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Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2024

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 March 31, 2024 and December 31, 2023:


	March 31,		December 31,
(dollars in thousands)	2024		2023
Commercial
Commercial and industrial	$	611,695	$	598,321
Real estate construction		125,966		124,034
Commercial real estate		1,152,948		1,126,912
Total commercial		1,890,609		1,849,267
Consumer
Residential real estate first mortgage		722,151		726,879
Residential real estate junior lien		156,882		154,134
Other revolving and installment		29,833		29,303
Total consumer		908,866		910,316
Total loans	$	2,799,475	$	2,759,583

Total loans included net deferred loan fees and costs of $46 thousand and $248 thousand at March 31, 2024 and December 31, 2023, respectively. Unearned discounts associated with the acquisition of Metro Phoenix Bank totaled $4.7 million and $5.1 million as of March 31, 2024 and December 31, 2023, respectively.

Accrued interest receivable on loans is recorded within accrued interest receivable, and totaled $12.3 million at March 31, 2024 and $12.2 million at December 31, 2023.

The Company manages its loan portfolio proactively to effectively identify problem credits and assess trends early, implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. The Company monitors and manages credit risk through the following governance structure:

●

The Credit Risk team, Collection and Special Assets team and the Credit Governance Committee, which is an internal management committee comprised of various executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Collections and Special Assets, Risk, and Commercial and Retail Banking, oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, and maintain the integrity of the loan rating system.

●

The Loan Committee is responsible for reviewing and approving all credit requests that exceed individual limits that have not been countersigned by an individual with sufficient assigned authority. This committee has full authority to commit the Bank to any request that fits within its assigned approval authority.

●

The adequacy of the ACL is overseen by the ACL Governance Committee, which is an internal management committee comprised of various Company executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Collections and Special Assets, Risk, and Commercial and Retail Banking. The ACL Governance Committee supports the oversight efforts of the Board of Directors.

●

The Board of Directors has approval authority and responsibility for all matters regarding loan policy, reviews all loans approved or declined by the Loan Committee, approves lending authority and monitors asset quality and concentration levels.

●

The ACL Governance Committee and Bank Board of Directors has approval authority and oversight responsibility for the ACL adequacy and methodology.

Loans with a carrying value of $1.6 billion as of March 31, 2024 and December 31, 2023, were pledged to secure public deposits, and for other purposes required or permitted by law.

ACL on Loans

The following tables present, by loan portfolio segment, a summary of the changes in the allowance for credit losses on loans for the three months ended March 31, 2024 and 2023:


	Three months ended March 31, 2024
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Credit Losses⁽¹⁾		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	9,894	$	122	$	(164)	$	123	$	9,975
Real estate construction		6,111		(189)		—		—		5,922
Commercial real estate		11,897		834		(29)		11		12,713
Total commercial		27,902		767		(193)		134		28,610
Consumer
Residential real estate first mortgage		6,578		63		—		—		6,641
Residential real estate junior lien		1,151		(3)		—		—		1,148
Other revolving and installment		212		(28)		(12)		13		185
Total consumer		7,941		32		(12)		13		7,974
Total	$	35,843	$	799	$	(205)	$	147	$	36,584

(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 ($793) thousand related to off-balance sheet credit exposure and $(6) thousand related to investment securities held-to-maturity.


	Three months ended March 31, 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	$	9,233	$	(707)	$	(395)	$	(175)	$	56	$	8,012
Real estate construction		1,437		2,549		439		—		—		4,425
Commercial real estate		12,761		(131)		35		—		11		12,676
Total commercial		23,431		1,711		79		(175)		67		25,113
Consumer
Residential real estate first mortgage		5,858		2,269		187		—		2		8,316
Residential real estate junior lien		1,317		(27)		121		(77)		6		1,340
Other revolving and installment		540		(96)		(118)		(5)		12		333
Total consumer		7,715		2,146		190		(82)		20		9,989
Unallocated		—		—		—		—		—		—
Total	$	31,146	$	3,857	$	269	$	(257)	$	87	$	35,102

(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 $230 thousand related to off-balance sheet credit exposure and $51 thousand related to investment securities held-to-maturity.

The ACL on loans at March 31, 2024, was $36.6 million, an increase of $0.7 million, or 2.1%, since December 31, 2023. The increase was primarily due to a combined ACL increase of $1.0 million provision for credit losses in commercial and industrial and commercial real estate loans. This increase was primarily due to recent downgrades in the related loan pools.

Credit Concentrations

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and industrial and owner occupied real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes and state and county codes. Property type coding is used for investment real estate. As of March 31, 2024, the Company’s total exposure to the general business industry and owner occupied real estate was 11.3% and 10.2%, respectively, of total loans. There were no other industry concentrations exceeding 10% of the Company's total loan portfolio as of March 31, 2024.

Credit Quality Indicators

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. These loans are rated as either performing or nonperforming.

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 tables set forth the amortized cost basis of loans by credit quality indicator and vintage based on the most recent analysis performed, as of March 31, 2024 and December 31, 2023:


													Revolving
(dollars in thousands)	Term Loans Amortized Cost Basis by Origination Year												Loans Amortized
As of March 31, 2024	2024		2023		2022		2021		2020		Prior		Cost Basis		Total
Commercial and industrial
Pass	$	41,962	$	183,564	$	82,980	$	56,800	$	60,343	$	48,218	$	95,175	$	569,042
Special mention		—		553		—		7,810		—		14		1,878		10,255
Substandard		—		446		4,960		1,543		5,487		2,976		16,986		32,398
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	41,962	$	184,563	$	87,940	$	66,153	$	65,830	$	51,208	$	114,039	$	611,695
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	164	$	—	$	164
Real estate construction
Pass	$	1,851	$	26,751	$	70,126	$	5,154	$	100	$	929	$	—	$	104,911
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		21,055		—		—		—		—		21,055
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	1,851	$	26,751	$	91,181	$	5,154	$	100	$	929	$	—	$	125,966
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Pass	$	29,459	$	272,847	$	262,017	$	140,221	$	139,105	$	267,003	$	7,854	$	1,118,506
Special mention		—		—		—		—		12,957		1,972		—		14,929
Substandard		—		6,020		2,261		5,187		—		5,397		648		19,513
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	29,459	$	278,867	$	264,278	$	145,408	$	152,062	$	274,372	$	8,502	$	1,152,948
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	29	$	—	$	29
Residential real estate first mortgage
Performing	$	5,538	$	71,933	$	199,111	$	216,774	$	106,562	$	116,181	$	751	$	716,850
Nonperforming		—		—		4,361		7		12		921		—		5,301
Subtotal	$	5,538	$	71,933	$	203,472	$	216,781	$	106,574	$	117,102	$	751	$	722,151
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate junior lien
Performing	$	2,059	$	17,642	$	15,169	$	5,872	$	4,528	$	6,394	$	102,630	$	154,294
Nonperforming		244		—		—		111		—		317		1,916		2,588
Subtotal	$	2,303	$	17,642	$	15,169	$	5,983	$	4,528	$	6,711	$	104,546	$	156,882
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other revolving and installment
Performing	$	880	$	4,633	$	5,786	$	828	$	3,449	$	1,747	$	12,509	$	29,832
Nonperforming		—		—		—		—		—		1		—		1
Subtotal	$	880	$	4,633	$	5,786	$	828	$	3,449	$	1,748	$	12,509	$	29,833
Gross charge-offs for the period ended	$	—	$	—	$	3	$	—	$	—	$	9	$	—	$	12
Total loans	$	81,993	$	584,389	$	667,826	$	440,307	$	332,543	$	452,070	$	240,347	$	2,799,475
Gross charge-offs for the period ended	$	—	$	—	$	3	$	—	$	—	$	202	$	—	$	205


													Revolving
(dollars in thousands)	Term Loans Amortized Cost Basis by Origination Year												Loans Amortized
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		Total
Commercial and industrial
Pass	$	197,533	$	89,090	$	67,691	$	64,272	$	34,603	$	15,053	$	100,239	$	568,481
Special mention		—		—		—		—		—		—		—		—
Substandard		464		4,844		236		6,328		94		2,513		15,361		29,840
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	197,997	$	93,934	$	67,927	$	70,600	$	34,697	$	17,566	$	115,600	$	598,321
Gross charge-offs for the period ended	$	39	$	—	$	49	$	11	$	247	$	90	$	—	$	436
Real estate construction
Pass	$	29,902	$	57,944	$	14,326	$	122	$	—	$	952	$	121	$	103,367
Special mention		—		—		—		—		—		—		—		—
Substandard		—		20,667		—		—		—		—		—		20,667
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	29,902	$	78,611	$	14,326	$	122	$	—	$	952	$	121	$	124,034
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Pass	$	272,261	$	265,549	$	142,027	$	153,796	$	116,861	$	159,454	$	7,794	$	1,117,742
Special mention		—		—		—		—		—		262		—		262
Substandard		—		587		2,872		—		3,690		1,759		—		8,908
Doubtful		—		—		—		—		—		—		—		—
Subtotal	$	272,261	$	266,136	$	144,899	$	153,796	$	120,551	$	161,475	$	7,794	$	1,126,912
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate first mortgage
Performing	$	72,180	$	207,177	$	218,719	$	108,100	$	33,102	$	87,212	$	284	$	726,774
Nonperforming		—		—		—		—		—		105		—		105
Subtotal	$	72,180	$	207,177	$	218,719	$	108,100	$	33,102	$	87,317	$	284	$	726,879
Gross charge-offs for the period ended	$	—	$	—	$	9	$	—	$	—	$	40	$	—	$	49
Residential real estate junior lien
Performing	$	18,408	$	15,655	$	5,946	$	4,857	$	1,769	$	5,280	$	100,438	$	152,353
Nonperforming		—		—		—		—		—		—		1,781		1,781
Subtotal	$	18,408	$	15,655	$	5,946	$	4,857	$	1,769	$	5,280	$	102,219	$	154,134
Gross charge-offs for the period ended	$	—	$	—	$	—	$	—	$	—	$	77	$	—	$	77
Other revolving and installment
Performing	$	5,320	$	6,395	$	980	$	4,489	$	1,554	$	952	$	9,613	$	29,303
Nonperforming		—		—		—		—		—		—		—		—
Subtotal	$	5,320	$	6,395	$	980	$	4,489	$	1,554	$	952	$	9,613	$	29,303
Gross charge-offs for the period ended	$	4	$	2	$	—	$	31	$	6	$	8	$	—	$	51
Total loans	$	596,068	$	667,908	$	452,797	$	341,964	$	191,673	$	273,542	$	235,631	$	2,759,583
Gross charge-offs for the period ended	$	43	$	2	$	58	$	42	$	253	$	215	$	—	$	613

Past Due and Nonaccrual Loans

The Company closely monitors the performance of its loan portfolio. A loan is placed on nonaccrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured. When one loan to a borrower is placed on nonaccrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on nonaccrual status. All previously accrued and unpaid interest is reversed at that time. A loan will return to accrual when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period, generally at least six months.

The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of March 31, 2024 and December 31, 2023:


	March 31, 2024
							90 Days
	Accruing		30 - 59 Days		60 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	605,573	$	593	$	43	$	—	$	5,486	$	611,695
Real estate construction		125,966		—		—		—		—		125,966
Commercial real estate		1,151,672		474		—		—		802		1,152,948
Total commercial		1,883,211		1,067		43		—		6,288		1,890,609
Consumer
Residential real estate first mortgage		717,046		4,478		—		—		627		722,151
Residential real estate junior lien		155,919		509		25		—		429		156,882
Other revolving and installment		29,735		64		33		—		1		29,833
Total consumer		902,700		5,051		58		—		1,057		908,866
Total loans	$	2,785,911	$	6,118	$	101	$	—	$	7,345	$	2,799,475


	December 31, 2023
							90 Days
	Accruing		30 - 59 Days		60 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	590,663	$	924	$	—	$	139	$	6,595	$	598,321
Real estate construction		124,034		—		—		—		—		124,034
Commercial real estate		1,125,669		128		—		—		1,115		1,126,912
Total commercial		1,840,366		1,052		—		139		7,710		1,849,267
Consumer
Residential real estate first mortgage		724,786		901		554		—		638		726,879
Residential real estate junior lien		153,220		666		—		—		248		154,134
Other revolving and installment		29,086		170		47		—		—		29,303
Total consumer		907,092		1,737		601		—		886		910,316
Total loans	$	2,747,458	$	2,789	$	601	$	139	$	8,596	$	2,759,583

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 March 31, 2024 and December 31, 2023:


	As of March 31, 2024
					90 Days
	Nonaccrual				or More
	with no Allowance				Past Due
(dollars in thousands)	for Credit Losses		Nonaccrual		and Accruing
Commercial
Commercial and industrial	$	69	$	5,486	$	—
Real estate construction		—		—		—
Commercial real estate		95		802		—
Total commercial		164		6,288		—
Consumer
Residential real estate first mortgage		621		627		—
Residential real estate junior lien		429		429		—
Other revolving and installment		—		1		—
Total consumer		1,050		1,057		—
Total loans	$	1,214	$	7,345	$	—


	December 31, 2023
					90 Days
	Nonaccrual				or More
	with no Allowance				Past Due
(dollars in thousands)	for Credit Losses		Nonaccrual		and Accruing
Commercial
Commercial and industrial	$	79	$	6,595	$	139
Real estate construction		—		—		—
Commercial real estate		95		1,115		—
Total commercial		174		7,710		139
Consumer
Residential real estate first mortgage		632		638		—
Residential real estate junior lien		185		248		—
Other revolving and installment		—		—		—
Total consumer		817		886		—
Total loans	$	991	$	8,596	$	139

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the three months ended March 31, 2024 and 2023, is estimated to have been $651 thousand and $38 thousand, respectively.

The Company’s policy is to reverse previously recorded interest income when a loan is placed on nonaccrual status. As a result, the Company did not record any interest income on its nonaccrual loans for the three months ended March 31, 2024 and 2023. At March 31, 2024 and December 31, 2023, total accrued interest receivable on loans, which had been excluded from reported amortized cost basis on loans, was $12.3 million and $12.2 million, respectively, and was reported within accrued interest receivable on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.

In cases where a borrower experiences financial difficulty, the Company may make certain concessions for which the terms of the loan are modified. 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 months ended March 31, 2024 and 2023, the Company did not provide any modifications to loans under these circumstances that were experiencing financial difficulty.

The following tables present 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 March 31, 2024 and December 31, 2023:


	As of March 31, 2024
	Primary Type of Collateral
									Allowance for
(dollars in thousands)	Real estate		Equipment		Other		Total		Credit Losses
Commercial
Commercial and industrial	$	5,070	$	—	$	—	$	5,070	$	2,280
Commercial real estate		515		—		40		555		366
Total commercial		5,585		—		40		5,625		2,646
Consumer
Residential real estate first mortgage		627		—		—		627		3
Residential real estate junior lien		429		—		1		430		—
Total consumer		1,056		—		1		1,057		3
Total loans	$	6,641	$	—	$	41	$	6,682	$	2,649


	As of December 31, 2023
	Primary Type of Collateral
									Allowance for
(dollars in thousands)	Real estate		Equipment		Other		Total		Credit Losses
Commercial
Commercial and industrial	$	6,124	$	—	$	—	$	6,124	$	2,384
Real estate construction		—		—		—		—		—
Commercial real estate		695		—		96		791		601
Total commercial		6,819		—		96		6,915		2,985
Consumer
Residential real estate first mortgage		638		—		—		638		3
Residential real estate junior lien		134		22		93		249		6
Other revolving and installment		—		—		—		—		—
Total consumer		772		22		93		887		9
Total loans	$	7,591	$	22	$	189	$	7,802	$	2,994

Collateral dependent loans are loans for which the repayment is expected to be provided substantially by the underlying collateral and there are no other available and reliable sources of repayment.