Loans and ACL | Note 3 – Loan s and ACL The following table presents the amortized cost of loans held for investment as of the dates stated. (Dollars in thousands) March 31, 2024 December 31, 2023 Commercial and industrial $ 489,972 $ 508,944 Real estate – construction, commercial 156,943 180,052 Real estate – construction, residential 62,947 75,832 Real estate – commercial 881,798 870,540 Real estate – residential 740,249 730,110 Real estate – farmland 5,673 5,470 Consumer 55,782 59,169 Gross loans 2,393,364 2,430,117 Deferred loan fees, net of costs 725 830 Total $ 2,394,089 $ 2,430,947 The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $ 815.2 million and $ 767.1 million were pledged as of March 31, 2024 and December 31, 2023, respectively. T he Company has pledged certain commercial and industrial loans totaling $ 101.8 million and $ 161.0 million as collateral for borrowings with the FRB Discount Window as of March 31, 2024 and December 31, 2023, respectively. The decline in availability at the FRB Discount Window during the first quarter of 2024 was primarily due to changes in eligibility of certain collateral. The following tables present the aging of the amortized cost of loans held for investment by loan category as of the dates stated. March 31, 2024 (Dollars in thousands) Current 30-59 60-89 Greater than Nonaccrual Total Commercial and industrial $ 448,156 $ 4,357 $ 1,609 $ 1,904 $ 33,946 $ 489,972 Real estate – construction, commercial 154,710 — — — 2,233 156,943 Real estate – construction, residential 62,947 — — — — 62,947 Real estate – commercial 872,060 2,297 — — 7,441 881,798 Real estate – residential 727,010 6,356 419 — 6,464 740,249 Real estate – farmland 5,673 — — — — 5,673 Consumer 47,151 6,966 470 405 790 55,782 Less: Deferred loan fees, net of costs 725 — — — — 725 Total Loans $ 2,318,432 $ 19,976 $ 2,498 $ 2,309 $ 50,874 $ 2,394,089 December 31, 2023 (Dollars in thousands) Current 30-59 60-89 Greater than Nonaccrual Total Commercial and industrial $ 464,939 $ 2,235 $ 632 $ 1,709 $ 39,429 $ 508,944 Real estate – construction, commercial 177,653 2,016 — — 383 180,052 Real estate – construction, residential 75,309 523 — — — 75,832 Real estate – commercial 855,263 2,109 714 574 11,880 870,540 Real estate – residential 717,141 5,101 288 — 7,580 730,110 Real estate – farmland 5,470 — — — — 5,470 Consumer 55,084 2,298 279 754 754 59,169 Deferred loan fees, net of costs 830 — — — — 830 Total Loans $ 2,351,689 $ 14,282 $ 1,913 $ 3,037 $ 60,026 $ 2,430,947 The following tables present the amortized cost of nonaccrual loans held for investment with and without an ACL by loan category as of the dates stated. March 31, 2024 (Dollars in thousands) Nonaccrual Loans with No ACL Nonaccrual Loans with an ACL Total Nonaccrual Loans Commercial and industrial $ — $ 33,946 $ 33,946 Real estate – construction, commercial 1,863 370 2,233 Real estate – commercial — 7,441 7,441 Real estate – residential 565 5,899 6,464 Consumer — 790 790 Total $ 2,428 $ 48,446 $ 50,874 December 31, 2023 (Dollars in thousands) Nonaccrual Loans with No ACL Nonaccrual Loans with an ACL Total Nonaccrual Loans Commercial and industrial $ 1,487 $ 37,942 $ 39,429 Real estate – construction, commercial — 383 383 Real estate – commercial 2,024 9,856 11,880 Real estate – residential 577 7,003 7,580 Consumer — 754 754 Total $ 4,088 $ 55,938 $ 60,026 The Company recognized $ 65 thousand and $ 89 thousand of interest income on nonaccrual loans during the three months ended March 31, 2024 and March 31, 2023, respectively. The following table presents accrued interest receivable by loan type reversed from interest income associated with loans held for investment that were placed on nonaccrual status for the periods stated. For the three months ended March 31, (Dollars in thousands) 2024 2023 Commercial and industrial $ 57 $ 11 Real estate – construction, commercial 25 1 Real estate – commercial 51 20 Real estate – residential 10 245 Consumer 5 49 Total $ 148 $ 326 Credit Quality Indicators The Company segments loans held for investment into risk categories based on relevant information about the expected ability of borrowers to repay debt, such as current financial information, historical payment performance, experience, collateral adequacy, credit documentation, and current economic trends, among other factors. Management assigns loan risk grades by a numerical system as an indication of credit quality of its portfolio of loans held for investment. The Company uses the following definitions for loan risk ratings and periodically evaluates the appropriateness of these ratings across its loan portfolio. Independent third-party loan reviews are periodically performed on the Company's loan portfolio and such reviews are used to validate management's determination of loan risk grades. Bank regulatory agencies also periodically review the Company's loan portfolio, including loan risk grades and may change a grade based on their judgment of the facts at the time of review. Risk Grade 1 – Strong: This grade is reserved for loans to the strongest of borrowers. These loans are to individuals or businesses where the probability of default is extremely low to the Bank and are secured with collateral where the loss given default is unlikely because of the source of repayment such as a lien on a deposit account held at the Bank. Character, credit history, and ability of individuals or company principals are excellent. High liquidity, minimum risk, strong ratios, and low servicing cost are present. Risk Grade 2 – Minimal: This grade is reserved for loans to borrowers who are deemed exceptionally strong. These loans are within established guidelines and where the borrowers have documented significant overall financial strength with consistent and predictable cash flows. These loans have excellent sources of repayment, significant balance sheet liquidity, no significant identifiable risk of collection, and conform in all respects to policy, underwriting standards, and federal and state regulations (no exceptions of any kind). In addition, guarantor support, when provided, is viewed as excellent. Risk Grade 3 – Acceptable: This grade is reserved for loans to borrowers who are deemed strong. These loans have adequate sources of repayment, with minimal identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: (1) conformity in all respects with policy, guidelines, underwriting standards, and federal and state regulations (no exceptions of any kind), (2) documented historical cash flow that meets or exceeds required minimum guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt. In addition, guarantor support, when provided, is viewed as strong. Risk Grade 4 – Satisfactory: This grade is given to satisfactory loans containing more, but deemed acceptable, risk and where the borrower is assessed as sound. These loans have adequate sources of repayment, with minimal identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics: (1) general conformity to the Bank's underwriting requirements, with limited exceptions to policy, product, or underwriting guidelines. All exceptions noted have documented mitigating factors that offset any additional risk associated with the exceptions noted, (2) documented historical cash flow that meets or exceeds required minimum guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt. In addition, guarantor support, when provided, is viewed as satisfactory. Risk Grade 5 – Watch: This grade is for satisfactory loans containing acceptable but elevated risk. These loans are characterized by borrowers who exhibit signs of financial distress or experience unstable or unfavorable change(s) adversely impacting their current or expected financial condition. The borrower's management is deemed to be satisfactory, the collateral securing the loan may have decreased in value, the debt service coverage ratio is inconsistent or breakeven but mostly positive, and/or guarantor support, if any, is limited or marginal. Loans classified as Watch warrant additional monitoring by management. Risk Grade 6 – Special Mention: This grade is for loans that have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the Bank's credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special mention credits typically do not conform to underwriting guidelines and/or exceptions without mitigating factors, or have emerging weaknesses that may or may not be cured with the passage of time. Risk Grade 7 – Substandard: A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. The probability of default is likely and may have occurred . Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: (1) current or expected unprofitable operations, (2) inadequate debt service coverage, (3) declining or inadequate liquidity, (4) improper loan structure, (5) questionable or weak repayment sources, and (6) lack of well-defined secondary repayment source. There is a distinct possibility of loss and the Bank will sustain some loss if the deficiencies are not corrected. Risk Grade 8 – Doubtful: Loans classified doubtful have all the weaknesses inherent in loans classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the Bank's position, which can include, but is not limited to (1) an injection of capital, (2) alternative financing, and (3) liquidation of assets or the pledging of additional collateral. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off against the allowance for credit losses. Risk Grade 9 – Loss: Loans classified loss are considered uncollectible and of such little value that continuance as assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer charging off the worthless loan, even though partial recovery may be effected in the future. Probable loss portions deemed uncollectible are charged off promptly against the allowance for credit losses. The following table presents the amortized cost of loans held for investment by internal loan risk grade by year of origination as of March 31, 2024. Also presented are current period gross charge-offs by loan type for the three months ended March 31, 2024. Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Total Commercial and industrial Risk Grades 1 - 4 $ 2,491 $ 14,949 $ 109,129 $ 25,875 $ 23,954 $ 20,635 $ 136,887 $ 333,920 Risk Grades 5 - 6 68 27,159 37,715 13,637 6,044 2,338 20,977 107,938 Risk Grade 7 — 77 324 6,135 803 752 7,716 15,807 Risk Grade 8 — — 29,750 2,557 — — — 32,307 Total 2,559 42,185 176,918 48,204 30,801 23,725 165,580 489,972 Current period gross charge-offs — 447 1,364 138 3 5 — 1,957 Real estate – construction, commercial Risk Grades 1 - 4 115 9,397 85,565 17,534 13,531 7,463 1,537 135,142 Risk Grades 5 - 6 — 1,101 5,529 1,513 194 5,684 3,632 17,653 Risk Grade 7 — 118 3,630 36 — 364 — 4,148 Total 115 10,616 94,724 19,083 13,725 13,511 5,169 156,943 Current period gross charge-offs — — — — — — — — Real estate – construction, residential Risk Grades 1 - 4 5,952 27,017 8,063 6,740 26 64 10,729 58,591 Risk Grades 5 - 6 — 2,281 1,362 — 165 — — 3,808 Risk Grade 7 — 393 155 — — — — 548 Total 5,952 29,691 9,580 6,740 191 64 10,729 62,947 Current period gross charge-offs — — — — — — — — Real estate – commercial Risk Grades 1 - 4 5,053 18,197 269,429 122,861 147,005 168,496 21,967 753,011 Risk Grades 5 - 6 — 452 43,469 15,779 17,641 33,312 4,214 114,867 Risk Grade 7 — — 1,104 6,977 3,835 2,007 — 13,923 Total 5,053 18,649 314,002 145,617 168,481 203,815 26,181 881,798 Current period gross charge-offs — — — — — — — — Real estate – residential Risk Grades 1 - 4 145 52,894 230,577 118,789 68,096 157,871 55,377 683,749 Risk Grades 5 - 6 229 12,509 10,066 3,659 2,278 13,796 3,341 45,878 Risk Grade 7 — — 2,160 1,266 1,455 5,465 276 10,622 Total 374 65,403 242,803 123,714 71,829 177,132 58,994 740,249 Current period gross charge-offs — — — — — — — Real estate – farmland Risk Grades 1 - 4 — — 1,004 1,383 — 2,956 186 5,529 Risk Grades 5 - 6 — 144 — — — — — 144 Total — 144 1,004 1,383 — 2,956 186 5,673 Current period gross charge-offs — — — — — — — — Consumer Risk Grades 1 - 4 3,566 23,334 12,661 3,001 2,303 1,179 8,098 54,142 Risk Grades 5 - 6 — 58 40 8 6 60 495 667 Risk Grade 7 — 195 377 193 123 85 — 973 Total 3,566 23,587 13,078 3,202 2,432 1,324 8,593 55,782 Current period gross charge-offs 523 75 119 10 16 2 — 745 Total Loans Risk Grades 1 - 4 $ 17,322 $ 145,788 $ 716,428 $ 296,183 $ 254,915 $ 358,664 $ 234,781 $ 2,024,081 Risk Grades 5 - 6 297 43,704 98,181 34,596 26,328 55,190 32,659 290,955 Risk Grade 7 — 783 7,750 14,607 6,216 8,673 7,992 46,021 Risk Grade 8 — — 29,750 2,557 — — — 32,307 Total $ 17,619 $ 190,275 $ 852,109 $ 347,943 $ 287,459 $ 422,527 $ 275,432 $ 2,393,364 Total current period gross charge-offs $ 523 $ 522 $ 1,483 $ 148 $ 19 $ 7 $ — $ 2,702 Of the $ 32.3 million of commercial and industrial loans classified as doubtful (risk grade 8) as of March 31, 2024 , $ 29.8 million was attributable to a specialty finance loan with a specific reserve, a component of the ACL, of $ 9.6 million as of the same date. There were no loans classified as loss (risk grade 9) as of March 31, 2024. The following table presents the amortized cost of loans held for investment by internal loan risk grade by year of origination as of December 31, 2023. Term Loans Recorded Investment Basis by Origination Year (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Total Commercial and industrial Risk Grades 1 - 4 $ 15,830 $ 114,291 $ 32,273 $ 25,429 $ 8,217 $ 14,200 $ 138,267 $ 348,507 Risk Grades 5 - 6 26,563 40,399 12,759 6,305 819 1,537 19,722 108,104 Risk Grade 7 — 877 3,623 829 543 134 9,191 15,197 Risk Grade 8 — 34,203 2,554 — — 379 — 37,136 Total 42,393 189,770 51,209 32,563 9,579 16,250 167,180 508,944 Real estate – construction, commercial Risk Grades 1 - 4 8,533 85,687 33,344 14,690 6,358 5,589 4,367 158,568 Risk Grades 5 - 6 4,213 11,072 760 293 — 738 3,827 20,903 Risk Grade 7 119 46 40 — — 376 — 581 Total 12,865 96,805 34,144 14,983 6,358 6,703 8,194 180,052 Real estate – construction, residential Risk Grades 1 - 4 31,611 22,734 3,867 59 741 67 10,656 69,735 Risk Grades 5 - 6 1,486 2,672 — 167 200 — — 4,525 Risk Grade 7 367 1,205 — — — — — 1,572 Total 33,464 26,611 3,867 226 941 67 10,656 75,832 Real estate – commercial Risk Grades 1 - 4 14,671 280,479 121,257 144,498 42,226 123,774 20,332 747,237 Risk Grades 5 - 6 2,841 25,075 9,038 19,597 12,921 27,778 4,214 101,464 Risk Grade 7 323 — 8,202 4,938 111 8,265 — 21,839 Total 17,835 305,554 138,497 169,033 55,258 159,817 24,546 870,540 Real estate – residential Risk Grades 1 - 4 51,042 218,375 121,872 69,165 27,877 132,986 55,327 676,644 Risk Grades 5 - 6 12,014 9,339 677 1,944 2,122 7,281 3,255 36,632 Risk Grade 7 — 2,240 2,446 1,812 943 9,307 85 16,833 Risk Grade 8 — — — — — 1 — 1 Total 63,056 229,954 124,995 72,921 30,942 149,575 58,667 730,110 Real estate – farmland Risk Grades 1 - 4 — 729 1,397 — 1,520 1,562 115 5,323 Risk Grades 5 - 6 147 — — — — — — 147 Total 147 729 1,397 — 1,520 1,562 115 5,470 Consumer Risk Grades 1 - 4 26,535 14,215 3,598 2,724 1,137 466 8,766 57,441 Risk Grades 5 - 6 61 42 12 12 8 433 495 1,063 Risk Grade 7 14 259 115 131 44 102 — 665 Total 26,610 14,516 3,725 2,867 1,189 1,001 9,261 59,169 Total Loans Risk Grades 1 - 4 $ 148,222 $ 736,510 $ 317,608 $ 256,565 $ 88,076 $ 278,644 $ 237,830 $ 2,063,455 Risk Grades 5 - 6 47,325 88,599 23,246 28,318 16,070 37,767 31,513 272,838 Risk Grade 7 823 4,627 14,426 7,710 1,641 18,184 9,276 56,687 Risk Grade 8 — 34,203 2,554 — — 380 — 37,137 Total $ 196,370 $ 863,939 $ 357,834 $ 292,593 $ 105,787 $ 334,975 $ 278,619 $ 2,430,117 The following tables present an analysis of the change in the ACL by major loan segment for the periods stated. Loan segments are presented as either commercial or consumer as follows: • Commercial – commercial and industrial; real estate – construction, commercial; real estate – commercial; and real estate – farmland; and • Consumer – real estate – construction, residential; real estate – residential; and consumer. For the three months ended March 31, 2024 (Dollars in thousands) Commercial Consumer Total Balance, beginning of period $ 27,491 $ 8,402 $ 35,893 Charge-offs ( 1,957 ) ( 745 ) ( 2,702 ) Recoveries 1,531 303 1,834 Net charge-offs ( 426 ) ( 442 ) ( 868 ) Balance, end of period $ 27,065 $ 7,960 $ 35,025 For the three months ended March 31, 2023 (Dollars in thousands) Commercial Consumer Total Balance, beginning of period $ 27,070 $ 3,670 $ 30,740 Impact of ASC 326 adoption 2,926 4,492 7,418 Charge-offs ( 799 ) ( 510 ) ( 1,309 ) Recoveries 118 104 222 Net charge-offs ( 681 ) ( 406 ) ( 1,087 ) (Recovery of) provision for credit losses - loans ( 2,049 ) 939 ( 1,110 ) Balance, end of period $ 27,266 $ 8,695 $ 35,961 There were no material changes to the assumptions, loss factors (both quantitative and qualitative), or reasonable and supportable forecasts used in the estimation of the ACL and the provision for credit losses for loans held for investment as of and for the three months ended March 31, 2024. Excluded from the ACL as of March 31, 2024 and December 31, 2023 was $ 12.9 million and $ 13.2 million of accrued interest attributable to loans held for investment, respectively, which is included in accrued interest receivable on the consolidated balance sheet. The following table presents the amortized cost of collateral-dependent loans as of the dates stated. (Dollars in thousands) March 31, 2024 December 31, 2023 Commercial and industrial $ 62,905 $ 67,555 Real estate – construction, commercial 5,719 6,309 Real estate – construction, residential — 2,303 Real estate – commercial 14,285 13,401 Real estate – residential 8,690 7,337 Total collateral-dependent loans $ 91,599 $ 96,905 Acquired Loans As of both March 31, 2024 and December 31, 2023 , the amortized cost of purchased credit deteriorated ("PCD") loans totaled $ 51.0 million, with estimated ACL of $ 522 thousand and $ 529 thousand, respectively. The remaining non-credit discount on PCD loans was $ 3.7 million and $ 3.8 million as of March 31, 2024 and December 31, 2023, respectively. Modified Loans The Company closely monitors the performance of borrowers experiencing financial difficulty that have been granted certain loan modifications it would otherwise not consider. The following table presents information on loans modified in the last 12 months from the date stated. March 31, 2024 (Dollars in thousands) Number of Loans Recorded Investment Recorded Investment of Modified Loans to Gross Loans by Category Financial Effect Modification - term extension and forbearance Forbearance agreements Commercial and industrial (1) 3 $ 33,979 6.93 % Real estate – construction, residential 1 155 0.02 % Real estate – residential 1 127 0.02 % Modification - payment deferral Payment deferral 6-9 months Real estate – residential 1 565 0.06 % Commercial and industrial 1 183 0.04 % Total 7 $ 35,009 1.46 % 29.8 million loan that was modified via a forbearance agreement in the second quarter of 2023 under which the borrower defaulted in the same period. This loan is collateral-dependent, is on nonaccrual status, and has a specific reserve of $ 9.6 million as of March 31, 2024. Subsequent to March 31, 2024, the Company received cash payments totaling $ 1.5 million, which were applied to the book principal balance of the loan. The following table presents an aging analysis of the recorded investment of loans modified as of the date stated. March 31, 2024 (Dollars in thousands) Current 30-89 Greater than Nonaccrual Total Commercial and industrial $ 1,681 $ — $ — $ 32,481 $ 34,162 Real estate – residential 127 — — 565 692 Real estate – construction, residential 155 — — — 155 Total modified loans $ 1,963 $ — $ — $ 33,046 $ 35,009 During the three months ended March 31, 2024, no loans modified on behalf of borrowers experiencing financial difficulty had a payment default. Nine residential mortgage loans with a total recorded investment of $ 1.3 million were in the process of foreclosure as of March 31, 2024 . |