Note 3. Loans

Loans at March 31, 2026 and December 31, 2025 are summarized as follows (in thousands):

Net deferred loan fees included in the above loan categories were $1.9 million at March 31, 2026 and $1.7 million at  December 31, 2025. Net unamortized discounts on loans acquired through business combinations included in the above loan categories totaled $12.9 million at March 31, 2026 and $13.2 million at December 31, 2025. Unamortized premiums on loans purchased from a third-party loan originator are included in the commercial and industrial loan categories and totaled $3.7 million as of March 31, 2026 and $4.1 million as of December 31, 2025.  Consumer and other loans included $546 thousand and $543 thousand of demand deposit overdrafts at March 31, 2026 and December 31, 2025, respectively.

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting.  The principal balance of purchased loans is included in the allowance for credit losses calculation.  The remaining net discount on purchased loans at  March 31, 2026 was $12.9 million. The outstanding principal balance and the carrying amount at  March 31, 2026 and December 31, 2025 of loans acquired in business combinations were as follows:

Risk characteristics of each loan portfolio class that are considered by the Company include:

The following tables provide a summary of loan classes and an aging of past due loans as of March 31, 2026 and December 31, 2025 (in thousands):

Credit Quality Indicators

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans. The Company utilizes a risk grading matrix to assign a rating to each of its loans. The loan ratings are summarized into the following categories: pass, special mention, substandard, doubtful, and loss. Pass rated loans include all risk rated credits other than those included in special mention, substandard, or doubtful. Loans classified as loss are charged-off. Loan officers assign risk grades to loans at origination and as renewals arise. The Bank’s Credit Administration department reviews risk grades for accuracy on a quarterly basis and as credit issues arise. In addition, a certain amount of loans are reviewed each year through the Company’s internal and external loan review process. A description of the general characteristics of the loan grading categories is as follows:

Pass – Loans classified as pass exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower as agreed.

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with 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. The Company considers all doubtful loans to be impaired and places the loan on non-accrual status.

Loss – Loans classified as loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of March 31, 2026 and December 31, 2025 (in thousands).