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Loans and Leases and Allowance for Loan and Lease Losses

3 Months Ended

Mar. 31, 2023

Loans and Leases and Allowance for Loan and Lease Losses

Note 5. Loans and Leases and Allowance for Credit Losses

Portfolio Segmentation:

Major categories of loans and leases are summarized as follows (in thousands):


	March 31,		December 31,
	2023		2022
Commercial real estate	$	1,635,534	$	1,627,761
Consumer real estate		606,343		587,977
Construction and land development		386,253		402,501
Commercial and industrial		571,153		551,867
Leases		67,701		67,427
Consumer and other		14,803		16,094
Total loans and leases		3,281,787		3,253,627
Less: Allowance for credit losses		(32,279)		(23,334)
Loans and leases, net	$	3,249,508	$	3,230,293

The loan and lease portfolio is disaggregated into segments. There are six loan and lease portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, leases, and consumer and other.

The following describe risk characteristics relevant to each of the portfolio segments:

Commercial Real Estate: Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Consumer Real Estate: Consumer real estate loans include real estate loans secured by first liens, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower’s income, sale of the property, or rental income derived from the property. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Construction and Land Development: Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and financial loans. These loans include those loans to commercial customers for use in normal business operations to finance working

capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers’ business operations.

Leases: The lease portfolio segment includes leases to small and mid-size companies for equipment financing leases. These leases are secured by a secured interest in the equipment being leased.

Consumer and Other: The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

The Bank occasionally enters into loan participation agreements with other banks in the ordinary course of business to diversify credit risk. For certain sold participation loans, the Bank has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their share of the loan without permission from the Bank. GAAP requires the participated portion of these loans to be recorded as secured borrowings. The participated portions of these loans are included in the Commercial Real Estate totals above with a corresponding liability reflected in other borrowings. At March 31, 2023 and December 31, 2022, the balance of such loans totaled $0 and $24.6 million, respectively.

The following tables detail the changes in the allowance for credit losses by loan and lease classification (in thousands):


	Three Months Ended March 31, 2023
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	10,821	$	4,028	$	3,059	$	3,997	$	1,293	$	136	$	23,334
Impact of adopting ASU 2016-13		879		1,952		2,145		1,451		(683)		13		5,757
PCD gross up		2,652		166		25		27		28		—		2,898
Charged-off loans and leases		—		—		—		(173)		(9)		(133)		(315)
Recoveries of charge-offs		2		5		—		20		—		28		55
Provision charged to expense		174		260		(10)		37		8		81		550
Ending balance	$	14,528	$	6,411	$	5,219	$	5,359	$	637	$	125	$	32,279


	Three Months Ended March 31, 2022
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	9,781	$	3,454	$	1,882	$	3,781	$	330	$	124	$	19,352
Charged-off loans and leases		—		(33)		—		(188)		(85)		(182)		(488)
Recoveries of charge-offs		1		7		—		17		157		26		208
Provision charged to expense		623		(40)		238		(109)		146		148		1,006
Ending balance	$	10,405	$	3,388	$	2,120	$	3,501	$	548	$	116	$	20,078

The following tables detail the allowance for credit losses and recorded investment in loans by loan classification and by impairment evaluation method as of December 31, 2022, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


					Construction		Commercial				Consumer
	Commercial		Consumer		and Land		and				and
	Real Estate		Real Estate		Development		Industrial		Leases		Other		Total
December 31, 2022:
Performing loans and leases	$	10,815	$	3,913	$	2,674	$	3,997	$	1,293	$	136	$	22,828
Impaired loans and leases		—		—		385		—		—		—		385
		10,815		3,913		3,059		3,997		1,293		136		23,213
PCI loans and leases		6		115		—		—		—		—		121
Total loans and leases	$	10,821	$	4,028	$	3,059	$	3,997	$	1,293	$	136	$	23,334


					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
December 31, 2022:
Performing loans and leases	$	1,611,815	$	578,342	$	400,114	$	549,974	$	66,459	$	16,091	$	3,222,795
Impaired loans and leases		—		1,283		858		—		—		—		2,141
		1,611,815		579,625		400,972		549,974		66,459		16,091		3,224,936
PCI loans and leases		15,946		8,352		1,529		1,893		968		3		28,691
Total loans and leases	$	1,627,761	$	587,977	$	402,501	$	551,867	$	67,427	$	16,094	$	3,253,627

We maintain the allowance for credit losses at a level that we deem appropriate to adequately cover the expected credit loss in the loan and lease portfolio. Our provision for credit losses for the three ended March 31, 2023, is $550 thousand and $1.0 million during the three months ended March 31, 2022. As of March 31, 2023, and December 31, 2022, our allowance for credit losses was $32.3 million and $23.3 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans and leases was 0.98% at March 31, 2023, and 0.72% at December 31, 2022.

A description of the general characteristics of the risk grades used by the Company is as follows:

Pass: Loans and leases in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan and lease obligations. Loans and leases in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.

Watch: Loans and leases in this risk category involve borrowers that exhibit characteristics, or are operating under conditions that, if not successfully mitigated as planned, have a reasonable risk of resulting in a downgrade within the next six to twelve months. Loans and leases may remain in this risk category for six months and then are either upgraded or downgraded upon subsequent evaluation.

Special Mention: Loans and leases in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned” classification. Loans and leases in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company’s credit position.

Substandard: Loans and leases in this risk grade are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or

weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans and leases in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Uncollectible: Loans and leases in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan or lease has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan or lease, even though partial recovery may be obtained in the future. Charge-offs against the allowance for credit losses are taken in the period in which the loan or lease becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans or leases within this category.

The Company evaluates the loan risk grading system definitions and allowance for credit loss methodology on an ongoing basis.

The following tables outline the amount of each loan and lease classification and the amount categorized into each risk rating based on year of origination (in thousands):


	March 31, 2023
	Loans Amortized Cost Basis by Origination Year
															Revolving
															Loans
													Revolving		Converted
	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total
Commercial real estate
Pass	$	49,648	$	569,114	$	477,163	$	202,863	$	144,939	$	144,968	$	13,309	$	599	$	1,602,603
Watch		2,497		8,236		3,307		2,493		8,427		387		-		-		25,347
Special mention		-		375		304		-		1,656		180		642		-		3,157
Substandard		587		2		3,336		56		-		446		-		-		4,427
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate		52,732		577,727		484,110		205,412		155,022		145,981		13,951		599		1,635,534
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Consumer real estate
Pass		25,091		194,860		115,389		58,731		37,562		66,410		103,080		542		601,665
Watch		319		-		179		146		326		216		451		-		1,637
Special mention		-		-		-		-		-		62		-		-		62
Substandard		202		992		-		-		-		1,723		62		-		2,979
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer real estate		25,612		195,852		115,568		58,877		37,888		68,411		103,593		542		606,343
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Construction and land development
Pass		56,857		216,188		64,077		5,791		5,786		8,545		27,452		-		384,696
Watch		178		50		-		-		-		218		-		-		446
Special mention		-		66		-		-		-		-		-		-		66
Substandard		-		-		38		620		-		387		-		-		1,045
Doubtful		-		-		-		-		-		-		-		-		-
Total construction and land development		57,035		216,304		64,115		6,411		5,786		9,150		27,452		-		386,253
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Commercial and industrial
Pass		48,067		202,708		87,842		39,714		13,566		29,975		141,902		1,544		565,318
Watch		220		1,184		3,252		168		130		148		455		-		5,557
Special mention		-		41		-		-		-		8		-		-		49
Substandard		-		229		-		-		-		-		-		-		229
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial and industrial		48,287		204,162		91,094		39,882		13,696		30,131		142,357		1,544		571,153
YTD gross charge-offs		-		(65)		(50)		(58)		-		-		-		-		(173)

Leases
Pass		7,703		36,564		13,881		6,875		1,918		760		-		-		67,701
Watch		-		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total leases		7,703		36,564		13,881		6,875		1,918		760		-		-		67,701
YTD gross charge-offs		-		-		-		-		(9)		-		-		-		(9)

Consumer and other
Pass		2,012		4,179		1,544		959		200		277		5,614		-		14,785
Watch		-		-		-		-		16		-		-		-		16
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		2		-		-		-		-		2
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer and other		2,012		4,179		1,544		961		216		277		5,614		-		14,803
YTD gross charge-offs		-		(64)		(22)		(14)		(13)		(20)		-		-		(133)

Total loans
Pass		189,378		1,223,613		759,896		314,933		203,971		250,935		291,357		2,685		3,236,768
Watch		3,214		9,470		6,738		2,807		8,899		969		906		-		33,003
Special mention		-		482		304		-		1,656		250		642		-		3,334
Substandard		789		1,223		3,374		678		-		2,556		62		-		8,682
Doubtful		-		-		-		-		-		-		-		-		-
Total loans	$	193,381	$	1,234,788	$	770,312	$	318,418	$	214,526	$	254,710	$	292,967	$	2,685	$	3,281,787
Total YTD gross charge-offs	$	-	$	(129)	$	(72)	$	(72)	$	(22)	$	(20)	$	-	$	-	$	(315)

The following tables outline the amount of each loan and lease classification and the amount categorized into each risk rating as of December 31, 2022, prior to the adoption of ASU 2016-13 (in thousands):


	December 31, 2022
					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
Non PCI Loans and Leases:	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
Pass	$	1,579,387	$	576,428	$	399,846	$	545,210	$	66,459	$	16,057	$	3,183,387
Watch		29,810		1,496		224		4,523		—		19		36,072
Special mention		2,539		35		—		61		—		—		2,635
Substandard		79		1,666		902		180		—		15		2,842
Doubtful		—		—		—		—		—		—		—
Total		1,611,815		579,625		400,972		549,974		66,459		16,091		3,224,936

PCI Loans and Leases:
Pass		11,924		6,927		1,054		1,893		968		3		22,769
Watch		1,439		188		46		—		—		—		1,673
Special mention		11		54		—		—		—		—		65
Substandard		2,572		1,183		429		—		—		—		4,184
Doubtful		—		—		—		—		—		—		—
Total		15,946		8,352		1,529		1,893		968		3		28,691
Total loans and leases	$	1,627,761	$	587,977	$	402,501	$	551,867	$	67,427	$	16,094	$	3,253,627

Past Due Loans and Leases:

A loan or lease is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan or lease agreement. Generally, management places a loan or lease on nonaccrual when there is a clear indicator that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan or lease is 90 days past due.

The following tables present an aging analysis of our loan and lease portfolio (in thousands):


	March 31, 2023
					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate	$	274	$	423	$	—	$	697	$	1,634,837	$	1,635,534
Consumer real estate		2,467		250		—		2,717		603,626		606,343
Construction and land development		634		—		—		634		385,619		386,253
Commercial and industrial		388		53		—		441		570,712		571,153
Leases		490		4		—		494		67,207		67,701
Consumer and other		17		—		—		17		14,786		14,803
Total	$	4,270	$	730	$	—	$	5,000	$	3,276,787	$	3,281,787


	December 31, 2022
					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate	$	54	$	—	$	—	$	54	$	1,627,707		1,627,761
Consumer real estate		594		—		—		594		587,383		587,977
Construction and land development		—		—		—		—		402,501		402,501
Commercial and industrial		185		18		—		203		551,664		551,867
Leases		1,024		84		143		1,251		66,176		67,427
Consumer and other		103		4		—		107		15,987		16,094
Total	$	1,960	$	106	$	143	$	2,209	$	3,251,418	$	3,253,627

The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still accruing interest at March 31, 2023 and December 31, 2022. Also presented is the balance of loans on nonaccrual status at March 31, 2023 for which there was no related allowance for credit losses recorded (in thousands):


	March 31, 2023						December 31, 2022
	Total		Nonaccrual		Loans Past Due		Total		Loans Past Due
	Nonaccrual		With No Allowance		Over 90 Days		Nonaccrual		Over 90 Days
	Loans		for Credit Losses		Still Accruing		Loans		Still Accruing
Commercial real estate	$	324	$	—	$	—	$	—	$	—
Consumer real estate		1,825		991		—		1,665		—
Construction and land development		686		—		—		920		—
Commercial and industrial		410		—		—		180		—
Leases		—		—		—		28		143
Consumer and other		2		1		—		15		—
Total	$	3,247	$	992	$	—	$	2,808	$	143

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses (in thousands):


	March 31, 2023
	Real Estate		Other		Total
Commercial real estate	$	3,898	$	—	$	3,898
Consumer real estate		1,373		—		1,373
Construction and land development		1,411		—		1,411
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
Total	$	6,682	$	—	$	6,682

Impaired Loans and Leases:

The following table presents impaired loans at December 31, 2022, as determined under ASC 310 prior to the adoption of ASU 2016-13. A loan or lease held for investment is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the terms of the loan or lease agreement. Presented are the recorded investment, unpaid principal balance and related allowance of impaired loans at December 31, 2022, by loan classification (in thousands):


	December 31, 2022
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	—	$	—	$	—
Consumer real estate		1,283		1,282		—
Construction and land development		—		—		—
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
		1,283		1,282		—
Impaired loans and leases with a valuation allowance:
Commercial real estate		—		—		—
Consumer real estate		—		—		—
Construction and land development		858		858		385
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
		858		858		385
PCI loans and leases:
Commercial real estate		500		580		6
Consumer real estate		684		646		115
Construction and land development		—		—		—
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
		1,184		1,226		121
Total impaired loans and leases	$	3,325	$	3,366	$	506

The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the three months ended March 31, 2022, respectively, of impaired loans by loan classification as determined under ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


	Three Months Ended March 31,
	2022
	Average		Interest
	Recorded		Income
	Investment		Recognized
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	—	$	—
Consumer real estate		1,937		17
Construction and land development		—		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		—		—
		1,937		17
Impaired loans and leases with a valuation allowance:
Commercial real estate		858		—
Consumer real estate		130		—
Construction and land development		—		—
Commercial and industrial		49		—
Leases		—		—
Consumer and other		—		—
		1,037		—
PCI loans and leases:
Commercial real estate		1,231		24
Consumer real estate		901		16
Construction and land development		—		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		3		—
		2,135		40
Total impaired loans and leases	$	5,109	$	57

Loan Modifications to Borrowers Experiencing Financial Difficulty:

The Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

At March 31, 2023, the Company had $97 thousand of loan modifications to borrowers experiencing financial difficulty, including $94 thousand of consumer real estate and $3 thousand in consumer and other, none of which were on nonaccrual. These modifications generally consist of payment delay and term extensions.

There were no loan modifications made to borrowers experiencing financial difficulty during the quarter ended March 31, 2023. There were no loan modifications made to borrowers experiencing financial difficulty during the quarter ended March 31, 2023, that subsequently defaulted.

As of December 31, 2022, prior to the adoption ASU 2022-02, management had approximately $101 thousand that meet the criteria of trouble debt restructured (“TDR”), none of which were on nonaccrual.

There was one loan for $516 that was modified as a TDR during the three months ended March 31, 2022.

Foreclosure Proceedings and Balances:

As of March 31, 2023, there were two residential real estate properties totaling $314 thousand secured by real estate included in other real estate owned and there were no residential real estate loan in the process of foreclosure.