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Loans and Allowance for Credit Losses
 3 Months Ended
Mar. 31, 2023
Receivables [Abstract]  
Loans and Allowance for Credit Losses LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans Held for Sale
The following table presents loans held for sale:
(Dollars in thousands)March 31, 2023December 31, 2022
Commercial$3,954 $5,641 
Total loans held for sale$3,954 $5,641 
Loans Held for Investment
Loans
The following table presents the amortized cost and unpaid principal balance of loans held for investment:
March 31, 2023December 31, 2022
(Dollars in thousands)Amortized
Cost		Unpaid
Principal		DifferenceAmortized
Cost		Unpaid
Principal		Difference
Commercial real estate$695,160 $696,121 $(961)$678,144 $679,239 $(1,095)
Construction, land development, land98,311 98,676 (365)90,976 91,147 (171)
1-4 family residential132,010 132,218 (208)125,981 126,185 (204)
Farmland67,596 67,797 (201)68,934 69,185 (251)
Commercial1,239,952 1,249,394 (9,442)1,251,110 1,262,493 (11,383)
Factored receivables1,178,104 1,182,374 (4,270)1,237,449 1,241,032 (3,583)
Consumer8,913 8,915 (2)8,868 8,871 (3)
Mortgage warehouse889,960 889,960 — 658,829 658,829 — 
Total loans held for investment4,310,006 $4,325,455 $(15,449)4,120,291 $4,136,981 $(16,690)
Allowance for credit losses(42,245)(42,807)
$4,267,761 $4,077,484 
The difference between the amortized cost and the unpaid principal is due to (1) premiums and discounts associated with acquired loans totaling $11,009,000 and $13,383,000 at March 31, 2023 and December 31, 2022, respectively, and (2) net deferred origination and factoring fees totaling $4,440,000 and $3,307,000 at March 31, 2023 and December 31, 2022, respectively.
Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $21,751,000 and $19,279,000 at March 31, 2023 and December 31, 2022, respectively, and was included in other assets on the Company's consolidated balance sheets.
At March 31, 2023 and December 31, 2022, the Company had $203,171,000 and $249,288,000, respectively, of customer reserves associated with factored receivables. These amounts represent customer reserves held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.
At March 31, 2023 and December 31, 2022 the balance of the Over-Formula Advance Portfolio, acquired from Transport Financial Solutions during 2020, included in factored receivables was $7,772,000 and $8,202,000, respectively. These balances were fully reserved as of those respective dates.
At March 31, 2023 the Company carried a separate $19,361,000 receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest Over-Formula Advance Portfolio carrier. This amount is separate from the acquired Over-Formula Advances. The amounts represented by this receivable were paid by the USPS directly to such customer in contravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was then not remitted back to us by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. We are a party to litigation in the United States Court of Federal Claims against the USPS seeking a ruling that the USPS was obligated to make the payments represented by this receivable directly to us. Based on our legal analysis and discussions with our counsel advising us on this matter, we continue to believe it is probable that we will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, we have not reserved for such balance as of March 31, 2023.
Loans with carrying amounts of $1,517,997,000 and $1,356,922,000 at March 31, 2023 and December 31, 2022, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity, Paycheck Protection Program Liquidity Facility borrowings and Federal Reserve Bank discount window borrowing capacity.
Allowance for Credit Losses
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring. The activity in the allowance for credit losses (“ACL”) related to loans held for investment is as follows:
(Dollars in thousands)Beginning
Balance		Credit Loss
Expense		Charge-offsRecoveriesEnding
Balance
Three months ended March 31, 2023
Commercial real estate$4,459 $(237)$— $70 $4,292 
Construction, land development, land1,155 (17)— 1 1,139 
1-4 family residential838 169 (5)2 1,004 
Farmland483 (11)— — 472 
Commercial15,918 947 (222)40 16,683 
Factored receivables19,121 550 (2,293)203 17,581 
Consumer175 21 (138)127 185 
Mortgage warehouse658 231 — — 889 
$42,807 $1,653 $(2,658)$443 $42,245 
(Dollars in thousands)Beginning
Balance		Credit Loss
Expense		Charge-offsRecoveriesEnding
Balance
Three months ended March 31, 2022
Commercial real estate$3,961 $(340)$(108)$14 $3,527 
Construction, land development, land827 73 — 1 901 
1-4 family residential468 (21)— 3 450 
Farmland562 (441)— — 121 
Commercial14,485 (607)(724)61 13,215 
Factored receivables20,915 2,235 (708)29 22,471 
Consumer226 41 (111)19 175 
Mortgage warehouse769 (76)— — 693 
$42,213 $864 $(1,651)$127 $41,553 
The decrease in required ACL during the three months ended March 31, 2023 is a function of net charge-offs of $2,215,000 and credit loss expense of $1,653,000.
The Company uses the discounted cash flow (DCF) method to estimate ACL for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit and PPP), and consumer loan pools. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment as a loss driver. The Company also utilizes and forecasts either one-year percentage change in national retail sales (commercial real estate – non multifamily, commercial general, commercial agriculture, commercial asset-based lending, commercial equipment finance, consumer), one-year percentage change in the national home price index (1-4 family residential and construction, land development, land), or one-year percentage change in national gross domestic product (commercial real estate – multifamily) as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments. The Company also forecasts prepayments speeds for use in the DCF models with higher prepayment speeds resulting in lower required ACL levels and vice versa for shorter prepayment speeds. These assumed prepayment speeds are based upon our historical prepayment speeds by loan type adjusted for the expected impact of the future interest rate environment. The impact of these assumed prepayment speeds is lesser in magnitude than the aforementioned loss driver assumptions.
For all DCF models at March 31, 2023, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At March 31, 2023 as compared to December 31, 2022, the Company forecasted a slight decrease national unemployment, a steeper decrease in one-year percentage change in national retail sales, a steeper decrease in one-year percentage change in the national home price index, and a minimal change in one-year percentage change in national gross domestic product. At March 31, 2023 for national unemployment, the Company projected a low percentage in the first quarter followed by a gradual rise in the following three quarters. For percentage change in national retail sales, the Company projected a near-zero level in the first projected quarter followed by a decline to negative levels over the last three projected quarters to a level below recent actual periods. For percentage changes in national home price index and national gross domestic product, the Company projected declines over the last three projected quarters to negative levels below recent actual periods. At March 31, 2023, the Company slowed its historical prepayment speeds in response to the expected interest rate environment in the macro economy.
The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, factored receivable, and mortgage warehouse loan pools. For each of these loan segments, the Company applies an expected loss ratio based on internal and peer historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions. Loss factors used to calculate the required ACL on pools that use the loss-rate method reflect the forecasted economic conditions described above.
For the three months ended March 31, 2023, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period increased the required ACL by $383,000. Decreases in required specific reserves decreased the required ACL at March 31, 2023 by $911,000. Changes in loan volume and mix during the three months ended March 31, 2023 did not have a material impact on the ACL during the period. Net charge-offs during the period were $2,215,000.
For the three months ended March 31, 2022, changes in projected loss drivers and prepayment assumptions over the reasonable and supportable forecast period decreased the required ACL by $1,017,000. Increases in required specific reserves increased the required ACL at March 31, 2022 by $879,000. Changes in loan volume and mix during the three months ended March 31, 2022 decreased the required ACL by $522,000. Net charge-offs during the period were $1,524,000.
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
(Dollars in thousands)Real EstateAccounts
Receivable		EquipmentOtherTotalACL
Allocation
March 31, 2023
Commercial real estate$563 $— $— $2,299 $2,862 $32 
Construction, land development, land— — — — — — 
1-4 family residential1,180 — — 45 1,225 126 
Farmland419 — 104 131 654 — 
Commercial112 — 3,213 10,203 13,528 5,402 
Factored receivables— 39,481 — — 39,481 11,701 
Consumer— — — 89 89 — 
Mortgage warehouse— — — — — — 
Total$2,274 $39,481 $3,317 $12,767 $57,839 $17,261 
At March 31, 2023 the balance of the Over-Formula Advance Portfolio included in factored receivables was $7,772,000 and was fully reserved. At March 31, 2023 the balance of Misdirected Payments included in factored receivables was $19,361,000 and carried no ACL allocation.
(Dollars in thousands)Real EstateAccounts
Receivable		EquipmentOtherTotalACL
Allocation
December 31, 2022
Commercial real estate$1,003 $— $— $140 $1,143 $283 
Construction, land development, land150 — — — 150 — 
1-4 family residential1,342 — — 49 1,391 108 
Farmland196 — 108 96 400 — 
Commercial193 — 5,334 10,370 15,897 4,737 
Factored receivables— 42,409 — — 42,409 13,042 
Consumer— — — 91 91 — 
Mortgage warehouse— — — — — — 
Total$2,884 $42,409 $5,442 $10,746 $61,481 $18,170 
At December 31, 2022 the balance of the Over-Formula Advance Portfolio included in factored receivables was $8,202,000 and carried an ACL allocation of $8,202,000. At December 31, 2022 the balance of Misdirected Payments included in factored receivables was $19,361,000 and carried no ACL allocation.
Past Due and Nonaccrual Loans
The following tables present an aging of contractually past due loans:
(Dollars in thousands)Past Due
30-59 Days		Past Due
60-90 Days		Past Due 90
Days or More		Total
Past Due		CurrentTotalPast Due 90
Days or More
and Accruing
March 31, 2023
Commercial real estate$919 $— $1,058 $1,977 $693,183 $695,160 $— 
Construction, land development, land298 — — 298 98,013 98,311 — 
1-4 family residential782 227 725 1,734 130,276 132,010 — 
Farmland402 33 — 435 67,161 67,596 — 
Commercial992 3,180 3,458 7,630 1,232,322 1,239,952 — 
Factored receivables21,233 5,676 32,897 59,806 1,118,298 1,178,104 32,897 
Consumer146 14 9 169 8,744 8,913 — 
Mortgage warehouse— — — — 889,960 889,960 — 
Total$24,772 $9,130 $38,147 $72,049 $4,237,957 $4,310,006 $32,897 
(Dollars in thousands)Past Due
30-59 Days		Past Due
60-90 Days		Past Due 90
Days or More		Total
Past Due		CurrentTotalPast Due 90
Days or More
and Accruing
December 31, 2022
Commercial real estate$1,301 $— $455 $1,756 $676,388 $678,144 $— 
Construction, land development, land— — 145 145 90,831 90,976 — 
1-4 family residential936 531 776 2,243 123,738 125,981 — 
Farmland— — — — 68,934 68,934 — 
Commercial1,630 3,139 2,847 7,616 1,243,494 1,251,110 — 
Factored receivables42,797 12,651 37,142 92,590 1,144,859 1,237,449 37,142 
Consumer52 41 2 95 8,773 8,868 — 
Mortgage warehouse— — — — 658,829 658,829 — 
Total$46,716 $16,362 $41,367 $104,445 $4,015,846 $4,120,291 $37,142 
At March 31, 2023 and December 31, 2022, total past due Over-Formula Advances recorded in factored receivables was $7,772,000 and $8,202,000, respectively, all of which was considered past due 90 days or more. At March 31, 2023 and December 31, 2022, the Misdirected Payments totaled $19,361,000, all of which was considered past due 90 days or more. Given the nature of factored receivables, these assets are disclosed as past due 90 days or more still accruing; however, the Company is not recognizing income on the assets. Historically, any income recognized on factored receivables that are past due 90 days or more has not been material.
The following table presents the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses:
March 31, 2023December 31, 2022
(Dollars in thousands)Total NonaccrualNonaccrual
With No ACL		Total NonaccrualNonaccrual
With No ACL
Commercial real estate$2,598 $2,468 $871 $319 
Construction, land development, land— — 150 150 
1-4 family residential1,226 1,020 1,391 1,238 
Farmland654 654 400 400 
Commercial13,529 3,273 15,393 3,662 
Factored receivables— — — — 
Consumer89 89 91 91 
Mortgage warehouse— — — — 
$18,096 $7,504 $18,296 $5,860 
The following table presents accrued interest on nonaccrual loans reversed through interest income:
Three Months Ended March 31,
(Dollars in thousands)20232022
Commercial real estate$16 $— 
Construction, land development, land— — 
1-4 family residential— — 
Farmland22 — 
Commercial7 4 
Factored receivables— — 
Consumer— — 
Mortgage warehouse— — 
$45 $4 
There was no interest earned on nonaccrual loans during the three months ended March 31, 2023 and 2022.
The following table presents information regarding nonperforming loans:
(Dollars in thousands)March 31, 2023December 31, 2022
Nonaccrual loans$18,096 $18,296 
Factored receivables greater than 90 days past due25,125 28,940 
Other nonperforming factored receivables(1)
276 491 
Troubled debt restructurings accruing interest— 503 
$43,497 $48,230 
(1)Other nonperforming factored receivables represent the portion of the Over-Formula Advance Portfolio that is not covered by Covenant's indemnification as well as other nonperforming factored receivables less than 90 days past due. This amount is also considered Classified from a risk rating perspective.
Credit Quality Information
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current collateral and financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk on a regular basis. Large groups of smaller balance homogeneous loans, such as consumer loans, are analyzed primarily based on payment status. The Company uses the following definitions for risk ratings:
Pass – Pass rated loans have low to average risk and are not otherwise classified.
Classified – Classified loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Certain classified loans have the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. As of March 31, 2023 and December 31, 2022, based on the most recent analysis performed, the risk category of loans is as follows:
Revolving
Loans		Revolving
Loans
Converted
To Term
Loans		Total
(Dollars in thousands)Year of Origination
March 31, 202320232022202120202019Prior
Commercial real estate
Pass$39,937 $213,434 $160,658 $193,211 $27,623 $49,660 $2,665 $423 $687,611 
Classified755 3,748 423 2,568 39 16 — — 7,549 
Total commercial real estate$40,692 $217,182 $161,081 $195,779 $27,662 $49,676 $2,665 $423 $695,160 
YTD gross charge-offs$— $— $— $— $— $— $— $— $— 
Construction, land development, land
Pass$22,290 $61,733 $6,550 $3,398 $3,146 $459 $735 $— $98,311 
Classified— — — — — — — — — 
Total construction, land development, land$22,290 $61,733 $6,550 $3,398 $3,146 $459 $735 $— $98,311 
YTD gross charge-offs$— $— $— $— $— $— $— $— $— 
1-4 family residential
Pass$9,364 $25,699 $21,231 $8,811 $2,745 $23,886 $38,378 $590 $130,704 
Classified46 30 136 6 53 966 69 — 1,306 
Total 1-4 family residential$9,410 $25,729 $21,367 $8,817 $2,798 $24,852 $38,447 $590 $132,010 
YTD gross charge-offs$— $— $— $— $— $5 $— $— $5 
Farmland
Pass$3,852 $15,682 $6,706 $8,095 $2,757 $23,748 $1,105 $200 $62,145 
Classified3,848 927 — 118 104 454 — — 5,451 
Total farmland$7,700 $16,609 $6,706 $8,213 $2,861 $24,202 $1,105 $200 $67,596 
YTD gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial
Pass$124,074 $294,695 $148,791 $112,083 $39,021 $15,779 $476,912 $630 $1,211,985 
Classified738 11,283 12,482 2,180 652 184 448 — 27,967 
Total commercial$124,812 $305,978 $161,273 $114,263 $39,673 $15,963 $477,360 $630 $1,239,952 
YTD gross charge-offs$1 $— $5 $216 $— $— $— $— $222 
Factored receivables
Pass$1,139,571 $— $— $7,496 $— $— $— $— $1,147,067 
Classified11,400 — — 19,637 — — — — 31,037 
Total factored receivables$1,150,971 $— $— $27,133 $— $— $— $— $1,178,104 
YTD gross charge-offs$— $2,293 $— $— $— $— $— $— $2,293 
Consumer
Pass$827 $2,386 $2,139 $725 $253 $2,400 $94 $— $8,824 
Classified— 9 1 — — 79 — — 89 
Total consumer$827 $2,395 $2,140 $725 $253 $2,479 $94 $— $8,913 
YTD gross charge-offs$114 $13 $7 $2 $— $2 $— $— $138 
Mortgage warehouse
Pass$889,960 $— $— $— $— $— $— $— $889,960 
Classified— — — — — — — — — 
Total mortgage warehouse$889,960 $— $— $— $— $— $— $— $889,960 
YTD gross charge-offs$— $— $— $— $— $— $— $— $— 
Total loans
Pass$2,229,875 $613,629 $346,075 $333,819 $75,545 $115,932 $519,889 $1,843 $4,236,607 
Classified16,787 15,997 13,042 24,509 848 1,699 517 — 73,399 
Total loans$2,246,662 $629,626 $359,117 $358,328 $76,393 $117,631 $520,406 $1,843 $4,310,006 
YTD gross charge-offs$115 $2,306 $12 $218 $— $7 $— $— $2,658 
Revolving
Loans		Revolving
Loans
Converted
To Term
Loans		Total
(Dollars in thousands)Year of Origination
December 31, 202220222021202020192018Prior
Commercial real estate
Pass$231,427 $156,895 $198,541 $28,033 $17,786 $35,658 $3,675 $— $672,015 
Classified3,668 551 1,855 39 — 16 — — 6,129 
Total commercial real estate$235,095 $157,446 $200,396 $28,072 $17,786 $35,674 $3,675 $— $678,144 
Construction, land development, land
Pass$71,236 $11,328 $4,535 $3,186 $35 $506 $— $— $90,826 
Classified— — 5 — — 145 — — 150 
Total construction, land development, land$71,236 $11,328 $4,540 $3,186 $35 $651 $— $— $90,976 
1-4 family residential
Pass$26,306 $22,639 $9,536 $2,929 $3,528 $20,910 $38,361 $300 $124,509 
Classified137 199 7 53 1 1,006 69 — 1,472 
Total 1-4 family residential$26,443 $22,838 $9,543 $2,982 $3,529 $21,916 $38,430 $300 $125,981 
Farmland
Pass$18,190 $7,291 $10,027 $2,699 $6,742 $18,569 $1,016 $204 $64,738 
Classified1,062 2,796 120 108 — 110 — — 4,196 
Total farmland$19,252 $10,087 $10,147 $2,807 $6,742 $18,679 $1,016 $204 $68,934 
Commercial
Pass$358,983 $181,933 $136,635 $41,912 $5,842 $12,145 $486,889 $161 $1,224,500 
Classified10,721 10,579 3,767 1,038 96 116 293 — 26,610 
Total commercial$369,704 $192,512 $140,402 $42,950 $5,938 $12,261 $487,182 $161 $1,251,110 
Factored receivables
Pass$1,196,912 $— $7,710 $— $— $— $— $— $1,204,622 
Classified12,974 — 19,853 — — — — — 32,827 
Total factored receivables$1,209,886 $— $27,563 $— $— $— $— $— $1,237,449 
Consumer
Pass$2,768 $1,981 $894 $304 $266 $2,418 $147 $— $8,778 
Classified— 1 2 — 8 79 — — 90 
Total consumer$2,768 $1,982 $896 $304 $274 $2,497 $147 $— $8,868 
Mortgage warehouse
Pass$658,829 $— $— $— $— $— $— $— $658,829 
Classified— — — — — — — — — 
Total mortgage warehouse$658,829 $— $— $— $— $— $— $— $658,829 
Total loans
Pass$2,564,651 $382,067 $367,878 $79,063 $34,199 $90,206 $530,088 $665 $4,048,817 
Classified28,562 14,126 25,609 1,238 105 1,472 362 — 71,474 
Total loans$2,593,213 $396,193 $393,487 $80,301 $34,304 $91,678 $530,450 $665 $4,120,291 
Loan Modifications to Borrowers Experiencing Financial Difficulty
The following table presents the amortized cost basis at the end of the reporting period of the loans modifications to borrowers experiencing financial difficulty:
Term Extension
Three Months Ended March 31, 2023
(Dollars in thousands)Amortized Cost% of Portfolio
Commercial real estate$119 — %
Commercial895 0.1 %
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
Term Extension
Three Months Ended March 31, 2023
Commercial real estate
Modification added a weighted average 0.3 years to the life of the modified loans, which did not have a material impact on cash flows.
Commercial
Modification added a weighted average 0.3 years to the life of the modified loans, which did not have a material impact on cash flows.
Payment Delay
Three Months Ended March 31, 2023
(Dollars in thousands)Amortized Cost % of Portfolio
Commercial real estate$755 0.1 %
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
Payment Delay
Three Months Ended March 31, 2023
Commercial real estate
Modification allowed for a weighted average 0.5 years of interest only payments with remaining balances due at maturity.
The following table presents the performance of loans that have been modified in the last twelve months:
March 31, 2023
(Dollars in thousands)CurrentPast Due
30-89 Days		Past Due
90 Days or More
Commercial real estate$874 $— $— 
Commercial895 — — 
$1,769 $— $— 
At March 31, 2023, the Company had $327,000 of commitments to lend additional funds to borrowers experiencing financial difficulty for which the Company modified the terms of the loans in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension during the current period.
There were no loans to borrowers experiencing financial difficulty that had a payment default during the three months ended March 31, 2023 and were modified in the twelve months prior to that default. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure. Modified loans in default are individually evaluated for the allowance for credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off and the allowance for credit losses is adjusted accordingly.
Residential Real Estate Loans In Process of Foreclosure
At March 31, 2023 and December 31, 2022, the Company had $136,000 and $129,000, respectively, in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.