Allowance for Credit Losses

3 Months Ended

Mar. 31, 2023

Activity in the allowance for credit losses is summarized as follows:


	Three Months Ended March 31, 2023
(In thousands)	Beginning Balance		Initial Allowance on PCD Loans Acquired During the Period		Provision for Credit Losses		Charge- Offs		Recoveries		Ending Balance
Construction and land development	$	6,464	$	5	$	69	$	—	$	2	$	6,540
Commercial real estate - owner occupied	6,051		139		101		—		1		6,292
Commercial real estate - non-owner occupied	43,258		647		9,715		(109)		64		53,575
Residential real estate	29,605		400		9,898		(159)		150		39,894
Commercial and financial	15,648		11,983		6,414		(2,642)		190		31,593
Consumer	12,869		161		5,401		(695)		10		17,746
Totals	$	113,895	$	13,335	$	31,598	$	(3,605)	$	417	$	155,640


	Three Months Ended March 31, 2022
(In thousands)	Beginning Balance		Allowance on PCD Loans Acquired During the Period		Provision for Credit Losses		Charge- Offs		Recoveries		TDR Allowance Adjustments		Ending Balance
Construction and land development	$	2,751	$	—	$	(493)	$	—	$	10	$	—	$	2,268
Commercial real estate - owner occupied	8,579		—		715		—		—		—		9,294
Commercial real estate - non-owner occupied	36,617		31		7,274		—		—		—		43,922
Residential real estate	12,811		17		1,060		(1)		191		(3)		14,075
Commercial and financial	19,744		3		(1,628)		(569)		177		—		17,727
Consumer	2,813		—		(372)		(95)		208		(2)		2,552
Totals	$	83,315	$	51	$	6,556	$	(665)	$	586	$	(5)	$	89,838

Management establishes the allowance using relevant available information from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Forecast data is sourced from Moody’s Analytics (“Moody’s”), a firm widely recognized for its research, analysis, and economic forecasts. The forecasts of future economic conditions are over a period that has been deemed reasonable and supportable, and in segments where it can no longer develop

reasonable and supportable forecasts, the Company reverts to longer-term historical loss experience to estimate losses over the remaining life of the loans.

As of March 31, 2023 and December 31, 2022, the Company utilized a blend of Moody’s most recent “U.S. Macroeconomic Outlook Baseline” and “Alternative Scenario 3 - Downside - 90th Percentile” scenarios and considered the uncertainty associated with the assumptions in both scenarios, including continued actions taken by the Federal Reserve with regard to monetary policy and interest rates and the potential impact of those actions, the ongoing Russia-Ukraine conflict and the magnitude of the resulting market disruption, the potential impact of persistent high inflation on economic growth and expectations around a recession occurring over the next 12 to 24 months. Outcomes in any or all of these factors could differ from the scenarios identified above, and the Company incorporated qualitative considerations reflecting the risk of uncertain economic conditions, and for additional dimensions of risk not captured in the quantitative model.

The following section discusses changes in the level of the allowance for credit losses for the three months ended March 31, 2023. The acquisition of Professional on January 31, 2023, added approximately $2.0 billion in loans, contributing to the increase in allowance in each segment.

In the Construction and Land Development segment, the increase in the allowance is attributed to higher loan balances. In this segment, the primary source of repayment is typically from proceeds of the sale, refinancing, or permanent financing of the underlying property; therefore, industry and collateral type and estimated collateral values are among the relevant factors in assessing expected losses.

In the Commercial Real Estate - Owner-Occupied segment, the increase in the allowance is attributed to higher loan balances. Risk characteristics include but are not limited to, collateral type, note structure and loan seasoning.

In the Commercial Real Estate - Non Owner-Occupied segment, the increase in the allowance is attributed to higher loan balances. Repayment is often dependent upon rental income from the successful operation of the underlying property. Loan performance may be adversely affected by general economic conditions or conditions specific to the real estate market, including property types. Collateral type, note structure and loan seasoning are among the risk characteristics analyzed for this segment.

The Residential Real Estate segment includes first mortgages secured by residential property, and home equity lines of credit. The increase in the allowance is due to higher loan balances and the increasing likelihood of economic recession reflected within the forecast. Risk characteristics considered for this segment include, but are not limited to, borrower FICO score, lien position, loan to value ratios and loan seasoning.

In the Commercial and Financial segment, borrowers are primarily small to medium sized professional firms and other businesses, and loans are generally supported by projected cash flows of the business, collateralized by business assets, and/or guaranteed by the business owners. The increase in reserves is attributed to the acquisition of Commercial and Financial loans from Professional, which includes a reserve for individually evaluated purchased credit deteriorated loans of $12.0 million. Industry, collateral type, estimated collateral values and loan seasoning are among the relevant factors in assessing expected losses.

Consumer loans include installment and revolving lines, loans for automobiles, boats, and other personal or family purposes. Risk characteristics considered for this segment include, but are not limited to, collateral type, loan to value ratios, loan seasoning and FICO score. The increase in the allowance reflects the increasing likelihood of economic recession reflected within the forecast, in addition to an increase in loan balances.

The allowance for credit losses is composed of specific allowances for loans individually evaluated and general allowances for loans grouped into loan pools based on similar characteristics, which are collectively evaluated. The Company’s loan portfolio and related allowance at March 31, 2023 and December 31, 2022 are shown in the following tables:


	March 31, 2023
	Individually Evaluated				Collectively Evaluated				Total
(In thousands)	Recorded Investment		Associated Allowance		Recorded Investment		Associated Allowance		Recorded Investment		Associated Allowance
Construction and land development	$	6	$	—	$	757,829	$	6,540	$	757,835	$	6,540
Commercial real estate - owner occupied	4,843		126		1,647,648		6,166		1,652,491		6,292
Commercial real estate - non-owner occupied	23,072		386		3,388,979		53,189		3,412,051		53,575
Residential real estate	12,986		177		2,341,408		39,717		2,354,394		39,894
Commercial and financial	39,355		14,798		1,616,529		16,795		1,655,884		31,593
Consumer	1,254		1,189		300,486		16,557		301,740		17,746
Totals	$	81,516	$	16,676	$	10,052,879	$	138,964	$	10,134,395	$	155,640


	December 31, 2022
	Individually Evaluated				Collectively Evaluated				Total
(In thousands)	Recorded Investment		Associated Allowance		Recorded Investment		Associated Allowance		Recorded Investment		Associated Allowance
Construction and land development	$	59	$	—	$	587,273	$	6,464	$	587,332	$	6,464
Commercial real estate - owner occupied	3,346		41		1,474,956		6,010		1,478,302		6,051
Commercial real estate - non-owner occupied	4,183		230		2,585,591		43,028		2,589,774		43,258
Residential real estate	11,333		275		1,838,170		29,330		1,849,503		29,605
Commercial and financial	12,167		2,639		1,341,059		13,009		1,353,226		15,648
Consumer	426		362		286,161		12,507		286,587		12,869
Totals	$	31,514	$	3,547	$	8,113,210	$	110,348	$	8,144,724	$	113,895