Loans and ACL

3 Months Ended

Mar. 31, 2023

Receivables [Abstract]

Loans and ACL

Note 4 – Loans and ACL

All loan and ACL information presented as of and for the three months ended March 31, 2023 is in accordance with ASC 326. All loan information presented prior to this period is presented in accordance with previously applicable

GAAP. As a result, the presentation of information pre-ASC 326 and post-ASC 326 adoption will not be comparable for most disclosures.

The following table presents the amortized cost of loans held for investment, including Paycheck Protection Program ("PPP") loans, as of the dates stated.

(Dollars in thousands)	March 31, 2023			December 31, 2022
Commercial and industrial	$	571,095		$	590,049
Paycheck Protection Program		7,988			11,967
Real estate – construction, commercial		180,149			183,301
Real estate – construction, residential		92,403			76,599
Real estate – mortgage, commercial		867,916			864,989
Real estate – mortgage, residential		672,473			631,772
Real estate – mortgage, farmland		6,394			6,599
Consumer		58,907			47,423
Gross loans		2,457,325			2,412,699
Less: deferred loan fees, net of costs		(345	)		(1,640	)
Total	$	2,456,980		$	2,411,059

The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $531.8 million and $436.0 million were pledged as of March 31, 2023 and December 31, 2022, respectively. Additionally, PPP loans were pledged as collateral for the FRB's Paycheck Protection Program Liquidity Facility ("PPPLF") advances in the amount of $0 and $51 thousand as of March 31, 2023 and December 31, 2022, respectively.

The following table presents the aging of the amortized cost of loans held for investment by loan category as of March 31, 2023.

	March 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	$	561,261		$	1,122	$	61	$	—	$	8,651	$	571,095
Paycheck Protection Program		7,988			—		—		—		—		7,988
Real estate – construction, commercial		177,739			1,106		867		—		437		180,149
Real estate – construction, residential		91,616			399		388		—		—		92,403
Real estate – mortgage, commercial		855,385			960		—		—		11,571		867,916
Real estate – mortgage, residential		658,290			4,153		585		1,998		7,447		672,473
Real estate – mortgage, farmland		6,394			—		—		—		—		6,394
Consumer		56,891			1,246		150		169		451		58,907
Less: Deferred loan fees, net of costs		(345	)		—		—		—		—		(345	)
Total Loans	$	2,415,219		$	8,986	$	2,051	$	2,167	$	28,557	$	2,456,980

The following table presents the amortized cost of nonaccrual loans held for investment by loan category as of the date stated.

	March 31, 2023
(Dollars in thousands)	Nonaccrual Loans with No ACL		Nonaccrual Loans with an ACL		Total Nonaccrual Loans
Commercial and industrial	$	186	$	8,465	$	8,651
Real estate – construction, commercial		—		437		437
Real estate – mortgage, commercial		10,108		1,463		11,571
Real estate – mortgage, residential		592		6,855		7,447
Consumer		2		449		451
Total	$	10,888	$	17,669	$	28,557

The table above excludes PPP loans of $8.0 million as of March 31, 2023. PPP loans are fully guaranteed by the U.S. government; therefore, the Company reports them as accruing loans. The Company received $378 thousand of interest payments from nonaccrual loans during the three months ended March 31, 2023.

Credit Quality Indicators

The Company categorizes loans held for investment into risk categories based on relevant information about the expected ability of borrowers to service their debt, such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. Management considers loan risk grades to be the best 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:

Risk Grade 1 – Strong: This grade is reserved for loans to the strongest of borrowers. These loans are to individuals or corporations that are well known to the Bank and are always secured with an almost guaranteed source of repayment such as a lien on a bank deposit account. Character, credit history, and ability of individuals or company principals are excellent and unquestioned. Source of income and industry of borrower appears stable. High liquidity, minimum risk, good ratios, and low handling cost are present.

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

Risk Grade 3 – Acceptable: This grade is reserved for loans to borrowers who are deemed strong. These loans have adequate sources of repayment, with little 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.

Risk Grade 4 – Satisfactory: This grade is given to satisfactory loans containing more risk than Risk Grade 3 loans. These loans have adequate sources of repayment, with little 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, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Risk Grade 5 – Watch: This grade is for satisfactory loans containing acceptable but elevated risk. These loans are characterized by borrowers who have a marginal cash flow, marginal profitability, or have experienced an unprofitable year and declining financial condition. The borrower's management may be deemed to be satisfactory, the collateral securing the loan may create a loan-to-value ratio in excess of 90%, the debt service coverage ratio and global debt service coverage are unstable but mostly positive, and/or guarantor support, if any, is inadequate. 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 exhibit underwriting guideline tolerances and/or exceptions with no mitigating factors, or emerging weaknesses that may or may not be cured as time passes.

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. Loans consistently not meeting the repayment schedule should be downgraded further to substandard. 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) high debt to worth ratios, (2) declining or negative earnings trends, (3) declining or inadequate

liquidity, (4) improper loan structure, (5) questionable repayment sources, (6) lack of well-defined secondary repayment source, and (7) unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings capacity, declining collateral margins, and/or unperfected collateral positions. The possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.

Risk Grade 8 – Doubtful: Loans classified doubtful have all the weaknesses inherent in loans classified substandard, plus 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 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 loan losses.

Risk Grade 9 – Loss: Loans classified loss are considered uncollectable and of such little value that their 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 of doubtful loans are charged off promptly against the allowance for loan losses.

There were no loans classified as doubtful or loss as of March 31, 2023.

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, 2023. Also presented are current period gross charge-offs by loan type for the three months ended March 31, 2023.

	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Commercial and industrial
Risk Grades 1 - 4	$	46,836	$	145,311	$	54,533	$	36,707	$	15,681	$	20,557	$	120,901	$	440,526
Risk Grades 5 - 6		117		34,640		9,205		8,391		467		1,450		25,942		80,212
Risk Grade 7		—		40,262		—		—		1,203		118		8,774		50,357
Total		46,953		220,213		63,738		45,098		17,351		22,125		155,617		571,095
Current period gross charge-offs		—		—		664		—		—		9		126		799
Paycheck Protection Program
Risk Grades 1 - 4		—		—		7,988		—		—		—		—		7,988
Total		—		—		7,988		—		—		—		—		7,988
Real estate – construction, commercial
Risk Grades 1 - 4		8,488		52,358		55,721		16,576		2,118		8,803		12,209		156,273
Risk Grades 5 - 6		—		5,571		6,301		722		—		710		10,282		23,586
Risk Grade 7		—		—		—		—		—		290		—		290
Total		8,488		57,929		62,022		17,298		2,118		9,803		22,491		180,149
Real estate – construction, residential
Risk Grades 1 - 4		20,084		50,390		15,528		1,113		998		—		2,456		90,569
Risk Grades 5 - 6		—		—		949		—		—		—		—		949
Risk Grade 7		21		864		—		—		—		—		—		885
Total		20,105		51,254		16,477		1,113		998		—		2,456		92,403
Real estate – mortgage, commercial
Risk Grades 1 - 4		28,993		250,028		117,823		153,436		44,957		151,324		20,171		766,732
Risk Grades 5 - 6		—		15,442		4,039		19,182		13,390		32,237		500		84,790
Risk Grade 7		—		—		6,344		—		774		9,176		100		16,394
Total		28,993		265,470		128,206		172,618		59,121		192,737		20,771		867,916
Real estate – mortgage, residential
Risk Grades 1 - 4		30,743		197,427		105,466		73,162		30,080		151,984		59,207		648,069
Risk Grades 5 - 6		22		1,282		24		2,112		2,508		6,852		878		13,678
Risk Grade 7		—		369		1,228		1,659		461		6,413		596		10,726
Total		30,765		199,078		106,718		76,933		33,049		165,249		60,681		672,473
Current period gross charge-offs		—		—		—		—		—		13		—		13
Real estate – mortgage, farmland
Risk Grades 1 - 4		—		729		1,328		—		1,657		2,372		184		6,270
Risk Grades 5 - 6		—		—		—		—		—		78		46		124
Total		—		729		1,328		—		1,657		2,450		230		6,394
Consumer
Risk Grades 1 - 4		18,113		18,718		5,544		4,515		2,292		1,320		7,284		57,786
Risk Grades 5 - 6		13		26		18		81		5		429		30		602
Risk Grade 7		—		50		109		115		104		141		—		519
Total		18,126		18,794		5,671		4,711		2,401		1,890		7,314		58,907
Current period gross charge-offs		38		97		39		12		36		6		269		497
Total Loans
Risk Grades 1 - 4	$	153,257	$	714,961	$	363,931	$	285,509	$	97,783	$	336,360	$	222,412	$	2,174,213
Risk Grades 5 - 6		152		56,961		20,536		30,488		16,370		41,756		37,678		203,941
Risk Grade 7		21		41,545		7,681		1,774		2,542		16,138		9,470		79,171
Total	$	153,430	$	813,467	$	392,148	$	317,771	$	116,695	$	394,254	$	269,560	$	2,457,325
Total current period gross charge-offs	$	38	$	97	$	703	$	12	$	36	$	28	$	395	$	1,309

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

•Commercial – Commercial and industrial; PPP; real estate – construction, commercial; real estate – mortgage, commercial; and real estate – mortgage, farmland; and

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

	For the three months ended March 31, 2023
(Dollars in thousands)	Commercial			Consumer			Total
Balance, beginning of period	$	19,269		$	3,670		$	22,939
Impact of ASC 326 adoption		(470	)		4,492			4,022
Charge-offs		(799	)		(510	)		(1,309	)
Recoveries		118			104			222
Net charge-offs		(681	)		(406	)		(1,087	)
Provision for credit losses - loans		3,161			939			4,100
Balance, end of period	$	21,279		$	8,695		$	29,974

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, 2023.

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

(Dollars in thousands)	March 31, 2023
Commercial and industrial	$	71,984
Real estate – construction, residential		580
Real estate – mortgage, commercial		12,641
Real estate – mortgage, residential		772
Total collateral-dependent loans	$	85,977

Acquired Loans

As of March 31, 2023, the amortized cost of PCD loans totaled $58.2 million with an estimated ACL of $639 thousand. The remaining non-credit discount on PCD loans was $5.3 million as of March 31, 2023.

Modified Loans

The Company closely monitors the performance of borrowers experiencing financial difficulty to understand the effectiveness of its loan modification efforts.

The following table presents information on modified loans as of the date stated.

	March 31, 2023
	All Modifications
(Dollars in thousands)	Number of Loans		Amortized Cost		Amortized Cost of Modified Loans to Gross Loans by Category			Financial Effect
Modification - term extension
Commercial and industrial		1	$	37,271		6.53	%	13-month extension through January 2024
Modification - interest-only
Real estate – mortgage, commercial		2		3,381		0.39	%	Interest-only payments for six months
Total		3	$	40,652		1.65	%

The modified commercial and industrial loan was performing in accordance with its modified terms during the first quarter 2023. The loan is collateral-dependent, management is closely monitoring, and the loan is adequately

collateralized as of March 31, 2023.

The following table presents an aging analysis of the amortized cost of loans modified in the preceding 12 months as of the date stated.

	March 31, 2023
	Payment Status (Amortized Cost)
(Dollars in thousands)	Current Loans		30-89 Days Past Due		90+ Days Past Due
Commercial and industrial	$	37,271	$	—	$	—
Real estate – mortgage, commercial		3,360		—		—
Total modified loans	$	40,631	$	—	$	—

None of the loans in the preceding tables have had a payment default during the three months ended March 31, 2023.

Six residential mortgage loans with a total amortized cost of $645 thousand were in the process of foreclosure as of March 31, 2023, compared to none as of December 31, 2022.

Pre-ASC 326 Adoption Disclosures

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following disclosures are presented under this previously applicable GAAP for the applicable prior periods.

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

	December 31, 2022
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Nonaccrual		Total Past Due & Nonaccrual		PCI Loans		Current Loans			Total Loans
Commercial and industrial	$	488	$	279	$	—	$	2,314	$	3,081	$	1,481	$	585,487		$	590,049
Paycheck Protection Program		—		—		—		—		—		—		11,967			11,967
Real estate – construction, commercial		1,136		19		—		714		1,869		—		181,432			183,301
Real estate – construction, residential		1,416		1,204		—		—		2,620		7		73,972			76,599
Real estate – mortgage, commercial		6,199		297		6,234		1,658		14,388		51,223		799,378			864,989
Real estate – mortgage, residential		4,544		231		1,998		5,143		11,916		5,678		614,178			631,772
Real estate – mortgage, farmland		—		75		—		—		75		—		6,524			6,599
Consumer		880		200		28		495		1,603		359		45,461			47,423
Less: deferred loan fees, net of costs		—		—		—		—		—		—		(1,640	)		(1,640	)
Total Loans	$	14,663	$	2,305	$	8,260	$	10,324	$	35,552	$	58,748	$	2,316,759		$	2,411,059

The following table presents the aging of the amortized cost of PCI loans as of the date stated.

	December 31, 2022
(Dollars in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Current Loans		Total Loans
Commercial and industrial	$	—	$	—	$	1,481	$	1,481
Real estate – construction, commercial		—		—		7		7
Real estate – mortgage, commercial		—		—		51,223		51,223
Real estate – mortgage, residential		354		—		5,324		5,678
Consumer		—		—		359		359
Total PCI Loans	$	354	$	—	$	58,394	$	58,748

The following table presents the outstanding principal balance and related recorded investment of acquired loans included in the consolidated balance sheets as of the date stated.

(Dollars in thousands)	December 31, 2022
PCI loans
Outstanding principal balance	$	64,911
Recorded investment		58,748
Purchased performing loans
Outstanding principal balance		513,461
Recorded investment		511,752
Total acquired loans
Outstanding principal balance		578,372
Recorded investment		570,500

The following table presents the changes in accretable yield for PCI loans for the period stated.

(Dollars in thousands)	For the three months ended March 31, 2022
Balance, beginning of period	$	16,849
Accretion		(3,512	)
Balance, end of period	$	13,337

The following table presents a summary of the loan portfolio individually and collectively evaluated for impairment as of the date stated.

	December 31, 2022
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively  Evaluated for  Impairment		Total Loan Balances			Related Allowance for Loan Losses
PCI loans:
Commercial and industrial	$	—	$	1,481	$	1,481		$	—
Real estate – construction, commercial		—		7		7			—
Real estate – mortgage, commercial		—		51,223		51,223			3
Real estate – mortgage, residential		—		5,678		5,678			—
Consumer		—		359		359			—
Total PCI loans		—		58,748		58,748			3
Originated and purchased performing loans:
Commercial and industrial		39,247		549,321		588,568			15,272
Real estate – construction, commercial		521		182,773		183,294			1,637
Real estate – construction, residential		—		76,599		76,599			628
Real estate – mortgage, commercial		4,567		809,199		813,766			2,353
Real estate – mortgage, residential		835		625,259		626,094			1,760
Real estate – mortgage, farmland		—		6,599		6,599			4
Consumer		—		47,064		47,064			1,282
Total originated and purchased performing loans		45,170		2,296,814		2,341,984			22,936
Gross loans		45,170		2,355,562		2,400,732			22,939
Less: deferred loan fees, net of costs		—		—		(1,640	)		—
Total	$	45,170	$	2,355,562	$	2,399,092		$	22,939

The table above excludes PPP loans of $12.0 million as of December 31, 2022. PPP loans are fully guaranteed by the U.S. government; therefore, the Company recorded no allowance for loan losses for these loans.

The following tables present information related to impaired loans held for investment by loan type as of and for the dates presented.

	December 31, 2022
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific allowance recorded:
Commercial and industrial	$	1,309	$	1,289	$	—
Real estate – construction, commercial		521		521		—
Real estate – mortgage, commercial		4,438		4,404		—
Real estate – mortgage, residential		835		834		—
With an allowance recorded:
Commercial and industrial	$	37,938	$	37,911	$	3,178
Real estate – mortgage, commercial		129		126		1
Total	$	45,170	$	45,085	$	3,179

	For the three months ended March 31, 2022
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	5,305	$	62
Real estate – construction, commercial		524		—
Real estate – mortgage, commercial		11,880		48
Real estate – mortgage, residential		1,342		14
With an allowance recorded:
Commercial and industrial	$	3,290	$	—
Real estate – mortgage, commercial		88		—
Real estate – mortgage, residential		59		—
Total	$	22,488	$	124

Impaired loans also include TDRs, and as of December 31, 2022, there were 11 TDRs totaling $1.1 million.

The following table presents the analysis of the change in the allowance for loan losses by loan type for the period stated.

(Dollars in thousands)	For the three months ended March 31, 2022
Allowance for loan losses, beginning of period	$	12,121
Charge-offs
Commercial and industrial		(2,401	)
Real estate – construction		(123	)
Real estate – mortgage		(16	)
Consumer		(279	)
Total charge-offs		(2,819	)
Recoveries
Commercial and industrial		74
Real estate – construction		12
Real estate – mortgage		4
Consumer		121
Total recoveries		211
Net charge-offs		(2,608	)
Provision for loan losses		2,500
Allowance for loan losses, end of period	$	12,013

The following table presents the amortized cost of loans held for investment by internal loan grade as of the date stated.

	December 31, 2022
(Dollars in thousands)	Grade 1 Prime		Grade 2 Desirable		Grade 3 Good		Grade 4 Acceptable		Grade 5 Pass/Watch		Grade 6 Special Mention		Grade 7 Substandard		Total
PCI loans:
Commercial and industrial	$	—	$	—	$	—	$	1,369	$	—	$	112	$	—	$	1,481
Real estate – construction, commercial		—		—		—		7		—		—		—		7
Real estate – mortgage, commercial		—		—		—		22,778		26,059		1,700		686		51,223
Real estate – mortgage residential		—		—		—		1,453		1,985		—		2,240		5,678
Consumer		—		—		—		—		353		—		6		359
Total PCI loans		—		—		—		25,607		28,397		1,812		2,932		58,748
Originated and purchased performing loans:
Commercial and industrial		318		885		193,144		312,278		38,552		2,834		40,557		588,568
Paycheck Protection Program		11,967		—		—		—		—		—		—		11,967
Real estate – construction, commercial		—		361		14,223		156,027		8,504		3,365		814		183,294
Real estate – construction, residential		—		—		3,110		72,327		1,162		—		—		76,599
Real estate – mortgage, commercial		—		2,330		187,648		561,554		54,352		2,048		5,834		813,766
Real estate – mortgage residential		—		7,311		233,697		365,511		11,858		—		7,717		626,094
Real estate – mortgage, farmland		549		—		1,315		4,609		126		—		—		6,599
Consumer		197		—		21,330		24,731		256		—		550		47,064
Total originated and purchased performing loans		13,031		10,887		654,467		1,497,037		114,810		8,247		55,472		2,353,951
Gross loans	$	13,031	$	10,887	$	654,467	$	1,522,644	$	143,207	$	10,059	$	58,404	$	2,412,699
Less: deferred loan fees, net of costs																(1,640	)
Total															$	2,411,059

There were no loans classified as doubtful or loss as of December 31, 2022.