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Loans Receivable and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2021

Loans Receivable and Allowance for Credit Losses

The following is a summary of loans receivable by major category:


	June 30, 2021		December 31, 2020
Loan portfolio composition	(Dollars in thousands)
Real estate loans:
Residential	$	61,360	$	54,795
Commercial	8,518,115		8,425,959
Construction	252,801		291,380
Total real estate loans	8,832,276		8,772,134
Commercial business *	4,001,423		4,157,787
Residential mortgage	543,622		582,232
Consumer and other	46,980		51,060
Loans receivable	13,424,301		13,563,213
Allowance for credit losses	(189,452)		(206,741)
Loans receivable, net of allowance for credit losses	$	13,234,849	$	13,356,472

__________________________________

* Commercial business loans as of June 30, 2021 and December 31, 2020 include $568.8 million and $452.7 million, respectively, in SBA Paycheck Protection Program loans

Loans receivable is stated at the amount of unpaid principal, adjusted for net deferred fees and costs, premiums and discounts, purchase accounting fair value adjustments, and allowance for credit losses. The Company had net deferred fees of $12.6 million and net deferred costs of $3.6 million at June 30, 2021 and December 31, 2020, respectively. Net loan fees related to SBA Paycheck Protection Program (“PPP”) loans totaled $15.7 million at June 30, 2021 compared to $6.4 million at December 31, 2020 and included fees from the origination of SBA PPP loans net of deferred origination costs. The increase in deferred fees for SBA PPP loans was primarily due to the origination of $324.5 million in second round SBA PPP loans during the six months ended June 30, 2021.

The loan portfolio consists of four segments: real estate, commercial business, residential mortgage, and consumer and other loans. Real estate loans are extended for the purchase and refinance of commercial real estate and are generally secured by first deeds of trust and are collateralized by residential or commercial properties. Commercial business loans are loans provided to businesses for various purposes such as for working capital, purchasing inventory, debt refinancing, business acquisitions, international trade finance activities, and other business related financing needs and also include warehouse lines of credit and SBA PPP loans. Residential mortgage loans are extended for personal, family, or household use and are secured by a mortgage or deed of trust. Consumer and other loans consist of home equity, credit card, and other personal loans.

Loans receivable declined $138.9 million from December 31, 2020 to $13.42 billion as of June 30, 2021. The decline in loans receivable during the six months ended June 30, 2021 was due a $283.0 million decline in warehouse lines of credit, $193.5 million in SBA PPP forgiveness, the return to the sale of SBA guaranteed loans totaling $30.0 million during the second quarter of 2021, and the second quarter of 2021 sale of $119.3 million in hotel/motel loans, most of which were classified as criticized loans. These declines were partially offset by an increase in commercial real estate loans which saw an increase in 2021 loan originations and the purchase of $98.3 million in residential mortgage loans during the second quarter of 2021.

The tables below details the activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2021 and 2020. Charge offs for the three and six months ended June 30, 2021 included $11.8 million in real estate loan charge offs that resulted from the sale of $119.3 million in hotel/motel loans with elevated credit risk, there were no such sales for the three and six ended June 30, 2020. Accrued interest receivables on loans totaled $47.1 million at June 30, 2021 and $54.6 million at December 31, 2020. The Company set aside an allowance on loan accrued interest receivables of $751 thousand at June 30, 2021 and $1.0 million at December 31, 2020.



	Real Estate		Commercial Business		Residential Mortgage		Consumer and Other		Total
	(Dollars in thousands)
Three Months Ended June 30, 2021
Balance, beginning of period	$	162,307	$	41,860	$	2,735	$	1,041	$	207,943
Provision (credit) for credit losses	4,227		(12,179)		877		75		(7,000)
Loans charged off	(12,172)		(572)		—		(48)		(12,792)
Recoveries of charge offs	891		391		—		19		1,301
Balance, end of period	$	155,253	$	29,500	$	3,612	$	1,087	$	189,452

Six Months Ended June 30, 2021
Balance, beginning of period	$	162,196	$	39,155	$	4,227	$	1,163	$	206,741
Provision (credit) for credit losses	6,572		(9,554)		(615)		(103)		(3,700)
Loans charged off	(14,990)		(1,182)		—		(141)		(16,313)
Recoveries of charge offs	1,475		1,081		—		168		2,724
Balance, end of period	$	155,253	$	29,500	$	3,612	$	1,087	$	189,452


	Real Estate		Commercial Business		Residential Mortgage		Consumer and Other		Total
	(Dollars in thousands)
Three Months Ended June 30, 2020
Balance, beginning of period	$	94,645	$	42,883	$	5,779	$	1,616	$	144,923

Provision (credit) for credit losses	24,534		(7,151)		89		28		17,500
Loans charged off	(174)		(459)		—		(271)		(904)
Recoveries of charge offs	25		220		—		7		252

Balance, end of period	$	119,030	$	35,493	$	5,868	$	1,380	$	161,771

Six Months Ended June 30, 2020
Balance, beginning of period	$	53,593	$	33,032	$	5,925	$	1,594	$	94,144
CECL day 1 adoption	27,791		(1,022)		(543)		(26)		26,200
Provision for credit losses	40,025		4,398		486		591		45,500
Loans charged off	(2,571)		(3,494)		—		(796)		(6,861)
Recoveries of charge offs	192		2,579		—		17		2,788

Balance, end of period	$	119,030	$	35,493	$	5,868	$	1,380	$	161,771

The following tables break out the allowance for credit losses and loan balance by measurement methodology at June 30, 2021 and December 31, 2020:


	June 30, 2021
	Real Estate		Commercial Business		Residential Mortgage		Consumer and Other		Total
	(Dollars in thousands)
Allowance for credit losses:
Individually evaluated	$	27,226	$	3,325	$	15	$	26	$	30,592
Collectively evaluated	128,027		26,175		3,597		1,061		158,860
Total	$	155,253	$	29,500	$	3,612	$	1,087	$	189,452

Loans outstanding:
Individually evaluated	$	138,368	$	20,978	$	3,053	$	236	$	162,635
Collectively evaluated	8,693,908		3,980,445		540,569		46,744		13,261,666
Total	$	8,832,276	$	4,001,423	$	543,622	$	46,980	$	13,424,301


	December 31, 2020
	Real Estate		Commercial Business		Residential Mortgage		Consumer and Other		Total
	(Dollars in thousands)
Allowance for credit losses:
Individually evaluated	$	3,683	$	3,575	$	25	$	42	$	7,325
Collectively evaluated	158,513		35,580		4,202		1,121		199,416
Total	$	162,196	$	39,155	$	4,227	$	1,163	$	206,741

Loans outstanding:
Individually evaluated	$	93,476	$	25,706	$	3,416	$	605	$	123,203
Collectively evaluated	8,678,658		4,132,081		578,816		50,455		13,440,010
Total	$	8,772,134	$	4,157,787	$	582,232	$	51,060	$	13,563,213

As of June 30, 2021 and December 31, 2020, reserves for unfunded loan commitments recorded in other liabilities were $1.4 million and $1.3 million, respectively. For the three and six months ended June 30, 2021, the Company recorded additions to reserves for unfunded commitments recorded in credit related expenses totaling $0 and $105 thousand, respectively. For the three and six months ended June 30, 2020, the Company recorded additions to reserves for unfunded commitments recorded in credit related expenses totaling to $50 thousand and $660 thousand, respectively.

Generally, loans are placed on nonaccrual status if principal and/or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to customers whose financial conditions have deteriorated are considered for nonaccrual status whether or not the loan is 90 days or more past due. Generally, payments received on nonaccrual loans are recorded as principal reductions. Loans are returned to accrual status only when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company does not recognize interest income while loans are on nonaccrual status.

The tables below represent the recorded investment of nonaccrual loans and loans past due 90 or more days and still on accrual status by class of loans and broken out by loans with a recorded ACL and those without a recorded ACL as of June 30, 2021 and December 31, 2020.


	June 30, 2021
	Nonaccrual with No ACL		Nonaccrual with an ACL		Total Nonaccrual (1)		Accruing Loans Past Due 90 or More Days
	(Dollars in thousands)
Real estate – residential	$	—	$	—	$	—	$	—
Real estate – commercial
Retail	10,463		34,100		44,563		—
Hotel & motel	13,654		5,428		19,082		3,776
Gas station & car wash	575		1,303		1,878		—
Mixed use	9,754		1,610		11,364		—
Industrial & warehouse	2,105		2,332		4,437		—
Other	1,791		5,083		6,874		—
Real estate – construction	7,424		—		7,424		—
Commercial business	5,035		7,182		12,217		26
Residential mortgage	1,440		1,612		3,052		872
Consumer and other	—		117		117		85
Total	$	52,241	$	58,767	$	111,008	$	4,759


	December 31, 2020
	Nonaccrual with No ACL		Nonaccrual with an ACL		Total Nonaccrual (1)		Accruing Loans Past Due 90 or More Days
	(Dollars in thousands)
Real estate – residential	$	—	$	—	$	—	$	—
Real estate – commercial
Retail	3,262		8,530		11,792		478
Hotel & motel	15,311		2,195		17,506		—
Gas station & car wash	151		1,493		1,644		—
Mixed use	1,883		788		2,671		—
Industrial & warehouse	5,443		1,022		6,465		—
Other	7,230		1,419		8,649		—
Real estate – construction	—		18,723		18,723		—
Commercial business	5,319		8,592		13,911		—
Residential mortgage	1,440		1,976		3,416		—
Consumer and other	—		461		461		136
Total	$	40,039	$	45,199	$	85,238	$	614

__________________________________

(1) Total nonaccrual loans exclude the guaranteed portion of SBA loans that are in liquidation totaling $23.6 million and $26.5 million, at June 30, 2021 and December 31, 2020, respectively.

The following table presents the amortized cost basis of collateral-dependent loans as of June 30, 2021 and December 31, 2020:


	June 30, 2021
	Real Estate Collateral		Other Collateral		Total
	(Dollars in thousands)
Real estate – residential	$	—	$	—	$	—
Real estate – commercial	97,184		—		97,184
Real estate – construction	7,424		—		7,424
Commercial business	7,518		6,560		14,078
Residential mortgage	1,439		—		1,439
Consumer and other	—		—		—
Total	$	113,565	$	6,560	$	120,125


	December 31, 2020
	Real Estate Collateral		Other Collateral		Total
	(Dollars in thousands)
Real estate – residential	$	—	$	—	$	—
Real estate – commercial	55,945		—		55,945
Real estate – construction	8,122		—		8,122
Commercial business	7,818		6,312		14,130
Residential mortgage	1,440		—		1,440
Consumer and other	15		—		15
Total	$	73,340	$	6,312	$	79,652

Interest income reversals due to loans being placed on nonaccrual status was $750 thousand and $319 thousand for the three months ended June 30, 2021 and 2020, respectively. Nonaccrual interest income reversals for the six months ended June 30, 2021 and 2020 were $1.7 million and $356 thousand, respectively.

The following table presents the recorded investment of past due loans, including nonaccrual loans past due 30 or more days, by the number of days past due as of June 30, 2021 and December 31, 2020 by class of loans:


	As of June 30, 2021								As of December 31, 2020
	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due
	(Dollars in thousands)
Real estate – residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate – commercial
Retail	788		8,148		10,852		19,788		852		8,141		10,276		19,269
Hotel & motel	2,487		2,808		16,373		21,668		62		1,401		14,744		16,207
Gas station & car wash	292		411		443		1,146		619		2,668		563		3,850
Mixed use	2,547		13,921		295		16,763		116		—		1,269		1,385
Industrial & warehouse	8,211		154		2,611		10,976		137		—		3,830		3,967
Other	2,149		42		2,913		5,104		2,738		545		3,000		6,283
Real estate – construction	—		—		7,424		7,424		8,122		—		—		8,122
Commercial business	431		4,209		5,545		10,185		816		3,683		4,700		9,199
Residential mortgage	6,359		540		2,702		9,601		4,841		—		2,263		7,104
Consumer and other	45		24		202		271		797		21		595		1,413
Total Past Due	$	23,309	$	30,257	$	49,360	$	102,926	$	19,100	$	16,459	$	41,240	$	76,799

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. Homogeneous loans (i.e., home mortgage loans, home equity lines of credit, overdraft loans, express business loans, and automobile loans) are not risk rated and credit risk is analyzed largely by the number of days past due. This analysis is performed at least on a quarterly basis.

The definitions for risk ratings are as follows:

•Pass: Loans that meet a preponderance or more of the Company’s underwriting criteria and evidence an acceptable level of risk.

•Special Mention: Loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

•Substandard: Loans that are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. Loans in this classification have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

•Doubtful: Loans that 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.

During the second quarter of 2021, the Company completed the sale of $119.3 million in hotel/motel loans. The sale consisted of loans with elevated credit risk or were likely to exhibit credit issues in the future. Of the $119.3 million in commercial real estate loans sold, $68.4 million were rated special mention and $33.6 million were rated substandard prior to being sold. The loans were sold at a 9.9% discount to amortized cost. The Company charged off $11.8 million during the second quarter of 2021 as a result of the note sale, all of which was reserved for in prior quarters.

The following table presents the amortized cost basis of loans receivable by class, credit quality indicator, and year of origination as of June 30, 2021 and December 31, 2020.


	As of June 30, 2021
	Term Loan by Origination Year												Revolving Loans		Total
	2021		2020		2019		2018		2017		Prior
	(Dollars in thousands)
Real Estate - Residential
Pass / not rated	$	12,995	$	14,311	$	13,556	$	5,547	$	3,831	$	10,098	$	658	$	60,996
Special mention	—		—		—		—		—		—		228		228
Substandard	—		—		—		136		—		—		—		136
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	12,995	$	14,311	$	13,556	$	5,683	$	3,831	$	10,098	$	886	$	61,360
Real Estate - Commercial
Pass / not rated	$	1,073,045	$	1,485,549	$	1,340,161	$	1,375,076	$	1,055,030	$	1,544,353	$	106,716	$	7,979,930
Special mention	4,223		5,706		48,552		29,215		40,713		71,144		11,978		211,531
Substandard	6,508		552		17,395		26,725		52,497		220,280		2,697		326,654
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	1,083,776	$	1,491,807	$	1,406,108	$	1,431,016	$	1,148,240	$	1,835,777	$	121,391	$	8,518,115
Real Estate - Construction
Pass / not rated	$	841	$	47,025	$	44,574	$	39,298	$	27,652	$	21,200	$	8,457	$	189,047
Special mention	—		—		—		45,989		4,428		5,913		—		56,330
Substandard	—		—		—		—		—		7,424		—		7,424
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	841	$	47,025	$	44,574	$	85,287	$	32,080	$	34,537	$	8,457	$	252,801
Commercial Business
Pass / not rated	$	889,734	$	866,932	$	516,793	$	147,361	$	112,324	$	100,388	$	1,297,976	$	3,931,508
Special mention	1,191		415		3,943		13,581		212		5,466		1,662		26,470
Substandard	1,457		8,552		1,856		2,114		12,840		7,860		8,766		43,445
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	892,382	$	875,899	$	522,592	$	163,056	$	125,376	$	113,714	$	1,308,404	$	4,001,423
Residential Mortgage
Pass / not rated	$	116,677	$	4,764	$	56,940	$	166,777	$	123,595	$	71,816	$	—	$	540,569
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		128		200		541		2,184		—		3,053
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	116,677	$	4,764	$	57,068	$	166,977	$	124,136	$	74,000	$	—	$	543,622
Consumer and Other
Pass / not rated	$	2,784	$	5,994	$	2,243	$	1,937	$	2,114	$	7,611	$	24,054	$	46,737
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		243		—		243
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	2,784	$	5,994	$	2,243	$	1,937	$	2,114	$	7,854	$	24,054	$	46,980
Total Loans
Pass / not rated	$	2,096,076	$	2,424,575	$	1,974,267	$	1,735,996	$	1,324,546	$	1,755,466	$	1,437,861	$	12,748,787
Special mention	5,414		6,121		52,495		88,785		45,353		82,523		13,868		294,559
Substandard	7,965		9,104		19,379		29,175		65,878		237,991		11,463		380,955
Doubtful / loss	—		—		—		—		—		—		—		—
Total	$	2,109,455	$	2,439,800	$	2,046,141	$	1,853,956	$	1,435,777	$	2,075,980	$	1,463,192	$	13,424,301


	December 31, 2020
	Term Loan by Origination Year												Revolving Loans		Total
	2020		2019		2018		2017		2016		Prior
	(Dollars in thousands)
Real Estate - Residential
Pass / not rated	$	15,158	$	13,924	$	7,587	$	4,316	$	6,800	$	3,460	$	3,104	$	54,349
Special mention	—		—		—		—		—		—		227		227
Substandard	—		—		139		—		—		80		—		219
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	15,158	$	13,924	$	7,726	$	4,316	$	6,800	$	3,540	$	3,331	$	54,795
Real Estate - Commercial
Pass / not rated	$	1,548,595	$	1,554,980	$	1,533,802	$	1,240,973	$	767,318	$	1,262,125	$	130,595	$	8,038,388
Special mention	—		2,805		24,569		10,694		8,031		32,048		1,600		79,747
Substandard	126		14,233		28,938		37,174		50,371		173,788		3,194		307,824
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	1,548,721	$	1,572,018	$	1,587,309	$	1,288,841	$	825,720	$	1,467,961	$	135,389	$	8,425,959
Real Estate - Construction
Pass / not rated	$	35,743	$	45,290	$	103,794	$	60,996	$	5,740	$	10,099	$	—	$	261,662
Special mention	—		—		—		—		5,771		5,224		—		10,995
Substandard	—		—		—		10,601		—		8,122		—		18,723
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	35,743	$	45,290	$	103,794	$	71,597	$	11,511	$	23,445	$	—	$	291,380
Commercial Business
Pass / not rated	$	1,294,368	$	584,453	$	224,447	$	117,708	$	77,209	$	43,674	$	1,686,428	$	4,028,287
Special mention	5,996		27,693		30,852		14,629		6,388		3,139		5,172		93,869
Substandard	2,430		1,323		5,539		4,394		6,158		5,463		10,323		35,630
Doubtful / loss	—		—		1		—		—		—		—		1
Subtotal	$	1,302,794	$	613,469	$	260,839	$	136,731	$	89,755	$	52,276	$	1,701,923	$	4,157,787
Residential Mortgage
Pass / not rated	$	5,733	$	90,958	$	217,343	$	168,827	$	55,246	$	40,554	$	—	$	578,661
Special mention	—		—		—		—		—		—		—		—
Substandard	—		122		536		561		1,715		637		—		3,571
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	5,733	$	91,080	$	217,879	$	169,388	$	56,961	$	41,191	$	—	$	582,232
Consumer and Other
Pass / not rated	$	8,309	$	2,463	$	1,818	$	2,321	$	4,756	$	2,811	$	27,890	$	50,368
Special mention	—		—		—		103		—		—		—		103
Substandard	—		—		—		—		55		532		2		589
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	8,309	$	2,463	$	1,818	$	2,424	$	4,811	$	3,343	$	27,892	$	51,060
Total Loans
Pass / not rated	$	2,907,906	$	2,292,068	$	2,088,791	$	1,595,141	$	917,069	$	1,362,723	$	1,848,017	$	13,011,715
Special mention	5,996		30,498		55,421		25,426		20,190		40,411		6,999		184,941
Substandard	2,556		15,678		35,152		52,730		58,299		188,622		13,519		366,556
Doubtful / loss	—		—		1		—		—		—		—		1
Total	$	2,916,458	$	2,338,244	$	2,179,365	$	1,673,297	$	995,558	$	1,591,756	$	1,868,535	$	13,563,213

For the three and six months ended June 30, 2021 and the twelve months ended December 31, 2020, there were no revolving loans converted to term loans.

The Company may reclassify loans held for investment to loans held for sale in the event that the Company plans to sell loans that were originated with the intent to hold to maturity. Loans transferred from held for investment to held for sale are carried at the lower of cost or fair value. The breakdown of loans by type that were reclassified from held for investment to held for sale for the three and six months ended June 30, 2021 and 2020 is presented in the following table:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Transfer of loans held for investment to held for sale	(Dollars in thousands)
Real estate - commercial	$	171,175	$	—	$	171,175	$	—

Commercial business	9,660		—		9,660		—
Residential mortgage	—		—		—		1,002
Total	$	180,835	$	—	$	180,835	$	1,002

On January 1, 2020 the Company adopted ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”, or CECL. The Company calculates its ACL by estimating expected credit losses on a collective basis for loans that share similar risk characteristics. Loans that do not share similar risk characteristics with other loans are evaluated for credit losses on an individual basis. The Company uses a combination of a modeled and non-modeled approach that incorporates current and future economic conditions to estimate lifetime expected losses on a collective basis. The Company uses Probability of Default (“PD”), Loss Given Default (“LGD”), and Exposure at Default (“EAD”) methodologies with quantitative factors and qualitative considerations in calculation of the allowance for credit losses for collectively assessed loans. The Company uses a reasonable and supportable period of 2 years at which point loss assumptions revert back to historical loss information by means of 1 year reversion period.

The ACL for the Company’s construction, credit card, and certain consumer loans is calculated based on a non-modeled approach utilizing historical loss rates to estimate losses. A non-modeled approach was chosen for these loans as fewer data points exist which could result in high levels of estimated loss volatility under a modeled approach. In aggregate, non-modeled loans represented less than 3% of the Company’s total loan portfolio as of June 30, 2021.

The Company’s Economic Forecast Committee (“EFC”) reviews economic forecast scenarios that are incorporated in the Company’s ACL. The EFC reviews multiple scenarios provided to the Company by an independent third party and chooses a single scenario that best aligns with management’s expectation of future economic conditions. The forecast scenario contains certain macroeconomic variables that are incorporated into the Company’s modeling process, including GDP, unemployment rates, interest rates, and commercial real estate prices. As of June 30, 2021, the Company chose a forecast scenario that incorporates the effect of the COVID-19 pandemic and the expected economic recovery into estimates of future economic conditions. The forecast improved considerably compared to forecasts used during the first quarter of 2021 with an increase in projected GDP growth and a large increase in projected commercial real estate prices combined with a reduction in unemployment, particularly for periods in 2021 and 2022. The forecast improvement reflect the current and projected effects of government stimulus packages, ongoing COVID-19 vaccinations, and the reopening of many businesses throughout the United States.

Additionally, in order to systematically quantify the credit risk impact of other trends and changes within the loan portfolio, the Company utilizes qualitative adjustments to the modeled and non-modeled estimated loss approaches. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the Loss Migration Ratio by as much as 25 basis points for each loan type pool. This matrix considers the following seven factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council (“FFIEC”) Interagency Policy Statement on the Allowance for Loan and Lease Losses, updated to reflect the adoption of CECL:

•Changes in lending policies and procedures, including underwriting standards and collection, charge off, and recovery practices;

•Changes in the nature and volume of the loan portfolio;

•Changes in the experience, ability, and depth of lending management and staff;

•Changes in the trends of the volume and severity of past due loans, classified loans, nonaccrual loans, troubled debt restructurings, and other loan modifications;

•Changes in the quality of the loan review system and the degree of oversight by the Directors;

•The existence and effect of any concentrations of credit and changes in the level of such concentrations; and

•The effect of external factors, such as competition, legal requirements, and regulatory requirements on the level of estimated losses in the loan portfolio.

For loans which do not share similar risk characteristics such as nonaccrual and TDR loans above $500 thousand, the Company evaluates these loans on an individual basis in accordance with ASC 326. These nonaccrual and TDR loans are considered to have different risk profiles than performing loans and therefore are evaluated separately. The Company decided to collectively assess TDRs and nonaccrual loans with balances below $500 thousand along with the performing and accrual loans in order to reduce the operational burden of individually assessing small TDR and nonaccrual loans with immaterial balances. For individually assessed loans, the ACL is measured using either 1) the present value of future cash flows discounted at the loan’s effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral, if the loan is collateral dependent. For the collateral dependent loans, the Company obtains a new appraisal to determine the fair value of collateral. The appraisals are based on an “as-is” valuation. To ensure that appraised values remain current, the Company either obtains updated appraisals every twelve months from a qualified independent appraiser or an internal evaluation of the collateral is performed by qualified personnel. If the third party market data indicates that the value of the collateral property has declined since the most recent valuation date, management adjusts the value of the property downward to reflect current market conditions. If the fair value of the collateral is less than the amortized balance of the loan, the Company recognizes an ACL with a corresponding charge to the provision for credit losses.

The Company maintains a separate ACL for its off-balance sheet unfunded loan commitments. The Company uses a funding rate to allocate the allowance to undrawn exposures. This funding rate is used as a credit conversion factor to capture how much undrawn lines of credit can potentially become drawn at any point. The funding rate is determined based on a lookback period of 8 quarters. Credit loss is not estimated for off-balance sheet credit exposures that are unconditionally cancellable by the Company.

The following tables present a breakdown of loans by recorded ACL, broken out by loans evaluated individually and collectively at June 30, 2021 and December 31, 2020:



	As of June 30, 2021
	Real Estate – Residential			Real Estate – Commercial			Real Estate – Construction			Commercial Business			Residential Mortgage			Consumer and Other			Total
	(Dollars in thousands)
Individually evaluated loans	$	—		$	130,944		$	7,424		$	20,978		$	3,053		$	236		$	162,635
ACL on individually evaluated loans	$	—		$	27,226		$	—		$	3,325		$	15		$	26		$	30,592
Individually evaluated loans ACL coverage	N/A			20.79		%	N/A			15.85		%	0.49		%	11.02		%	18.81		%
Collectively evaluated loans	$	61,360		$	8,387,171		$	245,377		$	3,980,445		$	540,569		$	46,744		$	13,261,666
ACL on collectively evaluated loans	$	330		$	126,040		$	1,657		$	26,175		$	3,597		$	1,061		$	158,860
Collectively evaluated loans ACL coverage	0.54		%	1.50		%	0.68		%	0.66		%	0.67		%	2.27		%	1.20		%
Total loans	$	61,360		$	8,518,115		$	252,801		$	4,001,423		$	543,622		$	46,980		$	13,424,301
Total ACL	$	330		$	153,266		$	1,657		$	29,500		$	3,612		$	1,087		$	189,452
Total ACL to total loans	0.54		%	1.80		%	0.66		%	0.74		%	0.66		%	2.31		%	1.41		%


	As of December 31, 2020
	Real Estate – Residential			Real Estate – Commercial			Real Estate – Construction			Commercial Business			Residential Mortgage			Consumer and Other			Total
	(Dollars in thousands)
Individually evaluated loans	$	—		$	74,753		$	18,723		$	25,706		$	3,416		$	605		$	123,203
ACL on individually evaluated loans	$	—		$	2,862		$	821		$	3,575		$	25		$	42		$	7,325
Individually evaluated loans ACL coverage	N/A			3.83		%	4.38		%	13.91		%	0.73		%	6.94		%	5.95		%
Collectively evaluated loans	$	54,795		$	8,351,206		$	272,657		$	4,132,081		$	578,816		$	50,455		$	13,440,010
ACL on collectively evaluated loans	$	391		$	156,665		$	1,457		$	35,580		$	4,202		$	1,121		$	199,416
Collectively evaluated loans ACL coverage	0.71		%	1.88		%	0.53		%	0.86		%	0.73		%	2.22		%	1.48		%
Total loans	$	54,795		$	8,425,959		$	291,380		$	4,157,787		$	582,232		$	51,060		$	13,563,213
Total ACL	$	391		$	159,527		$	2,278		$	39,155		$	4,227		$	1,163		$	206,741
Total ACL to total loans	0.71		%	1.89		%	0.78		%	0.94		%	0.73		%	2.28		%	1.52		%

Under certain circumstances, the Company provides borrowers relief through loan modifications. These modifications are either temporary in nature (“temporary modifications”) or are more substantive. The temporary modifications generally consist of interest only payments for a three to six month period, whereby principal payments are deferred. At the end of the modification period, the remaining principal balance is re-amortized based on the original maturity date. At the end of the modification period, the loan either 1) returns to the original contractual terms; 2) is further modified and accounted for as a troubled debt restructuring in accordance with ASC 310-10-35; or 3) is disposed of through foreclosure or liquidation.

TDR loans are individually evaluated in accordance with ASC 310 and ASC 326. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on their debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy. At June 30, 2021, total TDR loans were $88.5 million, compared to $51.6 million at December 31, 2020.

The balance of loans with modified terms due to COVID-19 as of June 30, 2021 totaled $318.7 million. The majority of these loans were modified in accordance with Section 4013 of the CARES Act. The CARES Act provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to TDR for a limited period of time to account for the effects of COVID-19 if (i) the loan modification is made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. As such, all modified loans that met the criteria outlined within Section 4013 of the CARES Act were not classified as TDR loans as of June 30, 2021 and December 31, 2020, unless the loans were TDR prior to the COVID-19 modification or borrowers were identified to be experiencing financial difficulty prior to the COVID-19 pandemic. As of June 30, 2021, real estate loans accounted for approximately 85% of the loans modified due to hardship from the COVID-19 pandemic. The modifications consisted of full payment deferrals, interest only payments, and a hybrid of full payment deferrals for a period of time followed by interest only payments. The modifications were granted mostly for periods from 3 to 9 months (see “COVID-19 Related Loan Modifications” in the Financial Condition section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information).

A summary of the recorded investment of TDR loans on accrual and nonaccrual status by type of concession as of June 30, 2021 and December 31, 2020 is presented below:


	As of June 30, 2021
	TDR Loans on Accrual Status								TDR Loans on Nonaccrual Status								Total TDRs
	Real Estate		Commercial Business		Residential Mortgage		Other		Real Estate		Commercial Business		Residential Mortgage		Other
	(Dollars in thousands)
Payment concession	$	17,305	$	808	$	—	$	58	$	8,357	$	523	$	—	$	—		$	27,051
Maturity / amortization concession	19,996		7,380		—		133		22,889		3,404		—		117			53,919
Rate concession	5,303		377		—		—		398		1,422		—		—			7,500

Total	$	42,604	$	8,565	$	—	$	191	$	31,644	$	5,349	$	—	$	117		$	88,470


	As of December 31, 2020
	TDR Loans on Accrual Status								TDR Loans on Nonaccrual Status								Total TDRs
	Real Estate		Commercial Business		Residential Mortgage		Other		Real Estate		Commercial Business		Residential Mortgage		Other
	(Dollars in thousands)
Payment concession	$	8,328	$	814	$	—	$	58	$	7,074	$	471	$	—	$	—	$	16,745
Maturity / amortization concession	11,331		10,219		—		114		925		3,814		—		117		26,520
Rate concession	6,112		378		—		—		424		1,430		—		—		8,344

Total	$	25,771	$	11,411	$	—	$	172	$	8,423	$	5,715	$	—	$	117	$	51,609

TDR loans on accrual status are comprised of loans that were accruing at the time of restructuring and for which the Company anticipates full repayment of both principal and interest under the restructured terms. TDR loans that are on nonaccrual status can be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments as modified. Sustained performance includes the periods prior to the modification and if the prior performance met or exceeded the modified terms. TDR loans on accrual status at June 30, 2021 were comprised of 37 commercial real estate loans totaling $42.6 million, 22 commercial business loans totaling $8.6 million, and 15 consumer and other loans totaling $191 thousand. TDR loans on accrual status at December 31, 2020 were comprised of 33 commercial real estate loans totaling $25.8 million, 25 commercial business loans totaling $11.4 million, and 16 consumer and other loans totaling $172 thousand. The Company expects that TDR loans on accrual status as of June 30, 2021, which were all performing in accordance with their restructured terms, to continue to comply with the restructured terms because of the reduced principal or interest payments on these loans. TDR loans that were restructured at market interest rates and had sustained performance as agreed under the modified loan terms may be reclassified as non-TDR after each year end but are reserved for under ASC 310-10. The Company recorded an allowance totaling $26.8 million and $4.8 million for TDR loans as of June 30, 2021 and December 31, 2020, respectively.

The following tables present the recorded investment of loans classified as TDR during the three and six months ended June 30, 2021 and 2020 by class of loans:


	Three Months Ended June 30, 2021	Three Months Ended June 30, 2020
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars in thousands)
Real estate – residential	—	$	—	1	$	216
Real estate – commercial
Retail	4	6,527		—	—
Hotel & motel	—	—		—	—
Gas station & car wash	—	—		1	479
Mixed use	1	4,624		1	464
Industrial & warehouse	—	—		—	—
Other	—	—		—	—
Real estate – construction	—	—		—	—
Commercial business	2	312		2	234
Residential mortgage	—	—		—	—
Consumer and other	1	12		3	14
Total	8	$	11,475	8	$	1,407


	For the Six Months Ended June 30, 2021	For the Six Months Ended June 30, 2020
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars in thousands)
Real estate – residential	—	$	—	1	$	216
Real estate – commercial
Retail	7	30,236		1	676
Hotel & motel	—	—		—	—
Gas station & car wash	1	575		2	527
Mixed use	1	4,624		1	464
Industrial & warehouse	2	9,149		1	261
Other	—	—		—	—
Real estate – construction	—	—		—	—
Commercial business	3	331		3	523
Residential mortgage	—	—		—	—
Consumer and other	5	54		4	30
Total	19	$	44,969	13	$	2,697

For TDRs modified during the three and six months ended June 30, 2021, the Company recorded $59 thousand and $23.7 million, respectively in ACL. Total charge-offs of TDR loans modified during the three and six months ended June 30, 2021 totaled $0. For TDR loans modified during the three and six months ended June 30, 2020, the Company recorded $57 thousand and $219 thousand, respectively in ACL. Total charge-offs of TDR loans modified during the three and six months ended June 30, 2020 totaled $0.

The following tables present loans modified as TDRs within the previous twelve months ended June 30, 2021 and 2020 that subsequently had payment defaults during the three and six months ended June 30, 2021 and 2020:


	Three Months Ended June 30, 2021			Three Months Ended June 30, 2020
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars in thousands)
Real estate – residential	—	$	—	—	$	—
Real estate – commercial
Retail	1	22,589		—	—
Hotel & motel	—	—		1	543
Gas station & car wash	—	—		—	—
Mixed Use	—	—		—	—
Industrial & warehouse	2	9,149		—	—
Other	—	—		1	133
Real estate – construction	—	—		—	—
Commercial business	—	—		1	18
Residential mortgage	—	—		—	—
Consumer and other	2	16		—	—
Total	5	$	31,754	3	$	694

	Six Months Ended June 30, 2021			Six Months Ended June 30, 2020
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars in thousands)
Real estate – residential	—	$	—	1	$	216
Real estate – commercial
Retail	2	23,551		1	676
Hotel & motel	—	—		1	543
Gas station & car wash	—	—		1	478
Mixed Use	—	—		1	464
Industrial & warehouse	2	9,149		1	261
Other	—	—		1	133
Real estate – construction	—	—		—	—
Commercial business	1	131		2	32
Residential mortgage	—	—		—	—
Consumer and other	4	42		1	6
Total	9	$	32,873	10	$	2,809

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. The Company recorded $23.6 million in ACL for TDR loans that had payment defaults during the three and six months ended June 30, 2021. Total charge offs for TDR loans that had payment defaults during the three and six months ended June 30, 2021 was $0.

The Company recorded $86 thousand and $143 thousand of allowance for TDR loans that had payment defaults during the three and six months ended June 30, 2020, respectively. Total charge offs for TDR loans that had payment defaults during the three and six months ended June 30, 2020 totaled $0.