Loans and Leases and Allowance for Credit 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) June 30, December 31, 2023 2022 Commercial real estate $ 1,641,757 $ 1,627,761 Consumer real estate 624,828 587,977 Construction and land development 394,742 402,501 Commercial and industrial 594,427 551,867 Leases 66,401 67,427 Consumer and other 15,635 16,094 Total loans and leases 3,337,790 3,253,627 Less: Allowance for credit losses (32,747) (23,334) Loans and leases, net $ 3,305,043 $ 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: Consumer Real Estate: 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: 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 June 30, 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 June 30, 2023 Consumer Construction Commercial Commercial Real and Land and Consumer Real Estate Estate Development Industrial Leases and Other Total Beginning balance $ 14,528 $ 6,411 $ 5,219 $ 5,359 $ 637 $ 125 $ 32,279 Charged-off loans and leases — — — (35) (59) (113) (207) Recoveries of charge-offs 1 4 25 85 — 140 255 Provision charged to expense (1) (215) 333 202 95 8 (3) 420 Ending balance $ 14,314 $ 6,748 $ 5,446 $ 5,504 $ 586 $ 149 $ 32,747 Three Months Ended June 30, 2022 Consumer Construction Commercial Commercial Real and Land and Consumer Real Estate Estate Development Industrial Leases and Other Total Beginning balance $ 10,405 $ 3,388 $ 2,120 $ 3,501 $ 548 $ 116 $ 20,078 Charged-off loans and leases — — — — (23) (120) (143) Recoveries of charge-offs 2 547 — 126 6 72 753 Provision charged to expense 193 (100) 784 32 276 65 1,250 Ending balance $ 10,600 $ 3,835 $ 2,904 $ 3,659 $ 807 $ 133 $ 21,938 Six Months Ended June 30, 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 — — — (208) (68) (246) (522) Recoveries of charge-offs 3 9 25 105 — 168 310 Provision charged to expense (1) (41) 593 192 132 16 78 970 Ending balance $ 14,314 $ 6,748 $ 5,446 $ 5,504 $ 586 $ 149 $ 32,747 Six Months Ended June 30, 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) (108) (302) (631) Recoveries of charge-offs 3 554 — 143 163 98 961 Provision charged to expense 816 (140) 1,022 (77) 422 213 2,256 Ending balance $ 10,600 $ 3,835 $ 2,904 $ 3,659 $ 807 $ 133 $ 21,938 (1) In the provision charged to expense there was a release of $307 thousand for unfunded commitments through the provision for credit losses not reflected in the three and six months ended June 30, 2023. 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 loan and lease losses for the three and six months ended June 30, 2023, is $420 thousand and $970 thousand, respectively, and $1.3 million and $2.3 million, during the three and six months ended June 30, 2022, respectively. As of June 30, 2023, and December 31, 2022, our allowance for credit losses was $32.7 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 June 30, 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: Watch: Special Mention: Substandard: 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: Uncollectible: The Company evaluates the loan risk grading system definitions and allowance for credit loss methodology on an ongoing basis. There were no changes to these subsequent to adoption ASU 2016-13 on January 1, 2023. 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) June 30, 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 $ 108,210 $ 544,700 $ 468,647 $ 184,539 $ 141,585 $ 127,216 $ 16,152 $ 8,246 $ 1,599,295 Watch 743 25,253 3,114 2,574 3,888 269 - - 35,841 Special mention - - - - 1,629 - 312 - 1,941 Substandard 993 1 3,164 53 - 469 - - 4,680 Doubtful - - - - - - - - - Total commercial real estate 109,946 569,954 474,925 187,166 147,102 127,954 16,464 8,246 1,641,757 YTD gross charge-offs - - - - - - - - - Consumer real estate Pass 64,050 186,718 102,568 57,022 36,105 60,153 109,600 2,996 619,212 Watch 172 72 321 303 - 1,285 769 - 2,922 Special mention - - - - - 55 - - 55 Substandard 200 950 - - - 1,474 15 - 2,639 Doubtful - - - - - - - - - Total consumer real estate 64,422 187,740 102,889 57,325 36,105 62,967 110,384 2,996 624,828 YTD gross charge-offs - - - - - - - - - Construction and land development Pass 81,326 199,971 57,062 4,580 5,286 7,581 31,428 1,673 388,907 Watch 2,632 113 1,960 - - 76 - - 4,781 Special mention - - - - - - - - - Substandard - - 38 620 - 396 - - 1,054 Doubtful - - - - - - - - - Total construction and land development 83,958 200,084 59,060 5,200 5,286 8,053 31,428 1,673 394,742 YTD gross charge-offs - - - - - - - - - Commercial and industrial Pass 100,693 186,281 75,120 36,064 12,554 28,479 147,625 5,354 592,170 Watch 77 646 222 134 85 100 623 - 1,887 Special mention - - - - - - - 24 24 Substandard 219 1 - 126 - - - - 346 Doubtful - - - - - - - - - Total commercial and industrial 100,989 186,928 75,342 36,324 12,639 28,579 148,248 5,378 594,427 YTD gross charge-offs - (66) (50) (58) - (34) - - (208) Leases Pass 14,316 32,866 11,883 5,605 1,280 451 - - 66,401 Watch - - - - - - - - - Special mention - - - - - - - - - Substandard - - - - - - - - - Doubtful - - - - - - - - - Total leases 14,316 32,866 11,883 5,605 1,280 451 - - 66,401 YTD gross charge-offs - (56) - - (12) - - - (68) Consumer and other Pass 4,522 3,436 1,221 843 154 219 5,078 78 15,551 Watch - - - - 15 - - - 15 Special mention - - - - - - - - - Substandard - 68 - 1 - - - - 69 Doubtful - - - - - - - - - Total consumer and other 4,522 3,504 1,221 844 169 219 5,078 78 15,635 YTD gross charge-offs (9) (88) (51) (39) (20) (39) - - (246) Total loans Pass 373,117 1,153,972 716,501 288,653 196,964 224,099 309,883 18,347 3,281,536 Watch 3,624 26,084 5,617 3,011 3,988 1,730 1,392 - 45,446 Special mention - - - - 1,629 55 312 24 2,020 Substandard 1,412 1,020 3,202 800 - 2,339 15 - 8,788 Doubtful - - - - - - - - - Total loans $ 378,153 $ 1,181,076 $ 725,320 $ 292,464 $ 202,581 $ 228,223 $ 311,602 $ 18,371 $ 3,337,790 Total YTD gross charge-offs $ (9) $ (210) $ (101) $ (97) $ (32) $ (73) $ - $ - $ (522) 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) June 30, 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 $ 586 $ — $ — $ 586 $ 1,641,171 $ 1,641,757 Consumer real estate 334 1,563 — 1,897 622,931 624,828 Construction and land development 478 — — 478 394,264 394,742 Commercial and industrial 1,531 257 — 1,788 592,639 594,427 Leases 213 53 — 266 66,135 66,401 Consumer and other 234 — — 234 15,401 15,635 Total $ 3,376 $ 1,873 $ — $ 5,249 $ 3,332,541 $ 3,337,790 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 June 30, 2023 and December 31, 2022. Also presented is the balance of loans on nonaccrual status at June 30, 2023 for which there was no related allowance for credit losses recorded (in thousands) : June 30, 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 $ 759 $ — $ — $ — $ — Consumer real estate 1,833 949 — 1,665 — Construction and land development 620 — — 920 — Commercial and industrial 346 1 — 180 — Leases 94 — — 28 143 Consumer and other 70 — — 15 — Total $ 3,722 $ 950 $ — $ 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) : June 30, 2023 Real Estate Other Total Commercial real estate $ 3,871 $ — $ 3,871 Consumer real estate 1,330 — 1,330 Construction and land development 1,411 — 1,411 Commercial and industrial — — — Leases — — — Consumer and other — — — Total $ 6,612 $ — $ 6,612 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. 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 and six months ended June 30, 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 June 30, 2022 Average Interest Recorded Income Investment Recognized Impaired loans and leases without a valuation allowance: Commercial real estate $ 152 $ — Consumer real estate 1,957 3 Construction and land development — — Commercial and industrial — — Leases — — Consumer and other — — 2,109 3 Impaired loans and leases with a valuation allowance: Commercial real estate 429 — Consumer real estate — — Construction and land development 429 — Commercial and industrial — — Leases — — Consumer and other — — 858 — PCI loans and leases: Commercial real estate 538 11 Consumer real estate 855 12 Construction and land development — — Commercial and industrial — — Leases — — Consumer and other 3 — 1,396 23 Total impaired loans and leases $ 4,363 $ 26 Six Months Ended June 30, 2022 Average Interest Recorded Income Investment Recognized Impaired loans and leases without a valuation allowance: Commercial real estate $ 101 $ — Consumer real estate 1,907 20 Construction and land development — — Commercial and industrial — — Leases — — Consumer and other — — 2,008 20 Impaired loans and leases with a valuation allowance: Commercial real estate 572 — Consumer real estate 87 — Construction and land development 286 — Commercial and industrial 32 — Leases — — Consumer and other — — 977 — PCI loans and leases: Commercial real estate 885 35 Consumer real estate 878 28 Construction and land development — — Commercial and industrial — — Leases — — Consumer and other 3 — 1,766 63 Total impaired loans and leases $ 4,751 $ 83 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 ” The table below shows loans and leases made to borrowers experiencing financial difficulty that were modified during the three and six months ended June 30, 2023 (dollars in thousands) Payment Delay Total Class Payment Term and Term of Financing Three months ended June 30, 2023 Delay Extension Extension Total Receivable Commercial real estate $ 413 $ 38 $ — $ 451 0.03 % Consumer real estate — — — — - Construction and land development — — — — - Commercial and industrial 66 — 153 219 0.04 Leases — — — — - Consumer and other — — — — - Total $ 479 $ 38 $ 153 $ 670 0.02 % Six months ended June 30, 2023 Commercial real estate $ 413 $ 38 $ — $ 451 0.03 % Consumer real estate — — — — - Construction and land development — — — — - Commercial and industrial 66 — 153 219 0.04 Leases — — — — - Consumer and other — — — — - Total $ 479 $ 38 $ 153 $ 670 0.02 % The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023 (dollars in thousands) Weighted-Average Term Weighted-Average Extension Total Payment Three months ended June 30, 2023 (in months) Delay Commercial real estate — $ 14 Consumer real estate — — Construction and land development — — Commercial and industrial 30 7 Leases — — Consumer and other — — Six months ended June 30, 2023 Commercial real estate — $ 14 Consumer real estate — — Construction and land development — — Commercial and industrial 30 7 Leases — — Consumer and other — — No loan modifications made to borrowers experiencing financial difficulty, defaulted during the three and six months ended June 30, 2023. The table below shows an age analysis of loans and leases made to borrowers experiencing financial difficulty that were modified on or after January 1, 2023, that date the Company adopted ASU 2022-02 (in thousands) June 30, 2023 90 Days 30-89 Days or More Current Past Due Past Due Nonaccrual Total Commercial real estate $ 38 $ — $ — $ 413 $ 451 Consumer real estate — — — — — Construction and land development — — — — — Commercial and industrial — — — 219 219 Leases — — — — — Consumer and other — — — — — Total $ 38 $ — $ — $ 632 $ 670 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 were three loans for $586 that were modified as a TDR during the six months ended June 30, 2022. Foreclosure Proceedings and Balances : As of June 30, 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. |