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 30-59 60-89 Greater than Nonaccrual Total 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 30-89 90+ 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 we re 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 60-89 Greater than Nonaccrual Total Past Nonaccrual PCI Loans Current Total 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 Greater than Current Total 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 Collectively 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 Unpaid Related 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 Interest 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 Grade Grade Grade Grade Grade Grade 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. |