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Loans and Allowance for Credit Losses

9 Months Ended

Sep. 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 September 30, 2023 and December 31, 2022:


	September 30,		December 31,
(dollars in thousands)	2023		2022
Commercial
Commercial and industrial	$	582,387	$	583,876
Real estate construction		97,742		97,810
Commercial real estate		1,025,014		881,670
Total commercial		1,705,143		1,563,356
Consumer
Residential real estate first mortgage		717,793		679,551
Residential real estate junior lien		152,677		150,479
Other revolving and installment		30,817		50,608
Total consumer		901,287		880,638
Total loans	$	2,606,430	$	2,443,994

Total loans included net deferred loan fees and costs of $0.5 million and $0.9 million at September 30, 2023 and December 31, 2022, respectively. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $5.2 million as of September 30, 2023.

Accrued interest receivable on loans is recorded within accrued interest receivable, and totaled $11.5 million at September 30, 2023 and $9.2 million at 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 September 30, 2023 and December 31, 2022:


	September 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	$	572,898	$	2,929	$	—	$	6,560	$	582,387
Real estate construction		97,627		—		—		115		97,742
Commercial real estate		1,024,118		—		—		896		1,025,014
Total commercial		1,694,643		2,929		—		7,571		1,705,143
Consumer
Residential real estate first mortgage		716,799		108		—		886		717,793
Residential real estate junior lien		151,593		538		—		546		152,677
Other revolving and installment		30,635		178		—		4		30,817
Total consumer		899,027		824		—		1,436		901,287
Total loans	$	2,593,670	$	3,753	$	—	$	9,007	$	2,606,430


	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 September 30, 2023 and December 31, 2022:


	As of September 30, 2023
	Nonaccrual				90 Days
	with no Allowance				or More
(dollars in thousands)	for Credit Losses		Nonaccrual		Past Due
Commercial
Commercial and industrial	$	—	$	6,560	$	—
Real estate construction		115		115		—
Commercial real estate		—		896		—
Total commercial		115		7,571		—
Consumer
Residential real estate first mortgage		880		886		—
Residential real estate junior lien		46		546		—
Other revolving and installment		—		4		—
Total consumer		926		1,436		—
Total loans	$	1,041	$	9,007	$	—


	December 31, 2022
	Nonaccrual				90 Days
	with no Allowance				or More
(dollars in thousands)	for Credit Losses		Nonaccrual		Past Due
Commercial
Commercial and industrial	$	638	$	1,162	$	—
Real estate construction		—		440		—
Commercial real estate		576		1,472		—
Total commercial		1,214		3,074		—
Consumer
Residential real estate first mortgage		535		535		—
Residential real estate junior lien		184		184		—
Other revolving and installment		1		1		—
Total consumer		720		720		—
Total loans	$	1,934	$	3,794	$	—

Loans with a carrying value of $1.9 billion as of September 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 nine months ended September 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 September 30, 2023:


													Revolving
(dollars in thousands)	Term Loans Amortized Cost Basis by Origination Year												Loans Amortized
As of September 30, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		Total
Commercial and industrial
Pass	$	104,091	$	107,346	$	75,494	$	67,184	$	37,877	$	50,189	$	108,524	$	550,705
Special mention		—		—		—		—		—		—		273		273
Substandard		117		5,052		377		8,064		104		2,214		15,481		31,409
Doubtful		—		—		—		—		—		—		—		—
Subtotal		104,208		112,398		75,871		75,248		37,981		52,403		124,278		582,387
Real estate construction
Pass		14,284		39,029		18,594		144		9,506		1,054		—		82,611
Special mention		—		15,131		—		—		—		—		—		15,131
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Subtotal		14,284		54,160		18,594		144		9,506		1,054		—		97,742
Commercial real estate
Pass		151,721		277,347		140,323		158,590		108,798		164,538		16,765		1,018,082
Special mention		—		—		—		—		—		—		—		—
Substandard		—		97		886		—		4,157		1,792		—		6,932
Doubtful		—		—		—		—		—		—		—		—
Subtotal		151,721		277,444		141,209		158,590		112,955		166,330		16,765		1,025,014
Residential real estate first mortgage
Pass		58,972		203,782		222,783		109,029		33,356		89,480		284		717,686
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		107		—		107
Doubtful		—		—		—		—		—		—		—		—
Subtotal		58,972		203,782		222,783		109,029		33,356		89,587		284		717,793
Residential real estate junior lien
Pass		17,021		16,755		6,452		4,908		1,779		6,299		97,541		150,755
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		331		1,591		1,922
Doubtful		—		—		—		—		—		—		—		—
Subtotal		17,021		16,755		6,452		4,908		1,779		6,630		99,132		152,677
Other revolving and installment
Pass		5,786		6,936		1,319		5,159		2,000		1,442		8,175		30,817
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Subtotal		5,786		6,936		1,319		5,159		2,000		1,442		8,175		30,817
Total Loans
Pass		351,875		651,195		464,965		345,014		193,316		313,002		231,289		2,550,656
Special mention		—		15,131		—		—		—		—		273		15,404
Substandard		117		5,149		1,263		8,064		4,261		4,444		17,072		40,370
Doubtful		—		—		—		—		—		—		—		—
Total loans	$	351,992	$	671,475	$	466,228	$	353,078	$	197,577	$	317,446	$	248,634	$	2,606,430

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 nine months ended September 30, 2023 and 2022:


	Three months ended September 30, 2023
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	7,813	$	442	$	(134)	$	456	$	8,577
Real estate construction		3,646		1,063		—		—		4,709
Commercial real estate		12,965		(270)		—		11		12,706
Total commercial		24,424		1,235		(134)		467		25,992
Consumer
Residential real estate first mortgage		7,901		(389)		(9)		254		7,757
Residential real estate junior lien		1,351		(14)		—		—		1,337
Other revolving and installment		293		(58)		(8)		24		251
Total consumer		9,545		(461)		(17)		278		9,345
Unallocated		1,727		(774)		—		—		953
Total	$	35,696	$	—	$	(151)	$	745	$	36,290


	Nine months ended September 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)	$	(275)	$	(394)	$	950	$	8,577
Real estate construction		1,446		2,518		745		—		—		4,709
Commercial real estate		12,688		(424)		408		—		34		12,706
Total commercial		23,292		1,232		878		(394)		984		25,992
Consumer
Residential real estate first mortgage		5,769		2,080		(339)		(9)		256		7,757
Residential real estate junior lien		1,289		(67)		140		(77)		52		1,337
Other revolving and installment		528		(104)		(188)		(36)		51		251
Total consumer		7,586		1,909		(387)		(122)		359		9,345
Unallocated		268		716		(31)		—		—		953
Total	$	31,146	$	3,857	$	460	$	(516)	$	1,343	$	36,290

(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 September 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,333	$	(845)	$	(672)	$	105	$	8,921
Real estate construction		878		378		—		76		1,332
Commercial real estate		10,834		1,335		—		101		12,270
Total commercial		22,045		868		(672)		282		22,523
Consumer
Residential real estate first mortgage		6,175		(584)		—		—		5,591
Residential real estate junior lien		1,467		(109)		—		7		1,365
Other revolving and installment		634		(75)		(75)		53		537
Total consumer		8,276		(768)		(75)		60		7,493
Unallocated		1,052		(100)		—		—		952
Total	$	31,373	$	—	$	(747)	$	342	$	30,968


	Nine months ended September 30, 2022
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	8,925	$	1,011	$	(1,336)	$	321	$	8,921
Real estate construction		783		473		—		76		1,332
Commercial real estate		12,376		(229)		—		123		12,270
Total commercial		22,084		1,255		(1,336)		520		22,523
Consumer
Residential real estate first mortgage		6,532		(941)		—		—		5,591
Residential real estate junior lien		1,295		(151)		—		221		1,365
Other revolving and installment		481		65		(130)		121		537
Total consumer		8,308		(1,027)		(130)		342		7,493
Unallocated		1,180		(228)		—		—		952
Total	$	31,572	$	—	$	(1,466)	$	862	$	30,968

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


	Gross Charge-offs for nine months ended September 30, 2023
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Total
Commercial
Commercial and industrial	$	39	$	—	$	28	$	11	$	247	$	69	$	394
Real estate construction		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—
Total commercial		39		—		28		11		247		69		394
Consumer
Residential real estate first mortgage		—		—		9		—		—		—		9
Residential real estate junior lien		—		—		—		—		—		77		77
Other revolving and installment		—		2		—		27		4		3		36
Total consumer		—		2		9		27		4		80		122
Total loans	$	39	$	2	$	37	$	38	$	251	$	149	$	516

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


	September 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	$	6,559	$	575,828	$	582,387	$	1,352	$	7,225	$	8,577
Real estate construction		115		97,627		97,742		—		4,709		4,709
Commercial real estate		896		1,024,118		1,025,014		—		12,706		12,706
Total commercial		7,570		1,697,573		1,705,143		1,352		24,640		25,992
Consumer
Residential real estate first mortgage		886		716,907		717,793		—		7,757		7,757
Residential real estate junior lien		547		152,130		152,677		—		1,337		1,337
Other revolving and installment		4		30,813		30,817		—		251		251
Total consumer		1,437		899,850		901,287		—		9,345		9,345
Unallocated		—		—		—		—		—		953
Total loans	$	9,007	$	2,597,423	$	2,606,430	$	1,352	$	33,985	$	36,290


	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 September 30, 2023:


	As of September 30, 2023
	Primary Type of Collateral
									Allowance for
(dollars in thousands)	Real estate		Equipment		Other		Total		Credit Losses
Commercial
Commercial and industrial	$	—	$	—	$	—	$	—	$	—
Commercial real estate		572		—		—		572		572
Total commercial		572		—		—		572		572
Consumer
Residential real estate first mortgage		886		—		—		886		3
Residential real estate junior lien		46		—		—		46		—
Other revolving and installment		—		—		4		4		2
Total consumer		932		—		4		936		5
Total loans	$	1,504	$	—	$	4	$	1,508	$	577

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 nine months ended September 30, 2022:


	Three months ended September 30,
	2022
	Average
	Recorded		Interest
(dollars in thousands)	Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	722	$	3
Commercial real estate		—		—
Residential real estate first mortgage		—		—
Residential real estate junior lien		—		—
Other revolving and installment		—		—
Total impaired loans with a valuation allowance		722		3
Impaired loans without a valuation allowance
Commercial and industrial		1,371		7
Commercial real estate		801		2
Residential real estate first mortgage		2,032		—
Residential real estate junior lien		189		—
Other revolving and installment		8		—
Total impaired loans without a valuation allowance		4,401		9
Total impaired loans
Commercial and industrial		2,093		10
Commercial real estate		801		2
Residential real estate first mortgage		2,032		—
Residential real estate junior lien		189		—
Other revolving and installment		8		—
Total impaired loans	$	5,123	$	12


	Nine Months Ended September 30,
	2022
	Average
	Recorded		Interest
(dollars in thousands)	Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	833	$	8
Commercial real estate		—		—
Residential real estate first mortgage		—		—
Residential real estate junior lien		—		—
Other revolving and installment		—		—
Total impaired loans with a valuation allowance		833		8
Impaired loans without a valuation allowance
Commercial and industrial		1,291		21
Commercial real estate		805		5
Residential real estate first mortgage		2,108		—
Residential real estate junior lien		193		—
Other revolving and installment		11		—
Total impaired loans without a valuation allowance		4,408		26
Total impaired loans
Commercial and industrial		2,124		29
Commercial real estate		805		5
Residential real estate first mortgage		2,108		—
Residential real estate junior lien		193		—
Other revolving and installment		11		—
Total impaired loans	$	5,241	$	34