ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY INFORMATION | 8. ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY INFORMATION The following tables provide the activity of allowance for credit losses and loan balances for the three and nine months ended September 30, 2022 and 2021. The increase was primarily due to an initial ACL of $49.6 million recorded in connection with the BMBC Merger and loan growth during the quarter. The initial $49.6 million ACL recorded includes $23.5 million related to non-PCD loans, or the initial provision for credit loss recorded, and $26.1 million related to PCD loans, which does not have an initial income statement impact, but adjusts the amortized cost basis of the loans at acquisition (i.e., a balance sheet gross-up). (Dollars in thousands) Commercial and Industrial (1) Owner-occupied Commercial Construction Residential (2) Consumer (3) Total Three months ended September 30, 2022 Allowance for credit losses Beginning balance $ 60,921 $ 5,510 $ 23,663 $ 5,058 $ 4,988 $ 41,830 $ 141,970 Charge-offs (5,120) — (544) — — (1,834) (7,498) Recoveries 3,194 4 101 653 207 114 4,273 Provision (credit) 889 489 (1,686) 788 (377) 7,347 7,450 Ending balance $ 59,884 $ 6,003 $ 21,534 $ 6,499 $ 4,818 $ 47,457 $ 146,195 Nine months ended September 30, 2022 Allowance for credit losses Beginning balance $ 49,967 $ 4,574 $ 11,623 $ 1,903 $ 3,352 $ 23,088 $ 94,507 Initial allowance on acquired PCD loans 22,614 595 2,684 71 61 78 26,103 Charge-offs (11,308) (179) (581) — (186) (4,062) (16,316) Recoveries 4,667 271 223 653 737 663 7,214 (Credit) provision (4) (6,056) 742 7,585 3,872 854 27,690 34,687 Ending balance $ 59,884 $ 6,003 $ 21,534 $ 6,499 $ 4,818 $ 47,457 $ 146,195 Period-end allowance allocated to: Loans evaluated on an individual basis $ 5,348 $ — $ — $ — $ — $ — $ 5,348 Loans evaluated on a collective basis 54,536 6,003 21,534 6,499 4,818 47,457 140,847 Ending balance $ 59,884 $ 6,003 $ 21,534 $ 6,499 $ 4,818 $ 47,457 $ 146,195 Period-end loan balances: Loans evaluated on an individual basis $ 21,565 $ 1,713 $ 9,483 $ 5,360 $ 6,451 $ 1,884 $ 46,456 Loans evaluated on a collective basis 3,147,913 1,786,878 3,270,896 1,022,843 752,142 1,675,244 11,655,916 Ending balance $ 3,169,478 $ 1,788,591 $ 3,280,379 $ 1,028,203 $ 758,593 $ 1,677,128 $ 11,702,372 (1) Includes commercial small business leases and PPP loans. (2) Period-end loan balance excludes reverse mortgages at fair value of $3.0 million. (3) Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans. (4) Includes $23.5 million initial provision for credit losses on non-PCD loans. (Dollars in thousands) Commercial and Industrial (1) Owner - Commercial Construction Residential (2) Consumer (3) Total Three months ended September 30, 2021 Allowance for credit losses Beginning balance $ 87,203 $ 6,181 $ 16,099 $ 3,512 $ 3,293 $ 16,130 $ 132,418 Charge-offs (7,612) (38) — (2,473) — (738) (10,861) Recoveries 4,031 41 198 — 34 320 4,624 (Credit) provision (17,804) (1,260) (3,054) 1,068 (326) 66 (21,310) Ending balance $ 65,818 $ 4,924 $ 13,243 $ 2,107 $ 3,001 $ 15,778 $ 104,871 Nine months ended September 30, 2021 Allowance for loan losses Beginning balance, prior to adoption of ASC 326 $ 150,875 $ 9,615 $ 31,071 $ 12,190 $ 6,893 $ 18,160 $ 228,804 Charge-offs (19,176) (83) — (2,473) — (1,683) (23,415) Recoveries 6,550 146 242 — 629 948 8,515 (Credit) provision (72,431) (4,754) (18,070) (7,610) (4,521) (1,647) (109,033) Ending balance $ 65,818 $ 4,924 $ 13,243 $ 2,107 $ 3,001 $ 15,778 $ 104,871 Period-end allowance allocated to: Loans evaluated on an individual basis $ 2,247 $ — $ 8 $ — $ — $ — $ 2,255 Loans evaluated on a collective basis 63,571 4,924 13,235 2,107 3,001 15,778 102,616 Ending balance $ 65,818 $ 4,924 $ 13,243 $ 2,107 $ 3,001 $ 15,778 $ 104,871 Period-end loan balances: Loans evaluated on an individual basis $ 24,375 $ 2,071 $ 2,708 $ 2,184 $ 5,877 $ 2,496 $ 39,711 Loans evaluated on a collective basis 2,204,139 1,337,589 1,985,276 760,462 568,804 1,115,718 7,971,988 Ending balance $ 2,228,514 $ 1,339,660 $ 1,987,984 $ 762,646 $ 574,681 $ 1,118,214 $ 8,011,699 (1) Includes commercial small business leases and PPP loans. (2) Period-end loan balance excludes reverse mortgages at fair value of $7.5 million. (3) Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans. The following tables show nonaccrual and past due loans presented at amortized cost at the date indicated: September 30, 2022 (Dollars in thousands) 30–89 Days Greater Total Past Accruing Nonaccrual Loans (1) Total Commercial and industrial (2) $ 6,641 $ 8,351 $ 14,992 $ 3,149,649 $ 4,837 $ 3,169,478 Owner-occupied commercial 887 — 887 1,787,365 339 1,788,591 Commercial mortgages 6,927 — 6,927 3,268,392 5,060 3,280,379 Construction — 2,000 2,000 1,021,045 5,158 1,028,203 Residential (3) 2,694 1,094 3,788 752,782 2,023 758,593 Consumer (4) 14,873 13,309 28,182 1,646,994 1,952 1,677,128 Total $ 32,022 $ 24,754 $ 56,776 $ 11,626,227 $ 19,369 $ 11,702,372 % of Total Loans 0.27 % 0.21 % 0.49 % 99.34 % 0.17 % 100 % (1) There was no allowance on nonaccrual loans as of September 30, 2022. (2) Includes commercial small business leases and PPP loans. (3) Residential accruing current balances excludes reverse mortgages at fair value of $3.0 million. (4) Includes $23.8 million of delinquent, but still accruing, U.S. government-guaranteed student loans that carry little risk of credit loss. December 31, 2021 (Dollars in thousands) 30–89 Days Greater Total Past Accruing Nonaccrual Loans (1) Total Commercial and industrial (2) $ 5,007 $ 547 $ 5,554 $ 2,256,554 $ 8,211 $ 2,270,319 Owner-occupied commercial 741 — 741 1,340,155 811 1,341,707 Commercial mortgages 3,525 810 4,335 1,875,105 2,070 1,881,510 Construction 7,933 — 7,933 679,268 12 687,213 Residential (3) 1,856 — 1,856 537,752 3,125 542,733 Consumer (4) 10,227 8,634 18,861 1,137,332 2,380 1,158,573 Total (4) $ 29,289 $ 9,991 $ 39,280 $ 7,826,166 $ 16,609 $ 7,882,055 % of Total Loans 0.37 % 0.13 % 0.50 % 99.29 % 0.21 % 100 % (1) Nonaccrual loans with an allowance totaled less than $0.1 million (2) Includes commercial small business leases and PPP loans. (3) Residential accruing current balances excludes reverse mortgages, at fair value of $3.9 million. (4) Includes $17.0 million of delinquent, but still accruing, U.S. government-guaranteed student loans that carry little risk of credit loss. The following table presents the amortized cost basis of nonaccruing collateral-dependent loans by class at September 30, 2022 and December 31, 2021: September 30, 2022 December 31, 2021 (Dollars in thousands) Property Equipment and other Property Equipment and other Commercial and industrial (1) $ 3,906 $ 931 $ 4,199 $ 4,012 Owner-occupied commercial 339 — 811 — Commercial mortgages 5,060 — 2,070 — Construction 5,158 — 12 — Residential (2) 2,023 — 3,125 — Consumer (3) 1,952 — 2,380 — Total $ 18,438 $ 931 $ 12,597 $ 4,012 (1) Includes commercial small business leases. (2) Excludes reverse mortgages at fair value. (3) Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans. Interest income recognized on individually reviewed loans was $0.3 million and $0.6 million during the three and nine months ended September 30, 2022, respectively, and $0.2 million and $0.6 million during the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there were 37 residential loans and 12 commercial loans in the process of foreclosure. The total outstanding balance on these loans was $5.2 million and $3.3 million, respectively. As of December 31, 2021, there were 28 residential loans and 9 commercial loans in the process of foreclosure. The total outstanding balance on these loans was $2.5 million and $3.2 million, respectively. Loan workout and other real estate owned (OREO) (recoveries) expenses were less than $0.3 million and $0.5 million during the three and nine months ended September 30, 2022, respectively, and $0.6 million and $1.4 million during three and nine months ended September 30, 2021, respectively. Loan workout and OREO expenses are included in Loan workout and other credit costs on the Consolidated Statement of Income. Credit Quality Indicators Below is a description of each of the risk ratings for all commercial loans: • Pass . These borrowers currently show no indication of deterioration or potential problems and their loans are considered fully collectible. • Special Mention. These borrowers have potential weaknesses that deserve management’s close attention. Borrowers in this category may be experiencing adverse operating trends, for example, declining revenues or margins, high leverage, tight liquidity, or increasing inventory without increasing sales. These adverse trends can have a potential negative effect on the borrower’s repayment capacity. These assets are not adversely classified and do not expose the Bank to significant risk that would warrant a more severe rating. Borrowers in this category may also be experiencing significant management problems, pending litigation, or other structural credit weaknesses. • Substandard or Lower . These borrowers have well-defined weaknesses that require extensive oversight by management. Borrowers in this category may exhibit one or more of the following: inadequate debt service coverage, unprofitable operations, insufficient liquidity, high leverage, and weak or inadequate capitalization. Relationships in this category are not adequately protected by the sound financial worth and paying capacity of the obligor or the collateral pledged on the loan, if any. A distinct possibility exists that the Bank will sustain some loss if the deficiencies are not corrected. In addition, some borrowers in this category could have the added characteristic that the possibility of loss is extremely high. Current circumstances in the credit relationship make collection or liquidation in full highly questionable. Such impending events include: perfecting liens on additional collateral, obtaining collateral valuations, an acquisition or liquidation preceding, proposed merger, or refinancing plan. Residential and Consumer Loans The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status. The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses as of September 30, 2022. Term Loans Amortized Cost Basis by Origination Year 2022 2021 2020 2019 2018 Prior Revolving loans amortized cost basis Revolving loans converted to term Total (Dollars in thousands) Commercial and industrial (1) : Risk Rating Pass (2) $ 930,884 $ 606,030 $ 464,829 $ 262,628 $ 149,437 $ 263,633 $ 7,690 $ 234,667 $ 2,919,798 Special mention 24,704 36,492 8,117 10,012 6,415 445 — 11,649 97,834 Substandard or Lower 28,685 16,986 8,290 44,594 38,139 10,196 10 4,946 151,846 $ 984,273 $ 659,508 $ 481,236 $ 317,234 $ 193,991 $ 274,274 $ 7,700 $ 251,262 $ 3,169,478 Owner-occupied commercial: Risk Rating Pass $ 210,160 $ 353,951 $ 269,106 $ 233,159 $ 114,041 $ 378,377 $ — $ 140,573 $ 1,699,367 Special mention 537 — — — — 2,803 — 3,427 6,767 Substandard or Lower 972 5,481 23,882 2,497 11,952 22,972 — 14,701 82,457 $ 211,669 $ 359,432 $ 292,988 $ 235,656 $ 125,993 $ 404,152 $ — $ 158,701 $ 1,788,591 Commercial mortgages: Risk Rating Pass $ 336,888 $ 669,155 $ 529,554 $ 554,465 $ 251,605 $ 650,400 $ — $ 202,570 $ 3,194,637 Special mention 1,456 77 6,077 6,201 — 32,197 — 3,706 49,714 Substandard or Lower 1,716 2,981 12,846 3,227 3,618 11,063 — 577 36,028 $ 340,060 $ 672,213 $ 548,477 $ 563,893 $ 255,223 $ 693,660 $ — $ 206,853 $ 3,280,379 Construction: Risk Rating Pass $ 345,581 $ 324,841 $ 167,194 $ 13,731 $ 26,587 $ 3,915 $ — $ 129,465 $ 1,011,314 Special mention — 603 8,926 — — — — — 9,529 Substandard or Lower 2,000 4,402 — 190 — — — 768 7,360 $ 347,581 $ 329,846 $ 176,120 $ 13,921 $ 26,587 $ 3,915 $ — $ 130,233 $ 1,028,203 Residential (3) : Risk Rating Performing $ 43,179 $ 116,041 $ 61,107 $ 36,561 $ 45,222 $ 450,032 $ — $ — $ 752,142 Nonperforming (4) — 565 503 1,000 124 4,259 — — 6,451 $ 43,179 $ 116,606 $ 61,610 $ 37,561 $ 45,346 $ 454,291 $ — $ — $ 758,593 Consumer (5) : Risk Rating Performing $ 416,706 $ 206,914 $ 133,026 $ 57,333 $ 233,399 $ 77,423 $ 544,810 $ 5,241 $ 1,674,852 Nonperforming (6) — — 238 — 539 — 1,238 261 2,276 $ 416,706 $ 206,914 $ 133,264 $ 57,333 $ 233,938 $ 77,423 $ 546,048 $ 5,502 $ 1,677,128 (1) Includes commercial small business leases. (2) Includes $4.2 million of PPP loans. (3) Excludes reverse mortgages at fair value. (4) Includes troubled debt restructured mortgages performing in accordance with the loans' modified terms and accruing interest. (5) Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans. (6) Includes troubled debt restructured home equity installment loans performing in accordance with the loans' modified terms and accruing interest. The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses, as of December 31, 2021. Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Prior Revolving loans amortized cost basis Revolving loans converted to term Total (Dollars in thousands) Commercial and industrial (1) : Risk Rating Pass (2) $ 556,896 $ 420,698 $ 329,354 $ 273,345 $ 139,800 $ 148,809 $ 5,551 $ 176,006 $ 2,050,459 Special mention 35,910 949 3,052 1,057 429 15,299 — 17,545 74,241 Substandard or Lower 12,533 14,408 53,655 29,046 19,114 6,921 29 9,913 145,619 $ 605,339 $ 436,055 $ 386,061 $ 303,448 $ 159,343 $ 171,029 $ 5,580 $ 203,464 $ 2,270,319 Owner-occupied commercial: Risk Rating Pass $ 305,156 $ 189,128 $ 172,503 $ 67,526 $ 136,697 $ 262,629 $ — $ 128,188 $ 1,261,827 Special mention 938 5,359 2,561 891 — 7,019 — 10,543 27,311 Substandard or Lower 3,192 13,736 4,138 9,418 5,580 11,039 — 5,466 52,569 $ 309,286 $ 208,223 $ 179,202 $ 77,835 $ 142,277 $ 280,687 $ — $ 144,197 $ 1,341,707 Commercial mortgages: Risk Rating Pass $ 416,149 $ 280,889 $ 217,311 $ 134,477 $ 229,863 $ 368,527 $ — $ 187,396 $ 1,834,612 Special mention — 4,185 — 861 11,588 1,385 — 2,097 20,116 Substandard or Lower 2,438 1,624 3,789 2,114 2,254 14,085 — 478 26,782 $ 418,587 $ 286,698 $ 221,100 $ 137,452 $ 243,705 $ 383,997 $ — $ 189,971 $ 1,881,510 Construction: Risk Rating Pass $ 248,053 $ 195,269 $ 84,868 $ 39,585 $ 2,223 $ 11,297 $ — $ 88,839 $ 670,134 Substandard or Lower 12,922 — 2,422 — 90 — — 1,645 17,079 $ 260,975 $ 195,269 $ 87,290 $ 39,585 $ 2,313 $ 11,297 $ — $ 90,484 $ 687,213 Residential (3) : Risk Rating Performing $ 59,977 $ 28,426 $ 12,526 $ 32,871 $ 44,969 $ 358,964 $ — $ — $ 537,733 Nonperforming (4) — 112 1,044 — 63 3,781 — — 5,000 $ 59,977 $ 28,538 $ 13,570 $ 32,871 $ 45,032 $ 362,745 $ — $ — $ 542,733 Consumer (5) : Risk Rating Performing $ 219,918 $ 169,922 $ 74,048 $ 203,519 $ 39,113 $ 60,952 $ 382,718 $ 5,364 $ 1,155,554 Nonperforming (6) — 147 — 600 71 — 1,655 546 3,019 $ 219,918 $ 170,069 $ 74,048 $ 204,119 $ 39,184 $ 60,952 $ 384,373 $ 5,910 $ 1,158,573 (1) Includes commercial small business leases. (2) Includes $31.5 million of PPP loans. (3) Excludes reverse mortgages at fair value. (4) Includes troubled debt restructured mortgages performing in accordance with the loans' modified terms and accruing interest. (5) Includes home equity lines of credit, installment loans, unsecured lines of credit and education loans. (6) Includes troubled debt restructured home equity installment loans performing in accordance with the loans' modified terms and accruing interest. Troubled Debt Restructurings (TDRs) The following table presents the balance of TDRs as of the indicated dates: (Dollars in thousands) September 30, 2022 December 31, 2021 Performing TDRs $ 17,108 $ 14,204 Nonperforming TDRs 1,079 756 Total TDRs $ 18,187 $ 14,960 Approximately $0.3 million and $0.2 million in related reserves have been established for these loans at September 30, 2022 and December 31, 2021, respectively. The following tables present information regarding the types of loan modifications made for the three and nine months ended September 30, 2022 and 2021: Three months ended September 30, 2022 Nine months ended September 30, 2022 Contractual payment reduction and term extension Maturity Date Extension Discharged in bankruptcy Other (1) Total Contractual payment reduction and term extension Maturity Date Extension Discharged in bankruptcy Other (1) Total Commercial and industrial — — — 2 2 1 — — 2 3 Commercial mortgages — — — — — — 1 — — 1 Construction — — — — — — 1 — — 1 Residential — — — — — 1 — 1 — 2 Consumer 50 8 4 2 64 51 32 7 3 93 Total 50 8 4 4 66 53 34 8 5 100 Three months ended September 30, 2021 Nine months ended September 30, 2021 Contractual payment reduction and term extension Maturity Date Extension Discharged in bankruptcy Other (1) Total Contractual payment reduction and term extension Maturity Date Extension Discharged in bankruptcy Other (1) Total Residential — — — — — — — 2 — 2 Consumer — 1 3 — 4 — 1 23 1 25 Total — 1 3 — 4 — 1 25 1 27 (1) Other includes interest rate reduction, forbearance, and interest only payments. Principal balances are generally not forgiven when a loan is modified as a TDR. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance, which is typically six months, and repayment is reasonably assured. The following tables present loans modified as TDRs during the three and nine months ended September 30, 2022 and 2021. Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 (Dollars in thousands) Pre Modification Post Modification Pre Modification Post Modification Commercial $ 157 $ 157 $ 185 $ 185 Commercial mortgages 2,390 2,390 2,390 2,390 Construction 2,000 2,000 2,000 2,000 Residential — — 138 138 Consumer 948 948 1,409 1,409 Total (1)(2) $ 5,495 $ 5,495 $ 6,122 $ 6,122 (1) During the three and nine months ended September 30, 2022, the TDRs set forth in the table above resulted in a less than $0.1 million increase and a $0.3 million increase in the allowance for credit losses, respectively, and no additional charge-offs in either period. During the three and nine months ended September 30, 2022, no TDRs defaulted that had received troubled debt modification during the past twelve months. (2) The TDRs set forth in the table above did not occur as a result of the loan forbearance program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 (Dollars in thousands) Pre Modification Post Modification Pre Modification Post Modification Residential $ — $ — $ 147 $ 147 Consumer 216 216 1,022 1,022 Total (1)(2) $ 216 $ 216 $ 1,169 $ 1,169 (1) During the three and nine months ended September 30, 2021 the TDRs set forth in the table above resulted in a less than $0.1 million increase in the allowance for credit losses for both periods, and no additional charge-offs in either period. During the three and nine months ended September 30, 2021, no TDRs defaulted that had received troubled debt modification during the past twelve months. (2) The TDRs set forth in the table above did not occur as a result of the loan forbearance program under the CARES Act. |