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Loans Receivable and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2022

Loans Receivable and Allowance for Credit Losses

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


	September 30, 2022		December 31, 2021
	(Dollars in thousands)
Loan portfolio composition
Real estate loans:
Residential	$	75,488	$	69,199
Commercial	9,216,194		8,816,080
Construction	213,211		220,652
Total real estate loans	9,504,893		9,105,931
Commercial business *	5,124,421		4,208,674
Residential mortgage	823,809		579,626
Consumer and other	38,064		58,512
Loans receivable	15,491,187		13,952,743
Allowance for credit losses	(160,561)		(140,550)
Loans receivable, net of allowance for credit losses	$	15,330,626	$	13,812,193

__________________________________

* Commercial business loans as of September 30, 2022 and December 31, 2021 include $5.9 million and $228.1 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, and purchase accounting fair value adjustments. The Company had net deferred fees of $9.3 million and $6.2 million at September 30, 2022 and December 31, 2021, respectively. Net loan fees related to SBA Paycheck Protection Program (“PPP”) loans totaled $130 thousand at September 30, 2022 compared to $6.7 million at December 31, 2021 and included fees from the origination of SBA PPP loans net of deferred origination costs.

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 includes 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 increased $1.54 billion from December 31, 2021 to $15.49 billion as of September 30, 2022. The increase in loans receivable during the nine months ended September 30, 2022 was due to an increase in all loan types apart from consumer and other loans. Record loan originations in 2022 contributed to the growth of the Company’s loan portfolio as of September 30, 2022 compared to December 31, 2021.

The Company had $42.0 million in loans held for sale as of September 30, 2022 compared to $99.0 million at December 31, 2021. Loans held for sale at September 30, 2022 consisted of $41.1 million in SBA guaranteed loans and $900 thousand in residential mortgage loans.

The tables below detail the activity in the allowance for credit losses (“ACL”) by portfolio segment for the three and nine months ended September 30, 2022 and 2021. Recoveries for the nine months ended September 30, 2022 included $17.3 million in recoveries from a single lending relationship that had $29.6 million in charge-offs in the third quarter of 2021.



	Real Estate		Commercial Business		Residential Mortgage		Consumer and Other		Total
	(Dollars in thousands)
Three Months Ended September 30, 2022
Balance, beginning of period	$	99,824	$	44,852	$	6,079	$	825	$	151,580
Provision (credit) for credit losses	109		8,276		837		(22)		9,200
Loans charged off	(185)		(262)		(22)		(81)		(550)
Recoveries of charge offs	176		147		—		8		331
Balance, end of period	$	99,924	$	53,013	$	6,894	$	730	$	160,561

Nine Months Ended September 30, 2022
Balance, beginning of period	$	108,440	$	27,811	$	3,316	$	983	$	140,550
Provision (credit) for credit losses	(25,433)		23,327		3,600		(94)		1,400
Loans charged off	(1,936)		(611)		(22)		(196)		(2,765)
Recoveries of charge offs	18,853		2,486		—		37		21,376
Balance, end of period	$	99,924	$	53,013	$	6,894	$	730	$	160,561


	Real Estate		Commercial Business		Residential Mortgage		Consumer and Other		Total
	(Dollars in thousands)
Three Months Ended September 30, 2021
Balance, beginning of period	$	155,253	$	29,500	$	3,612	$	1,087	$	189,452
Provision (credit) for credit losses	(9,142)		(1,011)		—		153		(10,000)
Loans charged off	(41,655)		(1,895)		(923)		(110)		(44,583)
Recoveries of charge offs	1,113		778		—		14		1,905

Balance, end of period	$	105,569	$	27,372	$	2,689	$	1,144	$	136,774

Nine Months Ended September 30, 2021
Balance, beginning of period	$	162,196	$	39,155	$	4,227	$	1,163	$	206,741
Provision (credit) for credit losses	(2,570)		(10,565)		(615)		50		(13,700)
Loans charged off	(56,645)		(3,077)		(923)		(251)		(60,896)
Recoveries of charge offs	2,588		1,859		—		182		4,629
Balance, end of period	$	105,569	$	27,372	$	2,689	$	1,144	$	136,774

The following tables break out the allowance for credit losses and loan balance by measurement methodology at September 30, 2022 and December 31, 2021:


	September 30, 2022
	Real Estate		Commercial Business		Residential Mortgage		Consumer and Other		Total
	(Dollars in thousands)
Allowance for credit losses:
Individually evaluated	$	2,956	$	4,207	$	15	$	21	$	7,199
Collectively evaluated	96,968		48,806		6,879		709		153,362
Total	$	99,924	$	53,013	$	6,894	$	730	$	160,561

Loans outstanding:
Individually evaluated	$	62,936	$	17,553	$	8,731	$	429	$	89,649
Collectively evaluated	9,441,957		5,106,868		815,078		37,635		15,401,538
Total	$	9,504,893	$	5,124,421	$	823,809	$	38,064	$	15,491,187


	December 31, 2021
	Real Estate		Commercial Business		Residential Mortgage		Consumer and Other		Total
	(Dollars in thousands)
Allowance for credit losses:
Individually evaluated	$	2,025	$	3,056	$	11	$	23	$	5,115
Collectively evaluated	106,415		24,755		3,305		960		135,435
Total	$	108,440	$	27,811	$	3,316	$	983	$	140,550

Loans outstanding:
Individually evaluated	$	83,347	$	19,407	$	3,470	$	409	$	106,633
Collectively evaluated	9,022,584		4,189,267		576,156		58,103		13,846,110
Total	$	9,105,931	$	4,208,674	$	579,626	$	58,512	$	13,952,743

As of September 30, 2022 and December 31, 2021, reserves for unfunded loan commitments recorded in other liabilities were $1.2 million and $1.1 million, respectively. For the three months ended September 30, 2022, the Company recorded a credit for unfunded commitments in credit related expenses totaling $250 thousand and recorded for the nine months ended September 30, 2022, additions to reserves for unfunded commitments totaling $130 thousand. For the three and nine months ended September 30, 2021, the Company recorded additions to reserves for unfunded commitments totaling $0 and $105 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 amortized cost 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 September 30, 2022 and December 31, 2021.


	September 30, 2022
	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	20,546		4,687		25,233		—
Hotel & motel	5,815		4,062		9,877		4,618
Gas station & car wash	2,847		1,011		3,858		—
Mixed use	781		3,258		4,039		—
Industrial & warehouse	129		919		1,048		—
Other	1,830		1,922		3,752		—
Real estate – construction	—		—		—		—
Commercial business	1,625		6,050		7,675		419
Residential mortgage	5,967		2,764		8,731		—
Consumer and other	—		358		358		269
Total	$	39,540	$	25,031	$	64,571	$	5,306


	December 31, 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	7,586		2,604		10,190		—
Hotel & motel	5,471		6,564		12,035		—
Gas station & car wash	575		1,267		1,842		—
Mixed use	5,307		1,412		6,719		—
Industrial & warehouse	687		1,897		2,584		—
Other	1,233		5,153		6,386		215
Real estate – construction	—		—		—		—
Commercial business	4,726		6,299		11,025		1,494
Residential mortgage	275		3,195		3,470		—
Consumer and other	—		365		365		422
Total	$	25,860	$	28,756	$	54,616	$	2,131

__________________________________

(1) Total nonaccrual loans exclude the guaranteed portion of SBA loans that are in liquidation totaling $9.9 million and $19.5 million, at September 30, 2022 and December 31, 2021, respectively.

The following table presents the amortized cost of collateral dependent loans as of September 30, 2022 and December 31, 2021:


	September 30, 2022						December 31, 2021
	Real Estate Collateral		Other Collateral		Total		Real Estate Collateral		Other Collateral		Total
	(Dollars in thousands)
Real estate – residential	$	—	$	—	$	—	$	—	$	—	$	—
Real estate – commercial	47,272		—		47,272		65,590		—		65,590
Real estate – construction	—		—		—		—		—		—
Commercial business	1,626		5,795		7,421		1,767		6,615		8,382
Residential mortgage	5,967		—		5,967		—		—		—
Consumer and other	—		—		—		—		—		—
Total	$	54,865	$	5,795	$	60,660	$	67,357	$	6,615	$	73,972

Collateral on loans is a significant portion of what secures collateral dependent loans and significant changes to the fair value of the collateral can potentially impact ACL. During the nine months ended September 30, 2022, the Company did not have any significant changes to the extent to which collateral secures its collateral dependent loans due to general deterioration or from other factors.

Accrued interest receivables on loans totaled $35.7 million at September 30, 2022 and $36.2 million at December 31, 2021. With the adoption of CECL, the Company elected not to consider accrued interest receivable in its estimates of expected credit losses because the Company writes off uncollectible accrued interest receivable in a timely manner. The Company considers writing off accrued interest amounts once the amounts become 90 days past due to be considered within a timely manner. The Company has elected to write off accrued interest receivables by reversing interest income. The following table presents interest income reversals, due to loans being placed on nonaccrual status, by loan segment for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(Dollars in thousands)
Real estate	$	154	$	1,071	$	1,406	$	2,761
Commercial business	21		12		47		49
Residential mortgage	153		—		292		(4)
Consumer and other	—		—		—		—
Total	$	328	$	1,083	$	1,745	$	2,806

The following table presents the amortized cost of past due loans, including nonaccrual loans past due 30 or more days, by the number of days past due as of September 30, 2022 and December 31, 2021 by class of loans:


	September 30, 2022								December 31, 2021
	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	5,086		—		5,412		10,498		1,250		927		9,167		11,344
Hotel & motel	222		4,708		8,456		13,386		9,320		4,148		4,760		18,228
Gas station & car wash	—		—		1,093		1,093		575		—		832		1,407
Mixed use	—		—		3,659		3,659		1,124		—		5,625		6,749
Industrial & warehouse	32		86		408		526		247		—		785		1,032
Other	—		236		2,021		2,257		1,198		6,522		3,185		10,905
Real estate – construction	—		—		—		—		—		—		—		—
Commercial business	6,070		958		3,132		10,160		1,792		2,362		6,482		10,636
Residential mortgage	1,764		241		4,795		6,800		14,177		—		3,099		17,276
Consumer and other	273		46		627		946		59		21		787		867
Total Past Due	$	13,447	$	6,275	$	29,603	$	49,325	$	29,742	$	13,980	$	34,722	$	78,444

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.

The following table presents the amortized cost basis of loans receivable by class, credit quality indicator, and year of origination as of September 30, 2022 and December 31, 2021.


	September 30, 2022
	Term Loan by Origination Year												Revolving Loans		Total
	2022		2021		2020		2019		2018		Prior
	(Dollars in thousands)
Real Estate - Residential
Pass / not rated	$	14,306	$	25,324	$	9,743	$	9,085	$	3,990	$	7,146	$	4,670	$	74,264
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		662		562		—		1,224
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	14,306	$	25,324	$	9,743	$	9,085	$	4,652	$	7,708	$	4,670	$	75,488
Real Estate - Commercial
Pass / not rated	$	2,083,073	$	2,195,049	$	1,328,885	$	1,055,329	$	1,039,822	$	1,272,491	$	93,323	$	9,067,972
Special mention	—		11,640		1,714		—		4,529		3,871		202		21,956
Substandard	1,017		8,716		2,737		19,041		21,684		72,794		277		126,266
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	2,084,090	$	2,215,405	$	1,333,336	$	1,074,370	$	1,066,035	$	1,349,156	$	93,802	$	9,216,194
Real Estate - Construction
Pass / not rated	$	1,435	$	38,964	$	62,814	$	35,424	$	8,053	$	4,607	$	89	$	151,386
Special mention	—		—		—		—		—		16,144		—		16,144
Substandard	45,681		—		—		—		—		—		—		45,681
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	47,116	$	38,964	$	62,814	$	35,424	$	8,053	$	20,751	$	89	$	213,211
Commercial Business
Pass / not rated	$	1,920,005	$	1,214,335	$	327,471	$	351,613	$	74,395	$	103,832	$	1,069,033	$	5,060,684
Special mention	—		20,390		13,621		119		2,099		485		4,585		41,299
Substandard	252		3,214		6,324		2,229		1,206		5,268		3,945		22,438
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	1,920,257	$	1,237,939	$	347,416	$	353,961	$	77,700	$	109,585	$	1,077,563	$	5,124,421
Residential Mortgage
Pass / not rated	$	346,195	$	289,014	$	1,395	$	34,293	$	65,713	$	78,468	$	—	$	815,078
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		107		387		8,237		—		8,731
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	346,195	$	289,014	$	1,395	$	34,400	$	66,100	$	86,705	$	—	$	823,809
Consumer and Other
Pass / not rated	$	2,837	$	1,047	$	3,816	$	1,355	$	1,185	$	7,026	$	20,425	$	37,691
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		373		—		373
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	2,837	$	1,047	$	3,816	$	1,355	$	1,185	$	7,399	$	20,425	$	38,064
Total Loans
Pass / not rated	$	4,367,851	$	3,763,733	$	1,734,124	$	1,487,099	$	1,193,158	$	1,473,570	$	1,187,540	$	15,207,075
Special mention	—		32,030		15,335		119		6,628		20,500		4,787		79,399
Substandard	46,950		11,930		9,061		21,377		23,939		87,234		4,222		204,713
Doubtful / loss	—		—		—		—		—		—		—		—
Total	$	4,414,801	$	3,807,693	$	1,758,520	$	1,508,595	$	1,223,725	$	1,581,304	$	1,196,549	$	15,491,187


	December 31, 2021
	Term Loan by Origination Year												Revolving Loans		Total
	2021		2020		2019		2018		2017		Prior
	(Dollars in thousands)
Real Estate - Residential
Pass / not rated	$	26,093	$	10,471	$	11,442	$	4,952	$	2,987	$	7,260	$	4,403	$	67,608
Special mention	—		—		—		534		—		924		—		1,458
Substandard	—		—		—		133		—		—		—		133
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	26,093	$	10,471	$	11,442	$	5,619	$	2,987	$	8,184	$	4,403	$	69,199
Real Estate - Commercial
Pass / not rated	$	2,451,662	$	1,415,909	$	1,252,851	$	1,238,425	$	883,790	$	1,086,182	$	89,501	$	8,418,320
Special mention	5,553		8,882		39,567		20,203		27,204		73,090		5,970		180,469
Substandard	7,436		7,718		17,533		25,330		53,000		105,995		279		217,291
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	2,464,651	$	1,432,509	$	1,309,951	$	1,283,958	$	963,994	$	1,265,267	$	95,750	$	8,816,080
Real Estate - Construction
Pass / not rated	$	16,545	$	67,628	$	32,044	$	32,908	$	8,292	$	5,685	$	89	$	163,191
Special mention	—		—		—		45,996		5,074		6,391		—		57,461
Substandard	—		—		—		—		—		—		—		—
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	16,545	$	67,628	$	32,044	$	78,904	$	13,366	$	12,076	$	89	$	220,652
Commercial Business
Pass / not rated	$	1,755,104	$	431,145	$	461,460	$	98,812	$	53,629	$	70,294	$	1,299,372	$	4,169,816
Special mention	1,379		523		4,780		2,897		550		5,083		2,594		17,806
Substandard	3,796		941		2,308		1,651		3,803		3,461		5,092		21,052
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	1,760,279	$	432,609	$	468,548	$	103,360	$	57,982	$	78,838	$	1,307,058	$	4,208,674
Residential Mortgage
Pass / not rated	$	282,191	$	1,420	$	40,377	$	112,743	$	85,446	$	53,979	$	—	$	576,156
Special mention	—		—		—		—		—		—		—		—
Substandard	275		—		128		394		541		2,132		—		3,470
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	282,466	$	1,420	$	40,505	$	113,137	$	85,987	$	56,111	$	—	$	579,626
Consumer and Other
Pass / not rated	$	19,203	$	5,347	$	1,783	$	1,699	$	1,769	$	6,165	$	22,095	$	58,061
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		451		—		451
Doubtful / loss	—		—		—		—		—		—		—		—
Subtotal	$	19,203	$	5,347	$	1,783	$	1,699	$	1,769	$	6,616	$	22,095	$	58,512
Total Loans
Pass / not rated	$	4,550,798	$	1,931,920	$	1,799,957	$	1,489,539	$	1,035,913	$	1,229,565	$	1,415,460	$	13,453,152
Special mention	6,932		9,405		44,347		69,630		32,828		85,488		8,564		257,194
Substandard	11,507		8,659		19,969		27,508		57,344		112,039		5,371		242,397
Doubtful / loss	—		—		—		—		—		—		—		—
Total	$	4,569,237	$	1,949,984	$	1,864,273	$	1,586,677	$	1,126,085	$	1,427,092	$	1,429,395	$	13,952,743

For the three and nine months ended September 30, 2022 and the twelve months ended December 31, 2021, 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 nine months ended September 30, 2022 and 2021 is presented in the following table:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Transfer of loans held for investment to held for sale	(Dollars in thousands)
Real estate - commercial	$	36,704	$	107,191	$	192,190	$	278,366

Commercial business	10,328		78,990		27,097		88,650
Residential mortgage	—		7,018		—		7,018
Total	$	47,032	$	193,199	$	219,287	$	374,034

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 differentiates its loan segments based on shared risk characteristics for which allowance for credit losses is measured on a collective basis.


			Risk Characteristics
Real estate			Property type, location, owner occupied status
Commercial business			Delinquency status, risk rating, industry type
Residential mortgage			FICO score, LTV, delinquency status, maturity date, collateral value, location
Consumer and other			Historical losses

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. Included in the quantitative portion of the analysis of the allowance for credit losses are key inputs including borrowers’ net operating income, debt coverage ratios, real estate collateral values, as well as key inputs that are more subjective or require management’s judgement including key macroeconomic variables from Moody’s forecast scenarios including GDP, unemployment rates, interest rates, and commercial real estate prices. These key inputs are utilized in the Company’s models to develop PD and LGD assumptions used in the calculation of estimated quantitative losses.

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 2% of the Company’s total loan portfolio as of September 30, 2022.

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. As of September 30, 2022, the Company utilized the Consensus economic forecast scenario from Moody’s as it best aligned with management’s expectations of future forecasts. The Company also utilized Moody’s Consensus economic forecast for the calculation of the December 31, 2021 ACL. The Consensus economic forecast projects that GDP growth will decline to less than 1.0% in 2023 then grow to over 2.0% by the end of 2024 with unemployment rising to the peak of 4.0% in 2023 and 2024. Commercial real estate prices in the Consensus scenario is expected to see a substantial reduction with the commercial real estate price index declining to -0.4% for 2023 before increasing to 4.5% for 2024.

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 $1.0 million, 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 $1.0 million 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 an estimated funding rate to allocate an 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 September 30, 2022 and December 31, 2021:


	September 30, 2022
	Real Estate – Residential			Real Estate – Commercial			Real Estate – Construction			Commercial Business			Residential Mortgage			Consumer and Other			Total
	(Dollars in thousands)
Individually evaluated loans	$	—		$	62,936		$	—		$	17,553		$	8,731		$	429		$	89,649
ACL on individually evaluated loans	$	—		$	2,956		$	—		$	4,207		$	15		$	21		$	7,199
Individually evaluated loans ACL coverage	N/A			4.70		%	N/A			23.97		%	0.17		%	4.90		%	8.03		%
Collectively evaluated loans	$	75,488		$	9,153,258		$	213,211		$	5,106,868		$	815,078		$	37,635		$	15,401,538
ACL on collectively evaluated loans	$	850		$	94,579		$	1,539		$	48,806		$	6,879		$	709		$	153,362
Collectively evaluated loans ACL coverage	1.13		%	1.03		%	0.72		%	0.96		%	0.84		%	1.88		%	1.00		%
Total loans	$	75,488		$	9,216,194		$	213,211		$	5,124,421		$	823,809		$	38,064		$	15,491,187
Total ACL	$	850		$	97,535		$	1,539		$	53,013		$	6,894		$	730		$	160,561
Total ACL to total loans	1.13		%	1.06		%	0.72		%	1.03		%	0.84		%	1.92		%	1.04		%


	December 31, 2021
	Real Estate – Residential			Real Estate – Commercial			Real Estate – Construction			Commercial Business			Residential Mortgage			Consumer and Other			Total
	(Dollars in thousands)
Individually evaluated loans	$	—		$	83,347		$	—		$	19,407		$	3,470		$	409		$	106,633
ACL on individually evaluated loans	$	—		$	2,025		$	—		$	3,056		$	11		$	23		$	5,115
Individually evaluated loans ACL coverage	N/A			2.43		%	N/A			15.75		%	0.32		%	5.62		%	4.80		%
Collectively evaluated loans	$	69,199		$	8,732,733		$	220,652		$	4,189,267		$	576,156		$	58,103		$	13,846,110
ACL on collectively evaluated loans	$	729		$	104,145		$	1,541		$	24,755		$	3,305		$	960		$	135,435
Collectively evaluated loans ACL coverage	1.05		%	1.19		%	0.70		%	0.59		%	0.57		%	1.65		%	0.98		%
Total loans	$	69,199		$	8,816,080		$	220,652		$	4,208,674		$	579,626		$	58,512		$	13,952,743
Total ACL	$	729		$	106,170		$	1,541		$	27,811		$	3,316		$	983		$	140,550
Total ACL to total loans	1.05		%	1.20		%	0.70		%	0.66		%	0.57		%	1.68		%	1.01		%

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 September 30, 2022, TDR loans totaled $53.6 million, compared to $65.5 million at December 31, 2021.

The balance of loans with modified terms due to COVID-19 as of September 30, 2022 totaled $800 thousand compared to $22.8 million at December 31, 2021. The 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 September 30, 2022 and December 31, 2021, 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 September 30, 2022, there was only one remaining commercial real estate loan modified due to COVID-19 (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 amortized cost of TDR loans on accrual and nonaccrual status by type of concession as of September 30, 2022 and December 31, 2021 is presented below:


	September 30, 2022
	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	$	5,410	$	532	$	—	$	15	$	23,369	$	267	$	—	$	—		$	29,593
Maturity / amortization concession	4,979		9,193		—		257		113		2,572		—		114			17,228
Rate concession	5,062		196		—		—		100		1,401		—		—			6,759

Total	$	15,451	$	9,921	$	—	$	272	$	23,582	$	4,240	$	—	$	114		$	53,580


	December 31, 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	$	23,196	$	790	$	—	$	16	$	7,533	$	420	$	—	$	—	$	31,955
Maturity / amortization concession	15,449		7,284		—		183		269		3,109		—		117		26,411
Rate concession	5,161		339		—		—		234		1,413		—		—		7,147

Total	$	43,806	$	8,413	$	—	$	199	$	8,036	$	4,942	$	—	$	117	$	65,513

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 September 30, 2022 were comprised of 28 commercial real estate loans totaling $15.5 million, 13 commercial business loans totaling $9.9 million, and 9 consumer and other loans totaling $272 thousand. TDR loans on accrual status at December 31, 2021 were comprised of 31 commercial real estate loans totaling $43.8 million, 19 commercial business loans totaling $8.4 million, and 10 consumer and other loans totaling $199 thousand. The Company expects that TDR loans on accrual status as of September 30, 2022, 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 $4.0 million and $2.7 million for TDR loans as of September 30, 2022 and December 31, 2021, respectively.

The following tables present the amortized cost of loans classified as TDR during the nine months ended September 30, 2022 and 2021 by class of loans. There were no loans classified as TDR during the three months ended September 30, 2022 and 2021.


	Nine Months Ended September 30, 2022	Nine Months Ended September 30, 2021
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars in thousands)
Real estate – residential	—	$	—	—	$	—
Real estate – commercial
Retail	—	—		4	6,922
Hotel & motel	1	1,985		—	—
Gas station & car wash	—	—		1	575
Mixed use	—	—		1	4,626
Industrial & warehouse	—	—		—	—
Other	1	590		—	—
Real estate – construction	—	—		—	—
Commercial business	1	2,885		3	319
Residential mortgage	—	—		—	—
Consumer and other	—	—		5	53
Total	3	$	5,460	14	$	12,495

For the TDRs modified during the nine months ended September 30, 2022, the Company recorded $782 thousand in ACL. Total charge-offs of TDR loans modified during the nine months ended September 30, 2022 totaled $0. For TDR loans modified during the three and nine months ended September 30, 2021, the Company recorded $0 thousand and $89 thousand in ACL, respectively. Total charge-offs of TDR loans modified during the three and nine months ended September 30, 2021 totaled $0.

There were no new TDR loans modified during the three months ended September 30, 2022 and 2021. There was one new TDR loan modified with a payment concession totaling $2.0 million and two new TDR loans modified with maturity concessions totaling $3.5 million during the nine months ended September 30, 2022. For the nine months ended September 30, 2021, there were seven TDR loans modified with payment concessions totaling $643 thousand and seven TDR loans modified through maturity concessions totaling $11.9 million.

The following tables present the amortized cost balance of loans modified as TDRs within the previous twelve months ended September 30, 2022 and 2021 that subsequently had payment defaults during the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars in thousands)
Real estate – residential	—	$	—	—	$	—
Real estate – commercial
Retail	—	—		4	6,988
Hotel & motel	—	—		—	—
Gas station & car wash	—	—		—	—
Mixed Use	—	—		1	4,626
Industrial & warehouse	—	—		—	—
Other	—	—		—	—
Real estate – construction	—	—		—	—
Commercial business	1	2,885		—	—
Residential mortgage	—	—		—	—
Consumer and other	—	—		3	30
Total	1	$	2,885	8	$	11,644

	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
	Number of Loans	Balance		Number of Loans	Balance
	(Dollars in thousands)
Real estate – residential	—	$	—	—	$	—
Real estate – commercial
Retail	1	1,144		4	6,988
Hotel & motel	—	—		—	—
Gas station & car wash	—	—		—	—
Mixed Use	—	—		1	4,626
Industrial & warehouse	—	—		—	—
Other	—	—		—	—
Real estate – construction	—	—		—	—
Commercial business	1	2,885		1	120
Residential mortgage	—	—		—	—
Consumer and other	—	—		4	41
Total	2	$	4,029	10	$	11,775

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. The Company recorded $771 thousand in ACL for TDR loans that had payment defaults during the three and nine months ended September 30, 2022. Total charge offs for TDR loans that had payment defaults during the three and nine months ended September 30, 2022 was $0.

The Company recorded $51 thousand and $84 thousand in ACL for TDR loans that had payment defaults during the three and nine months ended September 30, 2021, respectively. Total charge offs for TDR loans that had payment defaults during the three and nine months ended September 30, 2021 totaled $0.

There was one TDR loan that subsequently defaulted during the three months ended September 30, 2022 modified through maturity concessions. There were two TDR loans that subsequently defaulted modified through maturity concessions during the nine months ended September 30, 2022 consisting of one commercial real estate loan totaling $1.1 million and one commercial business loan totaling $2.9 million.

There were eight TDR loans that subsequently defaulted during the three months ended September 30, 2021. Four commercial real estate loans were modified through maturity concessions totaling $11.4 million. Four TDR loans that subsequently defaulted were modified through payment concessions which were comprised of one commercial real estate loan totaling to $221 thousand and three consumer and other loans totaling to $30 thousand.

There were ten TDR loans that subsequently defaulted during the nine months ended September 30, 2021. Four commercial real estate loans were modified through maturity concessions totaling $11.4 million. Six TDR loans that subsequently defaulted were modified through payment concessions which were comprised of one commercial business loan totaling to $120 thousand, one commercial real estate loan totaling to $221 thousand and four consumer and other loans totaling to $41 thousand.