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Loans and Allowance for Credit Losses on Loans

9 Months Ended

Sep. 30, 2022

Loans and Allowance for Credit Losses on Loans

Loans and Allowance for Credit Losses on Loans

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	September 30, 2022		December 31, 2021
Commercial ¹	$	888,081	$	771,474
Leases		251,603		176,031
Commercial real estate – investor		941,910		799,928
Commercial real estate – owner occupied		876,951		731,845
Construction		176,700		206,132
Residential real estate – investor		59,580		63,399
Residential real estate – owner occupied		220,969		213,248
Multifamily		322,856		309,164
HELOC		116,108		126,290
Other ²		14,576		23,293
Total loans		3,869,334		3,420,804
Allowance for credit losses on loans		(48,847)		(44,281)
Net loans ³	$	3,820,487	$	3,376,523

¹ Includes $2.4 million and $38.4 million of Paycheck Protection Program (“PPP”) loans at September 30, 2022 and December 31, 2021, respectively.

² The “Other” segment includes consumer and overdrafts in this table and in subsequent tables within Note 4 - Loans and Allowance for Credit Losses on Loans.

³ Excludes accrued interest receivable of $13.7 million and $9.2 million at September 30, 2022 and December 31, 2021, respectively, that is recorded in other assets on the consolidated balance sheet.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to assure access to collateral, in the event of borrower default, through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories

listed above represent 70.2% and 71.6% of the portfolio at September 30, 2022, and December 31, 2021, respectively, and include a mix of owner occupied and non-owner occupied commercial real estate, residential, construction and multifamily loans.

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three and nine months ended September 30, 2022 and 2021:



			(Release of)
	Beginning		Provision for						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2022
Commercial	$	14,114	$	(919)	$	67	$	47	$	13,175
Leases		1,736		(24)		178		-		1,534
Commercial real estate – investor		9,436		256		124		19		9,587
Commercial real estate – owner occupied		11,478		3,618		12		87		15,171
Construction		1,535		9		-		-		1,544
Residential real estate – investor		661		147		-		8		816
Residential real estate – owner occupied		1,869		149		-		113		2,131
Multifamily		2,434		33		-		63		2,530
HELOC		1,542		386		-		35		1,963
Other		583		(128)		103		44		396
	$	45,388	$	3,527	$	484	$	416	$	48,847



			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Nine months ended September 30, 2022
Commercial	$	11,751	$	1,488	$	149	$	85	$	13,175
Leases		3,480		(1,768)		178		-		1,534
Commercial real estate – investor		10,795		(664)		604		60		9,587
Commercial real estate – owner occupied		4,913		10,289		133		102		15,171
Construction		3,373		(1,829)		-		-		1,544
Residential real estate – investor		760		33		-		23		816
Residential real estate – owner occupied		2,832		(919)		-		218		2,131
Multifamily		3,675		(1,208)		-		63		2,530
HELOC		2,510		(649)		-		102		1,963
Other		192		404		320		120		396
	$	44,281	$	5,177	$	1,384	$	773	$	48,847



			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2021
Commercial	$	2,601	$	82	$	23	$	25	$	2,685
Leases		3,388		(41)		4		-		3,343
Commercial real estate – investor		9,003		(799)		101		18		8,121
Commercial real estate – owner occupied		2,520		8		5		7		2,530
Construction		3,048		(175)		-		-		2,873
Residential real estate – investor		975		(287)		-		7		695
Residential real estate – owner occupied		1,866		(116)		-		18		1,768
Multifamily		3,266		(121)		183		-		2,962
HELOC		1,833		(23)		-		28		1,838
Other		139		19		53		29		134
	$	28,639	$	(1,453)	$	369	$	132	$	26,949

			Provision for
Allowance for credit losses	Beginning		(Release of)						Ending
Nine months ended September 30, 2021	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Commercial	$	2,812	$	43	$	232	$	62	$	2,685
Leases		3,888		(513)		32		-		3,343
Commercial real estate – investor		7,899		265		101		58		8,121
Commercial real estate – owner occupied		3,557		(1,213)		39		225		2,530
Construction		4,054		(1,181)		-		-		2,873
Residential real estate – investor		1,740		(1,328)		-		283		695
Residential real estate – owner occupied		2,714		(1,074)		-		128		1,768
Multifamily		3,625		(480)		183		-		2,962
HELOC		1,948		(222)		17		129		1,838
Other		1,618		(1,483)		108		107		134
	$	33,855	$	(7,186)	$	712	$	992	$	26,949

The ACL on loans excludes $4.4 million, $4.5 million and $2.2 million of allowance for unfunded commitments as of September 30, 2022, December 31, 2021 and September 30, 2021, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of September 30, 2022 and December 31, 2021 excludes the purchase accounting adjustment of $1.0 million and $1.7 million, respectively, recorded due to our acquisition of West Suburban, which is also recorded within Other Liabilities, and is being accreted in interest income over the estimated life of the unused commitments.

The following tables presents the collateral dependent loans and the related ACL allocated by segment of loans as of September 30, 2022 and December 31, 2021:


			Accounts								ACL
September 30, 2022	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	895	$	8,748	$	4	$	1,090	$	10,737	$	1,453
Leases		-		-		1,821		-		1,821		11
Commercial real estate – investor		17,389		-		-		-		17,389		2,891
Commercial real estate – owner occupied		20,667		-		-		2,379		23,046		6,033
Construction		-		-		-		-		-		-
Residential real estate – investor		675		-		-		-		675		-
Residential real estate – owner occupied		1,773		-		-		-		1,773		248
Multifamily		672		-		-		-		672		-
HELOC		190		-		-		-		190		-
Other		-		-		-		-		-		-
Total	$	42,261	$	8,748	$	1,825	$	3,469	$	56,303	$	10,636


			Accounts								ACL
December 31, 2021	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	1,986	$	9,901	$	-	$	-	$	11,887	$	2,677
Leases		-		-		3,249		505		3,754		811
Commercial real estate – investor		5,693		-		-		-		5,693		-
Commercial real estate – owner occupied		9,147		-		-		2,490		11,637		362
Construction		2,104		-		-		-		2,104		992
Residential real estate – investor		925		-		-		-		925		-
Residential real estate – owner occupied		4,271		-		-		-		4,271		276
Multifamily		1,845		-		-		-		1,845		75
HELOC		1,006		-		-		-		1,006		190
Other		-		-		-		7		7		4
Total	$	26,977	$	9,901	$	3,249	$	3,002	$	43,129	$	5,387

Aged analysis of past due loans by segments of loans was as follows:


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
September 30, 2022	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	1,228	$	1,012	$	1,153	$	3,393	$	884,688	$	888,081	$	-
Leases		602		187		67		856		250,747		251,603		-
Commercial real estate – investor		-		1,457		17,945		19,402		922,508		941,910		12,833
Commercial real estate – owner occupied		723		-		3,091		3,814		873,137		876,951		-
Construction		314		-		7,380		7,694		169,006		176,700		7,380
Residential real estate – investor		457		68		1,040		1,565		58,015		59,580		283
Residential real estate – owner occupied		644		424		2,451		3,519		217,450		220,969		235
Multifamily		1,023		-		672		1,695		321,161		322,856		-
HELOC		635		-		630		1,265		114,843		116,108		21
Other		33		8		-		41		14,535		14,576		-
Total	$	5,659	$	3,156	$	34,429	$	43,244	$	3,826,090	$	3,869,334	$	20,752


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
December 31, 2021¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	3,407	$	1,413	$	1,828	$	6,648	$	764,826	$	771,474	$	1,396
Leases		125		-		1,571		1,696		174,335		176,031		-
Commercial real estate – investor		-		267		1,107		1,374		798,554		799,928		-
Commercial real estate – owner occupied		2,324		500		4,848		7,672		724,173		731,845		1,594
Construction		854		-		-		854		205,278		206,132		-
Residential real estate – investor		395		470		792		1,657		61,742		63,399		23
Residential real estate – owner occupied		1,994		591		3,077		5,662		207,586		213,248		97
Multifamily		-		1,046		-		1,046		308,118		309,164		-
HELOC		193		23		398		614		125,676		126,290		-
Other		50		46		23		119		23,174		23,293		-
Total	$	9,342	$	4,356	$	13,644	$	27,342	$	3,393,462	$	3,420,804	$	3,110

¹ Loans modified under the CARES Act were considered current if they were in compliance with the modified terms.

The table presents all nonaccrual loans as of September 30, 2022, and December 31, 2021:


Nonaccrual loan detail	September 30, 2022		With no ACL		December 31, 2021		With no ACL
Commercial	$	8,821	$	5,449	$	11,894	$	9,217
Leases		235		235		3,754		2,943
Commercial real estate – investor		5,112		2,018		5,694		5,694
Commercial real estate – owner occupied		9,581		7,035		11,637		11,205
Construction		145		145		160		160
Residential real estate – investor		1,097		1,097		876		876
Residential real estate – owner occupied		3,552		3,304		4,898		4,622
Multifamily		1,559		1,559		1,573		1,573
HELOC		2,022		2,022		1,042		852
Other		2		2		3		3
Total	$	32,126	$	22,866	$	41,531	$	37,145

The Company recognized $142,000 of interest on nonaccrual loans during the nine months ended September 30, 2022.

Credit Quality Indicators

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison to industry averages, historical payment experience, and current economic trends. This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and residential mortgages. Loans with a classified risk rating are reviewed quarterly regardless of size or loan type. The Company uses the following definitions for classified risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.

Credit quality indicators by loan segment and loan origination date at September 30, 2022 were as follows:


	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial
Pass	$	170,428	$	77,354	$	23,879	$	14,671	$	8,502	$	5,253	$	527,792	$	473	$	828,352
Special Mention		3,030		3,137		1,274		2,528		-		-		18,038		-		28,007
Substandard		5,407		2,976		3,214		12,833		15		60		7,217		-		31,722
Total commercial		178,865		83,467		28,367		30,032		8,517		5,313		553,047		473		888,081

Leases
Pass		122,629		69,757		30,415		21,531		5,628		1,408		-		-		251,368
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		93		142		-		-		-		-		235
Total leases		122,629		69,757		30,508		21,673		5,628		1,408		-		-		251,603

Commercial real estate – investor
Pass		335,320		238,901		148,301		65,813		49,805		60,056		6,960		-		905,156
Special Mention		5,353		-		-		-		-		3,149		-		-		8,502
Substandard		-		2,018		-		23,140		-		3,094		-		-		28,252
Total commercial real estate – investor		340,673		240,919		148,301		88,953		49,805		66,299		6,960		-		941,910

Commercial real estate – owner occupied
Pass		164,067		241,671		103,552		48,982		51,399		100,087		33,753		-		743,511
Special Mention		8,429		8,600		53,299		19,102		244		1,068		-		-		90,742
Substandard		2,625		17,316		1,135		18,309		-		3,313		-		-		42,698
Total commercial real estate – owner occupied		175,121		267,587		157,986		86,393		51,643		104,468		33,753		-		876,951

Construction
Pass		27,377		77,625		44,138		2,460		2,886		1,435		2,560		-		158,481
Special Mention		-		1,465		5,181		10,226		-		-		-		-		16,872
Substandard		1,232		-		-		115		-		-		-		-		1,347
Total construction		28,609		79,090		49,319		12,801		2,886		1,435		2,560		-		176,700

Residential real estate – investor
Pass		13,481		10,482		7,079		9,508		5,246		11,285		1,214		-		58,295
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		175		-		-		499		189		422		-		-		1,285
Total residential real estate – investor		13,656		10,482		7,079		10,007		5,435		11,707		1,214		-		59,580

Residential real estate – owner occupied
Pass		36,688		45,430		29,163		16,407		12,421		74,772		1,565		-		216,446
Special Mention		-		594		-		-		-		-		-		-		594
Substandard		-		272		239		725		132		2,561		-		-		3,929
Total residential real estate – owner occupied		36,688		46,296		29,402		17,132		12,553		77,333		1,565		-		220,969

Multifamily
Pass		71,830		108,581		53,862		15,559		56,411		7,538		101		155		314,037
Special Mention		-		-		-		6,837		-		-		-		-		6,837
Substandard		1,095		-		-		-		608		279		-		-		1,982
Total multifamily		72,925		108,581		53,862		22,396		57,019		7,817		101		155		322,856

HELOC
Pass		1,909		517		1,512		1,728		661		2,616		104,776		-		113,719
Special Mention		-		-		-		-		-		-		111		-		111
Substandard		63		-		-		-		70		210		1,935		-		2,278
Total HELOC		1,972		517		1,512		1,728		731		2,826		106,822		-		116,108

Other
Pass		2,892		3,102		501		166		57		122		7,734		-		14,574
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		2		-		-		-		-		-		2
Total other		2,892		3,102		503		166		57		122		7,734		-		14,576

Total loans
Pass		946,621		873,420		442,402		196,825		193,016		264,572		686,455		628		3,603,939
Special Mention		16,812		13,796		59,754		38,693		244		4,217		18,149		-		151,665
Substandard		10,597		22,582		4,683		55,763		1,014		9,939		9,152		-		113,730
Total loans	$	974,030	$	909,798	$	506,839	$	291,281	$	194,274	$	278,728	$	713,756	$	628	$	3,869,334

Credit quality indicators by loan segment and loan origination date at December 31, 2021, were as follows:


	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial
Pass	$	192,258	$	50,638	$	38,614	$	28,177	$	5,176	$	10,945	$	408,394	$	30	$	734,232
Special Mention		44		84		694		-		-		-		3,708		-		4,530
Substandard		9,498		4,048		14,121		326		-		75		4,644		-		32,712
Total commercial		201,800		54,770		53,429		28,503		5,176		11,020		416,746		30		771,474

Leases
Pass		83,402		44,129		32,259		8,950		1,170		2,367		-		-		172,277
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		2,834		623		-		297		-		-		3,754
Total leases		83,402		44,129		35,093		9,573		1,170		2,664		-		-		176,031

Commercial real estate – investor
Pass		245,346		175,218		118,697		85,049		64,810		55,523		18,602		-		763,245
Special Mention		15,466		-		10,550		-		-		-		-		-		26,016
Substandard		2,238		2,378		451		181		3,612		1,807		-		-		10,667
Total commercial real estate – investor		263,050		177,596		129,698		85,230		68,422		57,330		18,602		-		799,928

Commercial real estate – owner occupied
Pass		290,225		155,353		90,325		60,915		54,236		59,887		2,522		-		713,463
Special Mention		-		-		2,953		-		-		-		-		-		2,953
Substandard		8,318		942		1,686		-		1,251		3,232		-		-		15,429
Total commercial real estate – owner occupied		298,543		156,295		94,964		60,915		55,487		63,119		2,522		-		731,845

Construction
Pass		88,620		65,629		37,169		2,727		477		1,193		1,143		-		196,958
Special Mention		-		2,138		4,932		-		-		-		-		-		7,070
Substandard		160		-		-		1,944		-		-		-		-		2,104
Total construction		88,780		67,767		42,101		4,671		477		1,193		1,143		-		206,132

Residential real estate – investor
Pass		13,371		9,758		13,084		6,392		7,059		10,602		1,868		-		62,134
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		121		144		-		197		385		418		-		-		1,265
Total residential real estate – investor		13,492		9,902		13,084		6,589		7,444		11,020		1,868		-		63,399

Residential real estate – owner occupied
Pass		48,009		31,912		20,990		13,304		30,562		60,661		2,052			-		207,490
Special Mention		659		-		-		-		-		-		-			-		659
Substandard		322		183		6		1,219		176		3,193		-			-		5,099
Total residential real estate – owner occupied		48,990		32,095		20,996		14,523		30,738		63,854		2,052			-		213,248

Multifamily
Pass		109,175		71,748		39,293		61,190		11,399		7,117		64			-		299,986
Special Mention		-		-		6,900		-		-		-		-			-		6,900
Substandard		433		-		-		1,543		302		-		-			-		2,278
Total multifamily		109,608		71,748		46,193		62,733		11,701		7,117		64			-		309,164

HELOC
Pass		907		2,091		2,131		805		1,667		12,315		104,843			-		124,759
Special Mention		-		-		-		-		-		-		108			-		108
Substandard		-		-		-		17		12		376		1,018			-		1,423
Total HELOC		907		2,091		2,131		822		1,679		12,691		105,969			-		126,290

Other
Pass		8,659		1,099		437		254		1,414		4,214		7,206	-		-		23,283
Special Mention		-		-		-		-		-		-		-			-		-
Substandard		-		3		-		7		-		-		-			-		10
Total other		8,659		1,102		437		261		1,414		4,214		7,206			-		23,293

Total loans
Pass		1,079,972		607,575		392,999		267,763		177,970		224,824		546,694			30		3,297,827
Special Mention		16,169		2,222		26,029		-		-		-		3,816			-		48,236
Substandard		21,090		7,698		19,098		6,057		5,738		9,398		5,662			-		74,741
Total loans	$	1,117,231	$	617,495	$	438,126	$	273,820	$	183,708	$	234,222	$	556,172		$	30	$	3,420,804

The Company had $659,000 and $488,000 in residential real estate loans in the process of foreclosure as of September 30, 2022, and December 31, 2021, respectively.

Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties. Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower. These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications. The Bank participates in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments. Additionally, in accordance with interagency guidance, short-term deferrals granted due to the COVID-19 pandemic were not considered TDRs, if modified prior to January 1, 2022, unless the borrower was experiencing financial difficulty prior to the pandemic.

The specific allocation of the allowance for credit losses for TDRs is determined by calculating the present value of the TDR cash flows by discounting the original payment less an assumption for probability of default at the original note’s issue rate, and adding this amount to the present value of collateral less selling costs. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e., specific reserve) as a component of the allowance for credit losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for credit losses also includes an allowance based on a loss migration analysis for each loan category on loans and leases that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

There were no TDR loan modifications for the three months ended September 30, 2022 and two TDR loan modifications for an aggregate of $39,000 for the nine months ended September 30, 2022. There was no TDR activity for the three and nine months ended September 30, 2021. TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no TDR default activity for the periods ended September 30, 2022, and September 30, 2021, for loans that were restructured within the prior 12 month period.