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Allowance for Credit Losses (“ACL”) on Loans | 12 Months Ended
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Dec. 31, 2021
Credit Loss [Abstract] |
Allowance for Credit Losses (“ACL”) on Loans | Allowance for Credit Losses ("ACL") on Loans 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, current conditions, 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 $9.4 million at December 31, 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, construction, commercial and industrial, 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. These metrics are multiplied by the exposure at default, taking into consideration prepayments, to calculate the quantitative component of the ACL. The metrics are based on the migration of loans from performing to loss by credit risk 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 adjustments to address risks that may not be adequately represented in the risk rating migration model. 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 economic environment arising from the COVID-19 pandemic. These scenarios, which range from more benign to more severe economic outlooks, include a ‘most likely outcome’ (the “Baseline” scenario) and four less likely scenarios referred to as the “Upside” and “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 December 31, 2021 and December 31, 2020, the ACL for loans individually evaluated for impairment was $30,200 and $73,000, respectively. PCD Loans The Company adopted CECL using the prospective transition approach for PCD loans that were previously classified as PCI loans and accounted for under Accounting Standards Codification (“ASC”) Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,”. In accordance with the standard, management did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets was adjusted to reflect the addition of the $6.8 million of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis)will be accreted into interest income at the effective interest rate as of January 1, 2021. Upon adoption of CECL, the Company elected to maintain pools of loans that were previously accounted for under ASC Subtopic 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from existing pools if they are written off, paid off, or sold. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool's carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the noncredit premium or discount which will be amortized into interest income over the remaining life of the pool. Changes to the allowance for credit losses after adoption are recorded through provision expense. 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):
|  | Year Ended December 31, 2021
Balance at beginning of period |  | $ | 808 |
Impact of CECL adoption |  | 737
Balance at beginning of period |  | 1,545 |
Provision for credit losses |  | 307 |
Balance at end of period |  | $ | 1,852 |
A summary of changes in the allowance for credit losses for the years ended December 31, 2021, 2020, and 2019 follows (in thousands):
| December 31,
| 2021 |  | 2020 |  | 2019
Balance at beginning of year | $ | 37,607 |  |  | $ | 28,707 |  |  | $ | 27,497 |
Impact of CECL adoption | 10,353 |  |  | — |  |  | — |
Balance at January 1 | 47,960 |  |  | 28,707 |  |  | 27,497 |
(Benefit)/provision for credit losses | (6,184) |  |  | 12,742 |  |  | 22 |
Recoveries | 278 |  |  | 465 |  |  | 2,175 |
Charge-offs | (3,081) |  |  | (4,307) |  |  | (987) |
Balance at end of year | $ | 38,973 |  |  | $ | 37,607 |  |  | $ | 28,707 |
The following tables set forth activity in our allowance for credit losses by loan type, as of, and for the years ended, December 31, 2021, and December 31, 2020. The following tables also 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 allowance for credit losses that is allocated to each loan portfolio segment (in thousands):
| December 31, 2021
| Real Estate |  |  |  |  |  |  |  |  |
| Commercial (1) |  | One-to-Four Family |  | Home Equity and Lines of Credit |  | Construction and Land |  | Commercial and Industrial |  | Other |  | Total Loans (excluding PCD) |  | PCD |  | Total
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 33,005 |  |  | $ | 207 |  |  | $ | 260 |  |  | $ | 1,214 |  |  | $ | 1,842 |  |  | $ | 198 |  |  | $ | 36,726 |  |  | $ | 881 |  |  | $ | 37,607 |
Impact of CECL adoption | (1,949) |  |  | 5,233 |  |  | 419 |  |  | (921) |  |  | 947 |  |  | (188) |  |  | 3,541 |  |  | 6,812 |  |  | 10,353 |
Balance at January 1, 2021 | 31,056 |  |  | 5,440 |  |  | 679 |  |  | 293 |  |  | 2,789 |  |  | 10 |  |  | 40,267 |  |  | 7,693 |  |  | 47,960 |
Charge-offs | — |  |  | (21) |  |  | — |  |  | — |  |  | (646) |  |  | (3) |  |  | (670) |  |  | (2,411) |  |  | (3,081) |
Recoveries | 60 |  |  | 29 |  |  | 26 |  |  | — |  |  | 39 |  |  | 5 |  |  | 159 |  |  | 119 |  |  | 278 |
Provisions (credit) | (4,331) |  |  | (1,903) |  |  | (145) |  |  | (124) |  |  | 991 |  |  | (3) |  |  | (5,515) |  |  | (669) |  |  | (6,184) |
Ending balance | $ | 26,785 |  |  | $ | 3,545 |  |  | $ | 560 |  |  | $ | 169 |  |  | $ | 3,173 |  |  | $ | 9 |  |  | $ | 34,241 |  |  | $ | 4,732 |  |  | $ | 38,973 |
Ending balance: individually evaluated for impairment | $ | 25 |  |  | $ | 2 |  |  | $ | 2 |  |  | $ | — |  |  | $ | 1 |  |  | $ | — |  |  | $ | 30 |  |  | $ | — |  |  | $ | 30 |
Ending balance: collectively evaluated for impairment | $ | 26,760 |  |  | $ | 3,543 |  |  | $ | 558 |  |  | $ | 169 |  |  | $ | 3,172 |  |  | $ | 9 |  |  | $ | 34,211 |  |  | $ | — |  |  | $ | 34,211 |
Ending balance: PCD loans evaluated for impairment (2) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 4,732 |  |  | $ | 4,732 |
Loans, net: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance | $ | 3,326,662 |  |  | $ | 183,665 |  |  | $ | 109,956 |  |  | $ | 27,495 |  |  | $ | 141,005 |  |  | $ | 2,015 |  |  | $ | 3,790,798 |  |  | $ | 15,819 |  |  | $ | 3,806,617 |
Ending balance: individually evaluated for impairment | $ | 8,352 |  |  | $ | 1,562 |  |  | $ | 38 |  |  | $ | — |  |  | $ | 34 |  |  | $ | — |  |  | $ | 9,986 |  |  | $ | — |  |  | $ | 9,986 |
Ending balance: collectively evaluated for impairment | $ | 3,318,310 |  |  | $ | 182,103 |  |  | $ | 109,918 |  |  | $ | 27,495 |  |  | $ | 100,454 |  |  | $ | 2,015 |  |  | $ | 3,740,295 |  |  | $ | — |  |  | $ | 3,740,295 |
Ending balance: PCD loans evaluated for impairment (2) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 15,819 |  |  | $ | 15,819 |
PPP loans not evaluated for impairment (3) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 40,517 |  |  | $ | — |  |  | $ | 40,517 |  |  | $ | — |  |  | $ | 40,517 |
(1) Commercial includes commercial real estate loans collateralized by owner-occupied, non-owner occupied, and multifamily properties.
(2) Upon adoption of CECL, the Company elected to maintain pools of PCD loans that were previously accounted for under ASC 310-30, and will continue to evaluate PCD loans under this guidance.
(3) PPP loans are guaranteed by the SBA and therefore excluded from the allowance for credit losses.
The allowance for credit losses on loans increased to $39.0 million at December 31, 2021, compared to $37.6 million at December 31, 2020, primarily due to the adoption of ASU 2016-13, partially offset by an improvement in the economic forecast, specifically an improvement in the forecast for unemployment and gross domestic product, as well as an improvement in asset quality. The improvement in asset quality is primarily attributable to an improvement in risk ratings as loans previously modified for COVID-19 relief returned to consistent payment status.
| December 31, 2020
| Real Estate |  |  |  |  |  |  |  |  |  |
| Commercial |  | Multifamily |  | One-to-Four Family |  | Home Equity and Lines of Credit |  | Construction and Land |  | Commercial and Industrial |  | Other |  | Total Loans (excluding PCI) |  | PCI |  | Total
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 4,891 |  |  | $ | 20,203 |  |  | $ | 180 |  |  | $ | 317 |  |  | $ | 536 |  |  | $ | 1,640 |  |  | $ | 151 |  |  | $ | 27,918 |  |  | $ | 789 |  |  | $ | 28,707 |
Charge-offs | (4,213) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (94) |  |  | — |  |  | (4,307) |  |  | — |  |  | (4,307) |
Recoveries | 414 |  |  | — |  |  | 5 |  |  | 27 |  |  | — |  |  | 13 |  |  | 6 |  |  | 465 |  |  | — |  |  | 465 |
Provisions (credit) | 4,918 |  |  | 6,792 |  |  | 22 |  |  | (84) |  |  | 678 |  |  | 283 |  |  | 41 |  |  | 12,650 |  |  | 92 |  |  | 12,742 |
Ending balance | $ | 6,010 |  |  | $ | 26,995 |  |  | $ | 207 |  |  | $ | 260 |  |  | $ | 1,214 |  |  | $ | 1,842 |  |  | $ | 198 |  |  | $ | 36,726 |  |  | $ | 881 |  |  | $ | 37,607 |
Ending balance: individually evaluated for impairment | $ | 66 |  |  | $ | — |  |  | $ | — |  |  | $ | 3 |  |  | $ | — |  |  | $ | 4 |  |  | $ | — |  |  | $ | 73 |  |  | $ | — |  |  | $ | 73 |
Ending balance: collectively evaluated for impairment | $ | 5,944 |  |  | $ | 26,995 |  |  | $ | 207 |  |  | $ | 257 |  |  | $ | 1,214 |  |  | $ | 1,838 |  |  | $ | 198 |  |  | $ | 36,653 |  |  | $ | 881 |  |  | $ | 37,534 |
Loans, net: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance | $ | 717,566 |  |  | $ | 2,512,934 |  |  | $ | 212,222 |  |  | $ | 93,137 |  |  | $ | 74,351 |  |  | $ | 191,481 |  |  | $ | 3,029 |  |  | $ | 3,804,720 |  |  | $ | 18,518 |  |  | $ | 3,823,238 |
Ending balance: individually evaluated for impairment | $ | 10,650 |  |  | $ | 626 |  |  | $ | 1,903 |  |  | $ | 47 |  |  | $ | — |  |  | $ | 16 |  |  | $ | — |  |  | 13,242 |  |  | $ | — |  |  | $ | 13,242 |
Ending balance: collectively evaluated for impairment | $ | 706,916 |  |  | $ | 2,512,308 |  |  | $ | 210,319 |  |  | $ | 93,090 |  |  | $ | 74,351 |  |  | $ | 64,930 |  |  | $ | 3,029 |  |  | $ | 3,664,943 |  |  | $ | 18,518 |  |  | $ | 3,683,461 |
PPP loans not evaluated for impairment (1) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 126,535 |  |  | $ | — |  |  | $ | 126,535 |  |  | $ | — |  |  | $ | 126,535 |
(1) PPP loans are guaranteed by the SBA and therefore excluded from the allowance for credit losses. |  |

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