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Allowance for Credit Losses on Loans (“ACL”)
 6 Months Ended
Jun. 30, 2021
Credit Loss [Abstract]  
Allowance for Credit Losses on Loans (“ACL”) Allowance for Credit Losses on Loans (“ACL”)
On January 1, 2021, the Company adopted the CECL standard, which requires the measurement of expected credit losses for financial assets measured at amortized cost, including loans, and certain off-balance-sheet credit exposures. As a result of the adoption of CECL, the Company recorded a $10.4 million increase to its allowance for credit losses on loans, including $6.8 million related to PCD loans. For PCD loans, the allowance for credit losses recorded is recognized through a gross-up that increases the amortized cost basis of loans with a corresponding increase to the allowance for credit losses, and therefore results in no impact to shareholders' equity.

Under the CECL standard, the Company determines the ACL on loans based upon a consideration of its historical portfolio loss experience, current borrower-specific risk characteristics, forecasts of future economic conditions, reversion period, prepayments and qualitative adjustments. The allowance is measured on a collective (loan segment) 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. Accrued interest on loans is excluded from the calculation of the ACL due to the Company's non-accrual policy which results in the reversal of uncollectible accrued interest on non-accrual loans against interest income in a timely manner. Accrued interest receivable on loans held-for-investment totaled $12.6 million at June 30, 2021, and is reported in accrued interest receivable on the consolidated balance sheet.

The Company’s loan portfolio segmentation includes: multifamily, commercial real estate, one-to-four family residential mortgage, home equity and lines of credit, commercial and industrial, construction and other consumer loans.

Allowance for Collectively Evaluated Loans Held-for-Investment

In estimating the quantitative component of the allowance on a collective basis, the Company uses a risk rating migration model which calculates an expected life of loan loss percentage for each loan by generating probability of default and loss given default metrics. The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool, and the severity of loss, based on the aggregate net lifetime losses incurred using the Company's own historical loss experience and comparable peer data loss history. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) changes in lending policies and procedures; (ii) changes in local, regional, national, and international economic and business conditions and developments that affect the collectability of our portfolio, including the condition of various market segments; (iii) changes in the experience, ability and depth of lending management and other relevant staff; (iv) changes in the quality of our loan review system; (v) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (vi) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our existing portfolio.

The Company utilizes a two-year reasonable and supportable forecast period after which estimated losses revert to historical loss experience immediately for the remaining life of the loan. In establishing its estimate of expected credit losses, the Company utilizes five externally-sourced forward-looking economic scenarios developed by Moody's Analytics (“Moody's”).     

Management utilizes five different Moody's scenarios so as to incorporate uncertainties related to the unprecedented economic environment arising from the COVID-19 pandemic. These scenarios, which range from more benign to more severe economic outlooks, represent a ‘most likely outcome’ (the “Baseline” scenario) and four less likely scenarios referred to as the “Upside” scenarios and the “Downside” scenarios. Each scenario is assigned a weighting with a majority of the weighting placed on the Baseline scenario and lower weights placed on both the Upside and Downside scenarios. The weighting assigned by management is based on the economic outlook and available information at the reporting date. The model projects economic variables under each scenario based on detailed statistical analyses. The Company has identified and selected key variables that most closely correlated to its historical credit performance, which include: Gross domestic product, unemployment, and three collateral indices: the Commercial Property Price Index, the Commercial Property Price Apartment Index and the Case-Shiller Home Price Index.
Allowance for Individually Evaluated Loans

The Company measures specific reserves for individual loans that do not share common risk characteristics with other loans, consisting of all TDRs and non-accrual loans with an outstanding balance of $500,000 or greater. Loans individually evaluated for impairment are assessed to determine that the loan’s carrying value is not in excess of the estimated fair value of the collateral less cost to sell, if the loan is collateral-dependent, or the present value of the expected future cash flows, if the loan is not collateral-dependent. Management performs an evaluation of each impaired loan and generally obtains updated appraisals as part of the evaluation. In addition, management adjusts estimated fair values down to appropriately consider recent market conditions, our willingness to accept a lower sales price to effect a quick sale, and costs to dispose of any supporting collateral. Determining the estimated fair value of underlying collateral (and related costs to sell) can be difficult in illiquid real estate markets and is subject to significant assumptions and estimates. Management employs an independent third-party management firm that specializes in appraisal preparation and review to ascertain the reasonableness of updated appraisals. Projecting the expected cash flows under troubled debt restructurings which are not collateral-dependent is inherently subjective and requires, among other things, an evaluation of the borrower’s current and projected financial condition. Actual results may be significantly different than our projections and our established allowance for credit losses on these loans, which could have a material effect on our financial results. Individually impaired loans that have no impairment losses are not considered for collective allowances described earlier. At June 30, 2021 and December 31, 2020, the specific component of the ACL for loans individually evaluated for impairment was $68,000 and $73,000, respectively.

Allowance for Credit Losses – Off-Balance Sheet Exposures

An ACL for off-balance-sheet exposures represents an estimate of expected credit losses arising from off-balance sheet exposures such as loan commitments, standby letters of credit and unused lines of credit (loans on books already). Commitments to fund unused lines of credit are agreements to lend additional funds to customers as long as there have been no violations of any of the conditions established in the agreements (original or restructured). Commitments to originate loans generally have a fixed expiration or other termination clauses, which may require payment of a fee. Since some of these loan commitments are expected to expire without being drawn upon, total commitments do not necessarily represent future cash requirements. The reserve for off-balance sheet exposures is determined using the CECL reserve factor in the related funded loan segment, adjusted for an average historical funding rate. The allowance for credit losses for off-balance sheet credit exposures is recorded in other liabilities on the consolidated balance sheets and the corresponding provision is included in other non-interest expense.

The table below summarizes the allowance for credit losses for off-balance sheet credit exposures (in thousands):

Three Months Ended
June 30, 2021		Six Months Ended
June 30, 2021
Balance at beginning of period$1,702 $808 
Impact of CECL adoption— 737
Balance at beginning of period1,702 1,545 
Provision for credit losses106 263 
Balance at end of period$1,808 $1,808 
The following tables set forth activity in our allowance for credit losses on loans, by loan type, as of, and for the three and six months ended June 30, 2021, and June 30, 2020 (in thousands):

 
Three Months Ended June 30, 2021
 Real Estate     
 
Commercial (1)
One-to-Four FamilyConstruction and LandHome Equity and Lines of CreditCommercial and IndustrialOtherTotal Loans (excluding PCD)PCDTotal
Allowance for loan losses:
Beginning balance$28,882 $5,172 $269 $643 $2,940 $9 $37,915 $5,282 $43,197 
Charge-offs— — — — (12)— (12)— (12)
Recoveries— 1 — 1 7 — 9 — 9 
Provisions (credit)(2,342)(563)(10)19 (341)(2)(3,239)(462)(3,701)
Ending balance$26,540 $4,610 $259 $663 $2,594 $7 $34,673 $4,820 $39,493 
(1) Commercial includes commercial real estate loans collateralized by owner-occupied, non-owner occupied, and multifamily properties.

 
Three Months Ended June 30, 2020
 Real Estate     
 CommercialOne-to-Four FamilyConstruction and LandMultifamilyHome Equity and Lines of CreditCommercial and IndustrialOtherTotal Loans (excluding PCI)PCITotal
Allowance for loan losses:          
Beginning balance$5,444 $312 $671 $26,889 $574 $2,035 $86 $36,011 $789 $36,800 
Charge-offs(164)— — — — (57)— (221)— (221)
Recoveries13 2 — — — 3 2 20 — 20 
Provisions (credit)1,406 (42)266 354 (16)(135)88 1,921 — 1,921 
Ending balance$6,699 $272 $937 $27,243 $558 $1,846 $176 $37,731 $789 $38,520 
 Six Months Ended June 30, 2021
 Real Estate     
 
Commercial (1)
One-to-Four FamilyConstruction and LandHome Equity and Lines of CreditCommercial and IndustrialOtherTotal Loans (excluding PCD)PCDTotal
Beginning balance$33,005 $207 $1,214 $260 $1,842 $198 $36,726 $881 $37,607 
Impact of CECL adoption(1,949)5,233 (921)419 947 (188)3,541 6,812 10,353 
Balance at January 1, 202131,056 5,440 293 679 2,789 10 40,267 7,693 47,960 
Charge-offs— (21)— — (12)— (33)(2,411)(2,444)
Recoveries19 2 — 1 28 2 52 — 52 
Provisions (credit)(4,535)(811)(34)(17)(211)(5)(5,613)(462)(6,075)
Ending balance$26,540 $4,610 $259 $663 $2,594 $7 $34,673 $4,820 $39,493 
(1) Commercial includes commercial real estate loans collateralized by owner-occupied, non-owner occupied, and multifamily properties.

 
Six Months Ended June 30, 2020
 Real Estate     
 CommercialOne-to-Four FamilyConstruction and LandMultifamilyHome Equity and Lines of CreditCommercial and IndustrialOtherTotal Loans (excluding PCI)PCITotal
Allowance for loan losses:          
Beginning balance$4,891 $180 $536 $20,203 $317 $1,640 $151 $27,918 $789 $28,707 
Charge-offs(597)— — — — (94)— (691)— (691)
Recoveries388 2 — — 1 9 — 400 — 400 
Provisions (credit)2,017 90 401 7,040 240 291 25 10,104 — 10,104 
Ending balance$6,699 $272 $937 $27,243 $558 $1,846 $176 $37,731 $789 $38,520 
The following tables detail the amount of loans receivable held-for-investment, net of deferred loan fees and costs, that are evaluated, individually and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment, at June 30, 2021 and December 31, 2020 (in thousands):
 June 30, 2021
 Real Estate     
 
Commercial (1)
One-to-Four FamilyConstruction and LandHome Equity and Lines of CreditCommercial and IndustrialOtherTotal Loans (excluding PCD)PCDTotal
Allowance for credit losses on loans:
Ending balance: individually evaluated for impairment$61 $4 $— $2 $1 $— $68 $— $68 
Ending balance: collectively evaluated for impairment26,479 4,606 259 661 2,593 7 34,605 4,820 39,425 
Loans, net:         
Ending balance3,231,916 193,976 63,125 99,814 209,580 2,170 3,800,581 16,692 3,817,273 
Ending balance: individually evaluated for impairment9,716 1,610 1,107 43 14 — 12,490 — 12,490 
Ending balance: collectively evaluated for impairment3,222,200 192,366 62,018 99,771 76,858 2,170 3,655,383 16,692 3,672,075 
PPP loans not evaluated for impairment (2)
— — — — 132,708 — 132,708 — 132,708 

 December 31, 2020
 Real Estate     
 CommercialOne-to-Four FamilyConstruction and LandMultifamilyHome Equity and Lines of CreditCommercial and IndustrialOtherTotal Loans (excluding PCI)PCITotal
Allowance for credit losses on loans:
Ending balance: individually evaluated for impairment$66 $— $— $— $3 $4 $— $73 $— $73 
Ending balance: collectively evaluated for impairment5,944 207 1,214 26,995 257 1,838 198 36,653 881 37,534 
Loans, net:          
Ending balance717,566 212,222 74,351 2,512,934 93,137 191,481 3,029 3,804,720 18,518 3,823,238 
Ending balance: individually evaluated for impairment10,650 1,903 — 626 47 16 — 13,242 — 13,242 
Ending balance: collectively evaluated for impairment706,916 210,319 74,351 2,512,308 93,090 64,930 3,029 3,664,943 18,518 3,683,461 
PPP loans not evaluated for impairment (2)
— — — — — 126,535 — 126,535 — 126,535 
(1) Commercial includes commercial real estate loans collateralized by owner-occupied, non-owner occupied, and multifamily properties.
(2) PPP loans are guaranteed by the SBA and therefore excluded from the allowance for loan losses.