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Loans and Leases and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2024

Loans and Leases and Allowance for Credit Losses

Note 4. Loans and Leases and Allowance for Credit Losses

Portfolio Segmentation:

Major categories of loans and leases are summarized as follows (in thousands):


	March 31,		December 31,
	2024		2023
Commercial real estate	$	1,743,205	$	1,739,205
Consumer real estate		659,209		649,867
Construction and land development		321,860		327,185
Commercial and industrial		667,903		645,918
Leases		71,909		68,752
Consumer and other		13,469		13,535
Total loans and leases		3,477,555		3,444,462
Less: Allowance for credit losses		(34,203)		(35,066)
Loans and leases, net	$	3,443,352	$	3,409,396

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: Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Consumer Real Estate: Consumer real estate loans include real estate loans secured by first liens, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower’s income, sale of 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: Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and financial loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers’ business operations.

Leases: The lease portfolio segment includes leases to small and mid-size companies for equipment financing leases. These leases are secured by a secured interest in the equipment being leased.

Consumer and Other: The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

The following tables detail the changes in the allowance for credit losses by loan and lease classification (in thousands):


	Three Months Ended March 31, 2024
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	15,264	$	7,249	$	4,874	$	6,924	$	640	$	115	$	35,066
Charged-off loans and leases		—		(107)		(441)		(201)		(77)		(94)		(920)
Recoveries of charge-offs		2		79		—		26		—		28		135
Provision charged to expense ⁽¹⁾		(423)		25		271		(108)		94		63		(78)
Ending balance	$	14,843	$	7,246	$	4,704	$	6,641	$	657	$	112	$	34,203


	Three Months Ended March 31, 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		—		—		—		(173)		(9)		(133)		(315)
Recoveries of charge-offs		2		5		—		20		—		28		55
Provision charged to expense		174		260		(10)		37		8		81		550
Ending balance	$	14,528	$	6,411	$	5,219	$	5,359	$	637	$	125	$	32,279

(1)

In the provision charged to expense there was a release of $362 thousand unfunded commitments through the provision for credit losses not reflected in the three months ended March 31, 2024.

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 months ended March 31, 2024, and 2023, is ($78) thousand and $550 thousand, respectively. As of March 31, 2024, and December 31, 2023, our allowance for credit losses was $34.2 million and $35.1 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 March 31, 2024, and 1.02% at December 31, 2023.

A description of the general characteristics of the risk grades used by the Company is as follows:

Pass: Loans and leases in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan and lease obligations. Loans and leases in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.

Watch: Loans and leases in this risk category involve borrowers that exhibit characteristics, or are operating under conditions that, if not successfully mitigated as planned, have a reasonable risk of resulting in a downgrade within the next six to twelve months. Loans and leases may remain in this risk category for six months and then are either upgraded or downgraded upon subsequent evaluation.

Special Mention: Loans and leases in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned” classification. Loans and leases in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential

weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company’s credit position.

Substandard: Loans and leases in this risk grade are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or 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: Loans and leases in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Uncollectible: Loans and leases in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan or lease has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan or lease, even though partial recovery may be obtained in the future. Charge-offs against the allowance for credit losses are taken in the period in which the loan or lease becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans or leases within this category.

The Company evaluates the loan risk grading system definitions and allowance for credit loss methodology on an ongoing basis.

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):


	March 31, 2024
	Loans Amortized Cost Basis by Origination Year
															Revolving
															Loans
													Revolving		Converted
	2024		2023		2022		2021		2020		Prior		Loans		to Term		Total
Commercial real estate
Pass	$	26,854	$	272,348	$	570,319	$	420,101	$	175,214	$	232,580	$	15,370	$	-	$	1,712,786
Watch		-		4,609		1,266		1,930		2,661		10,755		559		-		21,780
Special mention		-		-		3,195		-		-		-		-		-		3,195
Substandard		-		881		-		3,362		308		893		-		-		5,444
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate		26,854		277,838		574,780		425,393		178,183		244,228		15,929		-		1,743,205
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Consumer real estate
Pass		20,868		123,370		170,452		95,970		52,595		77,419		110,895		818		652,387
Watch		-		255		-		704		115		97		1,548		-		2,719
Special mention		-		-		-		-		-		52		-		-		52
Substandard		-		194		-		176		253		3,321		107		-		4,051
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer real estate		20,868		123,819		170,452		96,850		52,963		80,889		112,550		818		659,209
YTD gross charge-offs		-		-		-		-		-		(107)		-		-		(107)

Construction and land development
Pass		44,621		91,788		112,195		16,914		2,349		11,541		33,024		243		312,675
Watch		3		5,600		2,889		221		-		-		-		-		8,713
Special mention		-		438		-		-		-		-		-		-		438
Substandard		-		-		-		34		-		-		-		-		34
Doubtful		-		-		-		-		-		-		-		-		-
Total construction and land development		44,624		97,826		115,084		17,169		2,349		11,541		33,024		243		321,860
YTD gross charge-offs		-		-		-		-		(441)		-		-		-		(441)

Commercial and industrial
Pass		21,783		163,348		156,287		56,170		21,534		32,713		210,622		613		663,070
Watch		-		158		14		2,905		-		-		519		35		3,631
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		183		614		200		129		76		-		-		1,202
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial and industrial		21,783		163,689		156,915		59,275		21,663		32,789		211,141		648		667,903
YTD gross charge-offs		-		(85)		(116)		-		-		-		-		-		(201)

Leases
Pass		11,038		26,324		24,078		7,176		2,553		740		-		-		71,909
Watch		-		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total leases		11,038		26,324		24,078		7,176		2,553		740		-		-		71,909
YTD gross charge-offs		-		(77)		-		-		-		-		-		-		(77)

Consumer and other
Pass		1,653		4,682		1,602		715		358		392		4,058		-		13,460
Watch		-		-		-		-		-		9		-		-		9
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer and other		1,653		4,682		1,602		715		358		401		4,058		-		13,469
YTD gross charge-offs		-		(39)		(22)		(9)		(7)		(17)		-		-		(94)

Total loans
Pass		126,817		681,860		1,034,933		597,046		254,603		355,385		373,969		1,674		3,426,287
Watch		3		10,622		4,169		5,760		2,776		10,861		2,626		35		36,852
Special mention		-		438		3,195		-		-		52		-		-		3,685
Substandard		-		1,258		614		3,772		690		4,290		107		-		10,731
Doubtful		-		-		-		-		-		-		-		-		-
Total loans	$	126,820	$	694,178	$	1,042,911	$	606,578	$	258,069	$	370,588	$	376,702	$	1,709	$	3,477,555
Total YTD gross charge-offs	$	-	$	(201)	$	(138)	$	(9)	$	(448)	$	(124)	$	-	$	-	$	(920)

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):


	March 31, 2024
					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	$	143	$	51	$	1,068	$	1,262	$	1,741,943	$	1,743,205
Consumer real estate		721		777		492		1,990		657,219		659,209
Construction and land development		—		23		—		23		321,837		321,860
Commercial and industrial		1,817		92		1,843		3,752		664,151		667,903
Leases		881		340		—		1,221		70,688		71,909
Consumer and other		65		23		22		110		13,359		13,469
Total	$	3,627	$	1,306	$	3,425	$	8,358	$	3,469,197	$	3,477,555


	December 31, 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	$	52	$	270	$	1,660	$	1,982	$	1,737,223		1,739,205
Consumer real estate		2,216		1,347		561		4,124		645,743		649,867
Construction and land development		631		—		620		1,251		325,934		327,185
Commercial and industrial		956		330		2,286		3,572		642,346		645,918
Leases		1,208		132		212		1,552		67,200		68,752
Consumer and other		80		9		98		187		13,348		13,535
Total	$	5,143	$	2,088	$	5,437	$	12,668	$	3,431,794	$	3,444,462

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 March 31, 2024 and December 31, 2023. Also presented is the balance of loans on nonaccrual status at March 31, 2024 for which there was no related allowance for credit losses recorded (in thousands):


	March 31, 2024						December 31, 2023
	Total		Nonaccrual		Loans Past Due		Total		Nonaccrual		Loans Past Due
	Nonaccrual		With No Allowance		Over 90 Days		Nonaccrual		With No Allowance		Over 90 Days
	Loans		for Credit Losses		Still Accruing		Loans		for Credit Losses		Still Accruing
Commercial real estate	$	1,752	$	802	$	—	$	2,044	$	1,352	$	—
Consumer real estate		2,466		1,503		—		2,647		1,562		—
Construction and land development		—		—		—		620		—		—
Commercial and industrial		1,953		160		73		2,480		160		—
Leases		—		—		—		140		—		72
Consumer and other		—		—		22		—		—		98
Total	$	6,171	$	2,465	$	95	$	7,931	$	3,074	$	170

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses (in thousands):


	March 31, 2024
	Real Estate		Other		Total
Commercial real estate	$	4,412	$	—	$	4,412
Consumer real estate		2,445		—		2,445
Construction and land development		—		—		—
Commercial and industrial		—		1,018		1,018
Leases		—		—		—
Consumer and other		—		—		—
Total	$	6,857	$	1,018	$	7,875

	December 31, 2023
	Real Estate		Other		Total
Commercial real estate	$	5,155	$	—	$	5,155
Consumer real estate		2,756		—		2,756
Construction and land development		1,411		—		1,411
Commercial and industrial		—		1,018		1,018
Leases		—		—		—
Consumer and other		—		—		—
Total	$	9,322	$	1,018	$	10,340

Loan Modifications to Borrowers Experiencing Financial Difficulty:

The table below shows the amortized cost of loans and leases made to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2024. There were no loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2023 (dollars in thousands):


					Payment Delay
	Payment		Term		and Term
Three Months Ended March 31, 2024	Delay		Extension		Extension		Total
Commercial real estate	$	—	$	200	$	—	$	200
Consumer real estate		—		—		—		—
Construction and land development		—		—		—		—
Commercial and industrial		—		—		—		—
Leases		—		—		—		—
Consumer and other		—		—		—		—
Total	$	—	$	200	$	—	$	200

The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2024 (dollars in thousands):


	Weighted-Average
	Term
	Extension
Three Months Ended March 31, 2024	(in months)
Commercial real estate		3
Consumer real estate		—
Construction and land development		—
Commercial and industrial		—
Leases		—
Consumer and other		—

No loan modifications made to borrowers experiencing financial difficulty defaulted during the three months ended March 31, 2024, and 2023, respectively.

The table below shows an age analysis of loans and leases made to borrowers experiencing financial difficulty that were modified in the last twelve months, (in thousands):


	March 31, 2024
					90 Days
			30-89 Days		or More
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial real estate	$	741	$	—	$	—	$	378	$	1,119
Consumer real estate		2,339		50		—		100		2,489
Construction and land development		682		—		—		—		682
Commercial and industrial		—		—		—		129		129
Leases		—		—		—		—		—
Consumer and other		—		—		—		—		—
Total	$	3,762	$	50	$	—	$	607	$	4,419

Foreclosure Proceedings and Balances:

As of March 31, 2024, there were two residential real estate properties totaling $279 thousand secured by real estate included in other real estate owned and there was two residential real estate loans totaling $694 thousand in the process of foreclosure.