| 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, 2024 December 31, 2023 Real estate: Commercial $ 2,687,456 $ 2,685,419 Commercial land and development 14,678 15,551 Commercial construction 62,513 62,863 Residential construction 18,141 15,456 Residential 28,685 25,893 Farmland 51,422 51,669 Commercial: Secured 143,273 165,109 Unsecured 26,175 23,850 Consumer and other 73,917 38,166 Subtotal 3,106,260 3,083,976 Net deferred loan fees (2,130) (2,257) Loans held for investment 3,104,130 3,081,719 Allowance for credit losses - loans (34,653) (34,431) Loans held for investment, net of allowance for credit losses $ 3,069,477 $ 3,047,288 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 may be 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 and their 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 may 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 the period indicated was as follows: Amortized Cost Basis by Origination Year as of March 31, 2024 (in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Revolving Converted to Term Total Real estate: Commercial Pass $ 71,988 $ 329,126 $ 971,602 $ 670,590 $ 236,866 $ 360,603 $ 4,850 $ — $ 2,645,625 Watch — — 11,517 15,855 4,699 5,178 — — 37,249 Substandard — — — — — 1,849 — — 1,849 Doubtful — — — — — — — — — Total 71,988 329,126 983,119 686,445 241,565 367,630 4,850 — 2,684,723 Commercial land and development Pass 1,663 9,899 2,217 — 183 714 — — 14,676 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 1,663 9,899 2,217 — 183 714 — — 14,676 Commercial construction Pass 110 7,124 37,899 — 11,230 5,897 — — 62,260 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 110 7,124 37,899 — 11,230 5,897 — — 62,260 Residential construction Pass 14,229 — — 3,913 — — — — 18,142 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 14,229 — — 3,913 — — — — 18,142 Residential Pass 3,203 4,828 3,896 6,195 2,259 6,925 1,409 — 28,715 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 3,203 4,828 3,896 6,195 2,259 6,925 1,409 — 28,715 Farmland Pass 690 2,302 8,030 12,669 7,826 19,884 3 — 51,404 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 690 2,302 8,030 12,669 7,826 19,884 3 — 51,404 Commercial: Secured Pass 1,394 27,663 26,760 12,033 11,387 18,864 31,061 — 129,162 Watch — 180 9,397 2,651 38 1,173 1,172 — 14,611 Substandard — — — — — 66 — — 66 Doubtful — — — — — — — — — Total 1,394 27,843 36,157 14,684 11,425 20,103 32,233 — 143,839 Amortized Cost Basis by Origination Year as of March 31, 2024 (in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Revolving Converted to Term Total Commercial: Unsecured Pass 958 4,890 3,321 4,471 5,717 2,142 4,692 — 26,191 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 958 4,890 3,321 4,471 5,717 2,142 4,692 — 26,191 Consumer and other Pass 16,057 39,913 10,317 7,587 1 279 — — 74,154 Watch — — 15 — — — — — 15 Substandard — — 11 — — — — — 11 Doubtful — — — — — — — — — Total 16,057 39,913 10,343 7,587 1 279 — — 74,180 Total Pass 110,292 425,745 1,064,042 717,458 275,469 415,308 42,015 — 3,050,329 Watch — 180 20,929 18,506 4,737 6,351 1,172 — 51,875 Substandard — — 11 — — 1,915 — — 1,926 Doubtful — — — — — — — — — Total $ 110,292 $ 425,925 $ 1,084,982 $ 735,964 $ 280,206 $ 423,574 $ 43,187 $ — $ 3,104,130 Amortized Cost Basis by Origination Year as of December 31, 2023 (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total Real estate: Commercial Pass $ 329,876 $ 992,181 $ 714,965 $ 238,655 $ 128,424 $ 247,030 $ 4,685 $ — $ 2,655,816 Watch — 8,534 6,274 4,727 574 4,896 — — 25,005 Substandard — — — — — 1,890 — — 1,890 Doubtful — — — — — — — — — Total 329,876 1,000,715 721,239 243,382 128,998 253,816 4,685 — 2,682,711 Commercial land and development Pass 11,388 3,229 — 184 — 733 — — 15,534 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 11,388 3,229 — 184 — 733 — — 15,534 Commercial construction Pass 9,074 32,154 4,189 11,230 — 5,897 — — 62,544 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 9,074 32,154 4,189 11,230 — 5,897 — — 62,544 Residential construction Pass 2,412 9,128 3,912 — — — — — 15,452 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 2,412 9,128 3,912 — — — — — 15,452 Amortized Cost Basis by Origination Year as of December 31, 2023 (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total Real estate: Residential Pass 4,838 3,964 6,244 2,279 1,182 5,995 1,420 — 25,922 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 4,838 3,964 6,244 2,279 1,182 5,995 1,420 — 25,922 Farmland Pass 2,311 8,037 12,678 7,860 12,365 8,391 4 — 51,646 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 2,311 8,037 12,678 7,860 12,365 8,391 4 — 51,646 Commercial: Secured Pass 25,299 28,879 14,304 12,164 9,918 10,363 50,020 — 150,947 Watch 189 8,802 2,705 63 154 941 1,727 — 14,581 Substandard — — — — 45 27 — — 72 Doubtful — — — — — — — — — Total 25,488 37,681 17,009 12,227 10,117 11,331 51,747 — 165,600 Unsecured Pass 3,891 3,782 4,902 5,963 2,240 7 3,072 — 23,857 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 3,891 3,782 4,902 5,963 2,240 7 3,072 — 23,857 Consumer and other Pass 18,489 11,359 8,264 6 — 307 — — 38,425 Watch — 16 — — — — — — 16 Substandard — 12 — — — — — — 12 Doubtful — — — — — — — — — Total 18,489 11,387 8,264 6 — 307 — — 38,453 Total Pass 407,578 1,092,713 769,458 278,341 154,129 278,723 59,201 — 3,040,143 Watch 189 17,352 8,979 4,790 728 5,837 1,727 — 39,602 Substandard — 12 — — 45 1,917 — — 1,974 Doubtful — — — — — — — — — Total $ 407,767 $ 1,110,077 $ 778,437 $ 283,131 $ 154,902 $ 286,477 $ 60,928 $ — $ 3,081,719 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 generally 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, 2024 consisted of the following: (in thousands) Past Due 30-59 Days 60-89 Days Greater Than 90 Days Total Past Due Current Total Loans Receivable Real estate: Commercial $ — $ — $ — $ — $ 2,684,723 $ 2,684,723 Commercial land and development — — — — 14,676 14,676 Commercial construction — — — — 62,260 62,260 Residential construction — — — — 18,142 18,142 Residential — — — — 28,715 28,715 Farmland — — — — 51,404 51,404 Commercial: Secured 182 — — 182 143,657 143,839 Unsecured — — — — 26,191 26,191 Consumer and other 94 — — 94 74,086 74,180 Total $ 276 $ — $ — $ 276 $ 3,103,854 $ 3,104,130 There were no loans greater than 90 days past due and still accruing interest income as of March 31, 2024. The age analysis of past due loans by class as of December 31, 2023 consisted of the following: (in thousands) Past Due Total Past Due Current Total Loans Receivable 30-59 Days 60-89 Days Greater Than 90 Days Real estate: Commercial $ — $ — $ — $ — $ 2,682,711 $ 2,682,711 Commercial land and development — — — — 15,534 15,534 Commercial construction — — — — 62,544 62,544 Residential construction — — — — 15,452 15,452 Residential — — — — 25,922 25,922 Farmland — — — — 51,646 51,646 Commercial: Secured — — — — 165,600 165,600 Unsecured — — — — 23,857 23,857 Consumer and other 76 — — 76 38,377 38,453 Total $ 76 $ — $ — $ 76 $ 3,081,643 $ 3,081,719 There were no loans greater than 90 days past due and still accruing interest income as of December 31, 2023. No collateral dependent loans were in process of foreclosure at March 31, 2024 or December 31, 2023. Non-accrual loans, segregated by class, were as follows as of March 31, 2024 and December 31, 2023: (in thousands) March 31, 2024 December 31, 2023 Real estate: Commercial $ 1,852 $ 1,893 Commercial: Secured 66 72 Total non-accrual loans $ 1,918 $ 1,965 No interest income was recognized on non-accrual loans in the three months ended March 31, 2024 or March 31, 2023. Non-accrual real estate loans did not have an allowance for credit losses as of March 31, 2024. 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 $39.2 thousand for the three months ended March 31, 2024, as compared to $9.1 thousand for the three months ended March 31, 2023. Allowance for Credit Losses - Loans The following table discloses activity in the allowance for credit losses - loans for the three months ended March 31, 2024. (in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance Real estate: Commercial $ 29,015 $ — $ — $ (120) $ 28,895 Commercial land and development 178 — — (14) 164 Commercial construction 718 — — (21) 697 Residential construction 89 — — 25 114 Residential 151 — — 13 164 Farmland 399 — — 39 438 Commercial: Secured 3,314 (998) 182 764 3,262 Unsecured 189 (34) — 104 259 Consumer and other 378 (71) 93 260 660 Total $ 34,431 $ (1,103) $ 275 $ 1,050 $ 34,653 The following table discloses activity in the allowance for credit losses - loans 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 Unfunded Loan Commitment Reserves Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the unaudited consolidated balance sheets. Provisions for unfunded loan commitments are included in “Provision for credit losses” in the unaudited consolidated statements of income. Three months ended (in thousands) March 31, 2024 March 31, 2023 Balance at beginning of period $ 1,247 $ 125 Effect of adoption of ASC 326 — 1,092 Provision (150) — Balance at end of period $ 1,097 $ 1,217 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 at March 31, 2024 and December 31, 2023. In addition, the Company pledges eligible tenants in common loans, which totaled $1.2 billion at March 31, 2024 and December 31, 2023, to secure its borrowing capacity with the Federal Reserve Discount Window. See Note 6, Long Term Debt and Other Borrowings, for further discussion of these borrowings. |
