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Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2023

Loans and Allowance for Credit Losses

NOTE 4 Loans and Allowance for Credit Losses

The following table presents total loans outstanding, by portfolio segment, as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
(dollars in thousands)	2023		2022
Commercial
Commercial and industrial	$	551,860	$	583,876
Real estate construction		78,428		97,810
Commercial real estate		1,003,821		881,670
Total commercial		1,634,109		1,563,356
Consumer
Residential real estate first mortgage		707,630		679,551
Residential real estate junior lien		157,231		150,479
Other revolving and installment		34,552		50,608
Total consumer		899,413		880,638
Total loans	$	2,533,522	$	2,443,994

Total loans included net deferred loan fees and costs of $0.8 million and $0.9 million at June 30, 2023 and December 31, 2022, respectively. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $6.2 million as of June 30, 2023.

Accrued interest receivable on loans is recorded within accrued interest receivable, and totaled $9.8 million at both June 30, 2023 and December 31, 2022.

Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurements of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed regularly to identify loans for nonaccrual status.

The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of June 30, 2023 and December 31, 2022:


	June 30, 2023
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	542,769	$	8,710	$	—	$	381	$	551,860
Real estate construction		78,277		—		—		151		78,428
Commercial real estate		1,002,925		—		—		896		1,003,821
Total commercial		1,623,971		8,710		—		1,428		1,634,109
Consumer
Residential real estate first mortgage		704,957		2,027		347		299		707,630
Residential real estate junior lien		156,626		105		—		500		157,231
Other revolving and installment		34,400		146		—		6		34,552
Total consumer		895,983		2,278		347		805		899,413
Total loans	$	2,519,954	$	10,988	$	347	$	2,233	$	2,533,522


	December 31, 2022
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	580,288	$	2,426	$	—	$	1,162	$	583,876
Real estate construction		97,370		—		—		440		97,810
Commercial real estate		879,830		368		—		1,472		881,670
Total commercial		1,557,488		2,794		—		3,074		1,563,356
Consumer
Residential real estate first mortgage		677,471		1,545		—		535		679,551
Residential real estate junior lien		149,918		377		—		184		150,479
Other revolving and installment		50,360		247		—		1		50,608
Total consumer		877,749		2,169		—		720		880,638
Total loans	$	2,435,237	$	4,963	$	—	$	3,794	$	2,443,994

In calculating expected credit losses, the Company includes loans on nonaccrual status and loans 90 days or more past due and still accruing. The following table presents the amortized cost basis on nonaccrual status loans and loans 90 days or more past due and still accruing as of June 30, 2023:


	As of June 30, 2023
	Nonaccrual				90 Days
	with no Allowance				or More
(dollars in thousands)	for Credit Losses		Nonaccrual		Past Due
Commercial
Commercial and industrial	$	119	$	381	$	—
Real estate construction		151		151		—
Commercial real estate		—		896		—
Total commercial		270		1,428		—
Consumer
Residential real estate first mortgage		293		299		347
Residential real estate junior lien		500		500		—
Other revolving and installment		—		6		—
Total consumer		793		805		347
Total loans	$	1,063	$	2,233	$	347

Loans with a carrying value of $1.6 billion as of June 30, 2023 and $1.5 billion as of December 31, 2022, were pledged to secure public deposits, and for other purposes required or permitted by law.

A loan for which the terms have been modified resulting in a concession represents a loan experiencing financial difficulty. Loans experiencing financial difficulty can include modifications for an interest rate reduction below current market rates, a forgiveness of principal balance, an extension of the loan term, an-other than significant payment delay, or some combination of similar types of modifications. During the three and six months ended June 30, 2023, the Company did not provide any modifications to loans under these circumstances that were experiencing financial difficulty.

The Company’s consumer loan portfolio is primarily comprised of secured loans that are evaluated at origination on a centralized basis against standardized underwriting criteria. The Company generally does not risk rate consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Credit quality for the consumer loan portfolio is measured by delinquency rates, nonaccrual amounts and actual losses incurred.

The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and performs detailed internal and external reviews of risk rated loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors,

trends in the industries in which the borrowers operate and the estimated fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan.

The Company’s ratings are aligned to pass and criticized categories. The criticized category includes special mention, substandard, and doubtful risk ratings. The risk ratings are defined as follows:

Pass: A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Well-defined weaknesses include a borrower’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company 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 repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible and charged off immediately.

The following table sets forth the amortized cost basis of loans by credit quality indicator and vintage based on the most recent analysis performed, as of June 30, 2023:


													Revolving
(dollars in thousands)	Term Loans Amortized Cost Basis by Origination Year												Loans Amortized
As of June 30, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		Total
Commercial and industrial
Pass	$	72,021	$	124,487	$	81,827	$	72,874	$	40,610	$	24,848	$	102,467	$	519,134
Substandard		—		5,223		415		8,463		186		823		17,616		32,726
Subtotal		72,021		129,710		82,242		81,337		40,796		25,671		120,083		551,860
Real estate construction
Pass		6,263		37,948		19,315		4,440		9,150		1,006		306		78,428
Substandard		—		—		—		—		—		—		—		—
Subtotal		6,263		37,948		19,315		4,440		9,150		1,006		306		78,428
Commercial real estate
Pass		105,650		278,338		150,233		160,601		110,705		176,802		14,685		997,014
Substandard		—		—		886		—		4,096		1,825		—		6,807
Subtotal		105,650		278,338		151,119		160,601		114,801		178,627		14,685		1,003,821
Residential real estate first mortgage
Pass		40,090		202,056		226,785		111,801		34,894		91,680		216		707,522
Substandard		—		—		—		—		—		108		—		108
Subtotal		40,090		202,056		226,785		111,801		34,894		91,788		216		707,630
Residential real estate junior lien
Pass		13,552		17,683		6,751		4,936		1,947		6,939		105,066		156,874
Substandard		—		—		—		—		—		357		—		357
Subtotal		13,552		17,683		6,751		4,936		1,947		7,296		105,066		157,231
Other revolving and installment
Pass		4,090		9,031		1,467		6,071		2,506		2,037		9,350		34,552
Substandard		—		—		—		—		—		—		—		—
Subtotal		4,090		9,031		1,467		6,071		2,506		2,037		9,350		34,552
Total Loans
Pass		241,666		669,543		486,378		360,723		199,812		303,312		232,090		2,493,524
Substandard		—		5,223		1,301		8,463		4,282		3,113		17,616		39,998
Total loans	$	241,666	$	674,766	$	487,679	$	369,186	$	204,094	$	306,425	$	249,706	$	2,533,522

The following table sets forth the risk category of loans by class of loans and credit quality indicator used on the most recent analysis performed as of December 31, 2022:


	December 31, 2022
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	558,694	$	21,969	$	3,213	$	—	$	583,876
Real estate construction		97,548		—		262		—		97,810
Commercial real estate		873,270		—		8,400		—		881,670
Total commercial		1,529,512		21,969		11,875		—		1,563,356
Consumer
Residential real estate first mortgage		678,743		63		745		—		679,551
Residential real estate junior lien		149,847		—		632		—		150,479
Other revolving and installment		50,607		—		1		—		50,608
Total consumer		879,197		63		1,378		—		880,638
Total loans	$	2,408,709	$	22,032	$	13,253	$	—	$	2,443,994

The adequacy of the allowance for credit losses on loans is assessed at the end of each quarter. The allowance for credit losses is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Historical data is evaluated in multiple components of the expected credit loss, including the reasonable and supportable forecast of each loan segment. Historical experience is used to infer probability of default and loss given the reasonable and supportable forecast period. Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit-related analytics as deemed appropriate.

The following tables present, by loan portfolio segment, a summary of the changes in the allowance for credit losses on loans for the three and six months ended June 30, 2023 and 2022:


	Three months ended June 30, 2023
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Credit Losses⁽¹⁾		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	7,800	$	(340)	$	(85)	$	438	$	7,813
Real estate construction		4,406		(760)		—		—		3,646
Commercial real estate		12,344		609		—		12		12,965
Total commercial		24,550		(491)		(85)		450		24,424
Consumer
Residential real estate first mortgage		8,060		(159)		—		—		7,901
Residential real estate junior lien		1,277		28		—		46		1,351
Other revolving and installment		314		(13)		(23)		15		293
Total consumer		9,651		(144)		(23)		61		9,545
Unallocated		901		826		—		—		1,727
Total	$	35,102	$	191	$	(108)	$	511	$	35,696

(1)	The difference in the credit loss expense reported herein compared to the Consolidated Statements of Income is associated with the credit loss expense reversal of $186 thousand related to off-balance sheet credit exposures and $5 thousand related to investment securities held-to-maturity.


	Six months ended June 30, 2023
	Beginning		Adoption		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		of ASC 326		Credit Losses⁽¹⁾		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	9,158	$	(862)	$	(717)	$	(260)	$	494	$	7,813
Real estate construction		1,446		2,518		(318)		—		—		3,646
Commercial real estate		12,688		(424)		678		—		23		12,965
Total commercial		23,292		1,232		(357)		(260)		517		24,424
Consumer
Residential real estate first mortgage		5,769		2,080		50		—		2		7,901
Residential real estate junior lien		1,289		(67)		154		(77)		52		1,351
Other revolving and installment		528		(104)		(130)		(28)		27		293
Total consumer		7,586		1,909		74		(105)		81		9,545
Unallocated		268		716		743		—		—		1,727
Total	$	31,146	$	3,857	$	460	$	(365)	$	598	$	35,696

(1)	The difference in the credit loss expense reported herein compared to the Consolidated Statements of Income is associated with the credit loss expense of $44 thousand related to off-balance sheet credit exposures and $46 thousand related to investment securities held-to-maturity.


	Three months ended June 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	9,795	$	1,085	$	(637)	$	90	$	10,333
Real estate construction		810		68		—		—		878
Commercial real estate		11,946		(1,123)		—		11		10,834
Total commercial		22,551		30		(637)		101		22,045
Consumer
Residential real estate first mortgage		6,661		(486)		—		—		6,175
Residential real estate junior lien		1,400		(134)		—		201		1,467
Other revolving and installment		644		(5)		(37)		32		634
Total consumer		8,705		(625)		(37)		233		8,276
Unallocated		457		595		—		—		1,052
Total	$	31,713	$	—	$	(674)	$	334	$	31,373


	Six months ended June 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	8,925	$	1,856	$	(664)	$	216	$	10,333
Real estate construction		783		95		—		—		878
Commercial real estate		12,376		(1,564)		—		22		10,834
Total commercial		22,084		387		(664)		238		22,045
Consumer
Residential real estate first mortgage		6,532		(357)		—		—		6,175
Residential real estate junior lien		1,295		(42)		—		214		1,467
Other revolving and installment		481		140		(55)		68		634
Total consumer		8,308		(259)		(55)		282		8,276
Unallocated		1,180		(128)		—		—		1,052
Total	$	31,572	$	—	$	(719)	$	520	$	31,373

The following table presents, by loan portfolio segment, a summary of charge-offs, by vintage, for the six months ended June 30, 2023:


	Gross Charge-offs for six months ended June 30, 2023
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Total
Commercial
Commercial and industrial	$	39	$	—	$	25	$	9	$	187	$	—	$	260
Real estate construction		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—
Total commercial		39		—		25		9		187		—		260
Consumer
Residential real estate first mortgage		—		—		—		—		—		—		—
Residential real estate junior lien		—		—		—		—		—		77		77
Other revolving and installment		—		2		—		21		4		1		28
Total consumer		—		2		—		21		4		78		105
Total loans	$	39	$	2	$	25	$	30	$	191	$	78	$	365

The following tables present the amortized cost and related allowance for credit losses on loans, by portfolio segment, as of June 30, 2023 and December 31, 2022:


	June 30, 2023
	Amortized Cost						Allowance for Credit Losses on Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
(dollars in thousands)	Impairment		Impairment		Total		Impairment		Impairment		Total
Commercial
Commercial and industrial	$	381	$	551,479	$	551,860	$	78	$	7,735	$	7,813
Real estate construction		—		78,428		78,428		—		3,646		3,646
Commercial real estate		886		1,002,935		1,003,821		572		12,393		12,965
Total commercial		1,267		1,632,842		1,634,109		650		23,774		24,424
Consumer
Residential real estate first mortgage		299		707,331		707,630		5		7,896		7,901
Residential real estate junior lien		500		156,731		157,231		—		1,351		1,351
Other revolving and installment		6		34,546		34,552		6		287		293
Total consumer		805		898,608		899,413		11		9,534		9,545
Unallocated		—		—		—		—		—		1,727
Total loans	$	2,072	$	2,531,450	$	2,533,522	$	661	$	33,308	$	35,696


	December 31, 2022
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
Commercial
Commercial and industrial	$	1,313	$	582,563	$	583,876	$	275	$	8,883	$	9,158
Real estate construction		262		97,548		97,810		97		1,349		1,446
Commercial real estate		1,472		880,198		881,670		582		12,106		12,688
Total commercial		3,047		1,560,309		1,563,356		954		22,338		23,292
Consumer
Residential real estate first mortgage		535		679,016		679,551		—		5,769		5,769
Residential real estate junior lien		184		150,295		150,479		—		1,289		1,289
Other revolving and installment		1		50,607		50,608		—		528		528
Total consumer		720		879,918		880,638		—		7,586		7,586
Unallocated		—		—		—		—		—		268
Total loans	$	3,767	$	2,440,227	$	2,443,994	$	954	$	29,924	$	31,146

The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans, as of June 30, 2023:


	As of June 30, 2023
	Primary Type of Collateral
									Allowance for
(dollars in thousands)	Real estate		Equipment		Other		Total		Credit Losses
Commercial
Commercial and industrial	$	—	$	188	$	—	$	188	$	68
Commercial real estate		—		—		—		—		—
Total commercial		—		188		—		188		68
Consumer
Residential real estate first mortgage		299		—		—		299		5
Residential real estate junior lien		500		—		—		500		—
Other revolving and installment		—		—		6		6		6
Total consumer		799		—		6		805		11
Total loans	$	799	$	188	$	6	$	993	$	79

Pre-ASC 326 Adoption impaired loan disclosures

The table below summarizes key information on impaired loans as of December 31, 2022:


	December 31, 2022
	Recorded		Unpaid		Related
(dollars in thousands)	Investment		Principal		Allowance
Impaired loans with a valuation allowance
Commercial and industrial	$	675	$	711	$	275
Real estate construction		262		440		97
Commercial real estate		896		900		582
Residential real estate first mortgage		—		—		—
Total impaired loans with a valuation allowance		1,833		2,051		954
Impaired loans without a valuation allowance
Commercial and industrial		638		767		—
Real estate construction		—		—		—
Commercial real estate		576		660		—
Residential real estate first mortgage		535		573		—
Residential real estate junior lien		184		218		—
Other revolving and installment		1		1		—
Total impaired loans without a valuation allowance		1,934		2,219		—
Total impaired loans
Commercial and industrial		1,313		1,478		275
Real estate construction		262		440		97
Commercial real estate		1,472		1,560		582
Residential real estate first mortgage		535		573		—
Residential real estate junior lien		184		218		—
Other revolving and installment		1		1		—
Total impaired loans	$	3,767	$	4,270	$	954

The table below presents the average recorded investment in impaired loans and interest income for the three and six months ended June 30, 2022:


	Three months ended June 30,
	2022
	Average
	Recorded		Interest
(dollars in thousands)	Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,018	$	2
Commercial real estate		176		2
Other revolving and installment		75		—
Total impaired loans with a valuation allowance		1,269		4
Impaired loans without a valuation allowance
Commercial and industrial		761		—
Commercial real estate		629		—
Residential real estate first mortgage		1,962		—
Residential real estate junior lien		196		—
Other revolving and installment		—		—
Total impaired loans without a valuation allowance		3,548		—
Total impaired loans
Commercial and industrial		1,779		2
Commercial real estate		805		2
Residential real estate first mortgage		1,962		—
Residential real estate junior lien		196		—
Other revolving and installment		75		—
Total impaired loans	$	4,817	$	4


	Six Months Ended June 30,
	2022
	Average
	Recorded		Interest
(dollars in thousands)	Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,156	$	6
Commercial real estate		177		3
Other revolving and installment		157		—
Total impaired loans with a valuation allowance		1,490		9
Impaired loans without a valuation allowance
Commercial and industrial		761		—
Commercial real estate		629		—
Residential real estate first mortgage		1,953		—
Residential real estate junior lien		198		—
Total impaired loans without a valuation allowance		3,541		—
Total impaired loans
Commercial and industrial		1,917		6
Commercial real estate		806		3
Residential real estate first mortgage		1,953		—
Residential real estate junior lien		198		—
Other revolving and installment		157		—
Total impaired loans	$	5,031	$	9