Loans and Allowance for Credit Losses | Note 4 Loans and Allowance for Credit Losses Loans consisted of the following at the dates indicated (dollars in thousands): March 31, 2023 December 31, 2022 Total Percent of Total Total Percent of Total Residential: 1-4 single family residential $ 7,133,615 28.6 % $ 7,128,834 28.6 % Government insured residential 1,656,129 6.7 % 1,771,880 7.1 % $ 8,789,744 35.3 % $ 8,900,714 35.7 % Commercial: Non-owner occupied commercial real estate 5,346,895 21.5 % 5,405,597 21.7 % Construction and land 324,805 1.3 % 294,360 1.2 % Owner occupied commercial real estate 1,863,333 7.5 % 1,890,813 7.6 % Commercial and industrial 6,617,716 26.5 % 6,417,721 25.9 % Pinnacle 919,584 3.7 % 912,122 3.7 % Bridge - franchise finance 239,205 1.0 % 253,774 1.0 % Bridge - equipment finance 266,715 1.1 % 286,147 1.1 % Mortgage warehouse lending 524,897 2.1 % 524,740 2.1 % 16,103,150 64.7 % 15,985,274 64.3 % Total loans 24,892,894 100.0 % 24,885,988 100.0 % Allowance for credit losses (158,792) (147,946) Loans, net $ 24,734,102 $ 24,738,042 Premiums, discounts and deferred fees and costs, excluding the non-credit related discount on PCD loans, totaled $56 million and $61 million at March 31, 2023 and December 31, 2022, respectively. The following table presents the amortized cost basis of residential PCD loans and the related amount of non-credit discount, net of the related ACL, at the dates indicated (in thousands): March 31, 2023 December 31, 2022 UPB $ 93,051 $ 96,437 Non-credit discount (42,357) (44,354) Total amortized cost of PCD loans 50,694 52,083 ACL related to PCD loans (381) (409) PCD loans, net $ 50,313 $ 51,674 Included in loans, net are direct or sales type finance leases totaling $641 million and $634 million at March 31, 2023 and December 31, 2022, respectively. The amount of income recognized from direct or sales type finance leases for the three months ended March 31, 2023 and 2022 totaled $4.3 million and $4.6 million, respectively and is included in interest income on loans in the consolidated statements of income. During the three months ended March 31, 2023 and 2022, the Company purchased residential loans totaling $187 million and $862 million, respectively. At March 31, 2023 and December 31, 2022, the Company had pledged loans with a carrying value of approximately $13.2 billion and $12.4 billion, respectively, as security for FHLB advances and Federal Reserve discount window capacity. At March 31, 2023 and December 31, 2022, accrued interest receivable on loans totaled $132 million and $129 million, respectively, and is included in other assets in the accompanying consolidated balance sheets. The amount of interest income reversed on non-accrual loans was not material for the three months ended March 31, 2023 and 2022. Allowance for credit losses The ACL was determined utilizing a 2-year reasonable and supportable forecast period. The quantitative portion of the ACL was determined using a single third-party provided economic scenario. The qualitative component was informed by alternate scenarios. Activity in the ACL is summarized below for the periods indicated (in thousands): Three Months Ended March 31, 2023 2022 Residential Commercial Total Residential Commercial Total Beginning balance $ 11,741 $ 136,205 $ 147,946 $ 9,187 $ 117,270 $ 126,457 Impact of adoption of ASU 2022-02 (117) (1,677) (1,794) N/A N/A N/A Balance after adoption of ASU 2022-02 11,624 134,528 146,152 9,187 117,270 126,457 Provision (recovery) 170 17,425 17,595 (256) 7,702 7,446 Charge-offs — (7,899) (7,899) — (10,671) (10,671) Recoveries 3 2,941 2,944 26 2,185 2,211 Ending balance $ 11,797 $ 146,995 $ 158,792 $ 8,957 $ 116,486 $ 125,443 The ACL increased by $10.8 million, from 0.59% to 0.64% of total loans, at March 31, 2023 compared to December 31, 2022. The more significant factors impacting the provision for credit losses for the three months ended March 31, 2023 included a deteriorating economic forecast and an increase in certain specific reserves. The following table presents gross charge-offs during the three months ended March 31, 2023, by year of origination (in thousands): 2023 2022 2021 2020 2019 Prior to 2019 Revolving Loans Total CRE $ — $ — $ — $ — $ — $ 35 $ — $ 35 C&I — 64 24 — 265 935 309 1,597 Bridge - franchise finance — — — 33 2,409 3,825 — 6,267 $ — $ 64 $ 24 $ 33 $ 2,674 $ 4,795 $ 309 $ 7,899 The following table presents the components of the provision for credit losses for the periods indicated (in thousands): Three Months Ended March 31, 2023 2022 Amount related to funded portion of loans $ 17,595 $ 7,446 Amount related to off-balance sheet credit exposures 2,193 384 Total provision for credit losses $ 19,788 $ 7,830 Credit quality information Credit quality of loans held for investment is continuously monitored by dedicated residential credit risk management and commercial portfolio management functions. The Company also has a workout and recovery department that monitors the credit quality of criticized and classified loans and an independent internal credit review function. Credit quality indicators for residential loans Management considers delinquency status to be the most meaningful indicator of the credit quality of residential loans, other than government insured residential loans. Delinquency statistics are updated at least monthly. LTV and FICO scores are also important indicators of credit quality for 1-4 single family residential loans other than government insured loans. FICO scores are generally updated semi-annually, and were most recently updated in the first quarter of 2023. LTVs are typically at origination since we do not routinely update residential appraisals. Substantially all of the government insured residential loans are government insured buyout loans, which the Company buys out of GNMA securitizations upon default. For these loans, traditional measures of credit quality are not particularly relevant considering the guaranteed nature of the loans and the underlying business model. Factors that impact risk inherent in the residential portfolio segment include national and regional economic conditions such as levels of unemployment, wages and interest rates, as well as residential property values. 1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on delinquency status: March 31, 2023 Amortized Cost By Origination Year 2023 2022 2021 2020 2019 Prior Total Current $ 117,258 $ 1,179,778 $ 3,111,081 $ 900,912 $ 312,977 $ 1,447,072 $ 7,069,078 30 - 59 Days Past Due — 16,570 16,841 3,801 1,363 5,764 44,339 60 - 89 Days Past Due — 732 418 — — 3,611 4,761 90 Days or More Past Due — 2,765 2,158 2,029 2,000 6,485 15,437 $ 117,258 $ 1,199,845 $ 3,130,498 $ 906,742 $ 316,340 $ 1,462,932 $ 7,133,615 December 31, 2022 Amortized Cost By Origination Year 2022 2021 2020 2019 2018 Prior Total Current $ 1,185,611 $ 3,149,299 $ 916,923 $ 316,023 $ 177,891 $ 1,321,011 $ 7,066,758 30 - 59 Days Past Due 12,752 16,432 3,266 2,953 1,854 5,759 43,016 60 - 89 Days Past Due 252 1,196 229 1,347 — 1,052 4,076 90 Days or More Past Due 2,589 2,158 2,173 360 3,069 4,635 14,984 $ 1,201,204 $ 3,169,085 $ 922,591 $ 320,683 $ 182,814 $ 1,332,457 $ 7,128,834 1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on LTV: March 31, 2023 Amortized Cost By Origination Year LTV 2023 2022 2021 2020 2019 Prior Total Less than 61% $ 12,750 $ 280,999 $ 1,282,249 $ 344,679 $ 75,652 $ 491,970 $ 2,488,299 61% - 70% 23,708 296,695 848,469 228,400 78,531 348,041 1,823,844 71% - 80% 80,800 619,158 964,695 333,590 156,693 580,755 2,735,691 More than 80% — 2,993 35,085 73 5,464 42,166 85,781 $ 117,258 $ 1,199,845 $ 3,130,498 $ 906,742 $ 316,340 $ 1,462,932 $ 7,133,615 December 31, 2022 Amortized Cost By Origination Year LTV 2022 2021 2020 2019 2018 Prior Total Less than 61% $ 282,940 $ 1,301,279 $ 354,720 $ 76,404 $ 42,864 $ 472,090 $ 2,530,297 61% - 70% 295,206 857,008 231,732 80,383 49,047 310,649 1,824,025 71% - 80% 620,049 975,542 336,066 158,406 86,463 510,633 2,687,159 More than 80% 3,009 35,256 73 5,490 4,440 39,085 87,353 $ 1,201,204 $ 3,169,085 $ 922,591 $ 320,683 $ 182,814 $ 1,332,457 $ 7,128,834 1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on FICO score: March 31, 2023 Amortized Cost By Origination Year FICO 2023 2022 2021 2020 2019 Prior Total 760 or greater $ 74,066 $ 809,442 $ 2,488,061 $ 712,689 $ 221,056 $ 995,139 $ 5,300,453 720 - 759 35,448 245,748 429,084 122,827 52,140 244,446 1,129,693 719 or less 7,744 144,655 213,353 71,226 43,144 223,347 703,469 $ 117,258 $ 1,199,845 $ 3,130,498 $ 906,742 $ 316,340 $ 1,462,932 $ 7,133,615 December 31, 2022 Amortized Cost By Origination Year FICO 2022 2021 2020 2019 2018 Prior Total 760 or greater $ 805,125 $ 2,513,045 $ 721,982 $ 212,574 $ 97,076 $ 944,783 $ 5,294,585 720 - 759 285,507 485,528 132,928 62,301 45,857 216,047 1,228,168 719 or less 110,572 170,512 67,681 45,808 39,881 171,627 606,081 $ 1,201,204 $ 3,169,085 $ 922,591 $ 320,683 $ 182,814 $ 1,332,457 $ 7,128,834 Credit quality indicators for commercial loans Factors that impact risk inherent in commercial portfolio segments include but are not limited to levels of economic activity, health of the national and regional economy, interest rates, industry trends, patterns of and trends in customer behavior that influence demand for our borrowers' products and services, and commercial real estate values. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial loans. Internal risk ratings are generally indicative of the likelihood that a borrower will default, are a key factor influencing the level and nature of ongoing monitoring of loans and may impact the estimation of the ACL. Internal risk ratings are updated on a continuous basis. Generally, relationships with balances in excess of defined thresholds, ranging from $1 million to $3 million, are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. The special mention rating is considered a transitional rating for loans exhibiting potential credit weaknesses that could result in deterioration of repayment prospects at some future date if not checked or corrected and that deserve management’s close attention. These borrowers may exhibit declining cash flows or revenues or increasing leverage. Loans with well-defined credit weaknesses that may result in a loss if the deficiencies are not corrected are assigned a risk rating of substandard. These borrowers may exhibit payment defaults, inadequate cash flows from current operations, operating losses, increasing balance sheet leverage, project cost overruns, unreasonable construction delays, exhausted interest reserves, declining collateral values, frequent overdrafts or past due real estate taxes. Loans with weaknesses so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors have not been charged off, are assigned an internal risk rating of doubtful. Commercial credit exposure based on internal risk rating: March 31, 2023 Amortized Cost By Origination Year Revolving Loans 2023 2022 2021 2020 2019 Prior Total CRE Pass $ 66,399 $ 1,248,325 $ 732,160 $ 546,742 $ 1,106,358 $ 1,363,097 $ 197,073 $ 5,260,154 Special mention — 42,950 2,150 — 17,913 411 — 63,424 Substandard — 12,263 1,355 19,008 119,227 196,269 — 348,122 Total CRE $ 66,399 $ 1,303,538 $ 735,665 $ 565,750 $ 1,243,498 $ 1,559,777 $ 197,073 $ 5,671,700 C&I Pass $ 320,398 $ 1,768,713 $ 762,133 $ 428,383 $ 605,736 $ 1,203,423 $ 3,071,337 $ 8,160,123 Special mention 38 2,955 433 — 2,534 2,330 22,864 31,154 Substandard 9 54,757 11,705 18,988 53,187 114,667 28,760 282,073 Doubtful — — — — 6,985 714 — 7,699 Total C&I $ 320,445 $ 1,826,425 $ 774,271 $ 447,371 $ 668,442 $ 1,321,134 $ 3,122,961 $ 8,481,049 Pinnacle Pass $ 42,815 $ 170,252 $ 107,137 $ 62,406 $ 62,354 $ 474,620 $ — $ 919,584 Total Pinnacle $ 42,815 $ 170,252 $ 107,137 $ 62,406 $ 62,354 $ 474,620 $ — $ 919,584 Bridge - Franchise Finance Pass $ 2,389 $ 28,106 $ 38,134 $ 36,376 $ 26,549 $ 52,902 $ — $ 184,456 Special mention — — — — 5,120 2,083 — 7,203 Substandard — 281 1,499 1,936 21,548 22,282 — 47,546 Total Bridge - Franchise Finance $ 2,389 $ 28,387 $ 39,633 $ 38,312 $ 53,217 $ 77,267 $ — $ 239,205 Bridge - Equipment Finance Pass $ — $ 26,280 $ 51,539 $ 15,922 $ 83,887 $ 87,934 $ — $ 265,562 Substandard — — — — 1,153 — — 1,153 Total Bridge - Equipment Finance $ — $ 26,280 $ 51,539 $ 15,922 $ 85,040 $ 87,934 $ — $ 266,715 Mortgage Warehouse Lending Pass $ — $ — $ — $ — $ — $ — $ 524,897 $ 524,897 Total Mortgage Warehouse Lending $ — $ — $ — $ — $ — $ — $ 524,897 $ 524,897 December 31, 2022 Amortized Cost By Origination Year Revolving Loans 2022 2021 2020 2019 2018 Prior Total CRE Pass $ 1,256,300 $ 758,025 $ 550,133 $ 1,138,113 $ 512,125 $ 932,030 $ 196,963 $ 5,343,689 Special mention — — — 18,006 — 709 — 18,715 Substandard 12,332 1,355 20,103 98,438 56,974 148,351 — 337,553 Total CRE $ 1,268,632 $ 759,380 $ 570,236 $ 1,254,557 $ 569,099 $ 1,081,090 $ 196,963 $ 5,699,957 C&I Pass $ 1,880,853 $ 825,410 $ 445,988 $ 689,003 $ 416,287 $ 832,952 $ 2,900,336 $ 7,990,829 Special mention 63 — 208 3,880 — 20,657 310 25,118 Substandard 25,898 13,916 3,319 103,625 19,715 104,190 21,277 291,940 Doubtful — — — — 647 — — 647 Total C&I $ 1,906,814 $ 839,326 $ 449,515 $ 796,508 $ 436,649 $ 957,799 $ 2,921,923 $ 8,308,534 Pinnacle Pass $ 179,223 $ 110,510 $ 66,592 $ 66,514 $ 29,783 $ 459,500 $ — $ 912,122 Total Pinnacle $ 179,223 $ 110,510 $ 66,592 $ 66,514 $ 29,783 $ 459,500 $ — $ 912,122 Bridge - Franchise Finance Pass $ 81,146 $ 19,251 $ 38,293 $ 34,483 $ 8,617 $ 6,799 $ — $ 188,589 Special mention — — — 5,432 2,168 — — 7,600 Substandard — 1,617 1,295 22,058 17,148 8,124 — 50,242 Doubtful — — 1,013 2,447 3,883 — — 7,343 Total Bridge - Franchise Finance $ 81,146 $ 20,868 $ 40,601 $ 64,420 $ 31,816 $ 14,923 $ — $ 253,774 Bridge - Equipment Finance Pass $ 27,386 $ 55,015 $ 16,488 $ 90,286 $ 33,264 $ 62,353 $ — $ 284,792 Substandard — — — 1,355 — — — 1,355 Total Bridge - Equipment Finance $ 27,386 $ 55,015 $ 16,488 $ 91,641 $ 33,264 $ 62,353 $ — $ 286,147 Mortgage Warehouse Lending Pass $ — $ — $ — $ — $ — $ — $ 524,740 $ 524,740 Total Mortgage Warehouse Lending $ — $ — $ — $ — $ — $ — $ 524,740 $ 524,740 At March 31, 2023 and December 31, 2022, the balance of revolving loans converted to term loans was immaterial. The following table presents criticized and classified commercial loans at the dates indicated (in thousands): March 31, 2023 December 31, 2022 Special mention $ 101,781 $ 51,433 Substandard - accruing 596,054 605,965 Substandard - non-accruing 82,840 75,125 Doubtful 7,699 7,990 Total $ 788,374 $ 740,513 Past Due and Non-Accrual Loans: The following table presents an aging of loans at the dates indicated (in thousands): March 31, 2023 December 31, 2022 Current 30 - 59 60 - 89 90 Days or Total Current 30 - 59 60 - 89 90 Days or Total 1-4 single family residential $ 7,069,078 $ 44,339 $ 4,761 $ 15,437 $ 7,133,615 $ 7,066,758 $ 43,016 $ 4,076 $ 14,984 $ 7,128,834 Government insured residential 969,134 167,880 81,457 437,658 1,656,129 1,025,523 159,461 94,294 492,602 1,771,880 CRE 5,657,401 2,723 — 11,576 5,671,700 5,680,829 4,328 4,773 10,027 5,699,957 C&I 8,433,706 19,573 2,570 25,200 8,481,049 8,280,321 2,508 1,028 24,677 8,308,534 Pinnacle 919,584 — — — 919,584 912,122 — — — 912,122 Bridge - franchise finance 236,063 1,094 — 2,048 239,205 243,574 1,321 — 8,879 253,774 Bridge - equipment finance 266,715 — — — 266,715 286,147 — — — 286,147 Mortgage warehouse lending 524,897 — — — 524,897 524,740 — — — 524,740 $ 24,076,578 $ 235,609 $ 88,788 $ 491,919 $ 24,892,894 $ 24,020,014 $ 210,634 $ 104,171 $ 551,169 $ 24,885,988 Included in the table above is the guaranteed portion of SBA loans past due by 90 days or more totaling $32.9 million and $30.8 million at March 31, 2023 and December 31, 2022, respectively. Loans contractually delinquent by 90 days or more and still accruing totaled $439 million and $494 million at March 31, 2023 and December 31, 2022, respectively, substantially all of which were government insured residential loans. These loans are government insured pool buyout loans, which the Company buys out of GNMA securitizations upon default. The following table presents information about loans on non-accrual status at the dates indicated (in thousands): March 31, 2023 December 31, 2022 Amortized Cost Amortized Cost With No Related Allowance Amortized Cost Amortized Cost With No Related Allowance 1-4 single family residential $ 23,102 $ — $ 21,311 $ — CRE 17,137 2,860 22,352 6,911 C&I 67,245 14,652 47,473 15,642 Bridge - franchise finance 6,157 2,479 13,290 1,668 $ 113,641 $ 19,991 $ 104,426 $ 24,221 Included in the table above is the guaranteed portion of non-accrual SBA loans totaling $36.9 million and $40.3 million at March 31, 2023 and December 31, 2022, respectively. The amount of interest income recognized on non-accrual loans was insignificant for the three months ended March 31, 2023 and 2022. The amount of additional interest income that would have been recognized on non-accrual loans had they performed in accordance with their contractual terms was approximately $1.9 million and $1.3 million for the three months ended March 31, 2023 and 2022, respectively. Collateral dependent loans: The following table presents the amortized cost basis of collateral dependent loans at the dates indicated (in thousands): March 31, 2023 December 31, 2022 Amortized Cost Extent to Which Secured by Collateral Amortized Cost Extent to Which Secured by Collateral 1-4 single family residential $ — $ — $ 730 $ 730 Commercial: CRE 14,990 14,527 19,486 18,353 C&I 22,184 21,470 26,404 25,344 Bridge - franchise finance 4,808 3,560 11,445 3,729 Total commercial 41,982 39,557 57,335 47,426 $ 41,982 $ 39,557 $ 58,065 $ 48,156 Collateral for the CRE loan class generally consists of commercial real estate, or for certain construction loans, residential real estate. Collateral for C&I loans generally consists of equipment, accounts receivable, inventory and other business assets. Bridge franchise finance loans may be collateralized by franchise value or by equipment. Residential loans are collateralized by residential real estate. There were no significant changes to the extent to which collateral secures collateral dependent loans during the three months ended March 31, 2023. Foreclosure of residential real estate The recorded investment in residential loans in the process of foreclosure was $382 million, of which $369 million was government insured, at March 31, 2023 and $413 million, of which $400 million was government insured, at December 31, 2022. The carrying amount of foreclosed residential real estate included in other assets in the accompanying consolidated balance sheet was insignificant at March 31, 2023 and December 31, 2022. Loan Modifications The following table summarizes loans that were modified for borrowers experiencing financial difficulty, by type of modification, during the period indicated (dollars in thousands): Three Months Ended March 31, 2023 Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total % (1) Total % (1) Total % (1) Total 1-4 single family residential $ 766 — % $ — — % $ — — % $ 766 Government insured residential 109 — % 36,920 2 % 2,312 — % 39,341 C&I — — % 4,918 — % — — % 4,918 $ 875 $ 41,838 $ 2,312 $ 45,025 (1) Represents percentage of loans receivable in each category. The following table summarizes the financial effect of the modifications made to borrowers experiencing difficulty, during the periods indicated: Financial Effect Interest Rate Reduction: 1-4 single family residential Reduced weighted average contractual interest rate from 3.8% to 3.1%. Government insured residential Reduced weighted average contractual interest rate from 4.8% to 3.8%. Term Extension: Residential Added a weighted average 9.6 years to the term of the modified loans. C&I Added a weighted average 0.7 years to the term of the modified loans. Combination - Interest Rate Reduction and Term Extension: Government insured residential Reduced weighted average contractual interest rate from 5.8% to 4.9% and added a weighted average 6.9 years to the term of the modified loans. The following table presents the aging at March 31, 2023, of loans that were modified since January 1, 2023, the date of adoption of ASU 2022-02 (in thousands): Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total 1-4 single family residential $ 766 $ — $ — $ — $ 766 Government insured residential 22,346 11,083 4,683 1,229 39,341 C&I 4,918 — — — 4,918 $ 28,030 $ 11,083 $ 4,683 $ 1,229 $ 45,025 The following table summarizes loans that were modified since January 1, 2023, the date of adoption of ASU 2022-02 and subsequently defaulted, during the period indicated (in thousands): Three Months Ended March 31, 2023 Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total Government insured residential $ 109 $ 5,070 $ 733 $ 5,912 Disclosures Prescribed by Legacy GAAP (Before Adoption of ASU 2022-02) for Prior Periods The following table summarizes loans that were modified in TDRs during the periods indicated, as well as loans modified during the twelve months preceding March 31, 2022 that experienced payment defaults during the periods indicated (dollars in thousands): Three Months Ended March 31, 2022 Loans Modified in TDRs TDRs Experiencing Payment Number of Amortized Cost Number of Amortized Cost 1-4 single family residential 4 $ 1,992 — $ — Government insured residential 390 63,539 125 21,391 C&I 8 15,219 — — 402 $ 80,750 125 $ 21,391 TDRs during the three months ended March 31, 2022 generally included interest rate reductions and extensions of maturity. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy. The total amount of such loans is not material. |