NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
General
First Community Bankshares, Inc. (the “Company”), is a financial holding company incorporated under the laws of the Commonwealth of Virginia. The Company’s principal executive office is located in Bluefield, Virginia. The Company provides banking products and services to individual and commercial customers through its wholly owned subsidiary First Community Bank (the “Bank”), a Virginia-chartered banking institution founded in 1874. The Bank offers wealth management and investment advice through its Trust Division and wholly owned subsidiary First Community Wealth Management, Inc. (“FCWM”). Unless the context suggests otherwise, the terms “First Community,” “Company,” “we,” “our,” and “us” refer to First Community Bankshares, Inc. and its subsidiaries as a consolidated entity.
Principles of Consolidation
The Company’s accounting and reporting policies conform with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices in the banking industry. The consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries and eliminate all intercompany balances and transactions. The Company operates in one business segment, Community Banking, which consists of all operations, including commercial and consumer banking, lending activities, and wealth management. Operating results for interim periods are not necessarily indicative of results that may be expected for other interim periods or for the full year. In management’s opinion, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments, including normal recurring accruals, and disclosures for a fair presentation.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2023. The condensed consolidated balance sheet as of December 31, 2022, has been derived from the audited consolidated financial statements.
Reclassifications
Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow.
Use of Estimates
Preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that require the most subjective or complex judgments relate to fair value measurements, investment securities, the allowance for loan losses, goodwill and other intangible assets, and income taxes. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.
Significant Accounting Policies
The Company’s significant accounting policies are included in Note 1, “Basis of Presentation and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2022 Form 10-K.
Allowance for Credit Losses (“ACL”)
On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU applies to all financial assets measured at amortized cost and off balance sheet credit exposures, including loans, investment securities, and unfunded commitments.
ACL – Investment Securities
Each quarter, the Company evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. The nature of the collateral is considered along with potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses in the Statement of Income and establish an allowance for credit losses on the Balance Sheet.
The Company excludes the accrued interest receivable from the amortized cost basis in measuring expected credit losses on the investment securities and does not record an allowance for credit losses on accrued interest receivable. As of March 31, 2023, the accrued interest receivable for investment securities available for sale was $1.01 million.
The Company’s estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. The Company does
not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Nonpayment of the amortized cost basis is
not expected to be
zero solely on the basis of the current value of collateral securing the security but, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates,
third-party guarantees, credit ratings, interest rate change since purchase, volatility of the security’s fair value and historical loss information for financial assets securitized with similar collateral. The Company performed an analysis that determined that the following securities have a
zero expected credit loss: U.S. Treasury Securities, Agency-Backed Securities including Government National Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Bank (“FHLB”), Federal Farm Credit Banks (“FFCB”) and Small Business Administration (“SBA”). All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United States Government or
one of its agencies. These securities are included in Government-Sponsored Entities Debt and Mortgage-Backed Securities line items in the Investment Securities footnote. Municipal securities and all other securities that do
not have a
zero expected credit loss will be evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value.
ACL – Loans
The Company reviews our allowance for credit losses quarterly to determine if it is sufficient to absorb expected loan losses in the portfolio. This determination requires management to make significant estimates and assumptions. While the Company uses its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities towards loan classifications. These uncertainties may result in material changes to the allowance for credit losses in the near term; however, the amount of the change cannot reasonably be estimated.
The ACL is an estimate of losses that will result from the inability of borrowers to make required loan payments. The Company established the incremental increase in the ACL at the adoption through retained earnings and subsequent adjustments will be made through a provision for credit losses charged to earnings. Loans charged off are recorded against the ACL and subsequent recoveries increase the ACL when they are recognized.
A systematic methodology is used to determine ACL for loans held for investment and certain off-balance sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. The Company considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of its ACL involves a high degree of judgement and reflects management’s best estimate within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management’s current estimate of expected credit losses. The Company’s ACL is calculated using collectively evaluated and individually evaluated loans.
The Company collectively evaluates loans that share similar risk characteristics. In general, loans are segmented by loan purpose. The Company collectively evaluates loans within the following consumer and commercial segments: Loans secured by 1-4 Family Properties, Home Equity Lines of Credit (“HELOC”), Owner Occupied Construction Loans, Consumer Loans, Commercial and Industrial, Multi-family, Non-farm/Non-residential Property, Commercial Construction/A&D/other Land Loans, Agricultural Loans, Credit Card Loans, Loans Secured by Farmland, and Other Consumer Loans (Overdrafts).
Risk characteristics of residential real estate loans which include loans secured by Single family properties, HELOC, and Owner occupied construction loans are dependent upon individual borrowers who are affected by changes in general economic conditions, real estate valuations, and the demand for housing. Commercial and Industrial, Multi-family residential, Non-farm/non-residential, Agricultural, and Loans secured by Farmland are similar in that they are generally dependent upon the borrower's internal cash flow from operations to service the debt and changes in general economic conditions. Commercial construction, Development, and other land loans, Consumer, and Other consumer loans (open pool) are similar in that they are dependent on changes in general economic conditions.
For collectively evaluated loans, the Company uses a combination of discounted cash flow and remaining life to estimate expected credit losses. During 2022, the Company changed third party model providers which necessitated a change from remaining life to open pool for the portfolios noted above. The change in method was not quantitatively significant. In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure its and its peers' historical credit losses experience with similar risk characteristics within the segments over an economic cycle. The Company reviewed the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Also considered were further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For the majority of the segments of collectively evaluated loans, the Company incorporated at least one macroeconomic driver using a statistical regression modeling methodology.
The Company considers forward-looking information in estimated expected credit losses. The Company subscribes to a third-party service which provides summary detail of dozens of economic forecasts. Using that information and other publicly available economic forecasts, management determines the economic variables to use for the one-year reasonable and supportable forecast period. Management has determined that the forecast period is consistent with how the Company has historically forecasted for its profitability planning and capital management. Management has evaluated the appropriateness of the reasonable and supportable forecast for the current period along with the inputs used in the estimation of expected credit losses. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to historical loss information over eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.
Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance sheet credit exposures, The Company considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation. Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending policies and procedures, 2) changes in economic conditions, 3) changes in portfolio nature and volume, 4) changes in management, 5) changes in past due loans, 6) changes in the quality of the Company’s credit review system, 7) changes in the value of underlying collateral, 8) the effect of concentrations of credit, and 9) the effect of other external factors.
When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another pool or should be individually evaluated. The Company currently maintains a net book balance threshold of $500,000 for individually-evaluated loans. Generally, individually-evaluated loans are on nonaccrual status. Based on the threshold above, consumer loans will generally remain in pools unless they meet the dollar threshold and foreclosure is probable. The expected credit losses on individually-evaluated loans will be estimated based on discounted cash flow analysis unless the loan meets the criteria for use of the fair value of collateral, either by virtue of an expected foreclosure or through meeting the definition of collateral-dependent. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss insofar as their credit profile improves and that the repayment terms were not considered to be unique to the asset.
The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of March 31, 2023, the accrued interest receivable for loans was $7.64 million.
Effective January 1, 2023, the Company adopted Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. As noted, the allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made at the time of a modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. Additionally, the Company may allow a loan to go interest only for a specified period of time.
The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The estimates are determined based on the likelihood of funding during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded balances are based on the same assumptions as used to estimate credit losses on existing funded loans. The expected losses associated with these exposures within the unfunded portion of the loans will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that a majority of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of March 31, 2023, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $964 thousand.
Recent Accounting Standards
Standards Adopted in 2023
In March 2022, the Financial Accounting Standards Board issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This new accounting topic provided accounting guidance for troubled debt restructuring (TDR) and write-offs, effective January 1, 2023. The amendments eliminated TDR accounting guidance for issuers that adopted ASU 2016-13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs. We adopted this standard, effective January 1, 2023. The updated guidance had no material impact on our Consolidated Financial Statements.
The Company does not expect other recent accounting standards issued by the FASB or other standards-setting bodies to have a material impact on the consolidated financial statements.
Note 2. Divestitures
On September 16, 2022, the Company completed the sale of its Emporia, Virginia branch to Benchmark Community Bank (the "Emporia Branch Sale"). The sale included the branch real estate, certain personal property, and all deposits associated with the branch. There were no loans included in the transaction. Benchmark paid a deposit premium of two percent for certain deposits. In addition, Benchmark paid $1.50 million for branch real estate and certain personal property. Total deposits acquired by Benchmark totaled $61.05 million. The deposits were composed of $18.38 million in demand, $28.46 million in interest-bearing demand, $11.52 million in savings, and $2.69 million in time deposits. The Company recognized a gain of $1.66 million from the Emporia Branch Sale.
On November 18, 2022, the Company and NC-based Surrey Bancorp ("Surrey"), parent company of Surrey Bank & Trust, jointly announced their entry into an agreement and plan of merger pursuant to which First Community would acquire Surrey and its wholly-owned bank subsidiary, Surrey Bank & Trust. The Company completed its acquisition of Surrey Bancorp and its subsidiary, Surrey Bank & Trust, on April 21, 2023. At closing, Surrey had approximately $468 million in assets, $253 million in loans, and $405 million in deposits.
Note 3. Debt Securities
There was no allowance for credit losses for debt securities as of March 31, 2023; therefore, it is not presented in the table below. The following tables present the amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains and losses, as of the dates indicated:
| | March 31, 2023 | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | Cost | | | Gains | | | Losses | | | Value | |
(Amounts in thousands) | | | | | | | | | | | | | | | | |
U.S. Agency securities | | $ | 1,500 | | | $ | - | | | $ | (9 | ) | | $ | 1,491 | |
U.S. Treasury Notes | | | 174,052 | | | | 3 | | | | (3,369 | ) | | | 170,686 | |
Municipal securities | | | 23,012 | | | | 25 | | | | (80 | ) | | | 22,957 | |
Corporate notes | | | 31,543 | | | | - | | | | (1,764 | ) | | | 29,779 | |
Agency mortgage-backed securities | | | 94,780 | | | | 4 | | | | (11,428 | ) | | | 83,356 | |
Total | | $ | 324,887 | | | $ | 32 | | | $ | (16,650 | ) | | $ | 308,269 | |
| | December 31, 2022 | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | Cost | | | Gains | | | Losses | | | Value | |
(Amounts in thousands) | | | | | | | | | | | | | | | | |
U.S. Agency securities | | $ | 1,500 | | | $ | — | | | $ | (15 | ) | | $ | 1,485 | |
U.S. Treasury Notes | | | 161,617 | | | | - | | | | (4,353 | ) | | | 157,264 | |
Municipal securities | | | 23,480 | | | | 21 | | | | (192 | ) | | | 23,309 | |
Corporate notes | | | 37,046 | | | | — | | | | (2,189 | ) | | | 34,857 | |
Agency mortgage-backed securities | | | 96,480 | | | | 3 | | | | (13,049 | ) | | | 83,434 | |
Total | | $ | 320,123 | | | $ | 24 | | | $ | (19,798 | ) | | $ | 300,349 | |
The following table presents the amortized cost and aggregate fair value of available-for-sale debt securities by contractual maturity, as of the date indicated. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
| | March 31, 2023 | |
| | Amortized | | | | | |
(Amounts in thousands) | | Cost | | | Fair Value | |
Available-for-sale debt securities | | | | | | | | |
Due within one year | | $ | 157,230 | | | $ | 154,233 | |
Due after one year but within five years | | | 70,343 | | | | 68,145 | |
Due after five years but within ten years | | | 2,534 | | | | 2,535 | |
| | | 230,107 | | | | 224,913 | |
Agency mortgage-backed securities | | | 94,780 | | | | 83,356 | |
Total debt securities available for sale | | $ | 324,887 | | | $ | 308,269 | |
The following tables present the fair values and unrealized losses for available-for-sale debt securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated:
| | March 31, 2023 | |
| | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
| | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
(Amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Agency securities | | $ | 1,491 | | | $ | (9 | ) | | $ | - | | | $ | - | | | $ | 1,491 | | | $ | (9 | ) |
U.S. Treasury Notes | | | 54,208 | | | | (554 | ) | | | 106,906 | | | | (2,815 | ) | | | 161,114 | | | | (3,369 | ) |
Municipal securities | | | 7,463 | | | | (60 | ) | | | 1,169 | | | | (20 | ) | | | 8,632 | | | | (80 | ) |
Corporate notes | | | 2,972 | | | | (28 | ) | | | 26,807 | | | | (1,736 | ) | | | 29,779 | | | | (1,764 | ) |
Agency mortgage-backed securities | | | 10,009 | | | | (513 | ) | | | 73,212 | | | | (10,915 | ) | | | 83,221 | | | | (11,428 | ) |
Total | | $ | 76,143 | | | $ | (1,164 | ) | | $ | 208,094 | | | $ | (15,486 | ) | | $ | 284,237 | | | $ | (16,650 | ) |
| | December 31, 2022 | |
| | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
| | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
(Amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Agency securities | | $ | 1,485 | | | $ | (15 | ) | | $ | — | | | $ | — | | | $ | 1,485 | | | $ | (15 | ) |
U.S. Treasury Notes | | | 157,264 | | | | (4,353 | ) | | | — | | | | — | | | | 157,264 | | | | (4,353 | ) |
Municipal securities | | | 12,347 | | | | (192 | ) | | | — | | | | — | | | | 12,347 | | | | (192 | ) |
Corporate notes | | | 32,368 | | | | (2,172 | ) | | | 2,489 | | | | (17 | ) | | | 34,857 | | | | (2,189 | ) |
Agency mortgage-backed securities | | | 64,993 | | | | (8,824 | ) | | | 18,305 | | | | (4,225 | ) | | | 83,298 | | | | (13,049 | ) |
Total | | $ | 268,457 | | | $ | (15,556 | ) | | $ | 20,794 | | | $ | (4,242 | ) | | $ | 289,251 | | | $ | (19,798 | ) |
There were 100 individual debt securities in an unrealized loss position as of March 31, 2023, and the combined depreciation in value represented 5.40% of the debt securities portfolio. There were 113 individual debt securities in an unrealized loss position as of December 31, 2022, and their combined depreciation in value represented 6.59% of the debt securities portfolio.
Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the investments. All of the U.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. All debt securities available for sale in an unrealized loss position as of March 31, 2023, continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities. See Note 1 – Basis of Presentation for further discussion.
Management continues to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to earnings as a provision for credit losses in such periods.
A gross realized gain from the sale of available-for-sale debt securities of $7 thousand was recognized for the three months ended March 31, 2023; no gross realized gains and losses were realized for the same period in 2022 .
The carrying amount of securities pledged for various purposes totaled $21.07 million as of March 31, 2023, and $22.43 million as of December 31, 2022.
Note 4. Loans
The Company groups loans held for investment into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Customer overdrafts reclassified as loans totaled $1.25 million as of March 31, 2023, and $1.80 million as of December 31, 2022. Deferred loan fees, net of loan costs, totaled $3.85 million as of March 31, 2023, and $8.81 million as of December 31, 2022.
In accordance with the adoption of ASU 2016-13, the table below reflects the loan portfolio at the amortized cost basis to include net deferred loan fees of $3.85 million and $8.81 million and unamortized discount related to loans acquired of $8.31 million and $3.80 million for March 31, 2023, and December 31, 2022, respectively. Accrued interest receivable (AIR) of $7.64 million as of March 31, 2023, and $7.94 million as of December 31, 2022, is accounted for separately and reported in Interest Receivable on the Consolidated Balance Sheet.
| | March 31, 2023 | | | December 31, 2022 | |
(Amounts in thousands) | | Amount | | | Percent | | | Amount | | | Percent | |
Loans held for investment | | | | | | | | | | | | | | | | |
Commercial loans | | | | | | | | | | | | | | | | |
Construction, development, and other land | | $ | 115,023 | | | | 4.81 | % | | $ | 117,174 | | | | 4.88 | % |
Commercial and industrial | | | 151,293 | | | | 6.33 | % | | | 150,428 | | | | 6.27 | % |
Multi-family residential | | | 148,746 | | | | 6.23 | % | | | 148,026 | | | | 6.17 | % |
Single family non-owner occupied | | | 207,632 | | | | 8.69 | % | | | 206,121 | | | | 8.59 | % |
Non-farm, non-residential | | | 793,229 | | | | 33.21 | % | | | 787,703 | | | | 32.82 | % |
Agricultural | | | 12,042 | | | | 0.50 | % | | | 12,032 | | | | 0.50 | % |
Farmland | | | 12,137 | | | | 0.51 | % | | | 11,779 | | | | 0.49 | % |
Total commercial loans | | | 1,440,102 | | | | 60.28 | % | | | 1,433,263 | | | | 59.72 | % |
Consumer real estate loans | | | | | | | | | | | | | | | | |
Home equity lines | | | 73,762 | | | | 3.09 | % | | | 75,642 | | | | 3.15 | % |
Single family owner occupied | | | 727,202 | | | | 30.44 | % | | | 734,540 | | | | 30.61 | % |
Owner occupied construction | | | 10,276 | | | | 0.43 | % | | | 10,366 | | | | 0.43 | % |
Total consumer real estate loans | | | 811,240 | | | | 33.96 | % | | | 820,548 | | | | 34.19 | % |
Consumer and other loans | | | | | | | | | | | | | | | | |
Consumer loans | | | 136,310 | | | | 5.71 | % | | | 144,582 | | | | 6.02 | % |
Other | | | 1,245 | | | | 0.05 | % | | | 1,804 | | | | 0.07 | % |
Total consumer and other loans | | | 137,555 | | | | 5.76 | % | | | 146,386 | | | | 6.09 | % |
Total loans held for investment, net of unearned income | | $ | 2,388,897 | | | | 100.00 | % | | $ | 2,400,197 | | | | 100.00 | % |
Note 5. Credit Quality
The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The general characteristics of each risk grade are as follows:
| ● | Pass -- This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include capital strength, earnings stability, liquidity, leverage, and industry conditions. |
| ● | Special Mention -- This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen. |
| ● | Substandard -- This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. These loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business to meet repayment terms. |
| ● | Doubtful -- This grade is assigned to loans that have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined. |
| ● | Loss -- This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future. |
The following table presents the recorded investment of the loan portfolio, by loan class and credit quality, as of the dates indicated:
| | March 31, 2023 | |
| | | | | | Special | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Pass | | | Mention | | | Substandard | | | Doubtful | | | Loss | | | Total | |
Commercial loans | | | | | | | | | | | | | | | | | | | | | | | | |
Construction, development, and other land | | $ | 114,002 | | | $ | 323 | | | $ | 698 | | | $ | - | | | $ | - | | | $ | 115,023 | |
Commercial and industrial | | | 146,749 | | | | 2,795 | | | | 1,749 | | | | - | | | | - | | | | 151,293 | |
Multi-family residential | | | 144,909 | | | | 3,629 | | | | 208 | | | | - | | | | - | | | | 148,746 | |
Single family non-owner occupied | | | 197,731 | | | | 2,006 | | | | 7,895 | | | | - | | | | - | | | | 207,632 | |
Non-farm, non-residential | | | 770,509 | | | | 10,865 | | | | 11,855 | | | | - | | | | - | | | | 793,229 | |
Agricultural | | | 11,896 | | | | 44 | | | | 102 | | | | - | | | | - | | | | 12,042 | |
Farmland | | | 10,257 | | | | 560 | | | | 1,320 | | | | - | | | | - | | | | 12,137 | |
Consumer real estate loans | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity lines | | | 71,030 | | | | 198 | | | | 2,534 | | | | - | | | | - | | | | 73,762 | |
Single family owner occupied | | | 700,431 | | | | 1,875 | | | | 24,896 | | | | - | | | | - | | | | 727,202 | |
Owner occupied construction | | | 10,116 | | | | - | | | | 160 | | | | - | | | | - | | | | 10,276 | |
Consumer and other loans | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans | | | 133,417 | | | | 10 | | | | 2,883 | | | | - | | | | - | | | | 136,310 | |
Other | | | 1,245 | | | | - | | | | - | | | | - | | | | - | | | | 1,245 | |
Total loans | | $ | 2,312,292 | | | $ | 22,305 | | | $ | 54,300 | | | $ | - | | | $ | - | | | $ | 2,388,897 | |
| | December 31, 2022 | |
| | | | | | Special | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Pass | | | Mention | | | Substandard | | | Doubtful | | | Loss | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial loans | | | | | | | | | | | | | | | | | | | | | | | | |
Construction, development, and other land | | $ | 115,972 | | | $ | 853 | | | $ | 349 | | | $ | - | | | $ | - | | | $ | 117,174 | |
Commercial and industrial | | | 147,543 | | | | 920 | | | | 1,965 | | | | - | | | | - | | | | 150,428 | |
Multi-family residential | | | 143,859 | | | | 3,946 | | | | 221 | | | | - | | | | - | | | | 148,026 | |
Single family non-owner occupied | | | 195,775 | | | | 2,303 | | | | 8,043 | | | | - | | | | - | | | | 206,121 | |
Non-farm, non-residential | | | 761,154 | | | | 14,903 | | | | 11,646 | | | | - | | | | - | | | | 787,703 | |
Agricultural | | | 11,722 | | | | 47 | | | | 263 | | | | - | | | | - | | | | 12,032 | |
Farmland | | | 9,868 | | | | 573 | | | | 1,338 | | | | - | | | | - | | | | 11,779 | |
Consumer real estate loans | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity lines | | | 72,927 | | | | 288 | | | | 2,427 | | | | - | | | | - | | | | 75,642 | |
Single family owner occupied | | | 706,952 | | | | 1,958 | | | | 25,630 | | | | - | | | | - | | | | 734,540 | |
Owner occupied construction | | | 10,204 | | | | - | | | | 162 | | | | - | | | | - | | | | 10,366 | |
Consumer and other loans | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans | | | 141,551 | | | | 11 | | | | 3,020 | | | | - | | | | - | | | | 144,582 | |
Other | | | 1,804 | | | | - | | | | - | | | | - | | | | - | | | | 1,804 | |
Total loans | | $ | 2,319,331 | | | $ | 25,802 | | | $ | 55,064 | | | $ | - | | | $ | - | | | $ | 2,400,197 | |
The following tables present the amortized cost basis and current period gross write-offs of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated:
(Amounts in thousands) | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
Balance at March 31, 2023 | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving | | | Total | |
Construction, development and other land | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 1,395 | | | $ | 62,109 | | | $ | 36,248 | | | $ | 4,350 | | | $ | 2,742 | | | $ | 5,780 | | | $ | 1,378 | | | $ | 114,002 | |
Special Mention | | | - | | | | - | | | | - | | | | 238 | | | | - | | | | 85 | | | | - | | | | 323 | |
Substandard | | | - | | | | - | | | | 225 | | | | - | | | | 205 | | | | 268 | | | | - | | | | 698 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total construction, development, and other land | | $ | 1,395 | | | $ | 62,109 | | | $ | 36,473 | | | $ | 4,588 | | | $ | 2,947 | | | $ | 6,133 | | | $ | 1,378 | | | $ | 115,023 | |
Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 13 | | | $ | - | | | $ | - | | | $ | 13 | |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 8,914 | | | $ | 64,754 | | | $ | 21,001 | | | $ | 11,423 | | | $ | 6,813 | | | $ | 14,684 | | | $ | 19,160 | | | $ | 146,749 | |
Special Mention | | | - | | | | 1,144 | | | | 17 | | | | 15 | | | | 321 | | | | 601 | | | | 697 | | | | 2,795 | |
Substandard | | | - | | | | 211 | | | | 163 | | | | 97 | | | | 604 | | | | 674 | | | | - | | | | 1,749 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total commercial and industrial | | $ | 8,914 | | | $ | 66,109 | | | $ | 21,181 | | | $ | 11,535 | | | $ | 7,738 | | | $ | 15,959 | | | $ | 19,857 | | | $ | 151,293 | |
Current period gross write-offs | | $ | - | | | $ | - | | | $ | 59 | | | $ | - | | | $ | 32 | | | $ | - | | | $ | - | | | $ | 91 | |
Multi-family residential | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 463 | | | $ | 44,906 | | | $ | 20,587 | | | $ | 30,849 | | | $ | 3,699 | | | $ | 41,118 | | | $ | 3,287 | | | $ | 144,909 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,629 | | | | - | | | | 3,629 | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | 208 | | | | - | | | | 208 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total multi-family residential | | $ | 463 | | | $ | 44,906 | | | $ | 20,587 | | | $ | 30,849 | | | $ | 3,699 | | | $ | 44,955 | | | $ | 3,287 | | | $ | 148,746 | |
Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Non-farm, non-residential | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 15,917 | | | $ | 221,536 | | | $ | 147,370 | | | $ | 112,918 | | | $ | 50,646 | | | $ | 210,888 | | | $ | 11,234 | | | $ | 770,509 | |
Special Mention | | | - | | | | - | | | | 1,905 | | | | 845 | | | | - | | | | 8,103 | | | | 12 | | | | 10,865 | |
Substandard | | | - | | | | 88 | | | | 1,110 | | | | 536 | | | | 3,609 | | | | 6,317 | | | | 195 | | | | 11,855 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total non-farm, non-residential | | $ | 15,917 | | | $ | 221,624 | | | $ | 150,385 | | | $ | 114,299 | | | $ | 54,255 | | | $ | 225,308 | | | $ | 11,441 | | | $ | 793,229 | |
Current period gross write-offs | | $ | - | | | $ | 8 | | | $ | - | | | $ | - | | | $ | - | | | $ | 2 | | | $ | - | | | $ | 10 | |
Agricultural | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 1,650 | | | $ | 5,514 | | | $ | 2,911 | | | $ | 885 | | | $ | 295 | | | $ | 183 | | | $ | 458 | | | $ | 11,896 | |
Special Mention | | | - | | | | - | | | | 31 | | | | 12 | | | | - | | | | 1 | | | | - | | | | 44 | |
Substandard | | | - | | | | - | | | | 35 | | | | - | | | | 46 | | | | 21 | | | | - | | | | 102 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total agricultural | | $ | 1,650 | | | $ | 5,514 | | | $ | 2,977 | | | $ | 897 | | | $ | 341 | | | $ | 205 | | | $ | 458 | | | $ | 12,042 | |
Current period gross write-offs | | $ | - | | | $ | 59 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 59 | |
Farmland | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 823 | | | $ | 640 | | | $ | 597 | | | $ | 777 | | | $ | 71 | | | $ | 6,662 | | | $ | 687 | | | $ | 10,257 | |
Special Mention | | | - | | | | - | | | | 108 | | | | 12 | | | | - | | | | 440 | | | | - | | | | 560 | |
Substandard | | | - | | | | - | | | | - | | | | 12 | | | | - | | | | 1,308 | | | | - | | | | 1,320 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total farmland | | $ | 823 | | | $ | 640 | | | $ | 705 | | | $ | 801 | | | $ | 71 | | | $ | 8,410 | | | $ | 687 | | | $ | 12,137 | |
Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
(Amounts in thousands) | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
Balance at March 31, 2023 | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving | | | Total | |
Home equity lines | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 85 | | | $ | 976 | | | $ | 97 | | | $ | 143 | | | $ | - | | | $ | 4,288 | | | $ | 65,441 | | | $ | 71,030 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 43 | | | | 155 | | | | 198 | |
Substandard | | | - | | | | 13 | | | | - | | | | 27 | | | | 35 | | | | 1,134 | | | | 1,325 | | | | 2,534 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total home equity lines | | $ | 85 | | | $ | 989 | | | $ | 97 | | | $ | 170 | | | $ | 35 | | | $ | 5,465 | | | $ | 66,921 | | | $ | 73,762 | |
Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 9 | | | $ | - | | | $ | 9 | |
Single family Mortgage | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 16,097 | | | $ | 157,381 | | | $ | 233,020 | | | $ | 203,425 | | | $ | 48,065 | | | $ | 239,664 | | | $ | 510 | | | $ | 898,162 | |
Special Mention | | | - | | | | - | | | | 349 | | | | 90 | | | | 124 | | | | 3,318 | | | | - | | | | 3,881 | |
Substandard | | | - | | | | 455 | | | | 1,314 | | | | 866 | | | | 1,226 | | | | 28,930 | | | | - | | | | 32,791 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total single family owner and non-owner occupied | | $ | 16,097 | | | $ | 157,836 | | | $ | 234,683 | | | $ | 204,381 | | | $ | 49,415 | | | $ | 271,912 | | | $ | 510 | | | $ | 934,834 | |
Current period gross write-offs | | $ | - | | | $ | - | | | $ | 31 | | | $ | - | | | $ | - | | | $ | 58 | | | $ | - | | | $ | 89 | |
Owner occupied construction | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 159 | | | $ | 6,979 | | | $ | 2,535 | | | $ | - | | | $ | 14 | | | $ | 429 | | | $ | - | | | $ | 10,116 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Substandard | | | - | | | | - | | | | - | | | | 159 | | | | - | | | | 1 | | | | - | | | | 160 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total owner occupied construction | | $ | 159 | | | $ | 6,979 | | | $ | 2,535 | | | $ | 159 | | | $ | 14 | | | $ | 430 | | | $ | - | | | $ | 10,276 | |
Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Consumer loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 10,475 | | | $ | 62,509 | | | $ | 32,019 | | | $ | 13,115 | | | $ | 6,243 | | | $ | 2,555 | | | $ | 7,746 | | | $ | 134,662 | |
Special Mention | | | - | | | | - | | | | 4 | | | | - | | | | 5 | | | | - | | | | 1 | | | | 10 | |
Substandard | | | 28 | | | | 892 | | | | 933 | | | | 459 | | | | 298 | | | | 213 | | | | 60 | | | | 2,883 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total consumer loans | | $ | 10,503 | | | $ | 63,401 | | | $ | 32,956 | | | $ | 13,574 | | | $ | 6,546 | | | $ | 2,768 | | | $ | 7,807 | | | $ | 137,555 | |
Current period gross write-offs | | $ | 200 | | | $ | 1,031 | | | $ | 802 | | | $ | 136 | | | $ | 78 | | | $ | 14 | | | $ | 38 | | | $ | 2,299 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
Balance at March 31, 2023 | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving | | | Total | |
Total Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 55,978 | | | $ | 627,304 | | | $ | 496,385 | | | $ | 377,885 | | | $ | 118,588 | | | $ | 526,251 | | | $ | 109,901 | | | $ | 2,312,292 | |
Special Mention | | | - | | | | 1,144 | | | | 2,414 | | | | 1,212 | | | | 450 | | | | 16,220 | | | | 865 | | | | 22,305 | |
Substandard | | | 28 | | | | 1,659 | | | | 3,780 | | | | 2,156 | | | | 6,023 | | | | 39,074 | | | | 1,580 | | | | 54,300 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | $ | 56,006 | | | $ | 630,107 | | | $ | 502,579 | | | $ | 381,253 | | | $ | 125,061 | | | $ | 581,545 | | | $ | 112,346 | | | $ | 2,388,897 | |
Current period gross write-offs | | $ | 200 | | | $ | 1,098 | | | $ | 892 | | | $ | 136 | | | $ | 123 | | | $ | 83 | | | $ | 38 | | | $ | 2,570 | |
(Amounts in thousands) | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
Balance at December 31, 2022 | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Prior | | | Revolving | | | Total | |
Construction, development | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
and other land | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 58,770 | | | $ | 39,995 | | | $ | 4,602 | | | $ | 3,050 | | | $ | 2,485 | | | $ | 5,608 | | | $ | 1,462 | | | $ | 115,972 | |
Special Mention | | | - | | | | 225 | | | | - | | | | - | | | | 94 | | | | 534 | | | | - | | | | 853 | |
Substandard | | | - | | | | - | | | | 267 | | | | 71 | | | | 11 | | | | - | | | | - | | | | 349 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total construction, development, and other land | | $ | 58,770 | | | $ | 40,220 | | | $ | 4,869 | | | $ | 3,121 | | | $ | 2,590 | | | $ | 6,142 | | | $ | 1,462 | | | $ | 117,174 | |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 69,678 | | | $ | 23,746 | | | $ | 12,047 | | | $ | 7,729 | | | $ | 9,121 | | | $ | 8,890 | | | $ | 16,332 | | | $ | 147,543 | |
Special Mention | | | 227 | | | | 20 | | | | 21 | | | | 367 | | | | 185 | | | | 1 | | | | 99 | | | | 920 | |
Substandard | | | 130 | | | | 112 | | | | 114 | | | | 620 | | | | 192 | | | | 797 | | | | - | | | | 1,965 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total commercial and industrial | | $ | 70,035 | | | $ | 23,878 | | | $ | 12,182 | | | $ | 8,716 | | | $ | 9,498 | | | $ | 9,688 | | | $ | 16,431 | | | $ | 150,428 | |
Multi-family residential | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 45,261 | | | $ | 20,881 | | | $ | 31,087 | | | $ | 3,733 | | | $ | 1,328 | | | $ | 41,063 | | | $ | 506 | | | $ | 143,859 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,946 | | | | - | | | | 3,946 | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | 221 | | | | - | | | | 221 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total multi-family residential | | $ | 45,261 | | | $ | 20,881 | | | $ | 31,087 | | | $ | 3,733 | | | $ | 1,328 | | | $ | 45,230 | | | $ | 506 | | | $ | 148,026 | |
Non-farm, non-residential | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 218,595 | | | $ | 145,675 | | | $ | 114,840 | | | $ | 52,575 | | | $ | 35,564 | | | $ | 185,448 | | | $ | 8,457 | | | $ | 761,154 | |
Special Mention | | | - | | | | 1,927 | | | | 852 | | | | 1,193 | | | | 2,708 | | | | 8,076 | | | | 147 | | | | 14,903 | |
Substandard | | | - | | | | 1,267 | | | | 675 | | | | 2,509 | | | | 1,531 | | | | 5,664 | | | | - | | | | 11,646 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total non-farm, non-residential | | $ | 218,595 | | | $ | 148,869 | | | $ | 116,367 | | | $ | 56,277 | | | $ | 39,803 | | | $ | 199,188 | | | $ | 8,604 | | | $ | 787,703 | |
Agricultural | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 6,244 | | | $ | 3,225 | | | $ | 1,003 | | | $ | 376 | | | $ | 154 | | | $ | 214 | | | $ | 506 | | | $ | 11,722 | |
Special Mention | | | - | | | | 33 | | | | 14 | | | | - | | | | - | | | | - | | | | - | | | | 47 | |
Substandard | | | 124 | | | | 37 | | | | 1 | | | | 66 | | | | 24 | | | | 11 | | | | - | | | | 263 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total agricultural | | $ | 6,368 | | | $ | 3,295 | | | $ | 1,018 | | | $ | 442 | | | $ | 178 | | | $ | 225 | | | $ | 506 | | | $ | 12,032 | |
Farmland | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 646 | | | $ | 713 | | | $ | 796 | | | $ | 77 | | | $ | 869 | | | $ | 6,150 | | | $ | 617 | | | $ | 9,868 | |
Special Mention | | | - | | | | 109 | | | | - | | | | - | | | | 222 | | | | 242 | | | | - | | | | 573 | |
Substandard | | | - | | | | - | | | | 12 | | | | - | | | | 253 | | | | 1,073 | | | | - | | | | 1,338 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total farmland | | $ | 646 | | | $ | 822 | | | $ | 808 | | | $ | 77 | | | $ | 1,344 | | | $ | 7,465 | | | $ | 617 | | | $ | 11,779 | |
(Amounts in thousands) | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
Balance at December 31, 2022 | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Prior | | | Revolving | | | Total | |
Home equity lines | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 1,960 | | | $ | 198 | | | $ | 241 | | | $ | - | | | $ | 24 | | | $ | 7,429 | | | $ | 63,075 | | | $ | 72,927 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 117 | | | | 171 | | | | 288 | |
Substandard | | | - | | | | - | | | | 27 | | | | 35 | | | | 114 | | | | 1,253 | | | | 998 | | | | 2,427 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total home equity lines | | $ | 1,960 | | | $ | 198 | | | $ | 268 | | | $ | 35 | | | $ | 138 | | | $ | 8,799 | | | $ | 64,244 | | | $ | 75,642 | |
Single family Mortgage | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 157,890 | | | $ | 237,363 | | | $ | 207,480 | | | $ | 48,795 | | | $ | 36,678 | | | $ | 214,148 | | | $ | 373 | | | $ | 902,727 | |
Special Mention | | | - | | | | 376 | | | | 90 | | | | 363 | | | | 262 | | | | 3,170 | | | | - | | | | 4,261 | |
Substandard | | | 461 | | | | 1,196 | | | | 740 | | | | 1,217 | | | | 1,991 | | | | 28,068 | | | | - | | | | 33,673 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total single family owner and non-owner occupied | | $ | 158,351 | | | $ | 238,935 | | | $ | 208,310 | | | $ | 50,375 | | | $ | 38,931 | | | $ | 245,386 | | | $ | 373 | | | $ | 940,661 | |
Owner occupied construction | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 6,357 | | | $ | 3,344 | | | $ | - | | | $ | 23 | | | $ | 11 | | | $ | 469 | | | $ | - | | | $ | 10,204 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Substandard | | | - | | | | - | | | | 162 | | | | - | | | | - | | | | - | | | | - | | | | 162 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total owner occupied construction | | $ | 6,357 | | | $ | 3,344 | | | $ | 162 | | | $ | 23 | | | $ | 11 | | | $ | 469 | | | $ | - | | | $ | 10,366 | |
Consumer loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 69,579 | | | $ | 37,603 | | | $ | 16,033 | | | $ | 7,640 | | | $ | 2,528 | | | $ | 2,040 | | | $ | 7,932 | | | $ | 143,355 | |
Special Mention | | | - | | | | 5 | | | | - | | | | 6 | | | | - | | | | - | | | | - | | | | 11 | |
Substandard | | | 881 | | | | 1,002 | | | | 466 | | | | 416 | | | | 36 | | | | 159 | | | | 60 | | | | 3,020 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total consumer loans | | $ | 70,460 | | | $ | 38,610 | | | $ | 16,499 | | | $ | 8,062 | | | $ | 2,564 | | | $ | 2,199 | | | $ | 7,992 | | | $ | 146,386 | |
(Amounts in thousands) | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
Balance at December 31, 2022 | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Prior | | | Revolving | | | Total | |
Total Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 634,980 | | | $ | 512,743 | | | $ | 388,129 | | | $ | 123,998 | | | $ | 88,762 | | | $ | 471,459 | | | $ | 99,260 | | | $ | 2,319,331 | |
Special Mention | | | 227 | | | | 2,695 | | | | 977 | | | | 1,929 | | | | 3,471 | | | | 16,086 | | | | 417 | | | | 25,802 | |
Substandard | | | 1,596 | | | | 3,614 | | | | 2,464 | | | | 4,934 | | | | 4,152 | | | | 37,246 | | | | 1,058 | | | | 55,064 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | $ | 636,803 | | | $ | 519,052 | | | $ | 391,570 | | | $ | 130,861 | | | $ | 96,385 | | | $ | 524,791 | | | $ | 100,735 | | | $ | 2,400,197 | |
The Company generally places a loan on nonaccrual status when it is 90 days or more past due. The following table presents nonaccrual loans, by loan class, as of the dates indicated:
| | March 31, 2023 | | | December 31, 2022 | |
(Amounts in thousands) | | No Allowance | | | With an Allowance | | | Total | | | No Allowance | | | With an Allowance | | | Total | |
Commercial loans | | | | | | | | | | | | | | | | | | | | | | | | |
Construction, development, and other land | | $ | 425 | | | $ | - | | | $ | 425 | | | $ | 31 | | | $ | - | | | $ | 31 | |
Commercial and industrial | | | 502 | | | | - | | | | 502 | | | | 438 | | | | - | | | | 438 | |
Multi-family residential | | | 208 | | | | - | | | | 208 | | | | 220 | | | | - | | | | 220 | |
Single family non-owner occupied | | | 942 | | | | - | | | | 942 | | | | 984 | | | | - | | | | 984 | |
Non-farm, non-residential | | | 1,524 | | | | - | | | | 1,524 | | | | 1,771 | | | | - | | | | 1,771 | |
Agricultural | | | 7 | | | | - | | | | 7 | | | | 9 | | | | - | | | | 9 | |
Farmland | | | 133 | | | | - | | | | 133 | | | | 133 | | | | - | | | | 133 | |
Consumer real estate loans | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity lines | | | 612 | | | | - | | | | 612 | | | | 400 | | | | - | | | | 400 | |
Single family owner occupied | | | 8,303 | | | | 586 | | | | 8,889 | | | | 8,228 | | | | 589 | | | | 8,817 | |
Owner occupied construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer and other loans | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans | | | 2,315 | | | | - | | | | 2,315 | | | | 2,405 | | | | - | | | | 2,405 | |
Total nonaccrual loans | | $ | 14,971 | | | $ | 586 | | | $ | 15,557 | | | $ | 14,619 | | | $ | 589 | | | $ | 15,208 | |
During the first quarter of 2023, no nonaccrual loan interest was recognized compared to $4 thousand for the same period of 2022.
The following tables presents the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category:
| | March 31, 2023 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Amortized Cost of | |
| | 30 - 59 Days | | | 60 - 89 Days | | | 90+ Days | | | Total | | | Current | | | Total | | | > 90 Days Accruing | |
(Amounts in thousands) | | Past Due | | | Past Due | | | Past Due | | | Past Due | | | Loans | | | Loans | | | No Allowance | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction, development, and other land | | $ | 173 | | | $ | 17 | | | $ | 418 | | | $ | 608 | | | $ | 114,415 | | | $ | 115,023 | | | $ | - | |
Commercial and industrial | | | 422 | | | | 112 | | | | 332 | | | | 866 | | | | 150,427 | | | | 151,293 | | | | - | |
Multi-family residential | | | 133 | | | | - | | | | - | | | | 133 | | | | 148,613 | | | | 148,746 | | | | - | |
Single family non-owner occupied | | | 1,169 | | | | 169 | | | | 120 | | | | 1,458 | | | | 206,174 | | | | 207,632 | | | | - | |
Non-farm, non-residential | | | 218 | | | | 48 | | | | 351 | | | | 617 | | | | 792,612 | | | | 793,229 | | | | - | |
Agricultural | | | 34 | | | | - | | | | 7 | | | | 41 | | | | 12,001 | | | | 12,042 | | | | - | |
Farmland | | | - | | | | - | | | | 133 | | | | 133 | | | | 12,004 | | | | 12,137 | | | | - | |
Consumer real estate loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity lines | | | 782 | | | | 120 | | | | 487 | | | | 1,389 | | | | 72,373 | | | | 73,762 | | | | - | |
Single family owner occupied | | | 5,172 | | | | 2,603 | | | | 2,222 | | | | 9,997 | | | | 717,205 | | | | 727,202 | | | | - | |
Owner occupied construction | | | - | | | | - | | | | - | | | | - | | | | 10,276 | | | | 10,276 | | | | - | |
Consumer and other loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans | | | 3,822 | | | | 985 | | | | 989 | | | | 5,796 | | | | 130,514 | | | | 136,310 | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | 1,245 | | | | 1,245 | | | | - | |
Total loans | | $ | 11,925 | | | $ | 4,054 | | | $ | 5,059 | | | $ | 21,038 | | | $ | 2,367,859 | | | $ | 2,388,897 | | | $ | - | |
| | December 31, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Amortized Cost of | |
| | 30 - 59 Days | | | 60 - 89 Days | | | 90+ Days | | | Total | | | Current | | | Total | | | > 90 Days Accruing | |
(Amounts in thousands) | | Past Due | | | Past Due | | | Past Due | | | Past Due | | | Loans | | | Loans | | | No Allowance | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction, development, and other land | | $ | 393 | | | $ | 8 | | | $ | 23 | | | $ | 424 | | | $ | 116,750 | | | $ | 117,174 | | | $ | - | |
Commercial and industrial | | | 756 | | | | 129 | | | | 217 | | | | 1,102 | | | | 149,326 | | | | 150,428 | | | | - | |
Multi-family residential | | | - | | | | - | | | | 83 | | | | 83 | | | | 147,943 | | | | 148,026 | | | | - | |
Single family non-owner occupied | | | 990 | | | | 122 | | | | 299 | | | | 1,411 | | | | 204,710 | | | | 206,121 | | | | - | |
Non-farm, non-residential | | | 646 | | | | 52 | | | | 548 | | | | 1,246 | | | | 786,457 | | | | 787,703 | | | | - | |
Agricultural | | | 36 | | | | 135 | | | | 9 | | | | 180 | | | | 11,852 | | | | 12,032 | | | | - | |
Farmland | | | - | | | | - | | | | 133 | | | | 133 | | | | 11,646 | | | | 11,779 | | | | - | |
Consumer real estate loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity lines | | | 519 | | | | 115 | | | | 262 | | | | 896 | | | | 74,746 | | | | 75,642 | | | | - | |
Single family owner occupied | | | 5,951 | | | | 2,322 | | | | 3,166 | | | | 11,439 | | | | 723,101 | | | | 734,540 | | | | - | |
Owner occupied construction | | | - | | | | - | | | | - | | | | - | | | | 10,366 | | | | 10,366 | | | | - | |
Consumer and other loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans | | | 4,282 | | | | 1,960 | | | | 1,459 | | | | 7,701 | | | | 136,881 | | | | 144,582 | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | 1,804 | | | | 1,804 | | | | - | |
Total loans | | $ | 13,573 | | | $ | 4,843 | | | $ | 6,199 | | | $ | 24,615 | | | $ | 2,375,582 | | | $ | 2,400,197 | | | $ | - | |
ASC 326 prescribes that when an entity determines foreclosure is probable, the expected credit loss is required to be measured based on the fair value of the collateral. As a practical expedient, an entity may use the fair value as of the reporting date when recording the net carrying amount of the asset. For the collateral dependent asset ("CDA") a credit loss expense is recorded for loan amounts in excess of fair value of the collateral. The table below summarizes collateral dependent loans, where foreclosure is probable, by type of collateral, and the extent to which they are collateralized during the period.
| | March 31, 2023 | | | December 31, 2022 | |
(Amounts in thousands) | | Balance | | | Collateral Coverage | | | % | | | Balance | | | Collateral Coverage | | | % | |
Commercial Real Estate | | | | | | | | | | | | | | | | | | | | | | | | |
Hotel | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | | - | |
Office | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Retail | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Multi-Family | | | | | | | | | | | | | | | | | | | | | | | | |
Industrial | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Office | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | | | | | |
Industrial | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity loans | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer owner occupied | | | 586 | | | | 574 | | | | 97.99 | % | | | 589 | | | | 574 | | | | 97.45 | % |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total collateral dependent loans | | $ | 586 | | | $ | 574 | | | | 97.99 | % | | $ | 589 | | | $ | 574 | | | | 97.45 | % |
The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. Effective, January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminated TDR accounting guidance for issuers that adopted ASU 2016-13, created a single loan modification accounting model, and clarified disclosure requirements for loan modifications and write-offs. Presented below are the amortized cost basis and percentage of loan class for loan modifications made to borrowers experiencing financial difficulty by loan class, concession type, and financial effect as of the date indicated:
| | | | | | | | | |
| | Payment Delays |
| | Amortized Cost Basis | | | % of Total Class of | | |
| | March 31, 2023 | | | Financing Receivable | | Financial Effect |
| | | | | | | | | |
(Amounts in thousands) | | | | | | | | | |
Single family owner occupied | | $ | 410 | | | | 0.056 | % | Deferred $6 thousand in principal to maturity |
Total | | $ | 410 | | | | | | |
| | | | | | | | | |
| | Term Extensions |
| | Amortized Cost Basis | | | % of Total Class of | | |
| | March 31, 2023 | | | Financing Receivable | | Financial Effect |
| | | | | | | | | |
(Amounts in thousands) | | | | | | | | | |
Consumer | | $ | 9 | | | | 0.007 | % | Extended term from 60 to 84 months |
Total | | $ | 9 | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | Principal Forgiveness |
| | Amortized Cost Basis | | | % of Total Class of | | |
| | March 31, 2023 | | | Financing Receivable | | Financial Effect |
| | | | | | | | | |
(Amounts in thousands) | | | | | | | | | |
Single family owner occupied | | $ | 10 | | | | 0.001 | % | Reduced amortized cost basis by $13 thousand |
Total | | $ | 10 | | | | | | |
| | | | | | | | | |
Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. As of March 31, 2023, there were no modified loans (or portions of a loan) deemed uncollectible.
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last three months:
| | March 31, 2023 | |
| | Payment Status (Amortized Cost Basis) | |
| | Current | | | 30-89 Days Past Due | | | 90+ Days Past Due | |
| | | | | | | | | | | | |
(Amounts in thousands) | | | | | | | | | | | | |
Single family owner occupied | | $ | 420 | | | $ | - | | | $ | - | |
Consumer | | | 9 | | | | - | | | | - | |
Total | | $ | 429 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Prior to the adoption of ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures below is the presentation of loans modified as TDRs, by loan class and accrual status, as of the date indicated:
| | December 31, 2022 | |
(Amounts in thousands) | | Nonaccrual(1) | | | Accruing | | | Total | |
Commercial loans | | | | | | | | | | | | |
Commercial and industrial | | $ | - | | | $ | 374 | | | $ | 374 | |
Single family non-owner occupied | | | 142 | | | | 838 | | | | 980 | |
Non-farm, non-residential | | | - | | | | 747 | | | | 747 | |
Consumer real estate loans | | | | | | | | | | | | |
Home equity lines | | | - | | | | 55 | | | | 55 | |
Single family owner occupied | | | 1,182 | | | | 5,073 | | | | 6,255 | |
Owner occupied construction | | | - | | | | - | | | | - | |
Consumer and other loans | | | | | | | | | | | | |
Consumer loans | | | - | | | | 25 | | | | 25 | |
Total TDRs | | $ | 1,324 | | | $ | 7,112 | | | $ | 8,436 | |
| | | | | | | | | | | | |
Allowance for credit losses related to TDRs | | | | | | | | | | $ | - | |
(1) | Nonaccrual TDRs are included in total nonaccrual loans disclosed in the nonaccrual table above. |
The following table presents interest income recognized on TDRs for the periods indicated:
| | Three Months Ended March 31, | |
| | 2022 | |
(Amounts in thousands) | | | | |
Interest income recognized | | $ | 105 | |
The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated:
| | Three Months Ended March 31, | |
| | 2022 | |
(Amounts in thousands) | | Total Contracts | | | Pre-modification Recorded Investment | | | Post-modification Recorded Investment(1) | |
Below market interest rate | | | | | | | | | | | | |
Single family owner occupied | | | 1 | | | $ | 31 | | | $ | 32 | |
Total below market interest rate | | | 1 | | | $ | 31 | | | $ | 32 | |
Total | | | 1 | | | $ | 31 | | | $ | 32 | |
(1) | Represents the loan balance immediately following modification |
As of March 31, 2022, there was one payment in default in the amount of $41 thousand for troubled debt restructured loans.
The following table provides information about other real estate owned (“OREO”), which consists of properties acquired through foreclosure, as of the dates indicated:
| | March 31, 2023 | | | December 31, 2022 | |
(Amounts in thousands) | | | | | | | | |
OREO | | $ | 481 | | | $ | 703 | |
| | | | | | | | |
OREO secured by residential real estate | | $ | 249 | | | $ | 407 | |
Residential real estate loans in the foreclosure process(1) | | $ | 1,850 | | | $ | 1,474 | |
(1) | The recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction |
Note 6. Allowance for Credit Losses
The following tables present the changes in the allowance for credit losses, by loan segment, during the periods indicated:
| | Three Months Ended March 31, 2023 | |
| | | | | | Consumer Real | | | Consumer and | | | Total | |
(Amounts in thousands) | | Commercial | | | Estate | | | Other | | | Allowance | |
Total allowance | | | | | | | | | | | | | | | | |
Balance at beginning of year: | | | | | | | | | | | | | | | | |
Allowance for credit losses - loans | | $ | 17,213 | | | $ | 8,931 | | | $ | 4,412 | | | $ | 30,556 | |
Allowance for credit losses - loan commitments | | | 1,018 | | | | 156 | | | | 22 | | | | 1,196 | |
Total allowance for credit losses beginning of year | | | 18,231 | | | | 9,087 | | | | 4,434 | | | | 31,752 | |
Provision for credit losses: | | | | | | | | | | | | | | | | |
Provision for credit losses - loans | | | 37 | | | | 103 | | | | 1,834 | | | | 1,974 | |
(Recovery of) provision for credit losses - loan commitments | | | (232 | ) | | | (6 | ) | | | 6 | | | | (232 | ) |
Total provision for credit losses - loans and loan commitments | | | (195 | ) | | | 97 | | | | 1,840 | | | | 1,742 | |
Charge-offs | | | (173 | ) | | | (98 | ) | | | (2,299 | ) | | | (2,570 | ) |
Recoveries | | | 192 | | | | 59 | | | | 578 | | | | 829 | |
Net recoveries (charge-offs) | | | 19 | | | | (39 | ) | | | (1,721 | ) | | | (1,741 | ) |
Allowance for credit losses - loans | | | 17,269 | | | | 8,995 | | | | 4,525 | | | | 30,789 | |
Allowance for credit losses - loan commitments | | | 786 | | | | 150 | | | | 28 | | | | 964 | |
Ending balance | | $ | 18,055 | | | $ | 9,145 | | | $ | 4,553 | | | $ | 31,753 | |
| | Three Months Ended March 31, 2022 | |
| | | | | | Consumer Real | | | Consumer and | | | Total | |
(Amounts in thousands) | | Commercial | | | Estate | | | Other | | | Allowance | |
Total allowance | | | | | | | | | | | | | | | | |
Balance at beginning of year: | | | | | | | | | | | | | | | | |
Allowance for credit losses - loans | | $ | 14,775 | | | $ | 9,972 | | | $ | 3,111 | | | $ | 27,858 | |
Allowance for credit losses - loan commitments | | | 576 | | | | 88 | | | | 14 | | | | 678 | |
Total allowance for credit losses beginning of year | | | 15,351 | | | | 10,060 | | | | 3,125 | | | | 28,536 | |
Provision for credit losses: | | | | | | | | | | | | | | | | |
Provision for credit losses - loans | | | 1,108 | | | | (241 | ) | | | 1,094 | | | | 1,961 | |
(Recovery of) provision for credit losses - loan commitments | | | 87 | | | | 6 | | | | 5 | | | | 98 | |
Total provision for credit losses - loans and loan commitments | | | 1,195 | | | | (235 | ) | | | 1,099 | | | | 2,059 | |
Charge-offs | | | (257 | ) | | | (6 | ) | | | (1,039 | ) | | | (1,302 | ) |
Recoveries | | | 270 | | | | 39 | | | | 155 | | | | 464 | |
Net (charge-offs) recoveries | | | 13 | | | | 33 | | | | (884 | ) | | | (838 | ) |
Allowance for credit losses - loans | | | 15,896 | | | | 9,764 | | | | 3,321 | | | | 28,981 | |
Allowance for credit losses - loan commitments | | | 663 | | | | 94 | | | | 19 | | | | 776 | |
Ending balance | | $ | 16,559 | | | $ | 9,858 | | | $ | 3,340 | | | $ | 29,757 | |
Note 7. Deposits
The following table presents the components of deposits as of the dates indicated:
| | March 31, 2023 | | | December 31, 2022 | |
(Amounts in thousands) | | | | | | | | |
Noninterest-bearing demand deposits | | $ | 823,297 | | | $ | 872,168 | |
Interest-bearing deposits: | | | | | | | | |
Interest-bearing demand deposits | | | 661,595 | | | | 679,609 | |
Money market accounts | | | 279,139 | | | | 264,734 | |
Savings deposits | | | 558,782 | | | | 578,974 | |
Certificates of deposit | | | 165,709 | | | | 180,008 | |
Individual retirement accounts | | | 96,102 | | | | 103,322 | |
Total interest-bearing deposits | | | 1,761,327 | | | | 1,806,647 | |
Total deposits | | $ | 2,584,624 | | | $ | 2,678,815 | |
Note 8. Leases
Operating leases are recorded as a right of use (“ROU”) asset and operating lease liability. The ROU asset is recorded in other assets, while the lease liability is recorded in other liabilities on the condensed balance sheet beginning January 1, 2019, when the Company adopted ASU 2016-02, on a prospective basis. The ROU asset represents the right to use an underlying asset during the lease term and the lease liability represents the obligation to make lease payments arising from the lease. The ROU asset and lease liability have been recognized based on the present value of the lease payments using a discount rate that represented our incremental borrowing rate at the lease commencement date or the date of adoption of ASU 2016-02. The lease expense, which is comprised of the amortization of the ROU asset and the implicit interest accreted on the lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the condensed statements of income.
The Company’s current operating leases relate to one existing bank branch and one operating lease acquired in a prior bank acquisition. The acquired operating lease was for vacant land and will terminate in July of 2029. The Company’s ROU asset was $625 thousand as of March 31, 2023 compared to $648 thousand as of December 31, 2022. The operating lease liability as of March 31, 2023, was $647 thousand compared to $670 thousand as of December 31, 2022. The Company’s total operating leases have remaining terms of 2 - 6 years; compared with 2 months to 6.5 years as of December 31, 2022. The March 31, 2023 weighted average discount rate of 3.28% did not change from December 31, 2022.
Future minimum lease payments as of the dates indicated are as follows:
Year | | March 31, 2023 | |
(Amounts in thousands) | | | | |
2024 | | $ | 119 | |
2025 | | | 113 | |
2026 | | | 101 | |
2027 | | | 101 | |
2028 and thereafter | | | 235 | |
Total lease payments | | | 669 | |
Less: Interest | | | (22 | ) |
Present value of lease liabilities | | $ | 647 | |
Year | | December 31, 2022 | |
(Amounts in thousands) | | | | |
2023 | | $ | 119 | |
2024 | | | 117 | |
2025 | | | 101 | |
2026 | | | 101 | |
2027 and thereafter | | | 261 | |
Total lease payments | | | 699 | |
Less: Interest | | | (29 | ) |
Present value of lease liabilities | | $ | 670 | |
Note 9. Borrowings
The following table presents the components of borrowings as of the dates indicated:
| | March 31, 2023 | | | December 31, 2022 | |
| | | | | | Weighted | | | | | | | Weighted | |
(Amounts in thousands) | | Balance | | | Average Rate | | | Balance | | | Average Rate | |
Retail repurchase agreements | | $ | 1,866 | | | | 0.06 | % | | $ | 1,874 | | | | 0.07 | % |
Repurchase agreements are secured by certain securities that remain under the Company’s control during the terms of the agreements.
As of March 31, 2023, the Company had no long-term borrowings.
Unused borrowing capacity with the FHLB totaled $393.69 million, net of FHLB letters of credit of $118.94 million, as of March 31, 2023. As of March 31, 2023, the Company maintains $731.49 million in qualifying loans to secure the FHLB borrowing capacity.
Note 10. Derivative Instruments and Hedging Activities
Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.
The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. In March 2020, the Company adopted ASU 2020-04, "Reference Rate Reform" which provided temporary guidance to ease the potential burden in accounting for reference rate reform. With global capital markets moving away from LIBOR, the guidance provided optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships that reference LIBOR. The migration from LIBOR is not expected to have any material effect on the Company's financial statements when and as changes are made to migrate from the reference rate.
Certain of the Company's interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of March 31, 2023.
Through July 2022, the Company had certain interest rate swaps that did not qualify as fair value hedges and the fair value changes in the derivative were recognized in earnings each period. On July 26, 2022, these swaps were terminated at a cost of $72 thousand.
The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:
| | March 31, 2023 | | | December 31, 2022 | |
| | Notional or | | | Fair Value | | | Notional or | | | Fair Value | |
| | Contractual | | | Derivative | | | Derivative | | | Contractual | | | Derivative | | | Derivative | |
(Amounts in thousands) | | Amount | | | Assets | | | Liabilities | | | Amount | | | Assets | | | Liabilities | |
Derivatives designated as hedges | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | 3,877 | | | $ | 150 | | | $ | - | | | $ | 3,983 | | | $ | 199 | | | $ | - | |
Total derivatives | | $ | 3,877 | | | $ | 150 | | | $ | - | | | $ | 3,983 | | | $ | 199 | | | $ | - | |
The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:
| | Three Months Ended March 31, | | |
(Amounts in thousands) | | 2023 | | | 2022 | | Income Statement Location |
Derivatives designated as hedges | | | | | | | | | |
Interest rate swaps | | $ | (20 | ) | | $ | 25 | | Interest and fees on loans |
Derivatives not designated as hedges | | | | | | | | | |
Interest rate swaps | | | - | | | | 51 | | Interest and fees on loans |
Total derivative (income) expense | | $ | (20 | ) | | $ | 76 | | |
Note 11. Employee Benefit Plans
The Company maintains two nonqualified domestic, noncontributory defined benefit plans (the “Benefit Plans”) for key members of senior management and non-management directors. The Company’s unfunded Benefit Plans include the Supplemental Executive Retention Plan ("SERP") and the Directors’ Supplemental Retirement Plan ("Director Plan"). The SERP was frozen near the end of 2021; the Director Plan was fundamentally frozen at that time as well. The following table presents the components of net periodic pension cost and the effect on the consolidated statements of income for the periods indicated:
| | Three Months Ended March 31, | | |
| | 2023 | | | 2022 | | Income Statement Location |
(Amounts in thousands) | | | | | | | | | |
Service cost | | $ | - | | | $ | - | | Salaries and employee benefits |
Interest cost | | | 82 | | | | 83 | | Other expense |
Amortization of prior service cost | | | - | | | | - | | Other expense |
Amortization of losses | | | 33 | | | | 34 | | Other expense |
Net periodic cost | | $ | 115 | | | $ | 117 | | |
Note 12. Earnings per Share
The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:
| | Three Months Ended | |
| | March 31, | |
| | 2023 | | | 2022 | |
(Amounts in thousands, except share and per share data) | | | | | | | | |
Net income | | $ | 11,782 | | | $ | 9,515 | |
| | | | | | | | |
Weighted average common shares outstanding, basic | | | 16,228,297 | | | | 16,817,284 | |
Dilutive effect of potential common shares | | | | | | | | |
Stock options | | | 16,405 | | | | 17,814 | |
Unvested stock awards | | | 44,787 | | | | 29,417 | |
Total dilutive effect of potential common shares | | | 61,192 | | | | 47,231 | |
Weighted average common shares outstanding, diluted | | | 16,289,489 | | | | 16,864,515 | |
| | | | | | | | |
Basic earnings per common share | | $ | 0.73 | | | $ | 0.57 | |
Diluted earnings per common share | | | 0.72 | | | | 0.56 | |
| | | | | | | | |
Antidilutive potential common shares | | | | | | | | |
Stock options | | | 131,198 | | | | 131,198 | |
Total potential antidilutive shares | | | 131,198 | | | | 131,198 | |
Note 13. Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax and by component, during the periods indicated:
| | Three Months Ended March 31, 2023 | |
| | Unrealized Gains | | | | | | | | | |
| | (Losses) on Available- | | | | | | | | | |
| | for-Sale Securities | | | Employee Benefit Plans | | | Total | |
(Amounts in thousands) | | | | | | | | | | | | |
Beginning balance | | $ | (15,621 | ) | | $ | (98 | ) | | $ | (15,719 | ) |
Other comprehensive income before reclassifications | | | 2,499 | | | | (26 | ) | | | 2,473 | |
Reclassified from AOCI | | | (5 | ) | | | 26 | | | | 21 | |
Other comprehensive income, net | | | 2,494 | | | | - | | | | 2,494 | |
Ending balance | | $ | (13,127 | ) | | $ | (98 | ) | | $ | (13,225 | ) |
| | Three Months Ended March 31, 2022 | |
| | Unrealized Gains | | | | | | | | | |
| | (Losses) on Available- | | | | | | | | | |
| | for-Sale Securities | | | Employee Benefit Plans | | | Total | |
(Amounts in thousands) | | | | | | | | | | | | |
Beginning balance | | $ | 15 | | | $ | (1,561 | ) | | $ | (1,546 | ) |
Other comprehensive loss before reclassifications | | | (4,658 | ) | | | (335 | ) | | | (4,993 | ) |
Reclassified from AOCI | | | - | | | | 27 | | | | 27 | |
Other comprehensive loss, net | | | (4,658 | ) | | | (308 | ) | | | (4,966 | ) |
Ending balance | | $ | (4,643 | ) | | $ | (1,869 | ) | | $ | (6,512 | ) |
The following table presents reclassifications out of AOCI, by component, during the periods indicated:
| | Three Months Ended | | |
| | March 31, | | Income Statement |
(Amounts in thousands) | | 2023 | | | 2022 | | Line Item Affected |
Available-for-sale securities | | | | | | | | | |
Gain recognized | | $ | (7 | ) | | $ | - | | Net loss on sale of securities |
Reclassified out of AOCI, before tax | | | (7 | ) | | | - | | Income before income taxes |
Income tax expense | | | (2 | ) | | | - | | Income tax expense |
Reclassified out of AOCI, net of tax | | | (5 | ) | | | - | | Net income |
Employee benefit plans | | | | | | | | | |
Amortization of prior service cost | | $ | - | | | $ | - | | Salaries and employee benefits |
Amortization of net actuarial benefit cost | | | 33 | | | | 34 | | Salaries and employee benefits |
Reclassified out of AOCI, before tax | | | 33 | | | | 34 | | Income before income taxes |
Income tax expense | | | 7 | | | | 7 | | Income tax expense |
Reclassified out of AOCI, net of tax | | | 26 | | | | 27 | | Net income |
Total reclassified out of AOCI, net of tax | | $ | 21 | | | $ | 27 | | Net income |
(1) | Amortization is included in net periodic pension cost. See Note 10, "Employee Benefit Plans." |
Note 14. Fair Value
Financial Instruments Measured at Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:
| ● | Level 1 – Observable, unadjusted quoted prices in active markets |
| ● | Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability |
| ● | Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions |
The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period. The following discussion describes the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the valuation hierarchy.
Assets and Liabilities Reported at Fair Value on a Recurring Basis
Available-for-Sale Debt Securities
Debt securities available for sale are reported at fair value on a recurring basis. The fair value of Level
1 securities is based on quoted market prices in active markets, if available. If quoted market prices are
not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are primarily derived from or corroborated by observable market data. Level
2 securities use fair value measurements from independent pricing services obtained by the Company. These fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond terms and conditions. The Company’s Level
2 securities include U.S. Agency and Treasury securities, municipal securities, and mortgage-backed securities. Securities are based on Level
3 inputs when there is limited activity or less transparency to the valuation inputs. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.
Fair value models may be required when trading activity has declined significantly or does not exist, prices are not current, or pricing variations are significant. For Level 3 securities, the Company obtains the cash flow of specific securities from third parties that use modeling software to determine cash flows based on market participant data and knowledge of the structures of each individual security. The fair values of Level 3 securities are determined by applying proper market observable discount rates to the cash flow derived from third-party models. Discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity, which are based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Securities with increased uncertainty about the receipt of cash flows are discounted at higher rates due to the addition of a deal specific credit premium based on assumptions about the performance of the underlying collateral. Finally, internal fair value model pricing and external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for reasonableness based on the direction of specific markets and the general economic indicators.
Equity Securities. Equity securities are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Equity securities that are not actively traded are classified in Level 2.
Loans Held for Investment. Loans held for investment that are subject to a fair value hedge are reported at fair value derived from third-party models. Loans designated in fair value hedges are recorded at fair value on a recurring basis.
Deferred Compensation Assets and Liabilities. Securities held for trading purposes are recorded at fair value on a recurring basis and included in other assets in the consolidated balance sheets. These securities include assets related to employee deferred compensation plans, which are generally invested in Level 1 equity securities. The liability associated with these deferred compensation plans is carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.
Derivative Assets and Liabilities. Derivatives are recorded at fair value on a recurring basis. The Company obtains dealer quotes, Level 2 inputs, based on observable data to value derivatives.
The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
| | March 31, 2023 | |
| | Total | | | Fair Value Measurements Using | |
(Amounts in thousands) | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Available-for-sale debt securities | | | | | | | | | | | | | | | | |
U.S. Agency securities | | $ | 1,491 | | | $ | - | | | $ | 1,491 | | | $ | - | |
U.S. Treasury Notes | | | 170,686 | | | | - | | | | 170,686 | | | | - | |
Municipal securities | | | 22,957 | | | | - | | | | 22,957 | | | | - | |
Corporate Notes | | | 29,779 | | | | | | | | 29,779 | | | | | |
Agency mortgage-backed securities | | | 83,356 | | | | - | | | | 83,356 | | | | - | |
Total available-for-sale debt securities | | | 308,269 | | | | - | | | | 308,269 | | | | - | |
Equity securities | | | 55 | | | | - | | | | 55 | | | | - | |
Fair value loans | | | 3,727 | | | | - | | | | - | | | | 3,727 | |
Derivative assets | | | 150 | | | | - | | | | 150 | | | | - | |
Deferred compensation assets | | | 5,658 | | | | 5,658 | | | | - | | | | - | |
Deferred compensation liabilities | | | 5,658 | | | | 5,658 | | | | - | | | | - | |
| | December 31, 2022 | |
| | Total | | | Fair Value Measurements Using | |
(Amounts in thousands) | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Available-for-sale debt securities | | | | | | | | | | | | | | | | |
U.S. Agency securities | | $ | 1,485 | | | $ | - | | | $ | 1,485 | | | $ | - | |
U.S. Treasury Notes | | | 157,264 | | | | - | | | | 157,264 | | | | - | |
Municipal securities | | | 23,309 | | | | - | | | | 23,309 | | | | - | |
Corporate notes | | | 34,857 | | | | - | | | | 34,857 | | | | - | |
Agency mortgage-backed securities | | | 83,434 | | | | - | | | | 83,434 | | | | - | |
Total available-for-sale debt securities | | | 300,349 | | | | - | | | | 300,349 | | | | - | |
Equity securities | | | 55 | | | | - | | | | 55 | | | | - | |
Fair value loans | | | 3,784 | | | | - | | | | - | | | | 3,784 | |
Derivative assets | | | 199 | | | | - | | | | 199 | | | | - | |
Deferred compensation assets | | | 5,142 | | | | 5,142 | | | | - | | | | - | |
Deferred compensation liabilities | | | 5,142 | | | | 5,142 | | | | - | | | | - | |
Assets Measured at Fair Value on a Nonrecurring Basis
Impaired Loans. Prior to the adoption of ASU 2016-13, impaired loans were recorded at fair value on a nonrecurring basis when repayment is expected solely from the sale of the loan’s collateral. Fair value is based on appraised value adjusted for customized discounting criteria, Level 3 inputs.
The Company maintains an active and robust problem credit identification system. The impairment review includes obtaining third-party collateral valuations to help management identify potential credit impairment and determine the amount of impairment to record. The Company’s Special Assets staff manages and monitors all impaired loans. Internal collateral valuations are generally performed within two to four weeks of identifying the initial potential impairment. The internal valuation compares the original appraisal to current local real estate market conditions and considers experience and expected liquidation costs. The Company typically receives a third-party valuation within thirty to forty-five days of completing the internal valuation. When a third-party valuation is received, it is reviewed for reasonableness. Once the valuation is reviewed and accepted, discounts are applied to fair market value, based on, but not limited to, our historical liquidation experience for like collateral, resulting in an estimated net realizable value. The estimated net realizable value is compared to the outstanding loan balance to determine the appropriate amount of specific impairment reserve.
OREO. OREO is recorded at fair value on a nonrecurring basis using Level 3 inputs. The Company calculates the fair value of OREO from current or prior appraisals that have been adjusted for valuation declines, estimated selling costs, and other proprietary qualitative adjustments that are deemed necessary.
The following tables present assets measured at fair value on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
| | March 31, 2023 | |
| | Total | | | Fair Value Measurements Using | |
| | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
(Amounts in thousands) | | | | | | | | | | | | | | | | |
Collateral dependent assets with specific reserves | | $ | 574 | | | $ | - | | | $ | - | | | $ | 574 | |
OREO | | $ | 481 | | | $ | - | | | $ | - | | | $ | 481 | |
| | December 31, 2022 | |
| | Total | | | Fair Value Measurements Using | |
| | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
(Amounts in thousands) | | | | | | | | | | | | | | | | |
Collateral dependent assets with specific reserves | | $ | 574 | | | $ | - | | | $ | - | | | $ | 574 | |
OREO | | | 703 | | | | - | | | | - | | | | 703 | |
Quantitative Information about Level 3 Fair Value Measurements
The following tables provides quantitative information for assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs as of the dates indicated:
| | | | Discount Range | |
| Valuation | Unobservable | | (Weighted Average) | |
| Technique | Input | | March 31, 2023 | |
| | | | | | |
Collateral dependent assets with specific reserves | Discounted appraisals(1) | Appraisal adjustments(2) | | | 2% (2%) | |
OREO | Discounted appraisals(1) | Appraisal adjustments(2) | | | 20% to 100% (77%) | |
(1) | Fair value is generally based on appraisals of the underlying collateral. |
(2) | Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments. |
| | | | Discount Range | |
| Valuation | Unobservable | | (Weighted Average) | |
| Technique | Input | | December 31, 2022 | |
| | | | | | |
Collateral dependent assets with specific reserves | Discounted appraisals(1) | Appraisal adjustments(2) | | | 3% (3%) | |
OREO | Discounted appraisals(1) | Appraisal adjustments(2) | | | 20% to 100% (69%) | |
(1) | Fair value is generally based on appraisals of the underlying collateral. |
(2) | Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments. |
Fair Value of Financial Instruments
The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. A description of valuation methodologies used for instruments not previously discussed is as follows:
Cash and Cash Equivalents. Cash and cash equivalents fair value is estimated at their carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.
Accrued Interest Receivable/Payable. Accrued interest receivable/payable fair value is estimated at its carrying amount, which is considered a reasonable estimate due to the short-term nature of these instruments.
Deposits and Securities Sold Under Agreements to Repurchase. Deposits and repurchase agreements with fixed maturities and rates are estimated at fair value using discounted future cash flows that apply interest rates available in the market for instruments with similar characteristics and maturities.
FHLB and Other Borrowings. FHLB and other borrowings are estimated at fair value using discounted future cash flows that apply interest rates available to the Company for borrowings with similar characteristics and maturities.
Off-Balance Sheet Instruments. The Company believes that fair values of unfunded commitments to extend credit, standby letters of credit, and financial guarantees are not meaningful; therefore, off-balance sheet instruments are not addressed in the fair value disclosures. The Company believes it is not feasible or practical to accurately disclose the fair values of off-balance sheet instruments due to the uncertainty and difficulty in assessing the likelihood and timing of advancing available proceeds, the lack of an established market for these instruments, and the diversity in fee structures. For additional information about the unfunded, contractual value of off-balance sheet financial instruments, see Note 15, “Litigation, Commitments, and Contingencies,” to the Condensed Consolidated Financial Statements of this report.
The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
| | March 31, 2023 | |
| | Carrying | | | | | | | Fair Value Measurements Using | |
(Amounts in thousands) | | Amount | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 92,385 | | | $ | 92,385 | | | $ | 92,385 | | | $ | - | | | $ | - | |
Debt securities available for sale | | | 308,269 | | | | 308,269 | | | | - | | | | 308,269 | | | | - | |
Equity securities | | | 55 | | | | 55 | | | | - | | | | 55 | | | | - | |
Loans held for investment, net of allowance | | | 2,358,108 | | | | 2,215,745 | | | | - | | | | - | | | | 2,215,745 | |
Derivative financial assets | | | 150 | | | | 150 | | | | - | | | | 150 | | | | - | |
Interest receivable | | | 8,646 | | | | 8,646 | | | | - | | | | 8,646 | | | | - | |
Deferred compensation assets | | | 5,658 | | | | 5,658 | | | | 5,658 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Time deposits | | | 261,811 | | | | 259,870 | | | | - | | | | 259,870 | | | | - | |
Securities sold under agreements to repurchase | | | 1,866 | | | | 1,866 | | | | - | | | | 1,866 | | | | - | |
Interest payable | | | 211 | | | | 211 | | | | - | | | | 211 | | | | - | |
Deferred compensation liabilities | | | 5,658 | | | | 5,658 | | | | 5,658 | | | | - | | | | - | |
| | December 31, 2022 | |
| | Carrying | | | | | | | Fair Value Measurements Using | |
(Amounts in thousands) | | Amount | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 170,846 | | | $ | 170,846 | | | $ | 170,846 | | | $ | - | | | $ | - | |
Debt securities available for sale | | | 300,349 | | | | 300,349 | | | | - | | | | 300,349 | | | | - | |
Equity securities | | | 55 | | | | 55 | | | | - | | | | 55 | | | | - | |
Loans held for investment, net of allowance | | | 2,369,641 | | | | 2,215,243 | | | | - | | | | - | | | | 2,215,243 | |
Interest receivable | | | 9,279 | | | | 9,279 | | | | - | | | | 9,279 | | | | - | |
Deferred compensation assets | | | 5,142 | | | | 5,142 | | | | 5,142 | | | | - | | | | - | |
Derivative assets | | | 199 | | | | 199 | | | | - | | | | 199 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Time deposits | | | 283,330 | | | | 281,744 | | | | - | | | | 281,744 | | | | - | |
Securities sold under agreements to repurchase | | | 1,874 | | | | 1,874 | | | | - | | | | 1,874 | | | | - | |
Interest payable | | | 159 | | | | 159 | | | | - | | | | 159 | | | | - | |
Deferred compensation liabilities | | | 5,142 | | | | 5,142 | | | | 5,142 | | | | - | | | | - | |
Note 15. Litigation, Commitments, and Contingencies
Litigation
In the normal course of business, the Company is a defendant in various legal actions and asserted claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, the Company believes the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on its financial condition, results of operations, or cash flows.
Commitments and Contingencies
The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. If the other party to a financial instrument does not perform, the Company’s credit loss exposure is the same as the contractual amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of each customer on a case-by-case basis. Collateral may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company maintains a reserve for the risk inherent in unfunded lending commitments, which is included in other liabilities in the consolidated balance sheets.
Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers. The amount of collateral obtained, if deemed necessary, to secure the customer’s performance under certain letters of credit is based on management’s credit evaluation of the customer.
The following table presents the off-balance sheet financial instruments as of the dates indicated:
| | March 31, 2023 | | | December 31, 2022 | |
(Amounts in thousands) | | | | | | | | |
Commitments to extend credit | | $ | 259,156 | | | $ | 278,926 | |
Standby letters of credit and financial guarantees(1) | | | 121,701 | | | | 119,681 | |
Total off-balance sheet risk | | $ | 380,857 | | | $ | 398,607 | |
| | | | | | | | |
(1) | Includes FHLB letters of credit |