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Allowance for Credit Losses
 3 Months Ended
Mar. 31, 2023
Financing Receivable, Allowance for Credit Loss, Writeoff, after Recovery [Abstract]  
Allowance for Credit Losses Allowance for Credit Losses
The ACL is evaluated on at least a quarterly basis, as losses are estimated to be probable and incurred. The provision for loan and lease losses increase or decrease the ACL, if deemed necessary. Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance.
The ACL is maintained at a level considered adequate to provide for losses that are probable and estimable. Management’s periodic evaluation of the adequacy of the ACL is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available.
Roll-Forward of Allowance by Portfolio Segment
The following table provides the activity of our allowance for credit losses for the three months ended March 31, 2023 under the CECL model in accordance with ASC 326 (as adopted on January 1, 2023):
Three Months Ended March 31, 2023
(dollars in thousands)Beginning Balance, prior to adoption of ASU No. 2016-13 for CECLAdjustment to initially apply ASU No. 2016-13 for CECLCharge-offsRecoveriesProvision (recovery of provision) for credit lossesEnding balance
Commercial mortgage$4,095 $(526)$— $— $(94)$3,475 
Home equity lines and loans188 439 (33)2 19 615 
Residential mortgage948 17 — — (97)868 
Construction3,075 (1,763)— — (193)1,119 
Commercial and industrial4,012 (1,023)— 39 (295)2,733 
Small business loans4,909 1,110 — — 297 6,316 
Consumer3 (3)— — — — 
Leases1,598 3,345 (1,464)3 1,834 5,316 
Total$18,828 $1,596 $(1,497)$44 $1,471 $20,442 

The following table provides the activity of the allowance for loan and lease losses for the three months ended March 31, 2022 under the incurred loss model:
Three Months Ended March 31, 2022
(dollars in thousands)Beginning BalanceCharge-offsRecoveriesProvision (Reversal)Ending Balance
Commercial mortgage$4,950 $— $— $(800)$4,150 
Home equity lines and loans224 — 6 (22)208 
Residential mortgage283 — 2 72 357 
Construction2,042 — — 215 2,257 
Commercial and industrial6,533 — 11 825 7,369 
Small business loans3,737 — — (365)3,372 
Consumer3 — — — 3 
Leases986 (566)— 690 1,110 
Total$18,758 $(566)$19 $615 $18,826 
Allowance Allocated by Portfolio Segment
The following tables detail the allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment at the dates indicated:
March 31, 2023
Allowance for credit lossesCarrying value of loans and leases
(dollars in thousands)Individually
evaluated
for impairment		Collectively
evaluated
for impairment		TotalIndividually
evaluated
for impairment		Collectively
evaluated
for impairment		Total
Commercial mortgage$— $3,475 $3,475 $2,263 $614,800 $617,063 
Home equity lines and loans— 615 615 985 61,065 62,050 
Residential mortgage— 868 868 1,440 222,957 224,397 
Construction— 1,119 1,119 1,206 266,182 267,388 
Commercial and industrial903 1,830 2,733 13,233 317,849 331,082 
Small business loans1,555 4,761 6,316 5,324 143,246 148,570 
Consumer— — — — 387 387 
Leases, net— 5,316 5,316 367 150,690 151,057 
Total (1)
$2,458 $17,984 $20,442 $24,818 $1,777,176 $1,801,994 
(1) Excludes deferred fees and loans carried at fair value.

The following table details the pre-CECL allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment at the dates indicated:
December 31, 2022
Allowance on loans and leasesCarrying value of loans and leases
(dollars in thousands)Individually
evaluated
for impairment		Collectively
evaluated
for impairment		TotalIndividually
evaluated
for impairment		Collectively
evaluated
for impairment		Total
Commercial mortgage$— $4,095 $4,095 $2,445 $562,955 $565,400 
Home equity lines and loans— 188 188 1,097 58,302 59,399 
Residential mortgage— 948 948 1,454 205,881 207,335 
Construction— 3,075 3,075 1,206 270,749 271,955 
Commercial and industrial 776 3,236 4,012 12,547 328,831 341,378 
Small business loans1,449 3,460 4,909 4,527 131,628 136,155 
Consumer— 3 3 — 488 488 
Leases, net— 1,598 1,598 902 138,084 138,986 
Total (1)
$2,225 $16,603 $18,828 $24,178 $1,696,918 $1,721,096 
(1) Excludes deferred fees and loans carried at fair value.

Credit Quality Indicators
As part of the process of determining the ACL to the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by Management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:
•Pass – Loans considered to be satisfactory with no indications of deterioration.
•Special mention – Loans classified as special mention have a potential weakness that deserves Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
•Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
•Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses at the dates indicated:

March 31, 2023Revolving Loans Converted to Term LoansRevolving LoansTotal
Term Loans
20232022202120202019Prior
Commercial mortgage
Pass/Watch$24,466 $128,528 $140,094 $99,498 $54,655 $143,017 $511 $378 $591,147 
Special Mention— 4,749 — — 5,872 10,893 — — 21,514 
Substandard— — — — 1,675 2,394 — 333 4,402 
Total$24,466 $133,277 $140,094 $99,498 $62,202 $156,304 $511 $711 $617,063 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Construction
Pass/Watch$8,301 $92,502 $66,901 $47,378 $4,739 $2,493 $— $26,126 $248,440 
Special Mention— — 67 — 4,449 13,226 — — 17,742 
Substandard— — — — — 1,206 — — 1,206 
Total$8,301 $92,502 $66,968 $47,378 $9,188 $16,925 $— $26,126 $267,388 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial and industrial
Pass/Watch$8,954 $51,139 $38,432 $10,429 $14,175 $46,074 $9,981 $110,982 $290,166 
Special Mention— 4,724 — — — 2,689 — 1,578 8,991 
Substandard— — 3,636 933 300 8,827 — 18,229 31,925 
Total$8,954 $55,863 $42,068 $11,362 $14,475 $57,590 $9,981 $130,789 $331,082 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Small business loans
Pass/Watch$15,999 $38,100 $50,952 $16,419 $5,979 $1,405 $2,638 $11,799 $143,291 
Special Mention— — — — — — — — — 
Substandard— — 2,489 890 912 — — 988 5,279 
Total$15,999 $38,100 $53,441 $17,309 $6,891 $1,405 $2,638 $12,787 $148,570 
Current period gross charge-offs$— $— $— $— $— $— $— $— $— 
Total by risk rating
Pass/Watch$57,720 $310,269 $296,379 $173,724 $79,548 $192,989 $13,130 $149,285 $1,273,044 
Special Mention— 9,473 67 — 10,321 26,808 — 1,578 48,247 
Substandard— — 6,125 1,823 2,887 12,427 — 19,550 42,812 
Doubtful— — — — — — — — — 
Total$57,720 $319,742 $302,571 $175,547 $92,756 $232,224 $13,130 $170,413 $1,364,103 
Total current period gross charge-offs$— $— $— $— $— $— $— $— $— 


The Corporation had no loans with a risk rating of Doubtful included within recorded investment in loans and leases held for investment at March 31, 2023.
In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status at the dates indicated:

March 31, 2023Revolving LoansTotal
Term Loans
20232022202120202019Prior
Home equity lines and loans
Performing$— $816 $402 $371 $2,374 $2,514 $54,588 $61,065 
Nonperforming— — — — — — 985 985 
Total$— $816 $402 $371 $2,374 $2,514 $55,573 $62,050 
Current period gross charge-offs$— $— $— $— $— $(33)$— $(33)
Residential mortgage (1)
Performing$18,023 $159,453 $24,365 $7,228 $466 $13,353 $— $222,888 
Nonperforming— — — 316 — 1,193 — 1,509 
Total$18,023 $159,453 $24,365 $7,544 $466 $14,546 $— $224,397 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
Consumer
Performing$— $45 $— $— $43 $256 $43 $387 
Nonperforming— — — — — — — — 
Total$— $45 $— $— $43 $256 $43 $387 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
Leases, net
Performing$16,610 $74,726 $44,180 $15,174 $— $— $— $150,690 
Nonperforming— 198 152 17 — — — 367 
Total$16,610 $74,924 $44,332 $15,191 $— $— $— $151,057 
Current period gross charge-offs$— $(561)$(881)$(22)$— $— $— $(1,464)
Total by Payment Performance
Performing$34,633 $235,040 $68,947 $22,773 $2,883 $16,123 $54,631 $435,030 
Nonperforming— 198 152 333 — 1,193 985 2,861 
Total$34,633 $235,238 $69,099 $23,106 $2,883 $17,316 $55,616 $437,891 
Total current period gross charge-offs$— $(561)$(881)$(22)$— $(33)$— $(1,497)
(1) Excludes $14,434 of loans at fair value.

Commercial and industrial loans classified as substandard totaled $31.9 million as of March 31, 2023, a decrease of $7.4 million, from $39.3 million as of December 31, 2022. The majority of commercial and industrial substandard loans is comprised of 14 different loan relationships with no specific industry concentration and an $11.0 million commercial loan relationship in the advertising industry that became a non-performing loan relationship late in 2021.

December 31, 2022
(dollars in thousands)PassSpecial
mention		SubstandardDoubtfulTotal
Commercial mortgage$536,705 $25,309 $3,386 $— $565,400 
Home equity lines and loans57,822 — 1,577 — 59,399 
Construction260,085 11,870 — — 271,955 
Commercial and industrial295,502 6,587 39,289 — 341,378 
Small business loans131,690 — 4,465 — 136,155 
Total$1,281,804 $43,766 $48,717 $— $1,374,287 
In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status at the dates indicated:
December 31, 2022
(dollars in thousands)PerformingNon-
performing		Total
Residential mortgage (1)
$205,881 $1,454 $207,335 
Consumer488 — 488 
Leases, net138,084 902 138,986 
Total$344,453 $2,356 $346,809 
(1) There were four nonperforming residential mortgage loans at March 31, 2023 and four nonperforming residential mortgage loans at December 31, 2022 with a combined outstanding principal balance of $560 thousand and $558 thousand, respectively, which were carried at fair value and not included in the table above.
Individually Evaluated Loans
The following tables detail the recorded investment and principal balance of individually evaluated loans by portfolio segment, their related Allowance and interest income recognized at the dates indicated.
The following tables detail the pre-CECL recorded investment and principal balance of individually evaluated loans by portfolio segment, their related Allowance and interest income recognized at the dates indicated.
March 31, 2023
December 31, 2022
(dollars in thousands)Recorded
investment		Principal
balance		Related
allowance		Recorded
investment		Principal
balance		Related
allowance
Individually evaluated loans with related allowance:
Commercial and industrial$10,986 $12,319 $903 $11,099 $12,095 $776 
Small business loans4,544 4,584 1,555 3,730 3,730 1,449 
Total$15,530 $16,903 $2,458 $14,829 $15,825 $2,225 
Individually evaluated loans without related allowance:
Commercial mortgage$2,263 $2,263 $— $2,445 $2,456 $— 
Commercial and industrial2,247 2,277 — 1,448 1,494 — 
Small business loans780 780 — 797 797 — 
Home equity lines and loans985 987 — 1,097 1,097 — 
Residential mortgage1,440 1,440 — 1,454 1,454 — 
Construction1,206 1,206 — 1,206 1,206 — 
Leases367 367 — 902 902 — 
Total$9,288 $9,320 $— $9,349 $9,406 $— 
Grand Total$24,818 $26,223 $2,458 $24,178 $25,231 $2,225 
The following table details the average recorded investment and interest income recognized on individually evaluated loans by portfolio segment.
Three Months Ended
March 31, 2023
Three Months Ended
March 31, 2022
(dollars in thousands)Average
Recorded
Investment		Interest
Income
Recognized		Average
recorded
investment		Interest
income
recognized
Individually evaluated loans with related allowance:
Commercial and industrial$10,917 $— $16,487 $— 
Small business loans4,584 — 666 — 
Total$15,501 $— $17,153 $— 
Individually evaluated loans without related allowance:
Commercial mortgage2,311 58 3,547 19 
Commercial and industrial2,170 — 454 — 
Small business loans796 2 117 3 
Home equity lines and loans998 — 1,002 — 
Residential mortgage1,445 30 1,796 2 
Construction1,032 — 1,206 15 
Leases423 — — — 
Total$9,175 $90 $8,122 $39 
Grand Total$24,676 $90 $25,275 $39 
Troubled Debt Restructuring
As result of the adoption of guidance related to CECL effective as of January 1, 2023, the Corporation had no reportable balances related to TDRs as of and for the three months ended March 31, 2023. See Note 1 “Summary of Significant Accounting Policies” for additional information.
The following table presents information about TDRs at the dates indicated:
(dollars in thousands)December 31,
2022
TDRs included in nonperforming loans and leases$207 
TDRs in compliance with modified terms 3,573 
Total TDRs $3,780 
There was 1 new modification on a commercial mortgage for $684 thousand for the year ended December 31, 2022. Total TDRs declined year-over-year, despite the new modification in 2022, as two TDRs from prior to 2021 totaling $563 thousand paid off in 2022. No modifications granted during the twelve months ended December 31, 2022 subsequently defaulted during the same time period.
Modifications to Debtors Experiencing Financial Difficulty
An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the ACL on loans and leases, a change to the allowance for credit losses is generally not recorded upon modification. However, when principal forgiveness is provided, the amortized cost basis of the asset is written off against the ACL on loans and leases. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
In some cases, the Corporation will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. When a combination of at least two different types of concessions are granted within the same reporting period on a loan, that loan is only reported once and classified as a combination of as a combination of 2 or more types of modifications.
There were no modifications granted to debtors experiencing financial difficulty for the three months ended March 31, 2023.