LOANS

3 Months Ended

Mar. 31, 2024

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

LOANS

LOANS

Portfolio Segments and Classes

The composition of loans, excluding loans held for sale, is summarized as follows:

	March 31, 2024			December 31, 2023
	Amount		% of Total	Amount		% of Total
Real estate mortgages:
Construction and development	$	252,934	12.8%	$	242,960	12.9%
Residential	238,702		12.1%	224,603		11.9%
Commercial	1,182,634		60.0%	1,144,867		60.5%
Commercial and industrial	288,701		14.7%	269,961		14.3%
Consumer and other	8,425		0.4%	8,286		0.4%
Gross Loans	1,971,396		100.0%	1,890,677		100.0%
Deferred loan fees	(6,247)			(6,169)
Allowance for credit losses	(25,144)			(24,378)
Loans, net	$	1,940,005		$	1,860,130

For purposes of the disclosures required pursuant to ASC 310, the loan portfolio was disaggregated into segments and then further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are three loan portfolio segments that include real estate, commercial and industrial, and consumer and other. A class is generally determined based on the initial measurement attribute, risk characteristic of the loan, and an entity’s method for monitoring and assessing credit risk. Commercial and industrial is a separate commercial loan class. Classes within the real estate portfolio segment include construction and development, residential mortgages, and commercial mortgages. Consumer loans and other are a class in itself.

The following describe risk characteristics relevant to each of the portfolio segments and classes:

Real estate - As discussed below, the Company offers various types of real estate loan products. All loans within this portfolio segment are particularly sensitive to the valuation of real estate:

•Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio class includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral.

•Residential mortgages include 1-4 family first mortgage loans which are repaid by various means such as a borrower’s income, sale of the property, or rental income derived from the property. Also included in residential mortgages are real estate loans secured by farmland, second liens, or open end real estate loans, such as home equity lines. These loans are typically repaid in the same means as 1-4 family first mortgages.

•Commercial real estate mortgage loans include both owner-occupied commercial real estate loans and other commercial real estate loans such as commercial loans secured by income producing properties. Owner-occupied commercial real estate loans made to operating businesses are long-term financing of land and buildings and are repaid by cash flows generated from business operations. Real estate loans for income-producing properties such as apartment buildings, hotels, office and industrial buildings, and retail shopping centers are repaid by cash flows from rent income derived from the properties.

Commercial and industrial - The commercial loan portfolio segment includes commercial and industrial loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, leases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the borrowers’ business operations.

Portfolio Segments and Classes (Continued)

Consumer and other - The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures which affects borrowers’ incomes and cash for repayment.

Credit Risk Management

The Chief Credit Officer, Officers Loan Committee and Directors Loan Committee are each involved in the credit risk management process and assess the accuracy of risk ratings, the quality of the portfolio and the estimation of inherent credit losses in the loan portfolio. This comprehensive process also assists in the prompt identification of problem credits. The Company has taken a number of measures to manage the portfolios and reduce risk, particularly in the more problematic portfolios.

The Company employs a credit risk management process with defined policies, accountability and routine reporting to manage credit risk in the loan portfolio segments. Credit risk management is guided by a comprehensive Loan Policy that provides for a consistent and prudent approach to underwriting and approvals of credits. Within the Board approved Loan Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans are individually underwritten, risk-rated, approved, and monitored.

Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer portfolio segment, the risk management process focuses on managing customers who become delinquent in their payments. For the commercial and real estate portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios. To ensure problem credits are identified on a timely basis, several specific portfolio reviews occur each year to assess the larger adversely rated credits for proper risk rating and accrual status.

Credit quality and trends in the loan portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by the Chief Credit Officer and reported to the Board of Directors.

A description of the general characteristics of the risk categories used by the Company is as follows:

•Pass - A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.

•Special Mention - A loan that has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

•Substandard - Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified 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.

•Doubtful - Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

•Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

Credit Risk Management (Continued)

The following tables summarizes the risk category of the Company’s loan portfolio based upon the most recent analysis on the year of origination as of March 31, 2024:

	2024		2023		2022		2021		2020		Prior		Revolving Loans		Total
Real Estate Mortgages:
Construction and development
Pass	$	13,948	$	52,983	$	140,428	$	26,016	$	1,735	$	6,875	$	6,530	$	248,515
Special Mention	—		—		—		—		—		4,419		—		4,419
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total	13,948		52,983		140,428		26,016		1,735		11,294		6,530		252,934
Current period gross write-off	—		—		—		—		—		—		—		—
Residential
Pass	15,864		50,403		56,688		21,604		41,520		18,535		33,602		238,216
Special Mention	—		81		—		—		—		—		53		134
Substandard	—		—		114		—		—		184		54		352
Doubtful	—		—		—		—		—		—		—		—
Total	15,864		50,484		56,802		21,604		41,520		18,719		33,709		238,702
Current period gross write-off	—		—		—		—		—		11		—		11
Commercial
Pass	31,761		231,255		331,937		268,060		97,495		184,663		15,218		1,160,389
Special Mention	124		—		102		1,172		2,597		1,708		330		6,033
Substandard	—		658		578		7,803		—		7,173		—		16,212
Doubtful	—		—		—		—		—		—		—		—
Total	31,885		231,913		332,617		277,035		100,092		193,544		15,548		1,182,634
Current period gross write-off	—		—		—		27		—		—		—		27
Commercial and industrial
Pass	16,856		68,317		49,159		18,633		19,455		11,138		94,811		278,369
Special Mention	736		43		—		329		2,632		158		4,089		7,987
Substandard	9		47		768		15		—		210		1,296		2,345
Doubtful	—		—		—		—		—		—		—		—
Total	17,601		68,407		49,927		18,977		22,087		11,506		100,196		288,701
Current period gross write-off	—		—		442		—		—		—		—		442
Consumer and other
Pass	1,445		1,809		952		173		58		1,286		2,695		8,418
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		7		—		—		—		7
Doubtful	—		—		—		—		—		—		—		—
Total	1,445		1,809		952		180		58		1,286		2,695		8,425
Current period gross write-off	—		15		—		—		—		—		—		15
Gross Loans
Pass	79,874		404,767		579,164		334,486		160,263		222,497		152,856		1,933,907
Special Mention	860		124		102		1,501		5,229		6,285		4,472		18,573
Substandard	9		705		1,460		7,825		—		7,567		1,350		18,916
Doubtful	—		—		—		—		—		—		—		—
Total	$	80,743	$	405,596	$	580,726	$	343,812	$	165,492	$	236,349	$	158,678	$	1,971,396
Current period gross write-off	$	—	$	15	$	442	$	27	$	—	$	11	$	—	$	495

Credit Risk Management (Continued)

The following tables summarizes the risk category of the Company’s loan portfolio based upon the most recent analysis on the year of origination as of December 31, 2023:

	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Real Estate Mortgages:
Construction and development
Pass	$	48,141	$	139,291	$	39,679	$	1,721	$	1,969	$	5,214	$	2,516	$	238,531
Special Mention	—		—		—		—		—		4,429		—		4,429
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total	48,141		139,291		39,679		1,721		1,969		9,643		2,516		242,960
Current period gross write-off	—		—		—		—		—		—		3		3
Residential
Pass	51,135		54,610		23,808		42,071		6,496		12,883		33,132		224,135
Special Mention	81		—		—		—		—		—		—		81
Substandard	—		118		—		—		153		62		54		387
Doubtful	—		—		—		—		—		—		—		—
Total	51,216		54,728		23,808		42,071		6,649		12,945		33,186		224,603
Current period gross write-off	—		—		—		—		—		—		—		—
Commercial
Pass	232,834		328,006		256,007		99,067		63,906		125,007		14,685		1,119,512
Special Mention	—		350		2,840		2,623		414		4,490		—		10,717
Substandard	660		432		7,811		—		—		5,735		—		14,638
Doubtful	—		—		—		—		—		—		—		—
Total	233,494		328,788		266,658		101,690		64,320		135,232		14,685		1,144,867
Current period gross write-off	—		—		—		—		—		—		—		—
Commercial and industrial
Pass	68,482		51,368		20,626		21,390		4,758		7,257		88,074		261,955
Special Mention	126		—		—		2,711		172		—		1,873		4,882
Substandard	—		1,210		20		—		219		—		1,675		3,124
Doubtful	—		—		—		—		—		—		—		—
Total	68,608		52,578		20,646		24,101		5,149		7,257		91,622		269,961
Current period gross write-off	424		51		167		44		—		—		—		686
Consumer and other
Pass	2,291		1,111		292		149		316		1,275		2,852		8,286
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total	2,291		1,111		292		149		316		1,275		2,852		8,286
Current period gross write-off	—		6		2		—		—		—		—		8
Gross Loans
Pass	402,883		574,386		340,412		164,398		77,445		151,636		141,259		1,852,419
Special Mention	207		350		2,840		5,334		586		8,919		1,873		20,109
Substandard	660		1,760		7,831		—		372		5,797		1,729		18,149
Doubtful	—		—		—		—		—		—		—		—
Total	$	403,750	$	576,496	$	351,083	$	169,732	$	78,403	$	166,352	$	144,861	$	1,890,677
Current period gross write-off	$	424	$	57	$	169	$	44	$	—	$	—	$	3	$	697

Credit Risk Management (Continued)

Collateral Dependent Loans

The Company classifies a loan as collateral dependent when the borrower is experiencing financial difficulty, and expected repayment is to be provided substantially through the operation or sale of collateral. The following tables summarize collateral dependent loans, which are individually evaluated to determine expected credit losses, as of March 31, 2024 and December 31, 2023:

	Real Estate		Other		Total		ACL
As of March 31, 2024
Real estate mortgages:
Construction and development	$	205	$	—	$	205	$	29
Residential	967		—		967		67
Commercial	17,093		—		17,093		769
Commercial and industrial	—		2,352		2,352		404
Consumer and other	—		17		17		—
Total	$	18,265	$	2,369	$	20,634	$	1,269

	Real Estate		Other		Total		ACL
As of December 31, 2023
Real estate mortgages:
Construction and development	$	210	$	—	$	210	$	31
Residential	980		—		980		72
Commercial	15,514		—		15,514		162
Commercial and industrial	—		3,131		3,131		1,100
Consumer and other	—		11		11		1
Total	$	16,704	$	3,142	$	19,846	$	1,366

Past Due Loans

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement.  Generally,

management places a loan on nonaccrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. The following tables present the aging of the recorded investment in loans and leases as of March 31, 2024 and December 31, 2023:

			Past Due Status (Accruing Loans)
	Current		30-59 Days		60-89 Days		90+ Days		Total Past Due		Nonaccrual with ACL		Nonaccrual without ACL		Total
As of March 31, 2024
Real estate mortgages:
Construction and development	$	252,934	$	—	$	—	$	—	$	—	$	—	$	—	$	252,934
Residential	237,530		773		153		—		926		23		223		238,702
Commercial	1,179,342		827		43		—		870		2,024		398		1,182,634
Commercial and industrial	287,690		191		42		—		233		778		—		288,701
Consumer and other	8,425		—		—		—		—		—		—		8,425
Total	$	1,965,921	$	1,791	$	238	$	—	$	2,029	$	2,825	$	621	$	1,971,396
As of December 31, 2023
Real estate mortgages:
Construction and development	$	242,315	$	591	$	54	$	—	$	645	$	—	$	—	$	242,960
Residential	223,195		1,106		—		51		1,157		23		228		224,603
Commercial	1,140,587		3,245		160		109		3,514		324		442		1,144,867
Commercial and industrial	269,598		265		98		—		363		—		—		269,961
Consumer and other	8,259		17		10		—		27		—		—		8,286
Total	$	1,883,954	$	5,224	$	322	$	160	$	5,706	$	347	$	670	$	1,890,677

The Company recognized $49 and $11 of interest income on nonaccrual loans during the three months ended March 31, 2024, and March 31, 2023, respectively.

Allowance for Credit Losses

The following tables detail activity in the allowance for credit losses by portfolio segment as of March 31, 2024 and March 31, 2023. As described in Note 1, the Company adopted ASU 2016-13 on January 1, 2023, which replaced the existing incurred loss methodology with an expected credit loss methodology (referred to as CECL). Under the incurred loss methodology, reserves for credit losses were recognized only when the losses were probable or had been incurred; under CECL, the Company is required to recognize the full amount of expected credit losses for the lifetime of the loan, based on historical experience, current conditions and reasonable and supportable forecasts. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

We maintain an allowance for credit losses on unfunded loan commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance for credit losses is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the consolidated balance sheet within other liabilities, while corresponding provision for these credit losses is recorded as a component of other operating expense. The allowance for credit losses on unfunded commitments as the result of the adoption of ASC 326 was $1,285. At March 31, 2024, $1,288 in allowance for credit losses on unfunded commitments was included in other liabilities on the consolidated balance sheets.

	Real Estate		Commercial		Consumer		Total
Allowance for credit losses:
Balance at December 31, 2023	$	19,826	$	4,466	$	86	$	24,378
Provision (credit) for credit losses	1,173		48		15		1,236
Loans charged off	(38)		(442)		(15)		(495)
Recoveries of loans previously charged off	8		16		1		25
Ending balance at March 31, 2024	$	20,969	$	4,088	$	87	$	25,144

	Real Estate		Commercial		Consumer		Total
Allowance for credit losses:
Balance at December 31, 2022	$	14,443	$	5,642	$	71	$	20,156
Impact of adoption of ASC 326	(1,164)		(120)		(1)		(1,285)
Provision (credit) for credit losses	2,348		(1,208)		41		1,181
Loans charged off	—		(218)		(6)		(224)
Recoveries of loans previously charged off	11		14		2		27
Ending balance at March 31, 2023	$	15,638	$	4,110	$	107	$	19,855

Modifications to Borrowers Experiencing Financial Difficulty

On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross charge offs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty.

From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of a principal forgiveness, an interest rate reduction, a payment delay, a term extension, or a combination thereof, among other things.

The table below details the amortized cost basis at the end of the reporting period for loans made to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2024.

Three Months Ended March 31, 2024	Term Extension		Term Extension and Rate Adjustment		Total		Percentage of Total Loans
Real estate mortgages:
Construction and development	$	—	$	—	$	—	—	%
Residential	—		—		—		—	%
Commercial	—		—		—		—	%
Commercial and industrial	—		—		—		—	%
Consumer and other	—		—		—		—	%
Total	$	—	$	—	$	—	—	%

The Company had no modified loans during the three months ended March 31, 2024 that subsequently defaulted. For purposes of this disclosure, the term default is defined as the earlier of being placed on nonaccrual status or reaching 90 days past due and still accruing with respect to principle and/or interest payments. The Company has no unfunded commitments to borrowers experiencing financial difficulty for which the Company has modified their loans as of March 31, 2024.

The table below details the amortized cost basis at the end of the reporting period for loans made to borrowers experiencing financial difficulty that were modified during the year ended December 31, 2023.

Modifications to Borrowers Experiencing Financial Difficulty (Continued)

Year Ended December 31, 2023	Term Extension		Term Extension and Rate Adjustment		Total		Percentage of Total Loans
Real estate mortgages:
Construction and development	$	89	$	117	$	206	—	%
Residential	—		—		—		—	%
Commercial	—		—		—		—	%
Commercial and industrial	—		—		—		—	%
Consumer and other	—		—		—		—	%
Total	$	89	$	117	$	206	—	%

The Company had no modified loans during the year ended December 31, 2023 that subsequently defaulted. For purposes of this disclosure, the term default is defined as the earlier of being placed on nonaccrual status or reaching 90 days past due and still accruing with respect to principle and/or interest payments. The Company has no unfunded commitments to borrowers experiencing financial difficulty for which the Company has modified their loans as of December 31, 2023.