
	March 31, 2023			December 31, 2022
	Amount		% of Total	Amount		% of Total
	(in thousands, except percentages)
Real estate mortgages:
Construction and development	$	227,560	13.8%	$	255,736	16.1%
Residential	196,923		11.9%	167,891		10.5%
Commercial	948,251		57.5%	904,872		56.8%
Commercial and industrial	270,825		16.4%	256,553		16.1%
Consumer and other	7,370		0.4%	7,655		0.5%
Gross Loans	1,650,929		100.0%	1,592,707		100.0%
Deferred loan fees	(5,614)			(5,543)
Allowance for credit losses	(19,855)			(20,156)
Loans, net	$	1,625,460		$	1,567,008

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.

•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.

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.

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.

•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.


	Pass		Special Mention		Substandard		Doubtful		Total
	(dollars in thousands)
As of March 31, 2023
Real estate mortgages:
Construction and development	$	222,962	$	4,533	$	65	$	—	$	227,560
Residential	194,766		1,282		875		—		196,923
Commercial	930,583		10,757		6,911		—		948,251
Commercial and industrial	255,861		9,005		5,959		—		270,825
Consumer and other	7,339		30		1		—		7,370
Total	$	1,611,511	$	25,607	$	13,811	$	—	$	1,650,929

As of December 31, 2022
Real estate mortgages:
Construction and development	$	251,130	$	4,539	$	67	$	—	$	255,736
Residential	165,388		1,787		716		—		167,891
Commercial	883,082		18,532		3,258		—		904,872
Commercial and industrial	247,948		8,322		283		—		256,553
Consumer and other	7,604		28		23		—		7,655
Total	$	1,555,152	$	33,208	$	4,347	$	—	$	1,592,707

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. There were no significant loans classified as collateral dependent as of March 31, 2023.

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, 2023 and December 31, 2022:


			Past Due Status (Accruing Loans)
	Current		30-59 Days		60-89 Days		90+ Days		Total Past Due		Nonaccrual with ALL		Nonaccrual without ALL		Total
As of March 31, 2023
Real estate mortgages:
Construction and development	$	226,636	$	860	$	—	$	—	$	860	$	—	$	64	$	227,560
Residential	196,378		278		—		—		278		27		240		196,923
Commercial	945,628		241		1,119		—		1,360		346		917		948,251
Commercial and industrial	270,603		171		—		—		171		21		30		270,825
Consumer and other	7,369		—		—		—		—		—		1		7,370
Total	$	1,646,614	$	1,550	$	1,119	$	—	$	2,669	$	394	$	1,252	$	1,650,929

As of December 31, 2022
Real estate mortgages:
Construction and development	$	255,575	$	—	$	94	$	—	$	94	$	—	$	67	$	255,736
Residential	167,108		147		72		—		219		30		534		167,891
Commercial	900,895		2,634		65		—		2,699		351		927		904,872
Commercial and industrial	254,824		1,379		38		—		1,417		277		35		256,553
Consumer and other	7,570		62		—		—		62		16		7		7,655
Total	$	1,585,972	$	4,222	$	269	$	—	$	4,491	$	674	$	1,570	$	1,592,707

The following tables detail activity in the allowance for credit losses by portfolio segment as of March 31, 2023 and March 31, 2022. 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. The Company did not have an aggregate effect of modification resulting from adoption of ASU 2016-13. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


	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


	Real Estate		Commercial		Consumer		Total
Allowance for loan losses:
Balance at December 31, 2021	$	11,554	$	3,166	$	124	$	14,844
Provision (credit) for loan losses	(1,299)		2,009		(10)		700
Loans charged off	(66)		—		(6)		(72)
Recoveries of loans previously charged off	17		—		3		20
Ending balance at March 31, 2022	$	10,206	$	5,175	$	111	$	15,492

Ending balance - individually evaluated for impairment	$	400	$	269	$	—	$	669
Ending balance - collectively evaluated for impairment	9,743		4,906		111		14,760
Ending balance - loans acquired with deteriorated credit quality	63		—		—		63
Total ending balance at March 31, 2022	$	10,206	$	5,175	$	111	$	15,492

Loans:
Ending balance - individually evaluated for impairment	$	15,943	$	283	$	22	$	16,248
Ending balance - collectively evaluated for impairment	1,068,050		219,478		9,055		1,296,583
Ending balance - loans acquired with deteriorated credit quality	1,235		—		—		1,235
Total ending balance at March 31, 2022	$	1,085,228	$	219,761	$	9,077	$	1,314,066

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 $1.3 million at March 31, 2023.

A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. The following tables detail our impaired loans, by portfolio class as of December 31, 2022.


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
December 31, 2022
With no related allowance recorded:
Real estate mortgages:
Construction and development	$	372	$	372	$	—	$	397
Residential	1,129		1,129		—		1,169
Commercial	7,323		7,323		—		7,282
Commercial and industrial	36		36		—		42
Consumer and other	18		18		—		24
Total with no related allowance recorded	8,878		8,878		—		8,914

With an allowance recorded:
Real estate mortgages:
Construction and development	92		92		39		95
Residential	255		326		90		265
Commercial	623		623		166		630
Commercial and industrial	277		277		248		298
Consumer and other	16		16		8		16
Total with an allowance recorded	1,263		1,334		551		1,304
Total impaired loans	$	10,141	$	10,212	$	551	$	10,218

A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. The following tables detail our interest income recognized on impaired loans, by portfolio class as of the three months ended March 31, 2022.


	Recorded Investment		Average Recorded Investment		Interest Income Recognized
Three Months Ended March 31, 2022
With no related allowance recorded:
Real estate mortgages:
Construction and development	$	4,810	$	4,813	$	55
Residential	1,477		1,485		21
Commercial	7,891		7,922		115
Commercial and industrial	14		17		—
Consumer and other	22		23		—
Total with no related allowance recorded	14,214		14,260		191

With an allowance recorded:
Real estate mortgages:
Construction and development	234		236		3
Residential	362		364		4
Commercial	2,404		2,406		9
Commercial and industrial	269		276		6
Consumer and other	—		—		—
Total with an allowance recorded	3,269		3,282		22
Total impaired loans	$	17,483	$	17,542	$	213