Loans and ACL

6 Months Ended

Jun. 30, 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)	June 30, 2024		December 31, 2023
Commercial and industrial	$	401,589	$	508,944
Real estate – construction, commercial		135,517		180,052
Real estate – construction, residential		55,849		75,832
Real estate – commercial		879,098		870,540
Real estate – residential		727,246		730,110
Real estate – farmland		5,717		5,470
Consumer		53,427		59,169
Gross loans		2,258,443		2,430,117
Deferred loan fees, net of costs		836		830
Total	$	2,259,279	$	2,430,947

The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $829.2 million and $767.1 million were pledged as of June 30, 2024 and December 31, 2023, respectively. The Company has pledged certain commercial and industrial loans totaling $81.2 million and $161.0 million as collateral for borrowings with the FRB Discount Window as of June 30, 2024 and December 31, 2023, respectively. The decline in the amount pledged at the FRB Discount Window was primarily due to paydowns and payoffs of the commercial and industrial loans serving as collateral.

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


	June 30, 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	$	384,877	$	2,150	$	1,526	$	2,751	$	10,285	$	401,589
Real estate – construction, commercial		134,017		—		1,180		—		320		135,517
Real estate – construction, residential		55,849		—		—		—		—		55,849
Real estate – commercial		863,718		8,647		359		—		6,374		879,098
Real estate – residential		717,816		501		2,906		—		6,023		727,246
Real estate – farmland		5,717		—		—		—		—		5,717
Consumer		49,515		2,195		672		376		669		53,427
Less: Deferred loan fees, net of costs		836		—		—		—		—		836
Total Loans	$	2,212,345	$	13,493	$	6,643	$	3,127	$	23,671	$	2,259,279


	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

As a result of an agreement the Company executed in the second quarter of 2024 to sell a nonperforming specialty finance loan to a third party, the Company reclassified this loan from loans held for investment to loans held for sale in the same period at its estimated fair value and recorded a charge-off of substantially all of the reserve held on the loan,

which was provisioned for in prior years. Payments received on this loan totaled approximately $9.0 million in the six months ended June 30, 2024. The sale is expected to consummate in the third quarter of 2024. The loan's carrying value was $14.4 million as of June 30, 2024 and is excluded from all 2024 tables in this footnote, unless otherwise noted.

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.


	June 30, 2024
(Dollars in thousands)	Nonaccrual Loans with No ACL		Nonaccrual Loans with an ACL		Total Nonaccrual Loans
Commercial and industrial	$	—	$	10,285	$	10,285
Real estate – construction, commercial		—		320		320
Real estate – commercial		—		6,374		6,374
Real estate – residential		557		5,466		6,023
Consumer		—		669		669
Total	$	557	$	23,114	$	23,671


	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 $122 thousand and $187 thousand of interest income on nonaccrual loans during the three and six months ended June 30, 2024, respectively, compared to $0 and $89 thousand for the same respective periods in 2023.

The following tables present 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 June 30,				For the six months ended June 30,
(Dollars in thousands)	2024		2023		2024		2023
Commercial and industrial	$	267	$	44	$	324	$	76
Real estate – construction, commercial		—		21		25		22
Real estate – construction, residential		—		14		—		19
Real estate – commercial		14		1		65		206
Real estate – residential		44		47		54		61
Consumer		3		4		8		5
Total	$	328	$	131	$	476	$	389

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 June 30, 2024. There were no loans classified as loss (risk grade 9) as of the same date. Also presented are current period gross charge-offs by loan type for the six months ended June 30, 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	$	7,340	$	14,180	$	87,369	$	18,050	$	21,300	$	19,557	$	101,747	$	269,543
Risk Grades 5 - 6		913		23,961		42,271		16,008		5,790		1,831		23,233		114,007
Risk Grade 7		—		3,252		1,315		6,764		783		1,377		1,791		15,282
Risk Grade 8		214		—		—		2,542		—		1		—		2,757
Total		8,467		41,393		130,955		43,364		27,873		22,766		126,771		401,589
Current period gross charge-offs		—		47		13,345		302		124		120		1		13,939

Real estate – construction, commercial
Risk Grades 1 - 4		—		8,765		58,330		16,190		10,604		5,791		2,252		101,932
Risk Grades 5 - 6		—		1,098		23,789		1,498		—		4,968		—		31,353
Risk Grade 7		—		117		1,723		32		—		360		—		2,232
Total		—		9,980		83,842		17,720		10,604		11,119		2,252		135,517
Current period gross charge-offs		—		—		—		—		—		—		—		—

Real estate – construction, residential
Risk Grades 1 - 4		7,508		17,128		4,974		9,758		—		62		12,189		51,619
Risk Grades 5 - 6		398		479		2,608		—		163		—		—		3,648
Risk Grade 7		—		427		155		—		—		—		—		582
Total		7,906		18,034		7,737		9,758		163		62		12,189		55,849
Current period gross charge-offs		—		—		—		—		—		39		—		39

Real estate – commercial																—
Risk Grades 1 - 4		4,255		21,379		268,057		119,175		145,317		159,935		20,358		738,476
Risk Grades 5 - 6		3,154		—		62,937		13,818		16,259		19,209		4,184		119,561
Risk Grade 7		—		—		—		9,051		3,772		7,109		25		19,957
Risk Grade 8		—		—		1,104		—		—		—		—		1,104
Total		7,409		21,379		332,098		142,044		165,348		186,253		24,567		879,098
Current period gross charge-offs		—		—		—		—		—		—		—		—

Real estate – residential
Risk Grades 1 - 4		934		56,064		227,986		116,478		67,486		149,912		57,409		676,269
Risk Grades 5 - 6		—		12,578		9,567		4,496		2,263		8,967		3,181		41,052
Risk Grade 7		—		—		1,796		954		1,166		5,635		374		9,925
Total		934		68,642		239,349		121,928		70,915		164,514		60,964		727,246
Current period gross charge-offs		—		—		—		—		—		42		2		44

Real estate – farmland
Risk Grades 1 - 4		150		—		1,002		1,266		—		2,888		167		5,473
Risk Grades 5 - 6		—		141		—		103		—		—		—		244
Total		150		141		1,002		1,369		—		2,888		167		5,717
Current period gross charge-offs		—		—		—		—		—		—		—		—

Consumer
Risk Grades 1 - 4		6,170		21,468		11,319		2,578		1,945		847		7,618		51,945
Risk Grades 5 - 6		—		54		38		11		26		57		407		593
Risk Grade 7		14		145		405		168		93		64		—		889
Total		6,184		21,667		11,762		2,757		2,064		968		8,025		53,427
Current period gross charge-offs		434		178		619		27		20		12		—		1,290

Total Loans
Risk Grades 1 - 4	$	26,357	$	138,984	$	659,037	$	283,495	$	246,652	$	338,992	$	201,740	$	1,895,257
Risk Grades 5 - 6		4,465		38,311		141,210		35,934		24,501		35,032		31,005		310,458
Risk Grade 7		14		3,941		5,394		16,969		5,814		14,545		2,190		48,867
Risk Grade 8		214		—		1,104		2,542		—		1		—		3,861
Total	$	31,050	$	181,236	$	806,745	$	338,940	$	276,967	$	388,570	$	234,935	$	2,258,443
Total current period gross charge-offs	$	434	$	225	$	13,964	$	329	$	144	$	213	$	3	$	15,312

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. There were no loans classified as loss (risk grade 9) as of the same date.


	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 June 30, 2024
(Dollars in thousands)	Commercial			Consumer			Total
Balance, beginning of period	$	27,065		$	7,960		$	35,025
Charge-offs		(11,982	)		(628	)		(12,610	)
Recoveries		1,829			192			2,021
Net charge-offs		(10,153	)		(436	)		(10,589	)
Provision for credit losses - loans		3,472			128			3,600
Balance, end of period	$	20,384		$	7,652		$	28,036


	For the three months ended June 30, 2023
(Dollars in thousands)	Commercial			Consumer			Total
Balance, beginning of period	$	27,266		$	8,695		$	35,961
Charge-offs		(7,326	)		(1,694	)		(9,020	)
Recoveries		887			126			1,013
Net charge-offs		(6,439	)		(1,568	)		(8,007	)
Provision for credit losses - loans		9,037			1,576			10,613
Balance, end of period	$	29,864		$	8,703		$	38,567


	For the six months ended June 30, 2024
(Dollars in thousands)	Commercial			Consumer			Total
Balance, beginning of period	$	27,491		$	8,402		$	35,893
Charge-offs		(13,939	)		(1,373	)		(15,312	)
Recoveries		3,360			495			3,855
Net charge-offs		(10,579	)		(878	)		(11,457	)
Provision for credit losses - loans		3,472			128			3,600
Balance, end of period	$	20,384		$	7,652		$	28,036


	For the six months ended June 30, 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		(8,125	)		(2,204	)		(10,329	)
Recoveries		1,005			230			1,235
Net charge-offs		(7,120	)		(1,974	)		(9,094	)
Provision for credit losses - loans		6,988			2,515			9,503
Balance, end of period	$	29,864		$	8,703		$	38,567

Of the commercial loan net charge-off amount in the 2024 periods, $9.4 million was attributable to the previously noted speciality finance loan that was reclassified from loans held for investment to loans held for sale in the second quarter of 2024.

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 and six months ended June 30, 2024.

Excluded from the ACL as of June 30, 2024 and December 31, 2023 was $12.5 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)	June 30, 2024		December 31, 2023
Commercial and industrial	$	43,721	$	67,555
Real estate – construction, commercial		4,039		6,309
Real estate – construction, residential		—		2,303
Real estate – commercial		14,814		13,401
Real estate – residential		4,667		7,337
Total collateral-dependent loans	$	67,241	$	96,905

Acquired Loans

As of June 30, 2024 and December 31, 2023, the amortized cost of purchased credit deteriorated ("PCD") loans totaled $49.0 million and $51.0 million, respectively, with estimated ACL of $486 thousand and $529 thousand, respectively. The remaining non-credit discount on PCD loans was $3.2 million and $3.8 million as of June 30, 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.


	June 30, 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)		4	$	18,834		4.69	%
Real estate – construction, residential		1		155		0.28	%
Real estate – residential		1		126		0.02	%
Modification - payment deferral								Payment deferral 6-9 months
Real estate – residential		1		557		0.08	%
Commercial and industrial		1		183		0.05	%
Total		8	$	19,855		0.88	%
(1) Included in this balance was a nonperforming specialty finance loan totaling $14.4 million and classified as held for sale as of June 30, 2024.

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


	June 30, 2024
(Dollars in thousands)	Current Loans		30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Nonaccrual		Total
Commercial and industrial (1)	$	1,680	$	—	$	—	$	17,337	$	19,017
Real estate – residential		126		—		—		557		683
Real estate – construction, residential		155		—		—		—		155
Total modified loans	$	1,961	$	—	$	—	$	17,894	$	19,855
(1) Included in this line item was a nonperforming specialty finance loan totaling $14.4 million and classified as held for sale as of June 30, 2024.

During the six months ended June 30, 2024, no loans modified on behalf of a borrower experiencing financial difficulty had a payment default.

As of June 30, 2024, five residential mortgage loans with a total recorded investment of $710 thousand were in the process of foreclosure.