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): June 30, 2024 December 31, 2023 Total Percent of Total Total Percent of Total Commercial: Non-owner occupied commercial real estate $ 5,367,663 21.8 % $ 5,323,241 21.6 % Construction and land 584,833 2.4 % 495,992 2.0 % Owner occupied commercial real estate 1,966,809 8.0 % 1,935,743 7.9 % Commercial and industrial 7,170,622 29.1 % 6,971,981 28.3 % Pinnacle - municipal finance 847,234 3.4 % 884,690 3.6 % Franchise and equipment finance 307,442 1.2 % 380,347 1.5 % Mortgage warehouse lending 539,159 2.2 % 432,663 1.8 % 16,783,762 68.1 % 16,424,657 66.7 % Residential: 1-4 single family residential 6,672,529 27.1 % 6,903,013 28.0 % Government insured residential 1,172,193 4.8 % 1,306,014 5.3 % 7,844,722 31.9 % 8,209,027 33.3 % Total loans 24,628,484 100.0 % 24,633,684 100.0 % Allowance for credit losses (225,698) (202,689) Loans, net $ 24,402,786 $ 24,430,995 Premiums, discounts and deferred fees and costs, excluding the non-credit related discount on PCD loans, totaled $39 million and $45 million at June 30, 2024 and December 31, 2023, 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): June 30, 2024 December 31, 2023 UPB $ 71,914 $ 80,123 Non-credit discount (30,855) (35,249) Total amortized cost of PCD loans 41,059 44,874 ACL related to PCD loans (129) (161) PCD loans, net $ 40,930 $ 44,713 Included in loans, net are direct or sales type finance leases totaling $582 million and $602 million at June 30, 2024 and December 31, 2023, respectively. The amount of income recognized from direct or sales type finance leases for the three and six months ended June 30, 2024 and 2023, totaled $3.8 million, $7.9 million, $4.4 million and $8.7 million, respectively, and is included in interest income on loans in the consolidated statements of income. During the three and six months ended June 30, 2024 and 2023, the Company purchased residential loans totaling $60 million, $127 million, $154 million, and $341 million, respectively. At June 30, 2024 and December 31, 2023, the Company had pledged loans with a carrying value of approximately $15.6 billion and $16.5 billion, respectively, as security for FHLB advances and Federal Reserve discount window capacity. Accrued interest receivable on loans totaled $135 million and $138 million at June 30, 2024 and December 31, 2023, 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 and six months ended June 30, 2024 and 2023. Allowance for credit losses Activity in the ACL is summarized below for the periods indicated (in thousands): Three Months Ended June 30, 2024 2023 Commercial Residential Total Commercial Residential Total Beginning balance $ 210,929 $ 6,627 $ 217,556 $ 146,995 $ 11,797 $ 158,792 Provision (recovery) 22,224 (401) 21,823 17,107 (2,912) 14,195 Charge-offs (16,100) — (16,100) (9,136) — (9,136) Recoveries 2,419 — 2,419 2,980 2 2,982 Ending balance $ 219,472 $ 6,226 $ 225,698 $ 157,946 $ 8,887 $ 166,833 Six Months Ended June 30, 2024 2023 Commercial Residential Total Commercial Residential Total Beginning balance $ 195,058 $ 7,631 $ 202,689 $ 136,205 $ 11,741 $ 147,946 Impact of adoption of ASU 2022-02 N/A N/A N/A (1,677) (117) (1,794) Balance after adoption of ASU 2022-02 195,058 7,631 202,689 134,528 11,624 146,152 Provision (recovery) 39,003 (1,375) 37,628 34,532 (2,742) 31,790 Charge-offs (21,452) (34) (21,486) (17,035) — (17,035) Recoveries 6,863 4 6,867 5,921 5 5,926 Ending balance $ 219,472 $ 6,226 $ 225,698 $ 157,946 $ 8,887 $ 166,833 The ACL was determined utilizing a 2-year reasonable and supportable forecast period. The quantitative portion of the ACL was determined using three weighted third-party provided economic scenarios. The ACL increased by $23.0 million, to 0.92% of total loans at June 30, 2024 from 0.82% of total loans at December 31, 2023. The more significant factors impacting the provision for credit losses and increase in the ACL for the six months ended June 30, 2024 were new loan production and changes in portfolio characteristics; risk rating migration and an increase in specific reserves; an increase in qualitative reserves, particularly related to office CRE; partially offset by an improved economic forecast and net charge-offs. The following table presents gross charge-offs during the six months ended June 30, 2024, by year of origination (in thousands): 2024 2023 2022 2021 2020 Prior to 2020 Revolving Loans Total CRE $ — $ — $ 4,369 $ — $ — $ 486 $ — $ 4,855 C&I — 202 12,000 29 — 1,091 114 13,436 Franchise and equipment finance — — — 765 — 2,396 — 3,161 Residential — — — — — 34 — 34 $ — $ 202 $ 16,369 $ 794 $ — $ 4,007 $ 114 $ 21,486 The following table presents the components of the provision for credit losses for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Amount related to funded portion of loans $ 21,823 $ 14,195 $ 37,628 $ 31,790 Amount related to off-balance sheet credit exposures (2,285) 1,322 (2,805) 3,515 Total provision for credit losses $ 19,538 $ 15,517 $ 34,823 $ 35,305 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 status is 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 2024. 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 (in thousands): June 30, 2024 Amortized Cost By Origination Year 2024 2023 2022 2021 2020 Prior Total Current $ 94,435 $ 338,608 $ 1,062,939 $ 2,865,654 $ 826,847 $ 1,451,944 $ 6,640,427 30 - 59 Days Past Due — 208 4,402 5,182 939 4,816 15,547 60 - 89 Days Past Due — — 626 — — 132 758 90 Days or More Past Due — — 2,592 1,781 — 11,424 15,797 $ 94,435 $ 338,816 $ 1,070,559 $ 2,872,617 $ 827,786 $ 1,468,316 $ 6,672,529 December 31, 2023 Amortized Cost By Origination Year 2023 2022 2021 2020 2019 Prior Total Current $ 363,123 $ 1,117,039 $ 2,965,840 $ 854,376 $ 296,146 $ 1,255,688 $ 6,852,212 30 - 59 Days Past Due 2,200 1,785 7,201 5,745 — 14,527 31,458 60 - 89 Days Past Due — 2,116 1,465 — 143 2,728 6,452 90 Days or More Past Due — 5,872 — — 1,439 5,580 12,891 $ 365,323 $ 1,126,812 $ 2,974,506 $ 860,121 $ 297,728 $ 1,278,523 $ 6,903,013 1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on LTV (in thousands): June 30, 2024 Amortized Cost By Origination Year LTV 2024 2023 2022 2021 2020 Prior Total Less than 61% $ 10,874 $ 61,201 $ 248,056 $ 1,166,464 $ 316,219 $ 461,585 $ 2,264,399 61% - 70% 13,699 61,046 271,529 787,903 210,764 336,510 1,681,451 71% - 80% 68,926 216,569 548,916 884,073 300,733 630,391 2,649,608 More than 80% 936 — 2,058 34,177 70 39,830 77,071 $ 94,435 $ 338,816 $ 1,070,559 $ 2,872,617 $ 827,786 $ 1,468,316 $ 6,672,529 December 31, 2023 Amortized Cost By Origination Year LTV 2023 2022 2021 2020 2019 Prior Total Less than 61% $ 63,117 $ 260,403 $ 1,211,101 $ 326,771 $ 72,219 $ 428,451 $ 2,362,062 61% - 70% 67,146 280,602 813,682 221,091 71,652 293,784 1,747,957 71% - 80% 235,060 583,724 915,166 312,188 148,483 519,699 2,714,320 More than 80% — 2,083 34,557 71 5,374 36,589 78,674 $ 365,323 $ 1,126,812 $ 2,974,506 $ 860,121 $ 297,728 $ 1,278,523 $ 6,903,013 1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on FICO score (in thousands): June 30, 2024 Amortized Cost By Origination Year FICO 2024 2023 2022 2021 2020 Prior Total 760 or greater $ 65,507 $ 249,632 $ 775,108 $ 2,292,131 $ 661,449 $ 1,030,230 $ 5,074,057 720 - 759 22,997 61,148 183,175 369,881 102,449 199,391 939,041 719 or less or not available 5,931 28,036 112,276 210,605 63,888 238,695 659,431 $ 94,435 $ 338,816 $ 1,070,559 $ 2,872,617 $ 827,786 $ 1,468,316 $ 6,672,529 December 31, 2023 Amortized Cost By Origination Year FICO 2023 2022 2021 2020 2019 Prior Total 760 or greater $ 253,774 $ 810,150 $ 2,378,572 $ 696,363 $ 203,966 $ 893,290 $ 5,236,115 720 - 759 78,882 194,135 392,179 99,412 50,984 210,663 1,026,255 719 or less or not available 32,667 122,527 203,755 64,346 42,778 174,570 640,643 $ 365,323 $ 1,126,812 $ 2,974,506 $ 860,121 $ 297,728 $ 1,278,523 $ 6,903,013 Past Due and Non-Accrual Loans: The following table presents an aging of loans at the dates indicated (in thousands): June 30, 2024 December 31, 2023 Current 30 - 59 60 - 89 90 Days or Total Current 30 - 59 60 - 89 90 Days or Total CRE $ 5,916,440 $ 25,536 $ 1,832 $ 8,688 $ 5,952,496 $ 5,779,309 $ 27,918 $ 1,947 $ 10,059 $ 5,819,233 C&I 9,100,510 2,826 761 33,334 9,137,431 8,851,585 16,228 5,536 34,375 8,907,724 Pinnacle - municipal finance 847,234 — — — 847,234 884,690 — — — 884,690 Franchise and equipment finance 307,442 — — — 307,442 380,347 — — — 380,347 Mortgage warehouse lending 539,159 — — — 539,159 432,663 — — — 432,663 1-4 single family residential 6,640,427 15,547 758 15,797 6,672,529 6,852,212 31,458 6,452 12,891 6,903,013 Government insured residential 788,005 110,787 48,849 224,552 1,172,193 835,282 131,652 61,942 277,138 1,306,014 $ 24,139,217 $ 154,696 $ 52,200 $ 282,371 $ 24,628,484 $ 24,016,088 $ 207,256 $ 75,877 $ 334,463 $ 24,633,684 Included in the table above is the guaranteed portion of SBA loans past due by 90 days or more totaling $35.7 million ($27.5 million of C&I and $8.2 million of CRE) and $39.7 million at June 30, 2024 and December 31, 2023, respectively. Loans contractually delinquent by 90 days or more and still accruing totaled $225 million and $278 million at June 30, 2024 and December 31, 2023, 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): June 30, 2024 December 31, 2023 Amortized Cost Amortized Cost With No Related Allowance Amortized Cost Amortized Cost With No Related Allowance CRE $ 62,389 $ 20,885 $ 13,727 $ 1,947 C&I 75,079 33,099 68,533 14,078 Franchise and equipment finance 18,983 4,866 23,678 7,796 1-4 single family residential 16,411 — 20,513 — $ 172,862 $ 58,850 $ 126,451 $ 23,821 Included in the table above is the guaranteed portion of non-accrual SBA loans totaling $39.0 million and $41.8 million at June 30, 2024 and December 31, 2023, respectively. The amount of interest income recognized on non-accrual loans was insignificant for the three and six months ended June 30, 2024 and 2023. 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 $3.4 million and $4.9 million for the three and six months ended June 30, 2024, respectively and $1.7 million and $3.4 million for the three and six months ended June 30, 2023, respectively. Collateral dependent loans: The following table presents the amortized cost basis of collateral dependent loans at the dates indicated (in thousands): June 30, 2024 December 31, 2023 Amortized Cost Extent to Which Secured by Collateral Amortized Cost Extent to Which Secured by Collateral CRE $ 61,183 $ 52,882 $ 11,574 $ 11,574 C&I 58,078 44,484 36,401 25,821 Franchise and equipment finance 18,983 15,830 23,488 18,678 $ 138,244 $ 113,196 $ 71,463 $ 56,073 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 and for owner-occupied commercial real estate loans, may also include commercial real estate. Franchise and equipment 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 secured collateral dependent loans during the six months ended June 30, 2024. Foreclosure of residential real estate The recorded investment in residential loans in the process of foreclosure was $201 million, of which $189 million was government insured at June 30, 2024, and $262 million, of which $250 million was government insured at December 31, 2023. The carrying amount of foreclosed residential real estate included in other assets in the accompanying consolidated balance sheet was insignificant at June 30, 2024 and December 31, 2023. Loan Modifications The following tables summarize loans that were modified for borrowers experiencing financial difficulty, by type of modification, during the periods indicated (dollars in thousands): Three Months Ended June 30, 2024 Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total % (1) Total % (1) Total % (1) Total CRE $ — — % $ 1,293 — % $ — — % $ 1,293 C&I — — % 95,694 1 % — — % 95,694 Government insured residential — — % 13,248 1 % 866 — % 14,114 $ — $ 110,235 $ 866 $ 111,101 Six Months Ended June 30, 2024 Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total % (1) Total % (1) Total % (1) Total CRE $ — — % $ 1,293 — % $ — — % $ 1,293 C&I — — % 95,694 1 % 29 — % 95,723 Government insured residential — — % 21,434 2 % 2,353 — % 23,787 $ — $ 118,421 $ 2,382 $ 120,803 Three Months Ended June 30, 2023 Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total % (1) Total % (1) Total % (1) Total C&I $ — — % $ 1,620 — % $ — — % $ 1,620 Franchise and equipment finance — — % 3,558 1 % — — % 3,558 Government insured residential — — % 23,325 2 % 482 — % 23,807 $ — $ 28,503 $ 482 $ 28,985 Six Months Ended June 30, 2023 Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total % (1) Total % (1) Total % (1) Total C&I $ — — % $ 6,298 — % $ — — % $ 6,298 Franchise and equipment finance — — % 3,558 1 % — — % 3,558 1-4 single family residential 761 — % — — % — — % 761 Government insured residential 109 — % 47,452 3 % 2,698 — % 50,259 $ 870 $ 57,308 $ 2,698 $ 60,876 (1) Represents percentage of loans receivable in each category. The following tables summarize the financial effect of the modifications made to borrowers experiencing difficulty, during the periods indicated: Three Months Ended June 30, 2024 Financial Effect Term Extension: CRE Added a weighted average 1.0 year to the term of the modified loans. C&I Added a weighted average 1.6 years to the term of the modified loans. Government insured residential Added a weighted average 9.5 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 7.4% to 7.2% and added a weighted average 2.1 years to the term of the modified loans. Six Months Ended June 30, 2024 Financial Effect Term Extension: CRE Added a weighted average 1.0 year to the term of the modified loans. C&I Added a weighted average 1.6 years to the term of the modified loans. Government insured residential Added a weighted average 9.8 years to the term of the modified loans. Combination - Interest Rate Reduction and Term Extension: C&I Reduced weighted average contractual interest rate from 21.2% to 5.0% and added a weighted average 2.2 years to the term of the modified loans. Government insured residential Reduced weighted average contractual interest rate from 6.8% to 6.3% and added a weighted average 4.6 years to the term of the modified loans. Three Months Ended June 30, 2023 Financial Effect Term Extension: C&I Added a weighted average 0.6 years to the term of the modified loans. Franchise and equipment finance Added a weighted average 0.3 years to the term of the modified loans. Government insured residential Added a weighted average 7.2 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 6.8% to 6.2% and added a weighted average 19.2 years to the term of the modified loans. Six Months Ended June 30, 2023 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: C&I Added a weighted average 0.6 years to the term of the modified loans. Franchise and equipment finance Added a weighted average 0.3 years to the term of the modified loans. Government insured residential Added a weighted average 8.0 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 6.0% to 5.3% and added a weighted average 7.6 years to the term of the modified loans. The following tables present the aging at June 30, 2024, of loans that were modified within the previous 12 months, and at June 30, 2023, of loans that were modified since January 1, 2023, the date of adoption of ASU 2022-02 (in thousands): June 30, 2024 Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total CRE $ 1,293 $ — $ — $ — $ 1,293 C&I 97,558 1,504 — — 99,062 Franchise and equipment finance 9,402 — — — 9,402 1-4 single family residential 73 — — — 73 Government insured residential 14,577 7,047 6,712 17,126 45,462 $ 122,903 $ 8,551 $ 6,712 $ 17,126 $ 155,292 June 30, 2023 Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total C&I $ 6,298 $ — $ — $ — $ 6,298 Franchise and equipment finance 3,558 — — — 3,558 1-4 single family residential — 761 — — 761 Government insured residential 19,996 14,058 6,374 9,831 50,259 $ 29,852 $ 14,819 $ 6,374 $ 9,831 $ 60,876 The following tables summarize loans that were modified within the previous 12 months and defaulted during the periods indicated (in thousands): Three Months Ended June 30, 2024 2023 Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total Government insured residential $ — $ 8,060 $ 1,084 $ 9,144 $ — $ 12,460 $ 183 $ 12,643 Six Months Ended June 30, 2024 2023 Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total Interest Rate Reduction Term Extension Combination - Interest Rate Reduction and Term Extension Total Government insured residential $ — $ 16,231 $ 1,956 $ 18,187 $ 109 $ 15,782 $ 314 $ 16,205 |