Allowance for Credit Losses on Loans

9 Months Ended

Sep. 30, 2022

The baseline loss rates used to calculate the ACL on loans at September 30, 2022 utilized the Bank's average quarterly historical loss information from December 31, 2012 through the balance sheet date. There were no changes to this assumption during the nine months ended September 30, 2022. The Bank believes the historic loss rates are viable inputs to the current CECL model as the Bank's lending practice and business has remained relatively stable throughout the periods. While the Bank's assets have grown, the credit culture has stayed relatively consistent.

Prepayments included in the CECL model at September 30, 2022 were based on the 48-month rolling historical averages for each segment, which management believes is an accurate representation of future prepayment activity. There were no changes to this assumption during the nine months ended September 30, 2022.

The reasonable and supportable period and subsequent reversion period used in the CECL model was five quarters and two quarters, respectively, at December 31, 2021. There were no changes to these assumptions during the nine months ended September 30, 2022. Management believes forecasts beyond this seven quarter time period tend to diverge in economic assumptions and may be less comparable to actual future events. As the length of the reasonable and supportable period increases, the degree of judgment involved in estimating the allowance increases.

During the nine months ended September 30, 2022, the ACL on loans decreased $272,000, or 0.6%, due primarily to a reversal of provision for credit losses on loans of $1.3 million driven by a $3.4 million reduction in the ACL on loans individually evaluated for losses and their related ACL offset partially by an increase related to the growth in loans receivable. The ACL on loans at September 30, 2022 and December 31, 2021 did not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.

During the nine months ended September 30, 2021, the ACL on loans decreased $21.9 million or 31.2%, due primarily to a reversal of provision for credit losses on loans of $21.8 million. The reversal of provision for credit losses was primarily driven by improvements in the economic forecast at September 30, 2021 as compared to the forecast at December 31, 2020.

A summary of the changes in the ACL on loans during the nine months ended September 30, 2022 and 2021 is as follows:


	Nine Months Ended September 30,
	2022		2021
	(In thousands)
Beginning balance	$	42,361	$	70,185
Charge-offs	(742)		(1,267)
Recoveries of loans previously charged-off	1,722		1,207
Reversal of provision for credit losses on loans	(1,252)		(21,808)
Ending balance	$	42,089	$	48,317

The following tables detail the activity in the ACL on loans by segment and class for the periods indicated:


	Three Months Ended September 30, 2022
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	14,033	$	—	$	455	$	180	$	14,668
Owner-occupied CRE	8,162		—		—		(443)		7,719
Non-owner occupied CRE	9,512		—		—		41		9,553
Total commercial business	31,707		—		455		(222)		31,940
Residential real estate	2,137		—		—		408		2,545
Real estate construction and land development:
Residential	1,081		—		5		208		1,294
Commercial and multifamily	2,203		—		102		1,505		3,810
Total real estate construction and land development	3,284		—		107		1,713		5,104
Consumer	2,568		(138)		50		20		2,500
Total	$	39,696	$	(138)	$	612	$	1,919	$	42,089


	Nine Months Ended September 30, 2022
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	17,777	$	(280)	$	876	$	(3,705)	$	14,668
Owner-occupied CRE	6,411		(36)		—		1,344		7,719
Non-owner occupied CRE	8,861		—		—		692		9,553
Total commercial business	33,049		(316)		876		(1,669)		31,940
Residential real estate	1,409		(30)		3		1,163		2,545
Real estate construction and land development:
Residential	1,304		—		19		(29)		1,294
Commercial and multifamily	3,972		—		155		(317)		3,810
Total real estate construction and land development	5,276		—		174		(346)		5,104
Consumer	2,627		(396)		669		(400)		2,500
Total	$	42,361	$	(742)	$	1,722	$	(1,252)	$	42,089


	Three Months Ended September 30, 2021
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	17,485	$	(743)	$	373	$	1,531	$	18,646
Owner-occupied CRE	8,562		—		12		(1,644)		6,930
Non-owner occupied CRE	10,630		—		—		(1,133)		9,497
Total commercial business	36,677		(743)		385		(1,246)		35,073
Residential real estate	1,153		—		—		(67)		1,086
Real estate construction and land development:
Residential	1,636		—		8		136		1,780
Commercial and multifamily	8,835		—		—		(1,530)		7,305
Total real estate construction and land development	10,471		—		8		(1,394)		9,085
Consumer	3,261		(204)		161		(145)		3,073
Total	$	51,562	$	(947)	$	554	$	(2,852)	$	48,317


	Nine Months Ended September 30, 2021
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	30,010	$	(757)	$	710	$	(11,317)	$	18,646
Owner-occupied CRE	9,486		—		25		(2,581)		6,930
Non-owner occupied CRE	10,112		—		—		(615)		9,497
Total commercial business	49,608		(757)		735		(14,513)		35,073
Residential real estate	1,591		—		—		(505)		1,086
Real estate construction and land development:
Residential	1,951		—		28		(199)		1,780
Commercial and multifamily	11,141		(1)		—		(3,835)		7,305
Total real estate construction and land development	13,092		(1)		28		(4,034)		9,085
Consumer	5,894		(509)		444		(2,756)		3,073
Total	$	70,185	$	(1,267)	$	1,207	$	(21,808)	$	48,317