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) September 30, December 31, 2023 2022 Commercial real estate $ 1,667,176 $ 1,627,761 Consumer real estate 638,518 587,977 Construction and land development 373,068 402,501 Commercial and industrial 617,115 551,867 Leases 68,538 67,427 Consumer and other 14,584 16,094 Total loans and leases 3,378,999 3,253,627 Less: Allowance for credit losses (33,687) (23,334) Loans and leases, net $ 3,345,312 $ 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 September 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 September 30, 2023 Consumer Construction Commercial Commercial Real and Land and Consumer Real Estate Estate Development Industrial Leases and Other Total Beginning balance $ 14,314 $ 6,748 $ 5,446 $ 5,504 $ 586 $ 149 $ 32,747 Charged-off loans and leases — (9) — (179) (143) (86) (417) Recoveries of charge-offs 2 4 — 48 — 19 73 Provision charged to expense (1) 691 413 (369) 307 201 41 1,284 Ending balance $ 15,007 $ 7,156 $ 5,077 $ 5,680 $ 644 $ 123 $ 33,687 Three Months Ended September 30, 2022 Consumer Construction Commercial Commercial Real and Land and Consumer Real Estate Estate Development Industrial Leases and Other Total Beginning balance $ 10,600 $ 3,835 $ 2,904 $ 3,659 $ 807 $ 133 $ 21,938 Charged-off loans and leases — — — (51) — (180) (231) Recoveries of charge-offs — 7 — 19 29 33 88 Provision charged to expense (21) 166 272 208 198 151 974 Ending balance $ 10,579 $ 4,008 $ 3,176 $ 3,835 $ 1,034 $ 137 $ 22,769 Nine Months Ended September 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 — (9) — (387) (211) (332) (939) Recoveries of charge-offs 5 13 25 153 — 187 383 Provision charged to expense (1) 650 1,006 (177) 439 217 119 2,254 Ending balance $ 15,007 $ 7,156 $ 5,077 $ 5,680 $ 644 $ 123 $ 33,687 Nine Months Ended September 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) — (240) (108) (482) (863) Recoveries of charge-offs 4 561 — 162 192 131 1,050 Provision charged to expense 794 26 1,294 132 620 364 3,230 Ending balance $ 10,579 $ 4,008 $ 3,176 $ 3,835 $ 1,034 $ 137 $ 22,769 (1) In the provision charged to expense there was a release of $489 thousand and $796 thousand for unfunded commitments through the provision for credit losses not reflected in the three and nine months ended September 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 allowance for 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 nine months ended September 30, 2023, is $1.3 million and $2.3 million, respectively, and $974 thousand and $3.2 million, during the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, and December 31, 2022, our allowance for credit losses was $33.7 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 1.00% at September 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) September 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 $ 168,217 $ 553,613 $ 436,468 $ 187,188 $ 141,248 $ 118,422 $ 14,878 $ 8,163 $ 1,628,197 Watch 20,665 1,269 2,418 2,652 3,848 267 - - 31,119 Special mention - 3,234 - - - - - - 3,234 Substandard 968 - 3,145 51 - 462 - - 4,626 Doubtful - - - - - - - - - Total commercial real estate 189,850 558,116 442,031 189,891 145,096 119,151 14,878 8,163 1,667,176 YTD gross charge-offs - - - - - - - - - Consumer real estate Pass 94,979 179,838 100,852 55,222 34,531 53,597 109,227 3,032 631,278 Watch 171 71 319 289 - 108 1,714 - 2,672 Special mention - - - - - 54 - - 54 Substandard 198 905 - - 164 2,908 339 - 4,514 Doubtful - - - - - - - - - Total consumer real estate 95,348 180,814 101,171 55,511 34,695 56,667 111,280 3,032 638,518 YTD gross charge-offs - - - - - (9) - - (9) Construction and land development Pass 95,692 166,355 50,591 4,188 5,162 7,265 35,908 1,797 366,958 Watch 4,194 399 451 - - 2 - - 5,046 Special mention - - - - - - - - - Substandard - - 36 620 - 408 - - 1,064 Doubtful - - - - - - - - - Total construction and land development 99,886 166,754 51,078 4,808 5,162 7,675 35,908 1,797 373,068 YTD gross charge-offs - - - - - - - - - Commercial and industrial Pass 137,793 174,721 67,809 24,379 11,313 26,674 164,939 8,006 615,634 Watch - 631 214 129 75 75 138 - 1,262 Special mention - - - - - - - 13 13 Substandard 206 - - - - - - - 206 Doubtful - - - - - - - - - Total commercial and industrial 137,999 175,352 68,023 24,508 11,388 26,749 165,077 8,019 617,115 YTD gross charge-offs - (154) (50) (183) - - - - (387) Leases Pass 23,304 29,453 10,074 4,459 933 315 - - 68,538 Watch - - - - - - - - - Special mention - - - - - - - - - Substandard - - - - - - - - - Doubtful - - - - - - - - - Total leases 23,304 29,453 10,074 4,459 933 315 - - 68,538 YTD gross charge-offs (27) (163) (9) - (12) - - - (211) Consumer and other Pass 5,539 2,314 1,060 671 148 229 4,538 73 14,572 Watch - - - - 12 - - - 12 Special mention - - - - - - - - - Substandard - - - - - - - - - Doubtful - - - - - - - - - Total consumer and other 5,539 2,314 1,060 671 160 229 4,538 73 14,584 YTD gross charge-offs (22) (115) (62) (48) (26) (59) - - (332) Total loans Pass 525,524 1,106,294 666,854 276,107 193,335 206,502 329,490 21,071 3,325,177 Watch 25,030 2,370 3,402 3,070 3,935 452 1,852 - 40,111 Special mention - 3,234 - - - 54 - 13 3,301 Substandard 1,372 905 3,181 671 164 3,778 339 - 10,410 Doubtful - - - - - - - - - Total loans $ 551,926 $ 1,112,803 $ 673,437 $ 279,848 $ 197,434 $ 210,786 $ 331,681 $ 21,084 $ 3,378,999 Total YTD gross charge-offs $ (49) $ (432) $ (121) $ (231) $ (38) $ (68) $ - $ - $ (939) 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) September 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 $ 862 $ — $ — $ 862 $ 1,666,314 $ 1,667,176 Consumer real estate 706 401 34 1,141 637,377 638,518 Construction and land development 110 408 — 518 372,550 373,068 Commercial and industrial 1,384 945 98 2,427 614,688 617,115 Leases 118 — — 118 68,420 68,538 Consumer and other 95 — 97 192 14,392 14,584 Total $ 3,275 $ 1,754 $ 229 $ 5,258 $ 3,373,741 $ 3,378,999 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 September 30, 2023 and December 31, 2022. Also presented is the balance of loans on nonaccrual status at September 30, 2023 for which there was no related allowance for credit losses recorded (in thousands) : September 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 $ 741 $ — $ — $ — $ — Consumer real estate 2,064 1,154 34 1,665 — Construction and land development 620 — — 920 — Commercial and industrial 314 — 98 180 — Leases 195 — — 28 143 Consumer and other — — 97 15 — Total $ 3,934 $ 1,154 $ 229 $ 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) : September 30, 2023 Real Estate Other Total Commercial real estate $ 3,836 $ — $ 3,836 Consumer real estate 2,434 — 2,434 Construction and land development 1,411 — 1,411 Commercial and industrial — — — Leases — — — Consumer and other — — — Total $ 7,681 $ — $ 7,681 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 nine months ended September 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 September 30, 2022 Average Interest Recorded Income Investment Recognized Impaired loans and leases without a valuation allowance: Commercial real estate $ 304 $ — Consumer real estate 1,742 72 Construction and land development — — Commercial and industrial — — Leases — — Consumer and other — — 2,046 72 Impaired loans and leases with a valuation allowance: Commercial real estate — — Consumer real estate — — Construction and land development 858 — Commercial and industrial — — Leases — — Consumer and other — — 858 — PCI loans and leases: Commercial real estate 525 11 Consumer real estate 880 12 Construction and land development — — Commercial and industrial — — Leases — — Consumer and other — — 1,405 23 Total impaired loans and leases $ 4,309 $ 95 Nine Months Ended September 30, 2022 Average Interest Recorded Income Investment Recognized Impaired loans and leases without a valuation allowance: Commercial real estate $ 152 $ — Consumer real estate 1,839 92 Construction and land development — — Commercial and industrial — — Leases — — Consumer and other — — 1,991 92 Impaired loans and leases with a valuation allowance: Commercial real estate 429 — Consumer real estate 87 — Construction and land development 429 — Commercial and industrial 32 — Leases — — Consumer and other — — 977 — PCI loans and leases: Commercial real estate 765 46 Consumer real estate 879 40 Construction and land development — — Commercial and industrial — — Leases — — Consumer and other 2 — 1,646 86 Total impaired loans and leases $ 4,614 $ 178 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 the amortized cost of loans and leases made to borrowers experiencing financial difficulty that were modified during the three and nine months ended September 30, 2023 (dollars in thousands) Payment Delay Total Class Payment Term and Term of Financing Three months ended September 30, 2023 Delay Extension Extension Total Receivable Commercial real estate $ — $ 528 $ — $ 528 0.03 % Consumer real estate — 514 — 514 0.08 Construction and land development — 748 — 748 0.20 Commercial and industrial — — — — - Leases — — — — - Consumer and other — — — — - Total $ — $ 1,790 $ — $ 1,790 0.05 % Nine months ended September 30, 2023 Commercial real estate $ 403 $ 566 $ — $ 969 0.06 % Consumer real estate — 514 — 514 0.08 Construction and land development — 748 — 748 0.20 Commercial and industrial 63 — 153 216 0.04 Leases — — — — - Consumer and other — — — — - Total $ 466 $ 1,828 $ 153 $ 2,447 0.07 % The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023 (dollars in thousands) Weighted-Average Term Weighted-Average Extension Total Payment Three months ended September 30, 2023 (in months) Delay Commercial real estate 12 $ — Consumer real estate 20 — Construction and land development 9 — Commercial and industrial — — Leases — — Consumer and other — — Nine months ended September 30, 2023 Commercial real estate 23 $ 23 Consumer real estate 15 — Construction and land development 9 — Commercial and industrial 30 7 Leases — — Consumer and other — — No loan modifications made to borrowers experiencing financial difficulty, defaulted during the three and nine months ended September 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) September 30, 2023 90 Days 30-89 Days or More Current Past Due Past Due Nonaccrual Total Commercial real estate $ — $ — $ — $ 968 $ 968 Consumer real estate 139 — — 376 515 Construction and land development 288 — — 460 748 Commercial and industrial — — — 216 216 Leases — — — — — Consumer and other — — — — — Total $ 427 $ — $ — $ 2,020 $ 2,447 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 no loans modified as a TDR during the nine months ended September 30, 2022. Foreclosure Proceedings and Balances : As of September 30, 2023, there were two residential real estate properties totaling $304 thousand secured by real estate included in other real estate owned and there were no residential real estate loans in the process of foreclosure. |