulty that have been granted certain loan modifications it would otherwise not consider.

The following table presents information on loans modified in the last 12 months from the date stated.


	March 31, 2024
(Dollars in thousands)	Number of Loans		Recorded Investment		Recorded Investment of Modified Loans to Gross Loans by Category			Financial Effect
Modification - term extension and forbearance								Forbearance agreements
Commercial and industrial (1)		3	$	33,979		6.93	%
Real estate – construction, residential		1		155		0.02	%
Real estate – residential		1		127		0.02	%
Modification - payment deferral								Payment deferral 6-9 months
Real estate – residential		1		565		0.06	%
Commercial and industrial		1		183		0.04	%
Total		7	$	35,009		1.46	%
(1) Included in this balance was a $29.8 million loan that was modified via a forbearance agreement in the second quarter of 2023 under which the borrower defaulted in the same period. This loan is collateral-dependent, is on nonaccrual status, and has a specific reserve of $9.6 million as of March 31, 2024. Subsequent to March 31, 2024, the Company received cash payments totaling $1.5 million, which were applied to the book principal balance of the loan.

The following table presents an aging analysis of the recorded investment of loans modified as of the date stated.


	March 31, 2024
(Dollars in thousands)	Current Loans		30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Nonaccrual		Total
Commercial and industrial	$	1,681	$	—	$	—	$	32,481	$	34,162
Real estate – residential		127		—		—		565		692
Real estate – construction, residential		155		—		—		—		155
Total modified loans	$	1,963	$	—	$	—	$	33,046	$	35,009

During the three months ended March 31, 2024, no loans modified on behalf of borrowers experiencing financial difficulty had a payment default.

Nine residential mortgage loans with a total recorded investment of $1.3 million were in the process of foreclosure as of March 31, 2024.