Loans | Note 4 - Loans Loans consist of the following: (Dollars in thousands) March 31, 2022 December 31, 2021 Loans held for sale $ 80,295 $ 80,387 LHFI: Loans secured by real estate: Commercial real estate $ 1,801,382 $ 1,693,512 Construction/land/land development 593,350 530,083 Residential real estate 922,054 909,739 Total real estate 3,316,786 3,133,334 Commercial and industrial (1) 1,358,597 1,454,235 Mortgage warehouse lines of credit 503,249 627,078 Consumer 15,774 16,684 Total LHFI (2) 5,194,406 5,231,331 Less: Allowance for loan losses 62,173 64,586 LHFI, net $ 5,132,233 $ 5,166,745 ____________________________ (1) Includes $32.2 million and $105.8 million of PPP loans at March 31, 2022 and December 31, 2021, respectively. (2) Includes net deferred loan fees of $8.4 million and $9.6 million at March 31, 2022, and December 31, 2021, respectively. The Company was a participating lender in the Paycheck Protection Program ("PPP") during fiscal years 2020 and 2021. There were approximately $32.2 million and $105.8 million in PPP loans outstanding included in the Company’s commercial and industrial loan portfolio at March 31, 2022, and December 31, 2021, respectively, which included $736,000 and $3.0 million in net deferred loan fees at March 31, 2022, and December 31, 2021, respectively. PPP loans have a maximum maturity of five years and earn interest at 1%. PPP loans are fully guaranteed by the U.S. government and can be forgiven by the Small Business Administration ("SBA") if the borrower uses the proceeds to pay specified expenses. The Company believes that the vast majority of its PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the program. The Company originated $767.4 million in PPP loans and as of March 31, 2022, $731.8 million have been forgiven. Credit quality indicators. As part of the Company's commitment to managing the credit quality of its loan portfolio, management annually and periodically updates and evaluates certain credit quality indicators, which include but are not limited to (i) weighted-average risk rating of the loan portfolio, (ii) net charge-offs, (iii) level of non-performing loans, (iv) level of classified loans (defined as substandard, doubtful and loss), and (v) the general economic conditions in the cities and states in which the Company operates. The Company maintains an internal risk rating system where ratings are assigned to individual loans based on assessed risk. Loan risk ratings are the primary indicator of credit quality for the loan portfolio and are continually evaluated to ensure they are appropriate based on currently available information. The following is a summary description of the Company's internal risk ratings: • Pass (1-6) Loans within this risk rating are further categorized as follows: Minimal risk (1) Well-collateralized by cash equivalent instruments held by the Bank. Moderate risk (2) Borrowers with excellent asset quality and liquidity. Borrowers' capitalization and liquidity exceed industry norms. Borrowers in this category have significant levels of liquid assets and have a low level of leverage. Better than average risk (3) Borrowers with strong financial strength and excellent liquidity that consistently demonstrate strong operating performance. Borrowers in this category generally have a sizable net worth that can be converted into liquid assets within 12 months. Average risk (4) Borrowers with sound credit quality and financial performance, including liquidity. Borrowers are supported by sufficient cash flow coverage generated through operations across the full business cycle. Marginally acceptable risk (5) Loans generally meet minimum requirements for an acceptable loan in accordance with lending policy, but possess one or more attributes that cause the overall risk profile to be higher than the majority of newly approved loans. Watch (6) A passing loan with one or more factors that identify a potential weakness in the overall ability of the borrower to repay the loan. These weaknesses are generally mitigated by other factors that reduce the risk of delinquency or loss. • Special Mention (7) This grade is intended to be temporary and includes borrowers whose credit quality has deteriorated and is at risk of further decline. • Substandard (8) This grade includes "Substandard" loans under regulatory guidelines. Substandard loans exhibit a well-defined weakness that jeopardizes debt repayment in accordance with contractual agreements, even though the loan may be performing. These obligations are characterized by the distinct possibility that a loss may be incurred if these weaknesses are not corrected and repayment may be dependent upon collateral liquidation or secondary source of repayment. • Doubtful (9) This grade includes "Doubtful" loans under regulatory guidelines. Such loans are placed on nonaccrual status and repayment may be dependent upon collateral with no readily determinable valuation or valuations that are highly subjective in nature. Repayment for these loans is considered improbable based on currently existing facts and circumstances. • Loss (0) This grade includes "Loss" loans under regulatory guidelines. Loss loans are charged-off or written down when repayment is not expected. In connection with the review of the loan portfolio, the Company considers risk elements attributable to particular loan types or categories in assessing the quality of individual loans. The list of loans to be reviewed for possible individual evaluation consists of nonaccrual commercial loans over $100,000 with direct exposure, unsecured loans over 90 days past due, commercial loans classified substandard or worse over $100,000 with direct exposure, TDRs, consumer loans greater than $100,000 with a FICO score under 625, loans greater than $100,000 in which the borrower has filed bankruptcy, and all loans 180 days or more past due. Loans under $50,000 will be evaluated collectively in designated pools unless a loss exposure has been identified. Some additional risk elements considered by loan type include: • for commercial real estate loans, the debt service coverage ratio, operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type; • for construction, land and land development loans, the perceived feasibility of the project, including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio; • for residential mortgage loans, the borrower's ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral; and • for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, industrial or professional enterprise, the borrower's business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral. The following table reflects recorded investments in loans by credit quality indicator and origination year at March 31, 2022, excluding loans held for sale and loans accounted for at fair value. The Company had an immaterial amount of revolving loans converted to term loans at March 31, 2022. Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Commercial real estate: Pass $ 213,746 $ 547,625 $ 330,492 $ 256,055 $ 215,760 $ 185,845 $ 20,262 $ 1,769,785 Special mention — — — 3,890 8,332 1,433 — 13,655 Classified — 1,842 593 745 2,403 12,196 163 17,942 Total commercial real estate loans $ 213,746 $ 549,467 $ 331,085 $ 260,690 $ 226,495 $ 199,474 $ 20,425 $ 1,801,382 Current period gross charge-offs $ — $ — $ — $ — $ — $ 166 $ — $ 166 Current period gross recoveries — — — — — 2 — 2 Current period net charge-offs (recoveries) $ — $ — $ — $ — $ — $ 164 $ — $ 164 Construction/land/land development: Pass $ 57,089 $ 272,703 $ 92,952 $ 87,621 $ 31,925 $ 5,232 $ 35,645 $ 583,167 Special mention — — — — — — — — Classified — 418 288 1,562 1,596 1,159 5,160 10,183 Total construction/land/land development loans $ 57,089 $ 273,121 $ 93,240 $ 89,183 $ 33,521 $ 6,391 $ 40,805 $ 593,350 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Current period gross recoveries — — — — — — — — Current period net charge-offs (recoveries) $ — $ — $ — $ — $ — $ — $ — $ — Residential real estate: Pass $ 98,676 $ 273,938 $ 256,590 $ 79,379 $ 44,583 $ 95,794 $ 59,291 $ 908,251 Special mention — — 170 — — — — 170 Classified 101 723 126 2,235 2,630 7,448 370 13,633 Total residential real estate loans $ 98,777 $ 274,661 $ 256,886 $ 81,614 $ 47,213 $ 103,242 $ 59,661 $ 922,054 Current period gross charge-offs $ — $ — $ — $ — $ — $ 75 $ — $ 75 Current period gross recoveries — — — — — 6 — 6 Current period net charge-offs (recoveries) $ — $ — $ — $ — $ — $ 69 $ — $ 69 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Commercial and industrial: Pass $ 81,971 $ 355,694 $ 127,696 $ 77,612 $ 45,066 $ 35,546 $ 605,033 $ 1,328,618 Special mention 150 73 27 — 204 — 999 1,453 Classified 79 11,448 121 1,685 2,431 6,673 6,089 28,526 Total commercial and industrial loans $ 82,200 $ 367,215 $ 127,844 $ 79,297 $ 47,701 $ 42,219 $ 612,121 $ 1,358,597 Current period gross charge-offs $ — $ 724 $ — $ 865 $ 335 $ 174 $ 48 $ 2,146 Current period gross recoveries — — — 27 12 135 461 635 Current period net charge-offs (recoveries) $ — $ 724 $ — $ 838 $ 323 $ 39 $ (413) $ 1,511 Mortgage Warehouse Lines of Credit: Pass $ — $ — $ — $ — $ — $ — $ 503,249 $ 503,249 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Current period gross recoveries — — — — — — — — Current period net charge-offs (recoveries) $ — $ — $ — $ — $ — $ — $ — $ — Consumer: Pass $ 2,004 $ 5,646 $ 1,742 $ 1,237 $ 300 $ 82 $ 4,667 $ 15,678 Classified 5 20 15 8 — — 48 96 Total consumer loans $ 2,009 $ 5,666 $ 1,757 $ 1,245 $ 300 $ 82 $ 4,715 $ 15,774 Current period gross charge-offs $ — $ 6 $ 7 $ — $ 1 $ 1 $ — $ 15 Current period gross recoveries — — — — 1 4 — 5 Current period net charge-offs (recoveries) $ — $ 6 $ 7 $ — $ — $ (3) $ — $ 10 The following table reflects recorded investments in loans by credit quality indicator and origination year at December 31, 2021, excluding loans held for sale and loans accounted for at fair value. The Company had an immaterial amount of revolving loans converted to term loans at December 31, 2021. Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total Commercial real estate: Pass $ 556,218 $ 369,128 $ 278,045 $ 236,543 $ 111,308 $ 86,498 $ 22,904 $ 1,660,644 Special mention — — — 8,392 15,828 — — 24,220 Classified 2,045 625 772 2,456 299 2,288 163 8,648 Total commercial real estate loans $ 558,263 $ 369,753 $ 278,817 $ 247,391 $ 127,435 $ 88,786 $ 23,067 $ 1,693,512 Current period gross charge-offs $ — $ — $ — $ 120 $ 24 $ 26 $ — $ 170 Current period gross recoveries — — — 48 3 14 — 65 Current period net charge-offs (recoveries) $ — $ — $ — $ 72 $ 21 $ 12 $ — $ 105 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total Construction/land/land development: Pass $ 256,212 $ 102,459 $ 85,442 $ 32,128 $ 5,422 $ 553 $ 30,729 $ 512,945 Special mention — — 8,126 — 1,003 — — 9,129 Classified 443 297 272 1,677 158 — 5,162 8,009 Total construction/land/land development loans $ 256,655 $ 102,756 $ 93,840 $ 33,805 $ 6,583 $ 553 $ 35,891 $ 530,083 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Current period gross recoveries — — — — — — — — Current period net charge-offs (recoveries) $ — $ — $ — $ — $ — $ — $ — $ — Residential real estate: Pass $ 313,898 $ 252,115 $ 109,564 $ 52,515 $ 45,042 $ 59,690 $ 60,342 $ 893,166 Special mention — 174 — 421 477 — — 1,072 Classified 1,398 191 2,393 2,848 1,819 6,606 246 15,501 Total residential real estate loans $ 315,296 $ 252,480 $ 111,957 $ 55,784 $ 47,338 $ 66,296 $ 60,588 $ 909,739 Current period gross charge-offs $ — $ 7 $ 61 $ — $ — $ 10 $ — $ 78 Current period gross recoveries — 21 19 — 25 52 — 117 Current period net charge-offs (recoveries) $ — $ (14) $ 42 $ — $ (25) $ (42) $ — $ (39) Commercial and industrial: Pass $ 448,377 $ 164,910 $ 93,488 $ 64,791 $ 14,742 $ 24,014 $ 599,144 $ 1,409,466 Special mention 259 2,170 — 1,519 — — 3,752 7,700 Classified 14,378 167 2,978 3,849 3,849 3,008 8,840 37,069 Total commercial and industrial loans $ 463,014 $ 167,247 $ 96,466 $ 70,159 $ 18,591 $ 27,022 $ 611,736 $ 1,454,235 Current period gross charge-offs $ 9 $ 1,172 $ 54 $ 5 $ 1,467 $ 6,354 $ 2,862 $ 11,923 Current period gross recoveries — 18 51 3 102 204 339 717 Current period net charge-offs (recoveries) $ 9 $ 1,154 $ 3 $ 2 $ 1,365 $ 6,150 $ 2,523 $ 11,206 Mortgage Warehouse Lines of Credit: Pass $ — $ — $ — $ — $ — $ — $ 627,078 $ 627,078 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Current period gross recoveries — — — — — — — — Current period net charge-offs (recoveries) $ — $ — $ — $ — $ — $ — $ — $ — Consumer: Pass $ 6,976 $ 2,169 $ 1,467 $ 443 $ 55 $ 67 $ 5,407 $ 16,584 Classified 26 21 1 — — 1 51 100 Total consumer loans $ 7,002 $ 2,190 $ 1,468 $ 443 $ 55 $ 68 $ 5,458 $ 16,684 Current period gross charge-offs $ — $ 5 $ 29 $ 2 $ — $ 9 $ 18 $ 63 Current period gross recoveries — — 20 7 1 17 4 49 Current period net charge-offs (recoveries) $ — $ 5 $ 9 $ (5) $ (1) $ (8) $ 14 $ 14 The following tables present the Company's loan portfolio aging analysis at the dates indicated: March 31, 2022 (Dollars in thousands) 30-59 Days Past Due 60-89 Days Past Due Loans Past Due 90 Days or More Total Past Due Current Loans Total Loans Receivable Accruing Loans 90 or More Days Past Due Loans secured by real estate: Commercial real estate $ 134 $ — $ — $ 134 $ 1,801,248 $ 1,801,382 $ — Construction/land/land development 1,420 151 — 1,571 591,779 593,350 — Residential real estate 827 1,549 7,827 10,203 911,851 922,054 — Total real estate 2,381 1,700 7,827 11,908 3,304,878 3,316,786 — Commercial and industrial 1,231 172 8,340 9,743 1,348,854 1,358,597 — Mortgage warehouse lines of credit — — — — 503,249 503,249 — Consumer 76 — 26 102 15,672 15,774 — Total LHFI $ 3,688 $ 1,872 $ 16,193 $ 21,753 $ 5,172,653 $ 5,194,406 $ — December 31, 2021 (Dollars in thousands) 30-59 Days Past Due 60-89 Days Past Due Loans Past Due 90 Days or More Total Past Due Current Loans Total Loans Receivable Accruing Loans 90 or More Days Past Due Loans secured by real estate: Commercial real estate $ 22 $ — $ 197 $ 219 $ 1,693,293 $ 1,693,512 $ — Construction/land/land development — 129 52 181 529,902 530,083 — Residential real estate 2,245 352 10,331 12,928 896,811 909,739 — Total real estate 2,267 481 10,580 13,328 3,120,006 3,133,334 — Commercial and industrial 77 1,172 10,927 12,176 1,442,059 1,454,235 — Mortgage warehouse lines of credit — — — — 627,078 627,078 — Consumer 90 — 21 111 16,573 16,684 — Total LHFI $ 2,434 $ 1,653 $ 21,528 $ 25,615 $ 5,205,716 $ 5,231,331 $ — The following tables detail activity in the allowance for loan credit losses by portfolio segment. Accrued interest of $15.5 million and $20.2 million was not included in the book value for the purposes of calculating the allowance at March 31, 2022, and March 31, 2021, respectively. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Three Months Ended March 31, 2022 (Dollars in thousands) Beginning Balance Charge-offs Recoveries Provision (1) Ending Balance Average Balance Net Charge-offs to Loan Average Balance (2) Loans secured by real estate: Commercial real estate $ 13,425 $ 166 $ 2 $ 1,345 $ 14,606 $ 1,718,259 0.04 % Construction/land/land development 4,011 — — 569 4,580 565,347 — Residential real estate 6,116 75 6 (226) 5,821 907,320 0.03 Commercial and industrial 40,146 2,146 635 (2,320) 36,315 1,425,236 0.43 Mortgage warehouse lines of credit 340 — — (11) 329 423,795 — Consumer 548 15 5 (16) 522 16,462 0.25 Total $ 64,586 $ 2,402 $ 648 $ (659) $ 62,173 $ 5,056,419 0.14 (1) The $327,000 provision for credit losses net benefit on the consolidated statements of income includes a $659,000 provision for loan losses net benefit, a $147,000 provision for off-balance sheet commitments and a $185,000 provision for held to maturity securities credit losses for the three months ended March 31, 2022. (2) Annualized. Three Months Ended March 31, 2021 (Dollars in thousands) Beginning Balance Charge-offs Recoveries Provision (1) Ending Balance Average Balance Net Charge-offs to Loan Average Balance (2) Loans secured by real estate: Commercial real estate $ 15,430 $ 28 $ 3 $ 2,992 $ 18,397 $ 1,421,819 0.01 % Construction/land/land development 8,191 — — (802) 7,389 541,782 — Residential real estate 9,418 — 9 (1,133) 8,294 888,208 — Commercial and industrial 51,857 2,955 108 332 49,342 1,821,089 0.63 Mortgage warehouse lines of credit 856 — — 67 923 961,808 — Consumer 918 44 13 (96) 791 17,649 0.71 Total $ 86,670 $ 3,027 $ 133 $ 1,360 $ 85,136 $ 5,652,355 0.21 (1) The $1.4 million provision for credit losses on the consolidated statements of income includes a $1.4 million net loan loss provision, and a $52,000 provision for off-balance sheet commitments for the three months ended March 31, 2021. (2) Annualized The release of credit loss provision during the three months ended March 31, 2022, reflects improved credit loss metrics with no material adjustments to model assumptions based upon economic forecasts. The Company's credit quality profile in relation to the allowance for loan credit losses drove a release of $23.0 million in the collectively evaluated portion of the reserve at March 31, 2022, when compared to March 31, 2021, of which a $16.7 million reduction was related to qualitative factor changes across the Company's risk pools. The following tables show the recorded investment in loans by loss estimation methodology. March 31, 2022 Collectively Evaluated Individually Evaluated (Dollars in thousands) Probability of Default Fair Value of Collateral Discounted Cash Flow Total Loans secured by real estate: Commercial real estate $ 1,799,439 $ — $ 1,943 $ 1,801,382 Construction/land/land development 593,128 — 222 593,350 Residential real estate 910,986 10,602 466 922,054 Commercial and industrial 1,348,536 8,744 1,317 1,358,597 Mortgage warehouse lines of credit 503,249 — — 503,249 Consumer 15,774 — — 15,774 Total $ 5,171,112 $ 19,346 $ 3,948 $ 5,194,406 December 31, 2021 Collectively Evaluated Individually Evaluated (Dollars in thousands) Probability of Default Fair Value of Collateral Discounted Cash Flow Total Loans secured by real estate: Commercial real estate $ 1,691,269 $ 166 $ 2,077 $ 1,693,512 Construction/land/land development 529,789 — 294 530,083 Residential real estate 898,456 8,150 3,133 909,739 Commercial and industrial 1,441,204 8,547 4,484 1,454,235 Mortgage warehouse lines of credit 627,078 — — 627,078 Consumer 16,682 2 — 16,684 Total $ 5,204,478 $ 16,865 $ 9,988 $ 5,231,331 The following tables show the allowance for loan credit losses by loss estimation methodology at March 31, 2022, and December 31, 2021. March 31, 2022 Collectively Evaluated Individually Evaluated (Dollars in thousands) Probability of Default Fair Value of Collateral Discounted Cash Flow Total Loans secured by real estate: Commercial real estate $ 14,575 $ — $ 31 $ 14,606 Construction/land/land development 4,580 — — 4,580 Residential real estate 5,275 546 — 5,821 Commercial and industrial 28,567 7,745 3 36,315 Mortgage warehouse lines of credit 329 — — 329 Consumer 522 — — 522 Total $ 53,848 $ 8,291 $ 34 $ 62,173 December 31, 2021 Collectively Evaluated Individually Evaluated (Dollars in thousands) Probability of Default Fair Value of Collateral Discounted Cash Flow Total Loans secured by real estate: Commercial real estate $ 13,416 $ — $ 9 $ 13,425 Construction/land/land development 3,997 — 14 4,011 Residential real estate 5,017 19 1,080 6,116 Commercial and industrial 29,995 6,680 3,471 40,146 Mortgage warehouse lines of credit 340 — — 340 Consumer 546 2 — 548 Total $ 53,311 $ 6,701 $ 4,574 $ 64,586 Collateral-dependent loans consist primarily of commercial real estate and commercial and industrial loans. These loans are individually evaluated when foreclosure is probable or when the repayment of the loan is expected to be provided substantially through the operation or sale of the underlying collateral and, in the case of commercial and industrial loans secured by equipment, the fair value of the collateral is estimated by third-party valuation experts. Loan balances are charged down to the underlying collateral value when they are deemed uncollectible. Note that the Company did not elect to use the collateral maintenance agreement practical expedient available under CECL. Nonaccrual LHFI were as follows: Nonaccrual With No Nonaccrual (Dollars in thousands) Loans secured by real estate: March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 Commercial real estate $ 177 $ 453 $ 233 $ 512 Construction/land/land development 110 52 256 338 Residential real estate 7,617 7,684 11,609 11,647 Total real estate 7,904 8,189 12,098 12,497 Commercial and industrial 743 58 8,987 12,306 Consumer — — 96 100 Total nonaccrual loans $ 8,647 $ 8,247 $ 21,181 $ 24,903 All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Subsequent receipts on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. At March 31, 2022, the Company had $1,000 in funding commitments for which the terms have been modified in TDRs. For the three months ended March 31, 2022 and 2021, gross interest income, that would have been recorded had the nonaccruing loans been current in accordance with their original terms, was $245,000 and $341,000, respectively. No interest income was recorded on these loans while they were considered nonaccrual during the three months ended March 31, 2022 and 2021. The Company elects the fair value option for recording residential mortgage loans held for sale in accordance with U.S. GAAP. The Company had $2.7 million of nonaccrual mortgage loans held for sale that were recorded using the fair value option election at March 31, 2022, compared to $1.8 million at December 31, 2021. Loans classified as TDRs, excluding the impact of forbearances granted due to COVID-19, were as follows: (Dollars in thousands) March 31, 2022 December 31, 2021 TDRs Nonaccrual TDRs $ 3,709 $ 4,064 Performing TDRs 3,338 2,763 Total $ 7,047 $ 6,827 The tables below summarize loans classified as TDRs by loan and concession type during the dates indicated. Three Months Ended March 31, 2022 (Dollars in thousands) Number of Loans Restructured Pre-Modification Recorded Balance Term Concessions Interest Rate Concessions Combination of Term and Rate Concessions Total Modifications Commercial and industrial 2 $ 664 $ 664 $ — $ — $ 664 Total 2 $ 664 $ 664 $ — $ — $ 664 |