| Loans and Allowance for Credit Losses | Loans and Allowance for Credit Losses The Company’s loan portfolio is its largest class of earning assets and typically provides higher yields than other types of earning assets. Associated with the higher yields is an inherent amount of credit risk which the Company attempts to mitigate through strong underwriting practices. The following table presents the balance of each major product type within the Company’s portfolio as of the dates indicated. (in thousands) March 31, December 31, Real estate: Commercial $ 2,442,520 $ 2,394,674 Commercial land and development 15,475 7,477 Commercial construction 98,415 88,669 Residential construction 9,410 6,693 Residential 23,862 24,230 Farmland 51,616 52,478 Commercial: Secured 173,500 165,186 Unsecured 24,776 25,431 Consumer and other 32,378 28,628 Subtotal 2,871,952 2,793,466 Less: Net deferred loan fees 2,104 2,140 Less: Allowance for credit losses 34,172 28,389 Loans held for investment, net of allowance for credit losses $ 2,835,676 $ 2,762,937 Underwriting Commercial loans : Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Real estate loans : Real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected than other loans by conditions in the real estate market or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. Construction loans : With respect to construction loans that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the ultimate success of the project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored using on-site inspections and are generally considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing. Residential real estate loans : Residential real estate loans are underwritten based upon the borrower’s income, credit history, and collateral. To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements. Farmland loans : Farmland loans are generally made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or service. Farmland loans are secured by real property and are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse weather conditions. Consumer loans : The Company purchased consumer loans underwritten utilizing credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements. Credit Quality Indicators The Company has established a loan risk rating system to measure and monitor the quality of the loan portfolio. All loans are assigned a risk rating from the inception of the loan until the loan is paid off. The primary loan grades are as follows: Loans rated pass : These are loans to borrowers with satisfactory financial support, repayment capacity, and credit strength. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Company’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts. Financial ratios and trends are acceptable. Negative external industry factors are generally not present. The loan may be secured, unsecured, or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. Loans rated watch : These are loans which have deficient loan quality and potentially significant issues, but losses do not appear to be imminent, and the issues are expected to be temporary in nature. The significant issues are typically: (i) a history of losses or events that threaten the borrower’s viability; (ii) a property with significant depreciation and/or marketability concerns; or (iii) poor or deteriorating credit, occasional late payments, and/or limited reserves but the loan is generally kept current. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans rated substandard : These are loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged (if any). Loans so classified exhibit a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. Loans rated doubtful : These are loans for which the collection or liquidation of the entire debt is highly questionable or improbable. Typically, the possibility of loss is extremely high. The losses on these loans are deferred until all pending factors have been addressed. The amortized cost basis of the Company’s loans by origination year, where origination is defined as the later of origination or renewal date, and credit quality indicator as of March 31, 2023 was as follows (disclosure not comparative due to adoption of ASC 326 on January 1, 2023 – refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for further details): Amortized Cost Basis by Origination Year (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total Real estate: Commercial Pass $ 72,905 $ 981,387 $ 725,336 $ 245,756 $ 131,860 $ 262,890 $ 2,966 $ — $ 2,423,100 Watch — 2,500 — 7,044 — 5,734 1,393 — 16,671 Substandard — — — — — 102 — — 102 Doubtful — — — — — — — — — Total 72,905 983,887 725,336 252,800 131,860 268,726 4,359 — 2,439,873 Commercial land and development Pass 8,376 4,553 1,296 187 — 1,019 — — 15,431 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 8,376 4,553 1,296 187 — 1,019 — — 15,431 Commercial construction Pass 757 32,079 47,673 11,725 — — — — 92,234 Watch — — — — — 5,900 — — 5,900 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 757 32,079 47,673 11,725 — 5,900 — — 98,134 Residential construction Pass — 3,209 6,201 — — — — — 9,410 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total — 3,209 6,201 — — — — — 9,410 Residential Pass 628 4,048 6,399 2,336 2,299 6,605 1,407 — 23,722 Watch — — — — — — — — — Substandard — — — — — 175 — — 175 Doubtful — — — — — — — — — Total 628 4,048 6,399 2,336 2,299 6,780 1,407 — 23,897 Farmland Pass — 8,157 12,811 8,129 12,753 9,731 — — 51,581 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total — 8,157 12,811 8,129 12,753 9,731 — — 51,581 Commercial: Secured Pass 4,196 52,454 25,275 17,792 12,243 15,668 44,634 — 172,262 Watch — 610 8 38 13 906 — — 1,575 Substandard — — — — 56 62 — — 118 Doubtful — — — — — — — — — Total 4,196 53,064 25,283 17,830 12,312 16,636 44,634 — 173,955 Amortized Cost Basis by Origination Year (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total Commercial: Unsecured Pass 4,243 3,362 4,560 4,965 2,680 67 4,953 — 24,830 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 4,243 3,362 4,560 4,965 2,680 67 4,953 — 24,830 Consumer and other Pass 6,155 15,636 10,563 — — 360 — — 32,714 Watch — — — — — — — — — Substandard — 23 — — — — — — 23 Doubtful — — — — — — — — — Total 6,155 15,659 10,563 — — 360 — — 32,737 Total Pass 97,260 1,104,885 840,114 290,890 161,835 296,340 53,960 — 2,845,284 Watch — 3,110 8 7,082 13 12,540 1,393 — 24,146 Substandard — 23 — — 56 339 — — 418 Doubtful — — — — — — — — — Total $ 97,260 $ 1,108,018 $ 840,122 $ 297,972 $ 161,904 $ 309,219 $ 55,353 $ — $ 2,869,848 Management regularly reviews the Company’s loans for accuracy of risk grades whenever new information is received. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk, and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. Management monitors construction loans monthly and reviews consumer loans based on delinquency. Management also reviews loans graded “watch” or worse, regardless of loan type, no less than quarterly. The age analysis of past due loans by class as of March 31, 2023 consisted of the following: (in thousands) Past Due 30-89 Greater Than Total Past Current Total Loans Real estate: Commercial $ — $ — $ — $ 2,439,873 $ 2,439,873 Commercial land and development — — — 15,431 15,431 Commercial construction — — — 98,134 98,134 Residential construction — — — 9,410 9,410 Residential — 175 175 23,722 23,897 Farmland — — — 51,581 51,581 Commercial: Secured 46 — 46 173,909 173,955 Unsecured — — — 24,830 24,830 Consumer and other 81 — 81 32,656 32,737 Total $ 127 $ 175 $ 302 $ 2,869,546 $ 2,869,848 There were no loans between 60-89 days past due nor any loans greater than 90 days past due and still accruing as of March 31, 2023. The age analysis of past due loans by class as of December 31, 2022 consisted of the following: (in thousands) Past Due Total Past Current Total Loans 30-89 Greater Than Real estate: Commercial $ — $ — $ — $ 2,392,053 $ 2,392,053 Commercial land and development — — — 7,447 7,447 Commercial construction — — — 88,314 88,314 Residential construction — — — 6,693 6,693 Residential 175 — 175 24,088 24,263 Farmland — — — 52,446 52,446 Commercial: Secured — — — 165,609 165,609 Unsecured — — — 25,488 25,488 Consumer and other 194 — 194 28,819 29,013 Total $ 369 $ — $ 369 $ 2,790,957 $ 2,791,326 There were no loans between 60-89 days past due nor any loans greater than 90 days past due and still accruing as of December 31, 2022. One collateral dependent loan was in process of foreclosure at March 31, 2023: a commercial term loan secured by a single family residence with an unpaid principal balance of $175.0 thousand and no related allowance. Non-accrual loans, segregated by class, were as follows as of March 31, 2023 and December 31, 2022: (in thousands) March 31, December 31, Real estate: Commercial $ 102 $ 106 Residential 175 175 Commercial: Secured 118 123 Consumer and other 23 — Total non-accrual loans $ 418 $ 404 No interest income was recognized on non-accrual loans in the three months ended March 31, 2023 or March 31, 2022. Non-accrual real estate loans did not have an allowance for credit losses as of March 31, 2023. Interest income can be recognized on non-accrual loans in cases where resolution occurs through a sale or full payment is received on the non-accrual loan. The amount of foregone interest income related to non-accrual loans was $9.1 thousand for the three months ended March 31, 2023, compared to $18.3 thousand for the three months ended March 31, 2022. Allowance for Credit Losses The following table discloses activity in the allowance for credit losses for the three months ended March 31, 2023. (in thousands) Beginning Balance Effect of Adoption of ASC 326 Charge-offs Recoveries Provision (Benefit) Ending Balance Real estate: Commercial $ 19,216 $ 7,606 $ — $ — $ 24 $ 26,846 Commercial land and development 54 74 — — 96 224 Commercial construction 645 882 — — (104) 1,423 Residential construction 49 81 — — 43 173 Residential 175 3 — — 1 179 Farmland 644 (396) — — (31) 217 Commercial: Secured 7,098 (3,060) (488) 92 573 4,215 Unsecured 116 37 — — (3) 150 Consumer and other 347 80 (384) 401 (44) 400 Unallocated 45 (45) — — 345 345 Total $ 28,389 $ 5,262 $ (872) $ 493 $ 900 $ 34,172 The following table discloses activity in the allowance for credit losses for the three months ended March 31, 2022. (in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance Real estate: Commercial $ 12,869 $ — $ — $ 999 $ 13,868 Commercial land and development 50 — — 16 66 Commercial construction 371 — — 59 430 Residential construction 50 — — (10) 40 Residential 192 — — 16 208 Farmland 645 — — (34) 611 Commercial: Secured 6,859 (309) 46 443 7,039 Unsecured 207 — — 39 246 Consumer and other 889 (67) 41 225 1,088 Unallocated 1,111 — — (803) 308 Total $ 23,243 $ (376) $ 87 $ 950 $ 23,904 Unfunded Loan Commitment Reserves Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the unaudited consolidated balance sheets. Provisions for the unfunded loan commitments are included in “Other operating expenses” in the unaudited consolidated statements of income. Three months ended (in thousands) March 31, March 31, Balance at January 1 $ 125 $ 102 Effect of adoption of ASC 326 1,092 — Balance at March 31 $ 1,217 $ 102 Pledged Loans The Company’s FHLB line of credit is secured under terms of a collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $1.7 billion and $1.6 billion at March 31, 2023 and December 31, 2022, respectively. In addition, the Company pledges eligible tenants in common loans, which totaled $46.0 million and $41.9 million at March 31, 2023 and December 31, 2022, respectively, to secure its borrowing capacity with the Federal Reserve Bank of San Francisco. See Note 6, Long Term Debt and Other Borrowings, for further discussion of these borrowings. |
