Allowance for Credit Losses on Loans

6 Months Ended

Jun. 30, 2023

Allowance for Credit Losses on LoansThe Company's methodology for determining the ACL on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. For a description of the Company's ACL policy, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently

Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2022 Annual Form 10-K.

GAAP requires the Company to develop reasonable and supportable forecasts of future conditions, and estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Company and the ultimate collectability of future cash flows over the life of a loan. The Company uses macroeconomic scenarios from an independent third party. These scenarios are based on past events, current conditions, and the likelihood of future events occurring. The Company’s ACL model at June 30, 2023 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout the U.S. economy, higher energy prices, and general uncertainty concerning future economic conditions, and the potential for recessionary conditions.

The Company recognizes that historical information used as the basis for determining future expected credit losses may not always, by itself, provide a sufficient basis for determining future expected credit losses. The Company, therefore, considers the need for qualitative adjustments to the ACL on a quarterly basis. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.

As of June 30, 2023, qualitative adjustments primarily relate to certain segments of the loan portfolio deemed by management to be of a higher-risk profile where management believes the quantitative component of the Company’s ACL model may not have fully captured the associated impact to the ACL. In addition, qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.

During the six months ended June 30, 2023, the ACL on loans increased $3.4 million, or 8.0%, to $46.4 million from $43.0 million at December 31, 2022 due primarily to a provision for credit losses on loans of $3.7 million driven by growth in loans receivable, net.

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


	Three Months Ended June 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	13,566	$	—	$	38	$	(316)	$	13,288
Owner-occupied CRE	7,525		—		—		978		8,503
Non-owner occupied CRE	8,846		—		—		636		9,482
Total commercial business	29,937		—		38		1,298		31,273
Residential real estate	2,902		—		—		(37)		2,865
Real estate construction and land development:
Residential	1,542		—		—		129		1,671
Commercial and multifamily	7,443		—		—		571		8,014
Total real estate construction and land development	8,985		—		—		700		9,685
Consumer	2,645		(144)		57		27		2,585
Total	$	44,469	$	(144)	$	95	$	1,988	$	46,408


	Six Months Ended June 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	13,962	$	(161)	$	89	$	(602)	$	13,288
Owner-occupied CRE	7,480		—		—		1,023		8,503
Non-owner occupied CRE	9,276		—		—		206		9,482
Total commercial business	30,718		(161)		89		627		31,273


	Six Months Ended June 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(In thousands)
Residential real estate	2,872		—		—		(7)		2,865
Real estate construction and land development:
Residential	1,654		—		—		17		1,671
Commercial and multifamily	5,409		—		—		2,605		8,014
Total real estate construction and land development	7,063		—		—		2,622		9,685
Consumer	2,333		(297)		90		459		2,585
Total	$	42,986	$	(458)	$	179	$	3,701	$	46,408


	Three Months Ended June 30, 2022
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(In thousands)
Commercial business:
Commercial and industrial	$	15,265	$	(117)	$	149	$	(1,264)	$	14,033
Owner-occupied CRE	7,085		—		—		1,077		8,162
Non-owner occupied CRE	9,582		—		—		(70)		9,512
Total commercial business	31,932		(117)		149		(257)		31,707
Residential real estate	1,803		—		—		334		2,137
Real estate construction and land development:
Residential	1,124		—		6		(49)		1,081
Commercial and multifamily	3,175		—		53		(1,025)		2,203
Total real estate construction and land development	4,299		—		59		(1,074)		3,284
Consumer	2,299		(132)		53		348		2,568
Total	$	40,333	$	(249)	$	261	$	(649)	$	39,696


	Six Months Ended June 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)	$	421	$	(3,885)	$	14,033
Owner-occupied CRE	6,411		(36)		—		1,787		8,162
Non-owner occupied CRE	8,861		—		—		651		9,512
Total commercial business	33,049		(316)		421		(1,447)		31,707
Residential real estate	1,409		(30)		3		755		2,137
Real estate construction and land development:
Residential	1,304		—		14		(237)		1,081
Commercial and multifamily	3,972		—		53		(1,822)		2,203
Total real estate construction and land development	5,276		—		67		(2,059)		3,284
Consumer	2,627		(258)		619		(420)		2,568
Total	$	42,361	$	(604)	$	1,110	$	(3,171)	$	39,696