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Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2023

LOANS AND ALLOWANCE FOR CREDIT LOSSES

At June 30, 2023, the Company’s loan portfolio was $16.83 billion, compared to $16.14 billion at December 31, 2022. The various categories of loans are summarized as follows:


	June 30,		December 31,
(In thousands)	2023		2022
Consumer:
Credit cards	$	209,452	$	196,928
Other consumer	148,333		152,882
Total consumer	357,785		349,810
Real Estate:
Construction and development	2,930,586		2,566,649
Single family residential	2,633,365		2,546,115
Other commercial	7,546,130		7,468,498
Total real estate	13,110,081		12,581,262
Commercial:
Commercial	2,569,330		2,632,290
Agricultural	280,541		205,623
Total commercial	2,849,871		2,837,913
Other	515,916		373,139
Total loans	$	16,833,653	$	16,142,124

The above table presents total loans at amortized cost. The difference between amortized cost and unpaid principal balance is primarily premiums and discounts associated with acquisition date fair value adjustments on acquired loans as well as deferred origination costs and fees totaling $13.6 million and $26.4 million at June 30, 2023 and December 31, 2022, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $66.2 million and $65.4 million at June 30, 2023 and December 31, 2022, respectively, and is included in interest receivable on the consolidated balance sheets.

Loan Origination/Risk Management – The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral; obtaining and monitoring collateral; and providing an adequate allowance for credit losses by regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry. The Company seeks to use diversification within the loan portfolio to reduce its credit risk, thereby minimizing the adverse impact on the portfolio if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default.

Consumer – The consumer loan portfolio consists of credit card loans and other consumer loans. Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to economic downturns that result in increased unemployment. Other consumer loans include direct and indirect installment loans and account overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

Real estate – The real estate loan portfolio consists of construction and development loans (“C&D”), single family residential loans and commercial loans. C&D and commercial real estate (“CRE”) loans can be particularly sensitive to valuation of real estate. CRE cycles are inevitable. The long planning and production process for new properties and rapid shifts in business conditions and employment create an inherent tension between supply and demand for commercial properties. While general economic trends often move individual markets in the same direction over time, the timing and magnitude of changes are determined by other forces unique to each market. CRE cycles tend to be local in nature and longer than other credit cycles. Factors influencing the CRE market are traditionally different from those affecting residential real estate markets; thereby making predictions for one market based on the other difficult. Additionally, submarkets within CRE – such as office, industrial,

apartment, retail and hotel – also experience different cycles, providing an opportunity to lower the overall risk through diversification across types of CRE loans. Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and duration. The Company monitors these loans closely.

Commercial – The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchases or other expansion projects. Paycheck Protection Program (“PPP”) loans are also included in the commercial loan portfolio. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations. The Company continues its efforts to keep loan terms short, reducing the negative impact of upward movement in interest rates. Term loans are generally set up with one or three year balloons, and the Company has instituted a pricing mechanism for commercial loans. It is standard practice to require personal guaranties on commercial loans for closely-held or limited liability entities.

Paycheck Protection Program Loans – The Company originated loans pursuant to multiple PPP appropriations of the Coronavirus Aid, Relief and Economic Security Act which provided 100% federally guaranteed loans for small businesses to cover up to 24 weeks of payroll costs and assistance with mortgage interest, rent and utilities. Notably, these small business loans may be forgiven by the SBA if borrowers maintain their payrolls and satisfy certain other conditions. PPP loans have a zero percent risk-weight for regulatory capital ratios. As of June 30, 2023 and December 31, 2022, the total outstanding balance of PPP loans was $6.8 million and $8.9 million, respectively.

Other – The other loan portfolio includes mortgage warehouse loans, representing warehouse lines of credit to mortgage originators for the disbursement of newly originated 1-4 family residential loans. Also included in the other loan portfolio are loans to public sector customers, including state and local governments.

Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The amortized cost basis of nonaccrual loans segregated by category of loans are as follows:


	June 30,		December 31,
(In thousands)	2023		2022
Consumer:
Credit cards	$	268	$	349
Other consumer	629		433
Total consumer	897		782
Real estate:
Construction and development	3,400		2,799
Single family residential	21,427		22,319
Other commercial	14,142		14,998
Total real estate	38,969		40,116
Commercial:
Commercial	29,162		17,356
Agricultural	2,248		177
Total commercial	31,410		17,533
Other	3		3
Total	$	71,279	$	58,434

As of June 30, 2023 and December 31, 2022, nonaccrual loans for which there was no related allowance for credit losses had an amortized cost of $13.0 million and $16.9 million, respectively. These loans are individually assessed and do not hold an allowance due to being adequately collateralized under the collateral-dependent valuation method.

An age analysis of the amortized cost basis of past due loans, including nonaccrual loans, segregated by class of loans is as follows:


(In thousands)	Gross 30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due & Accruing
June 30, 2023
Consumer:
Credit cards	$	1,666	$	495	$	2,161	$	207,291	$	209,452	$	426
Other consumer	1,217		245		1,462		146,871		148,333		—
Total consumer	2,883		740		3,623		354,162		357,785		426
Real estate:
Construction and development	1,273		3,233		4,506		2,926,080		2,930,586		—
Single family residential	11,035		8,022		19,057		2,614,308		2,633,365		28
Other commercial	4,762		7,433		12,195		7,533,935		7,546,130		—
Total real estate	17,070		18,688		35,758		13,074,323		13,110,081		28
Commercial:
Commercial	4,990		18,776		23,766		2,545,564		2,569,330		284
Agricultural	247		1,978		2,225		278,316		280,541		—
Total commercial	5,237		20,754		25,991		2,823,880		2,849,871		284
Other	—		3		3		515,913		515,916		—
Total	$	25,190	$	40,185	$	65,375	$	16,768,278	$	16,833,653	$	738

December 31, 2022
Consumer:
Credit cards	$	1,297	$	409	$	1,706	$	195,222	$	196,928	$	225
Other consumer	852		214		1,066		151,816		152,882		—
Total consumer	2,149		623		2,772		347,038		349,810		225
Real estate:
Construction and development	4,677		443		5,120		2,561,529		2,566,649		—
Single family residential	23,625		11,075		34,700		2,511,415		2,546,115		106
Other commercial	2,759		7,100		9,859		7,458,639		7,468,498		—
Total real estate	31,061		18,618		49,679		12,531,583		12,581,262		106
Commercial:
Commercial	5,034		7,575		12,609		2,619,681		2,632,290		176
Agricultural	111		67		178		205,445		205,623		—
Total commercial	5,145		7,642		12,787		2,825,126		2,837,913		176
Other	61		3		64		373,075		373,139		—
Total	$	38,416	$	26,886	$	65,302	$	16,076,822	$	16,142,124	$	507

Loan Modifications to Borrowers Experiencing Financial Difficulty

The Company has internal loan modification programs for borrowers experiencing financial difficulties. Modifications to borrowers experiencing financial difficulties may include interest rate reductions, principal or interest forgiveness and/or term extensions. The Company primarily uses interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.

The following table presents the period-end balance of loan modifications, segregated by type of modification, to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023.


	Combination: Interest Rate		Percent of
	Modification and		Total Class
(Dollars in thousands)	Term Extension		of Loans
Commercial:
Commercial	$	655	0.03	%
Total commercial	$	655	0.03	%

The financial effects of the loan modification made to a borrower experiencing financial difficulty was not significant during the three and six month periods ended June 30, 2023. The loan modification reported in the table above did not significantly impact the Company’s determination of the allowance for credit losses on loans during the three and six months ended June 30, 2023. During the three and six months ended June 30, 2023, the Company modified one loan, whereby the borrower was experiencing financial difficulty at the time of modification, that was current as of June 30, 2023 with a recorded investment of $655,000. Additionally, there were no modified loans for which a payment default occurred during the three and six month periods ended June 30, 2023 and were modified in the 12 months prior to default.

At June 30, 2023 and December 31, 2022, the Company had $1.3 million and $3.0 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At June 30, 2023 and December 31, 2022, the Company had $423,000 and $853,000, respectively, of Other Real Estate Owned (“OREO”) secured by residential real estate properties.

Troubled Debt Restructurings (Prior to the adoption of ASU 2022-02)

When the Company restructured a loan to a borrower that was experiencing financial difficulty and granted a concession that it would not otherwise consider, a “troubled debt restructuring” (“TDR”) resulted, and the Company classified the loan as a TDR. The Company granted various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.

Once an obligation was restructured because of such credit problems, it continued to be considered a TDR until paid in full; or, if an obligation yielded a market interest rate and no longer has any concession regarding payment amount or amortization, then it was not considered a TDR at the beginning of the calendar year after the year in which the improvement had taken place. The Company returned TDRs to accrual status only if (1) all contractual amounts due were reasonably expected to be repaid within a prudent period and (2) repayment was in accordance with the contract for a sustained period, typically at least six months.

TDRs were individually evaluated for expected credit losses. The Company assessed the exposure for each modification, either by the fair value of the underlying collateral or the present value of expected cash flows, and determined if a specific allowance for credit losses was needed.

The following table presents a summary of TDRs segregated by class of loans as of December 31, 2022.


	Accruing TDR Loans			Nonaccrual TDR Loans			Total TDR Loans
(Dollars in thousands)	Number	Balance		Number	Balance		Number	Balance
Real estate:
Single-family residential	24	$	1,849	12	$	1,589	36	$	3,438
Other commercial	—	—		—	—		—	—
Total real estate	24	1,849		12	1,589		36	3,438
Commercial:
Commercial	—	—		1	33		1	33
Total commercial	—	—		1	33		1	33
Total	24	$	1,849	13	$	1,622	37	$	3,471

The following table presents loans that were restructured as TDRs during the three and six month periods ended June 30, 2022.



(Dollars in thousands)	Number of loans	Balance Prior to TDR		Balance at June 30,		Change in Maturity Date		Change in Rate		Financial Impact on Date of Restructure
Three and Six Months Ended June 30, 2022
Real estate:
Other commercial	1	$	13	$	13	$	—	$	13	$	—
Total real estate	1	$	13	$	13	$	—	$	13	$	—

During the three and six months ended June 30, 2022, the Company modified one loan with a recorded investment of $13,000 prior to modification, which was deemed a TDR. The restructured loan was modified by reducing the interest rate on the loan. No specific reserve was recorded with respect to this TDR. Also, there was no immediate financial impact from the restructuring of this loan, as it was not considered necessary to charge-off interest or principal on the date of restructure.

Additionally, there were no loans considered TDRs for which a payment default occurred during the six months ended June 30, 2022.

There were no TDRs with pre-modification loan balances for which OREO was received in full or partial satisfaction of the loans during the three and six month period ended June 30, 2022.

Credit Quality Indicators – As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk rating of commercial and real estate loans, (ii) the level of classified commercial and real estate loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions of the Company’s local markets.

The Company utilizes a risk rating matrix to assign a risk rate to each of its commercial and real estate loans. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. A description of the general characteristics of the risk ratings is as follows:

•Pass (Excellent) – This category includes loans which are virtually free of credit risk. Borrowers in this category represent the highest credit quality and greatest financial strength.

•Pass (Good) - Loans under this category possess a nominal risk of default. This category includes borrowers with strong financial strength and superior financial ratios and trends. These loans are generally fully secured by cash or equivalents (other than those rated “excellent”).

•Pass (Acceptable – Average) - Loans in this category are considered to possess a normal level of risk. Borrowers in this category have satisfactory financial strength and adequate cash flow coverage to service debt requirements. If secured, the perfected collateral should be of acceptable quality and within established borrowing parameters.

•Pass (Monitor) - Loans in the Watch (Monitor) category exhibit an overall acceptable level of risk, but that risk may be increased by certain conditions, which represent “red flags”. These “red flags” require a higher level of supervision or monitoring than the normal “Pass” rated credit. The borrower may be experiencing these conditions for the first time, or it may be recovering from weakness, which at one time justified a higher rating. These conditions may include: weaknesses in financial trends; marginal cash flow; one-time negative operating results; non-compliance with policy or borrowing agreements; poor diversity in operations; lack of adequate monitoring information or lender supervision; questionable management ability/stability.

•Special Mention - A loan in this category has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention loans are not adversely classified (although they are “criticized”) and do not expose an institution to sufficient risk to warrant adverse classification. Borrowers may be experiencing adverse operating trends or an ill-proportioned balance sheet. Non-financial characteristics of a Special Mention rating may include management problems, pending litigation, a non-existent or ineffective loan agreement or other material structural weakness, and/or other significant deviation from prudent lending practices.

•Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the loan.

•Doubtful - A loan classified Doubtful has all the weaknesses inherent in a substandard loan except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. The possibility of loss is extremely high, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Pending factors include: proposed merger or acquisition; liquidation procedures; capital injection; perfection of liens on additional collateral; and refinancing plans. Loans classified as Doubtful are placed on nonaccrual status.

•Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loans has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless loan, even though partial recovery may be affected in the future. Borrowers in the Loss category are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Loans should be classified as Loss and charged-off in the period in which they become uncollectible.

The Company monitors credit quality in the consumer portfolio by delinquency status. The delinquency status of loans is updated daily. A description of the delinquency credit quality indicators is as follows:

•Current - Loans in this category are either current in payments or are under 30 days past due. These loans are considered to have a normal level of risk.

•30-89 Days Past Due - Loans in this category are between 30 and 89 days past due and are subject to the Company’s loss mitigation process. These loans are considered to have a moderate level of risk.

•90+ Days Past Due - Loans in this category are 90 days or more past due and are placed on nonaccrual status. These loans have been subject to the Company’s loss mitigation process and foreclosure and/or charge-off proceedings have commenced.

The Company uses a dual risk rating scale that utilizes quantitative models and qualitative factors (“score cards”) to assist in determining the appropriate risk rating for its commercial loans. This dual risk rating methodology incorporates a “probability of default” analysis which utilizes quantified metrics such as loan terms and financial performance, as well as a “loss given default” analysis which utilizes collateral values and economics of the market, among other attributes. Model outputs are reviewed and analyzed to ensure the projected risk levels are commensurate with underwriting and credit leader expectations. The risk rating scale includes Probability of Default levels of 1 – 16 and Loss Given Default levels of A – I. The scale allows for more granular recognition of risk and diversification of grading among traditional Pass grades.

The following is a reconciliation between the expanded risk rating scale and the Company’s traditional risk rating segments utilized within the commercial loan classes presented in the credit quality indicator tables.

•Pass - Includes loans with an expanded risk rating of 1 through 11. Loans with a risk rating of 10 and 11 equate to loans included on management’s “watch list” and is intended to be utilized on a temporary basis for pass grade borrowers where a significant risk-modifying action is anticipated in the near term.

•Special Mention - Includes loans with an expanded risk rating of 12.

•Substandard - Includes loans with an expanded risk rating of 13 and 14.

•Doubtful and loss - Includes loans with an expanded risk rating of 15 and 16.

The following table presents a summary of loans by credit quality indicator, as of June 30, 2023, segregated by class of loans.


	Term Loans Amortized Cost Basis by Origination Year
(In thousands)	2023 (YTD)		2022		2021		2020		2019		2018 and Prior		Lines of Credit (“LOC”) Amortized Cost Basis		LOC Converted to Term Loans Amortized Cost Basis		Total
Consumer - credit cards
Delinquency:
Current	$	—	$	—	$	—	$	—	$	—	$	—	$	207,291	$	—	$	207,291
30-89 days past due	—		—		—		—		—		—		1,666		—		1,666
90+ days past due	—		—		—		—		—		—		495		—		495
Total consumer - credit cards	—		—		—		—		—		—		209,452		—		209,452
Current-period consumer - credit cards gross charge-offs	—		—		—		—		—		—		2,486		—		2,486
Consumer - other
Delinquency:
Current	51,542		49,740		18,189		6,047		2,469		2,595		16,289		—		146,871
30-89 days past due	145		476		185		195		6		37		173		—		1,217
90+ days past due	—		65		153		—		9		17		1		—		245
Total consumer - other	51,687		50,281		18,527		6,242		2,484		2,649		16,463		—		148,333
Current-period consumer - other gross charge-offs	18		513		214		55		28		97		143		—		1,068
Real estate - C&D
Risk rating:
Pass	63,331		185,255		65,189		41,966		12,798		26,591		2,522,794		—		2,917,924
Special mention	—		—		—		—		—		406		3,342		—		3,748
Substandard	—		565		103		2		11		196		8,037		—		8,914
Doubtful and loss	—		—		—		—		—		—		—		—		—
Total real estate - C&D	63,331		185,820		65,292		41,968		12,809		27,193		2,534,173		—		2,930,586
Current-period real estate - C&D gross charge-offs	—		1,148		—		—		—		8		—		—		1,156
Real estate - SF residential
Delinquency:
Current	230,962		656,365		373,639		237,589		122,329		637,891		354,957		576		2,614,308
30-89 days past due	13		1,838		1,609		478		54		5,639		1,404		—		11,035
90+ days past due	—		451		985		497		597		5,140		352		—		8,022
Total real estate - SF residential	230,975		658,654		376,233		238,564		122,980		648,670		356,713		576		2,633,365
Current-period real estate - SF residential gross charge-offs	—		1		—		—		—		109		200		—		310
Real estate - other commercial
Risk rating:
Pass	256,143		1,747,880		1,280,524		585,377		219,471		866,189		2,282,403		—		7,237,987
Special mention	16,810		1,279		27,790		10,642		2,686		46,041		97,843		—		203,091
Substandard	438		9,361		17,719		9,226		3,456		28,954		35,898		—		105,052
Doubtful and loss	—		—		—		—		—		—		—		—		—
Total real estate - other commercial	273,391		1,758,520		1,326,033		605,245		225,613		941,184		2,416,144		—		7,546,130
Current-period real estate - other commercial gross charge-offs	—		—		—		7		—		35		131		—		173


	Term Loans Amortized Cost Basis by Origination Year
(In thousands)	2023 (YTD)		2022		2021		2020		2019		2018 and Prior		Lines of Credit (“LOC”) Amortized Cost Basis		LOC Converted to Term Loans Amortized Cost Basis		Total
Commercial
Risk rating:
Pass	222,995		466,055		248,760		114,917		55,019		75,495		1,325,382		348		2,508,971
Special mention	18		12,032		1,061		24		14		947		11,578		—		25,674
Substandard	28		7,723		3,561		1,066		1,325		5,649		15,270		—		34,622
Doubtful and loss	—		61		—		—		—		2		—		—		63
Total commercial	223,041		485,871		253,382		116,007		56,358		82,093		1,352,230		348		2,569,330
Current-period commercial - gross charge-offs	—		332		205		140		158		180		619		—		1,634
Commercial - agriculture
Risk rating:
Pass	26,529		37,597		18,044		7,414		2,218		2,056		183,682		17		277,557
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		635		488		256		40		28		1,537		—		2,984
Doubtful and loss	—		—		—		—		—		—		—		—		—
Total commercial - agriculture	26,529		38,232		18,532		7,670		2,258		2,084		185,219		17		280,541
Current-period commercial - agriculture gross charge-offs	—		—		—		—		—		3		—		—		3
Other
Delinquency:
Current	25,701		147,955		29,128		7,408		3,724		43,391		258,606		—		515,913
30-89 days past due	—		—		—		—		—		—		—		—		—
90+ days past due	—		—		—		—		—		3		—		—		3
Total other	25,701		147,955		29,128		7,408		3,724		43,394		258,606		—		515,916
Current-period other - gross charge-offs	—		—		—		—		—		—		54		—		54
Total	$	894,655	$	3,325,333	$	2,087,127	$	1,023,104	$	426,226	$	1,747,267	$	7,329,000	$	941	$	16,833,653

The following table presents a summary of loans by credit quality indicator, as of December 31, 2022, segregated by class of loans.


	Term Loans Amortized Cost Basis by Origination Year
(In thousands)	2022		2021		2020		2019		2018		2017 and Prior		Lines of Credit (“LOC”) Amortized Cost Basis		LOC Converted to Term Loans Amortized Cost Basis		Total
Consumer - credit cards
Delinquency:
Current	$	—	$	—	$	—	$	—	$	—	$	—	$	195,222	$	—	$	195,222
30-89 days past due	—		—		—		—		—		—		1,297		—		1,297
90+ days past due	—		—		—		—		—		—		409		—		409
Total consumer - credit cards	—		—		—		—		—		—		196,928		—		196,928
Consumer - other
Delinquency:
Current	86,303		26,339		10,071		3,804		2,671		2,275		20,350		3		151,816
30-89 days past due	298		241		135		13		34		119		12		—		852
90+ days past due	121		47		2		1		2		41		—		—		214
Total consumer - other	86,722		26,627		10,208		3,818		2,707		2,435		20,362		3		152,882
Real estate - C&D
Risk rating:
Pass	237,304		68,916		50,912		16,920		13,625		9,611		2,163,776		334		2,561,398
Special mention	—		—		—		—		—		41		1,342		—		1,383
Substandard	1,091		116		36		13		31		103		2,478		—		3,868
Doubtful and loss	—		—		—		—		—		—		—		—		—
Total real estate - C&D	238,395		69,032		50,948		16,933		13,656		9,755		2,167,596		334		2,566,649
Real estate - SF residential
Delinquency:
Current	700,976		411,885		295,365		141,608		192,176		440,931		324,282		4,192		2,511,415
30-89 days past due	3,105		3,415		1,290		2,018		3,129		8,626		2,042		—		23,625
90+ days past due	586		871		885		968		1,017		6,312		436		—		11,075
Total real estate - SF residential	704,667		416,171		297,540		144,594		196,322		455,869		326,760		4,192		2,546,115
Real estate - other commercial
Risk rating:
Pass	1,917,352		1,482,049		768,630		254,986		179,729		428,027		2,093,379		19,469		7,143,621
Special mention	19,538		32,831		38,821		206		2,261		20,741		104,431		—		218,829
Substandard	24,639		3,399		27,399		2,544		2,026		15,217		30,824		—		106,048
Doubtful and loss	—		—		—		—		—		—		—		—		—
Total real estate - other commercial	1,961,529		1,518,279		834,850		257,736		184,016		463,985		2,228,634		19,469		7,468,498
Commercial
Risk rating:
Pass	595,256		300,650		168,539		41,924		31,329		35,447		1,401,402		24,940		2,599,487
Special mention	199		1,700		11		32		—		927		2,708		80		5,657
Substandard	5,257		2,435		3,328		802		891		1,290		11,337		1,805		27,145
Doubtful and loss	—		—		—		—		—		—		—		1		1
Total commercial	600,712		304,785		171,878		42,758		32,220		37,664		1,415,447		26,826		2,632,290
Commercial - agriculture
Risk rating:
Pass	44,377		22,901		12,044		4,483		1,029		369		119,342		310		204,855
Special mention	8		—		—		—		—		—		—		—		8
Substandard	55		8		78		49		10		—		560		—		760
Doubtful and loss	—		—		—		—		—		—		—		—		—
Total commercial - agriculture	44,440		22,909		12,122		4,532		1,039		369		119,902		310		205,623
Other
Delinquency:
Current	152,086		29,362		8,181		4,742		20,018		25,349		132,384		953		373,075
30-89 days past due	—		—		—		—		—		61		—		—		61
90+ days past due	—		—		—		—		—		3		—		—		3
Total other	152,086		29,362		8,181		4,742		20,018		25,413		132,384		953		373,139
Total	$	3,788,551	$	2,387,165	$	1,385,727	$	475,113	$	449,978	$	995,490	$	6,608,013	$	52,087	$	16,142,124

Allowance for Credit Losses

Allowance for Credit Losses – The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, quantitative factors, and other qualitative considerations. The allowance, in the judgment of management, is necessary to reserve for expected loan losses and risks inherent in the loan portfolio. The Company’s allowance for credit loss methodology includes reserve factors calculated to estimate current expected credit losses to amortized cost balances over the remaining contractual life of the portfolio, adjusted for prepayments, in accordance with ASC Topic 326-20, Financial Instruments - Credit Losses. Accordingly, the methodology is comprised of two components: individual assessments on loans with unique risk characteristics and collective assessments for loans that share similar risk characteristics. Loans with similar risk characteristics such as loan type, collateral type, and internal risk ratings are aggregated for collective assessment. The Company uses statistically-based models that leverage assumptions about current and future economic conditions throughout the contractual life of the loan. Expected credit losses are estimated by either lifetime loss rates or expected loss cash flows based on three key parameters: probability-of-default (“PD”), exposure-at-default (“EAD”), and loss-given-default (“LGD”). Future economic conditions are incorporated to the extent that they are reasonable and supportable. Beyond the reasonable and supportable periods, the economic variables revert to a historical equilibrium at a pace dependent on the state of the economy reflected within the economic scenarios. To determine the best estimate of credit losses as of June 30, 2023, the Company utilized a probability-weighted, multiple-scenario approach consisting of Baseline, Upside (S1), and Downside (S3) scenarios published by Moody’s Analytics in June 2023 that was updated to reflect the U.S. economic outlook. The Company also includes qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for. These factors may include but are not limited to portfolio trends and considerations, other economic considerations, policy actions, concentration risk, or imprecision risk.

Loans with similar risk characteristics such as loan type, collateral type, and internal risk ratings are aggregated into homogeneous segments for assessment. Reserve factors are based on estimated probability of default and loss given default for each segment. The estimates are determined based on economic forecasts over the reasonable and supportable forecast period based on projected performance of economic variables that have a statistical relationship with the historical loss experience of the segments. For contractual periods that extend beyond the one-year forecast period, the estimates revert to average historical loss experiences over a one-year period on a straight-line basis.

Loans that have unique risk characteristics are evaluated on an individual basis. These evaluations are typically performed on loans with a deteriorated internal risk rating. For a collateral-dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for credit losses as a specific allocation.

Loans for which the repayment is expected to be provided substantially through the operation or sale of collateral and where the borrower is experiencing financial difficulty had an amortized cost of $99.7 million and $70.9 million as of June 30, 2023 and December 31, 2022, respectively, as further detailed in the table below. The collateral securing these loans consist of commercial real estate properties, residential properties, and other business assets.


(In thousands)	Real Estate Collateral		Other Collateral		Total
June 30, 2023
Construction and development	$	7,517	$	—	$	7,517
Single family residential	1,446		—		1,446
Other commercial real estate	75,017		—		75,017
Commercial	—		15,741		15,741
Total	$	83,980	$	15,741	$	99,721

December 31, 2022
Construction and development	$	2,156	$	—	$	2,156
Single family residential	—		—		—
Other commercial real estate	65,450		—		65,450
Commercial	—		3,320		3,320
Total	$	67,606	$	3,320	$	70,926

The following table details activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2023. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


(In thousands)	Commercial		Real Estate		Credit Card		Other Consumer and Other		Total
Allowance for credit losses:
Three Months Ended June 30, 2023
Beginning balance, April 1, 2023	$	30,256	$	163,906	$	6,446	$	5,949	$	206,557
Provision for credit loss expense	1,483		1,464		995		1,119		5,061
Charge-offs	(1,225)		(435)		(1,409)		(666)		(3,735)
Recoveries	471		878		298		436		2,083
Net (charge-offs) recoveries	(754)		443		(1,111)		(230)		(1,652)
Ending balance, June 30, 2023	$	30,985	$	165,813	$	6,330	$	6,838	$	209,966

Six Months Ended June 30, 2023
Beginning balance, January 1, 2023	$	34,406	$	150,795	$	5,140	$	6,614	$	196,955
Provision for credit loss expense	(3,322)		15,485		3,144		670		15,977
Charge-offs	(1,637)		(1,639)		(2,486)		(1,122)		(6,884)
Recoveries	1,538		1,172		532		676		3,918
Net charge-offs	(99)		(467)		(1,954)		(446)		(2,966)
Ending balance, June 30, 2023	$	30,985	$	165,813	$	6,330	$	6,838	$	209,966

Activity in the allowance for credit losses for the three and six months ended June 30, 2022 was as follows:


(In thousands)	Commercial		Real Estate		Credit Card		Other Consumer and Other		Total
Allowance for credit losses:
Three Months Ended June 30, 2022
Beginning balance, April 1, 2022	$	9,177	$	161,389	$	2,894	$	5,464	$	178,924
Acquisition adjustment for PCD loans	854		3,187		—		2		4,043
Provision for credit loss expense	22,853		1,629		4,470		1,454		30,406
Charge-offs	(688)		(124)		(1,004)		(518)		(2,334)
Recoveries	621		400		249		302		1,572
Net (charge-offs) recoveries	(67)		276		(755)		(216)		(762)
Ending balance, June 30, 2022	$	32,817	$	166,481	$	6,609	$	6,704	$	212,611

Six Months Ended June 30, 2022
Beginning balance, January 1, 2022	$	17,458	$	179,270	$	3,987	$	4,617	$	205,332
Acquisition adjustment for PCD loans	854		3,187		—		2		4,043
Provision for credit loss expense	20,334		(16,193)		4,023		2,328		10,492
Charge-offs	(7,007)		(600)		(1,924)		(932)		(10,463)
Recoveries	1,178		817		523		689		3,207
Net (charge-offs) recoveries	(5,829)		217		(1,401)		(243)		(7,256)
Ending balance, June 30, 2022	$	32,817	$	166,481	$	6,609	$	6,704	$	212,611

As of June 30, 2023, the Company’s allowance for credit losses was considered sufficient based upon expected losses that were supported by scenario-weighted economic forecasts. The provision expense for the three and six months ended June 30, 2023 was primarily due to the loan growth experienced during the periods, as well as the impact of updated economic assumptions.

Reserve for Unfunded Commitments

In addition to the allowance for credit losses, the Company has established a reserve for unfunded commitments, classified in other liabilities. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The reserve for unfunded commitments was $36.9 million and $41.9 million as of June 30, 2023 and December 31, 2022, respectively. The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining the allowance for credit losses. During the three and six month periods ended June 30, 2023, $5.0 million was released from the reserve for unfunded commitments primarily due to a decline in unfunded commitments resulting from customers utilizing lines of credit during the period. For the three and six month periods ended June 30, 2022, an adjustment to the reserve for unfunded commitments resulted in an expense of $3.5 million associated with the Day 2 CECL provision related to the Spirit acquisition and was included in the provision for credit losses in the statement of income.

Provision for Credit Losses

Provision for credit losses is determined by the Company as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposure after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments.

The components of the provision for credit losses for the three and six month periods ended June 30, 2023 and 2022 were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2023		2022		2023		2022
Provision for credit losses related to:
Loans	$	5,061	$	30,406	$	15,977	$	10,492
Unfunded commitments	(5,000)		3,453		(5,000)		3,453
Securities - HTM	1,326		—		1,826		—
Securities - AFS	(1,326)		—		11,474		—
Total	$	61	$	33,859	$	24,277	$	13,945

Purchased Credit Deteriorated (“PCD”) Loans

Purchased loans that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. For PCD loans, the initial estimate of expected credit losses is recognized in the allowance for credit loss on the date of acquisition using the same methodology as discussed in the Allowance for Credit Losses section included above.

The following table provides a summary of loans purchased as part of the Spirit acquisition with credit deterioration at acquisition:


(In thousands)	Commercial		Real Estate		Credit Card		Other Consumer and Other		Total
Unpaid principal balance	$	8,258	$	66,534	$	—	$	59	$	74,851
PCD allowance for credit loss at acquisition	(6,433)		(3,187)		—		(2)		(9,622)
Non-credit related discount	(378)		(998)		—		(1)		(1,377)
Fair value of PCD loans	$	1,447	$	62,349	$	—	$	56	$	63,852