Loans and Leases and Allowance for Loan and Lease Losses | Note 5. Loans and Leases and Allowance for Loan and Lease Losses Portfolio Segmentation: Major categories of loans and leases are summarized as follows (in thousands) December 31, 2022 December 31, 2021 PCI All Other PCI All Other Loans and Leases 1 Loans and Leases Total Loans and Leases 1 Loans and Leases Total Commercial real estate $ 15,946 $ 1,611,815 $ 1,627,761 $ 20,875 $ 1,363,281 $ 1,384,156 Consumer real estate 8,352 579,625 587,977 11,833 465,439 477,272 Construction and land development 1,529 400,972 402,501 2,882 275,504 278,386 Commercial and industrial 1,893 549,974 551,867 2,516 485,508 488,024 Leases 968 66,459 67,427 3,170 50,538 53,708 Consumer and other 3 16,091 16,094 71 11,780 11,851 Total loans and leases 28,691 3,224,936 3,253,627 41,347 2,652,050 2,693,397 Less: Allowance for loan and lease losses (121) (23,213) (23,334) (179) (19,173) (19,352) Loans and leases, net $ 28,570 $ 3,201,723 $ 3,230,293 $ 41,168 $ 2,632,877 $ 2,674,045 1 For purposes of the disclosures required pursuant to the adoption of ASC 310, the loan and lease portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. 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: Consumer Real Estate: Construction and Land Development: Commercial and Industrial: Leases: Consumer and Other: 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 December 31, 2022, the total participated portions of loans of this nature totaled $24.6 million and none at December 31, 2021. Subsequent to year-end, these loan participation agreements were amended in order to permit sales treatment accounting. Credit Risk Management: The Company employs a credit risk management process with defined policies, accountability and routine reporting to manage credit risk in the loan and lease portfolio segments. Credit risk management is guided by credit policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within the Credit Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans and leases are individually underwritten, risk-rated, approved, and monitored. Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer real estate and consumer and other portfolio segments, the risk management process focuses on managing customers who become delinquent in their payments. For the other portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios, including a third party review of the largest credits on an annual basis or more frequently, as needed. To ensure problem credits are identified on a timely basis, several specific portfolio reviews occur periodically to assess the larger adversely rated credits for proper risk rating and accrual status. Credit quality and trends in the loan and lease portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by Director, Management and Loan Committees. The allowance for loan and lease losses is a valuation reserve established through provisions for loan and lease losses charged against income. The allowance for loan and lease losses, which is evaluated quarterly, is maintained at a level that management deems sufficient to absorb probable losses inherent in the loan and lease portfolio. Loans and leases deemed to be uncollectible are charged against the allowance for loan and lease losses, while recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses. The allowance for loan and lease losses is comprised of specific valuation allowances for loans and leases evaluated individually for impairment and general allocations for pools of homogeneous loans and leases with similar risk characteristics and trends. The allowance for loan and lease losses related to specific loans and leases is based on management’s estimate of potential losses on impaired loans and leases as determined by: (1) the present value of expected future cash flows; (2) the fair value of collateral if the loan or lease is determined to be collateral dependent; or (3) the loan’s or leases’ observable market price. The Company’s homogeneous loan and lease pools include commercial real estate loans, consumer real estate loans, construction and land development loans, commercial and industrial loans, leases and consumer and other loans. The general allocations to these loan and lease pools are based on the historical loss rates for specific loan and lease types and the internal risk grade, if applicable, adjusted for both internal and external qualitative risk factors. The qualitative factors considered by management include, among other factors: (1) changes in local and national economic conditions; (2) changes in asset quality; (3) changes in loan and lease portfolio volume; (4) the composition and concentrations of credit; (5) the impact of competition on loan and lease structuring and pricing; (6) the impact of the regulatory environment and changes in laws; (7) effectiveness of the Company’s loan and lease policies, procedures and internal controls. The total allowance established for each homogeneous loan and lease pool represents the product of the historical loss ratio adjusted for qualitative factors and the total dollar amount of the loans and leases in the pool. The determination of the adequacy of the allowance for loan and lease losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and leases, management obtains independent appraisals for significant collateral. The Company’s loans and leases are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Company has a diversified loan and lease portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions. While management uses available information to recognize losses on loans and leases, further reductions in the carrying amounts of loans and leases may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and leases. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans and leases may change materially in the near term. The composition of loans by loan and lease classification for impaired and performing loan and lease status is summarized in the tables below (in thousands) 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 December 31, 2021: Performing loans and leases $ 1,362,423 $ 463,374 $ 275,504 $ 485,411 $ 50,538 $ 11,780 $ 2,649,030 Impaired loans and leases 858 2,065 — 97 — — 3,020 1,363,281 465,439 275,504 485,508 50,538 11,780 2,652,050 PCI loans and leases 20,875 11,833 2,882 2,516 3,170 71 41,347 Total loans and leases $ 1,384,156 $ 477,272 $ 278,386 $ 488,024 $ 53,708 $ 11,851 $ 2,693,397 The following tables show the allowance for loan and lease losses allocation by loan classification for impaired, PCI, and performing loans (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 December 31, 2021: Performing loans and leases $ 9,355 $ 3,237 $ 1,882 $ 3,685 $ 330 $ 123 $ 18,612 Impaired loans and leases 396 69 — 96 — — 561 9,751 3,306 1,882 3,781 330 123 19,173 PCI loans and leases 30 148 — — — 1 179 Total loans and leases $ 9,781 $ 3,454 $ 1,882 $ 3,781 $ 330 $ 124 $ 19,352 The following tables detail the changes in the allowance for loan and lease losses by loan classification (in thousands) Year Ended December 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) — (307) (110) (744) (1,194) Recoveries of charge-offs 6 564 — 184 194 210 1,158 Provision charged to expense 1,034 43 1,177 339 879 546 4,018 Ending balance $ 10,821 $ 4,028 $ 3,059 $ 3,997 $ 1,293 $ 136 $ 23,334 Year Ended December 31, 2021 Consumer Construction Commercial Commercial Real and Land and Consumer Real Estate Estate Development Industrial Leases and Other Total Beginning balance $ 7,579 $ 3,471 $ 2,076 $ 5,107 $ — $ 113 $ 18,346 Charged-off loans and leases — (67) — (298) (166) (482) (1,013) Recoveries of charge-offs 83 39 — 25 41 198 386 Provision charged to expense 2,119 11 (194) (1,053) 455 295 1,633 Ending balance $ 9,781 $ 3,454 $ 1,882 $ 3,781 $ 330 $ 124 $ 19,352 Year Ended December 31, 2020 Consumer Construction Commercial Commercial Real and Land and Consumer Real Estate Estate Development Industrial Leases and Other Total Beginning balance $ 4,508 $ 2,576 $ 1,127 $ 1,957 $ — $ 75 $ 10,243 Charged-off loans and leases — (23) — (420) — (398) (841) Recoveries of charge-offs 19 39 2 114 — 87 261 Provision charged to expense 3,052 879 947 3,456 — 349 8,683 Ending balance $ 7,579 $ 3,471 $ 2,076 $ 5,107 $ — $ 113 $ 18,346 We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan and lease portfolio. Our provision for loan and lease losses for the years ended December 31, 2022, 2021 and 2020, were $4.0 million, $1.6 million and $8.7 million, respectively. As of December 31, 2022, and 2021, our allowance for loan and lease losses was $23.3 million and $19.4 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for loan and lease loss as a percentage of total loans was 0.72% at December 31, 2022 and 2021, respectively. A description of the general characteristics of the risk grades used by the Company is as follows: Pass: Watch: Special Mention: Substandard: Doubtful: Uncollectible: The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made during the past year. The following tables outline the amount of each loan and lease classification and the amount categorized into each risk rating (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 December 31, 2021 Construction Commercial Commercial Consumer and Land and Consumer Non PCI Loans and Leases: Real Estate Real Estate Development Industrial Leases and Other Total Pass $ 1,330,888 $ 460,190 $ 275,124 $ 480,677 $ 50,538 $ 11,724 $ 2,609,141 Watch 27,246 1,334 237 4,345 — 42 33,204 Special mention 4,120 1,525 70 228 — — 5,943 Substandard 1,027 2,390 73 213 — 14 3,717 Doubtful — — — 45 — — 45 Total 1,363,281 465,439 275,504 485,508 50,538 11,780 2,652,050 PCI Loans and Leases: Pass 16,019 9,714 2,335 2,516 3,170 71 33,825 Watch 1,271 539 91 — — — 1,901 Special mention 15 68 — — — — 83 Substandard 3,570 1,512 456 — — — 5,538 Doubtful — — — — — — — Total 20,875 11,833 2,882 2,516 3,170 71 41,347 Total loans and leases $ 1,384,156 $ 477,272 $ 278,386 $ 488,024 $ 53,708 $ 11,851 $ 2,693,397 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 agreement. Generally, management places a loan or lease on nonaccrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. The following tables present an aging analysis of our loan and lease portfolio (in thousands) December 31, 2022 30-60 Days 61-89 Days Past Due 90 Total Past Due and Past Due and Days or More Past Due and Accruing Accruing and Accruing Nonaccrual Nonaccrual PCI Current Total Commercial real estate $ 54 $ — $ — $ — $ 54 $ 15,946 $ 1,611,761 $ 1,627,761 Consumer real estate 594 — — 1,665 2,259 8,352 577,366 587,977 Construction and land development — — — 920 920 1,529 400,052 402,501 Commercial and industrial 185 18 — 180 383 1,893 549,591 551,867 Leases 1,024 84 143 28 1,279 968 65,180 67,427 Consumer and other 103 4 — 15 122 3 15,969 16,094 Total $ 1,960 $ 106 $ 143 $ 2,808 $ 5,017 $ 28,691 $ 3,219,919 $ 3,253,627 December 31, 2021 30-60 Days 61-89 Days Past Due 90 Total Past Due and Past Due and Days or More Past Due and Accruing Accruing and Accruing Nonaccrual Nonaccrual PCI Current Total Commercial real estate $ 172 $ — $ — $ 858 $ 1,030 $ 20,875 $ 1,362,251 $ 1,384,156 Consumer real estate 884 10 — 2,139 3,033 11,833 462,406 477,272 Construction and land development 91 — — — 91 2,882 275,413 278,386 Commercial and industrial 1,191 119 45 116 1,471 2,516 484,037 488,024 Leases 361 — — — 361 3,170 50,177 53,708 Consumer and other 99 4 19 11 133 71 11,647 11,851 Total $ 2,798 $ 133 $ 64 $ 3,124 $ 6,119 $ 41,347 $ 2,645,931 $ 2,693,397 Impaired Loans and Leases: 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. The following is an analysis of the impaired loan and lease portfolio, including PCI loans and leases, detailing the related allowance recorded (in thousands) December 31, 2022 December 31, 2021 Unpaid Unpaid Recorded Principal Related Recorded Principal Related Investment Balance Allowance Investment Balance Allowance Impaired loans and leases without a valuation allowance: Commercial real estate $ — $ — $ — $ — $ — $ — Consumer real estate 1,283 1,282 — 1,805 1,806 — Construction and land development — — — — — — Commercial and industrial — — — — — — Leases — — — — — — Consumer and other — — — — — — 1,283 1,282 — 1,805 1,806 — Impaired loans and leases with a valuation allowance: Commercial real estate — — — 858 859 396 Consumer real estate — — — 260 262 69 Construction and land development 858 858 385 — — — Commercial and industrial — — — 97 96 96 Leases — — — — — — Consumer and other — — — — — — 858 858 385 1,215 1,217 561 PCI loans and leases: Commercial real estate 500 580 6 707 926 30 Consumer real estate 684 646 115 1,129 1,251 148 Construction and land development — — — — — — Commercial and industrial — — — — — — Leases — — — — — — Consumer and other — — — 5 3 1 1,184 1,226 121 1,841 2,180 179 Total impaired loans and leases $ 3,325 $ 3,366 $ 506 $ 4,861 $ 5,203 $ 740 Year Ended December 31, 2022 2021 Average Interest Average Interest Recorded Income Recorded Income Investment Recognized Investment Recognized Impaired loans and leases without a valuation allowance: Commercial real estate $ 122 $ — $ 800 $ 1 Consumer real estate 1,728 94 1,783 78 Construction and land development — — — — Commercial and industrial — — — — Leases — — — — Consumer and other — — — — 1,850 94 2,583 79 Impaired loans and leases with a valuation allowance: Commercial real estate 343 — 1,145 104 Consumer real estate 52 — 334 14 Construction and land development 515 — — — Commercial and industrial 19 — 132 8 Leases — — — — Consumer and other — — — — 929 — 1,611 126 PCI loans and leases: Commercial real estate 702 57 488 42 Consumer real estate 819 50 1,140 83 Construction and land development — — — — Commercial and industrial — — 197 3 Leases — — — — Consumer and other 2 — 13 — 1,523 107 1,838 128 Total impaired loans and leases $ 4,302 $ 201 $ 6,032 $ 333 Troubled Debt Restructurings: At December 31, 2022 and 2021, impaired loans included loans that were classified as TDRs. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. In assessing whether or not a borrower is experiencing financial difficulties, the Company considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether: (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy; and (iv) the debtor’s projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification. The Company considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Company include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Company generally include one or more modifications to the terms of the debt, such as: (i) a reduction in the interest rate for the remaining life of the debt; (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk; (iii) a temporary period of interest-only payments; and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan. As of December 31, 2022, and 2021, management had approximately $101 thousand and $206 thousand, respectively, in loans that met the criteria for TDR restructured loans, none of which were on nonaccrual. A loan is placed back on accrual status when both principal and interest are current and it is probable that management will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. The following table presents a summary of loans that were modified as troubled debt restructurings at December 31, 2022 (dollars in thousands) Pre-Modification Post-Modification Outstanding Outstanding Recorded Recorded December 31, 2022 Number of Contracts Investment Investment Consumer real estate 1 $ 74 $ 97 Consumer and other 1 10 4 There was one loan that was modified as troubled debt restructuring during the past twelve months, but was paid-off after the restructuring and not outstanding at December 31, 2022. None of the trouble debt restructurings are currently past due. Foreclosure Proceedings and Balances : As of December 31, 2022, there was one residential real estate property for $281 thousand in which physical possession had been obtained and included within other real estate owned assets and none at December 31, 2021. There was one residential real estate loan for $33 thousand in the process of foreclosure at December 31, 2022, and none at December 31, 2021. Purchased Credit Impaired Loans and Leases: The Company has acquired loans and leases which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans and leases for the years ended December 31, are as follows (in thousands) December 31, December 31, 2022 2021 Commercial real estate $ 25,364 $ 31,600 Consumer real estate 10,225 14,215 Construction and land development 2,202 3,699 Commercial and industrial 2,424 3,424 Leases 1,211 3,557 Consumer and other 27 125 Total loans and leases 41,453 56,620 Less: Remaining purchase discount (12,762) (15,273) Total loans and leases, net of purchase discount 28,691 41,347 Less: Allowance for loan and leases losses (121) (179) Carrying amount, net of allowance $ 28,570 $ 41,168 The following is a summary of the accretable yield on acquired loans and leases for the years ended December 31, (in thousands) 2022 2021 2020 Accretable yield, beginning of period $ 14,618 $ 16,889 $ 8,454 Additions — 4,202 2,515 Accretion income (4,561) (6,306) (5,347) Reclassification 2,295 2,214 2,792 Other changes, net 4,504 (2,381) 8,475 Accretable yield, end of period $ 16,856 $ 14,618 $ 16,889 There was an allowance for loan and leases losses on purchase credit impaired loans at the years ended December 31, 2022 and 2021 of $121 thousand and $179 thousand, respectively. Related Party Loans: In the ordinary course of business, the Company has granted loans to certain related interests, including directors, executive officers, and their affiliates (collectively referred to as "related parties"). Such loans are made in the ordinary course of business and on substantially the same terms as those for comparable transactions prevailing at the time and do not present other unfavorable features. A summary of activity in loans to related parties is as follows (in thousands) 2022 2021 Balance, beginning of year $ 13,970 $ 14,459 Disbursements 3,162 1,306 Repayments (2,886) (1,795) Balance, end of year $ 14,246 $ 13,970 At December 31, 2022, the Company had pre-approved but unused lines of credit totaling approximately $12.8 million to related parties. |