Allowance for Credit Losses on Loans

9 Months Ended

Sep. 30, 2023

Allowance for Credit Loss [Abstract]

The 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, the likelihood of future events occurring and include consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. Economic forecast models for the current period are uploaded to the model, which targets certain forecasted macroeconomic factors, such as unemployment rate, gross domestic product, housing price index, commercial real estate price index, and certain rate and market indices. Macroeconomic factor multipliers are determined through regression analysis and applied to loss rates for each segment of loans with similar risk characteristics. Each of the forecasted segment balances is impacted by a mix of these macroeconomic factors. Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year. A macroeconomic sensitive model is developed for each segment given the current and forecasted conditions and a macroeconomic multiplier is calculated for each forecast period considering the forecasted losses as compared to the long-term average actual losses of the dataset. The impact of those macroeconomic factors on each segment, both positive or negative, using the reasonable and supportable period, are added to the calculated baseline loss allowance. After the reasonable and supportable period, forecasted loss rates revert to historical baseline loss levels over the predetermined reversion period on a straight-lined basis.

At September 30, 2023, the Company upgraded the version of the model used to calculate the ACL for collectively evaluated loans. This new version includes changes to the macroeconomic variables used for each of the loan segments to either add or eliminate variables based upon regression testing and the relationship to expected results and the lookback period

was changed to look back to 2000 as compared to 1991 to improve data relevance. The most significant changes to macroeconomic variables were in the commercial and industrial segment and commercial real estate segments. The commercial and industrial segment had previously used unemployment as a macroeconomic variable which was removed and replaced with a market index, rate index and real estate price index. The commercial real estate segments had previously used gross domestic product as a macroeconomic variable which was removed and replaced with a housing price index. The new version also added a segment for home equity lines of credit. The overall impact to the ACL for collectively evaluated loans due to this version change prior to applying qualitative adjustments was not considered to be material.

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 September 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 nine months ended September 30, 2023, the ACL on loans increased $3.9 million to $46.9 million from $43.0 million at December 31, 2022 due primarily to a provision for credit losses on loans of $3.1 million driven by growth in loans receivable, net and secondarily due to net recoveries of $895,000 as a result of a $1.1 million recovery from the payoff of a nonaccrual loan.

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


	Three Months Ended September 30, 2023
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	13,288	$	(15)	$	1,253	$	(2,781)	$	11,745
Owner-occupied CRE	8,503		—		—		191		8,694
Non-owner occupied CRE	9,482		—		—		1,184		10,666
Total commercial business	31,273		(15)		1,253		(1,406)		31,105
Residential real estate	2,865		—		—		684		3,549
Real estate construction and land development:
Residential	1,671		—		—		(163)		1,508
Commercial and multifamily	8,014		—		—		437		8,451
Total real estate construction and land development	9,685		—		—		274		9,959
Consumer	2,585		(123)		59		(187)		2,334
Total	$	46,408	$	(138)	$	1,312	$	(635)	$	46,947


	Nine Months Ended September 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	13,962	$	(176)	$	1,342	$	(3,383)	$	11,745
Owner-occupied CRE	7,480		—		—		1,214		8,694
Non-owner occupied CRE	9,276		—		—		1,390		10,666
Total commercial business	30,718		(176)		1,342		(779)		31,105


	Nine Months Ended September 30, 2023
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(Dollars in thousands)
Residential real estate	2,872		—		—		677		3,549
Real estate construction and land development:
Residential	1,654		—		—		(146)		1,508
Commercial and multifamily	5,409		—		—		3,042		8,451
Total real estate construction and land development	7,063		—		—		2,896		9,959
Consumer	2,333		(420)		149		272		2,334
Total	$	42,986	$	(596)	$	1,491	$	3,066	$	46,947


	Three Months Ended September 30, 2022
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(Dollars 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		(Reversal of) Provision for Credit Losses		Ending Balance
	(Dollars 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

The following table details the activity in the ACL on unfunded commitments during the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(Dollars in thousands)
Balance, beginning of period	$	1,777	$	997	$	1,744	$	2,607
(Reversal of) provision for credit losses on unfunded commitments	(243)		26		(210)		(1,584)
Balance, end of period	$	1,534	$	1,023	$	1,534	$	1,023