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Allowance for Credit Losses

12 Months Ended

Dec. 31, 2024

6. Allowance for Credit Losses

Available for Sale Securities and Held to Maturity Securities

The Company has evaluated available for sale debt securities that are in an unrealized loss position and has determined that any decline in value is unrelated to credit loss and related to changes in market interest rates since purchase. None of the available for sale debt securities held were past due at December 31, 2024. In addition, as of December 31, 2024, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company does not expect to have credit losses associated with the debt securities, and no allowance was recognized on the debt securities portfolio.

Loans Held for Investment

The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of the Company’s existing portfolio. Management’s methodology for determining the allowance for credit losses uses the current expected credit losses (“CECL”) standard. Management considers the level of allowance for credit losses to be a reasonable and supportable estimate of expected credit losses inherent within the loans held for investment portfolio as of December 31, 2024. While the Company believes it has an appropriate allowance for the existing loan portfolio at December 31, 2024, additional provision for losses on existing loans may be necessary in the future. Future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as changes in macroeconomic forecasts and loan cash flow assumptions. In addition to the allowance for credit losses, the Company maintains a separate allowance for credit losses related to off-balance sheet credit exposures, including unfunded loan commitments, and this amount is included in other liabilities within the consolidated balance sheets. For further information on the policies that govern the estimation of the allowances for credit losses levels, see Note 1 to the consolidated financial statements.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the Company’s best estimate of expected credit losses as of December 31, 2024, the Company utilized a single macroeconomic alternative scenario, or S5, published by Moody’s Analytics in December 2024 that was updated to reflect the U.S. economic outlook. During our previous macroeconomic assessment as of December 31, 2023, we utilized a single macroeconomic alternative scenario, or S7, published by Moody’s Analytics in December 2023. The S5 alternative economic scenario expects the economy to underperform in the long-term. In this alternative scenario, elevated borrowing costs reduce credit-sensitive spending, higher tariffs weaken the economy, and concerns grow about broader international conflicts. Significant variables that impact the modeled losses across the Company’s loan portfolios are the U.S. Real Gross Domestic Product, or GDP, growth rates and unemployment rate assumptions. Changes in these assumptions and forecasts of economic conditions could significantly affect the estimate of expected credit losses at the balance sheet date or between reporting periods.

During 2022, the increase in provision for credit losses was driven by a deteriorating U.S. economic outlook since December 31, 2021. The net impact to the allowance of changes associated with collectively evaluated loans included a provision for credit losses of $10.0 million, while individually evaluated loans during 2022 included reversals of credit losses of $1.7 million. The change in the allowance for credit losses during 2022 was primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, and changes in loan balances and qualitative factors from the prior year. The change in the allowance during 2022 was also impacted by net charge-offs of $4.2 million.

During 2023, the increase in provision for credit losses reflected a build in the allowance related to loan portfolio changes since December 31, 2022 and a deteriorating outlook for commercial real estate markets. Specific to the Bank, the net

impact to the allowance of changes associated with collectively evaluated loans included a provision for credit losses of $12.7 million, while individually evaluated loans during 2023 included a provision for credit losses of $5.8 million. The change in the allowance for credit losses during 2023 was primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, and changes in loan balances and qualitative factors from the prior year. The change in the allowance during 2023 was also impacted by net charge-offs of $2.4 million.

During 2024, the provision for credit losses reflected a build in the allowance related to specific reserves since December 31, 2023, significantly offset by both the change in the U.S. economic outlook and changes in the collectively evaluated loan portfolio within the banking segment. Specific to the Bank, the net impact to the allowance of changes associated with individually evaluated loans included a provision for credit losses of $15.2 million, while collectively evaluated loans during 2024 included a reversal of credit losses of $14.2 million. The change in the allowance for credit losses during 2024 was primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, and changes in loan balances and qualitative factors from the prior year. The change in the allowance during 2024 was also impacted by net charge-offs of $11.2 million.

Changes in the allowance for credit losses for loans held for investments, distributed by portfolio segment, are shown below (in thousands).


	Balance,		Provision for				Recoveries on
	Beginning of		(Reversal of)		Loans		Charged Off		Balance,
Year Ended December 31, 2024	Year		Credit Losses		Charged Off		Loans		End of Year
Commercial real estate:
Non-owner occupied	$	40,061	$	(9,104)	$	(1,647)	$	—	$	29,310
Owner occupied		28,114		4,849		—		149		33,112
Commercial and industrial		20,926		14,520		(11,865)		2,028		25,609
Construction and land development		12,102		(4,943)		—		2		7,161
1-4 family residential		9,461		(4,302)		(2)		170		5,327
Consumer		648		(28)		(284)		211		547
Broker-dealer		101		(51)		—		—		50
Total	$	111,413	$	941	$	(13,798)	$	2,560	$	101,116


	Balance,		Provision for				Recoveries on
	Beginning of		(Reversal of)		Loans		Charged Off		Balance,
Year Ended December 31, 2023	Year		Credit Losses		Charged Off		Loans		End of Year
Commercial real estate:
Non-owner occupied	$	39,247	$	806	$	(34)	$	42	$	40,061
Owner occupied		24,008		5,042		(977)		41		28,114
Commercial and industrial		16,035		6,334		(4,888)		3,445		20,926
Construction and land development		6,051		6,052		(1)		—		12,102
1-4 family residential		9,313		86		(73)		135		9,461
Consumer		554		205		(387)		276		648
Broker-dealer		234		(133)		—		—		101
Total	$	95,442	$	18,392	$	(6,360)	$	3,939	$	111,413


	Balance,		Provision for				Recoveries on
	Beginning of		(Reversal of)		Loans		Charged Off		Balance,
Year Ended December 31, 2022	Year		Credit Losses		Charged Off		Loans		End of Year
Commercial real estate:
Non-owner occupied	$	36,001	$	3,218	$	—	$	28	$	39,247
Owner occupied		23,353		555		—		100		24,008
Commercial and industrial		21,982		(1,748)		(6,945)		2,746		16,035
Construction and land development		4,674		1,377		—		—		6,051
1-4 family residential		4,589		4,729		(138)		133		9,313
Consumer		578		119		(432)		289		554
Broker-dealer		175		59		—		—		234
Total	$	91,352	$	8,309	$	(7,515)	$	3,296	$	95,442

Unfunded Loan Commitments

The Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion to estimate the allowance for credit loss on unfunded loan commitments. The allowance is based on the estimated exposure at default, multiplied by the lifetime PD grade and LGD grade for that particular loan segment. The Bank estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type. The expected losses on unfunded commitments align with statistically calculated parameters used to calculate the allowance for credit losses on the funded portion. There is no reserve calculated for letters of credit as they are issued primarily as credit enhancements and the likelihood of funding is low.

Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).


	Year Ended December 31,
	2024		2023		2022
Balance, beginning of year	$	8,876	$	7,784	$	5,880
Other noninterest expense		(958)		1,092		1,904
Balance, end of year	$	7,918	$	8,876	$	7,784

During 2022, the increase in the allowance for unfunded commitments was due to increases in both loan expected loss rates and available commitment balances. During 2023, the increase in the allowance for unfunded commitments was due to increases in loan expected loss rates, while during 2024, the decrease in the allowance for unfunded commitments was primarily due to decreases in commitment balances and loan expected loss rates.