Allowance for Credit Losses (“ACL”) on Loans

6 Months Ended

Jun. 30, 2022

Allowance for Credit Losses (“ACL”) on 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 the potential default, taking into consideration estimated 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 whether 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, 2022 and December 31, 2021, the ACL for loans individually evaluated for impairment was $36,600 and $30,200, 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 Current Expected Credit Losses (“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, 2022		Six Months Ended June 30, 2022
Balance at beginning of period	$	2,131	$	1,852


Provision for credit losses	349		628
Balance at end of period	$	2,480	$	2,480

The allowance for credit losses on loans was $39.0 million at both June 30, 2022 and December 31, 2021

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, 2022, and June 30, 2021 (in thousands):


	Three Months Ended June 30, 2022
	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	$	27,247	$	3,589	$	679	$	166	$	2,954	$	9	$	34,644	$	4,630	$	39,274
Charge-offs	—		—		—		—		—		—		—		(525)		(525)
Recoveries	19		—		—		—		114		—		133		—		133
Provisions (credit)	799		(584)		123		119		(363)		2		96		53		149
Ending balance	$	28,065	$	3,005	$	802	$	285	$	2,705	$	11	$	34,873	$	4,158	$	39,031


	Three Months Ended June 30, 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	28,882		5,172		643		269		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)		19		(10)		(341)		(2)		(3,239)		(462)		(3,701)
Ending balance	$	26,540	$	4,610	$	663	$	259	$	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, 2022
	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	$	26,785	$	3,545	$	560	$	169	$	3,173	$	9	$	34,241	$	4,732	$	38,973
Charge-offs	—		—		—		—		(185)		—		(185)		(525)		(710)
Recoveries	97		—		—		—		119		—		216		—		216
Provisions (credit)	1,183		(540)		242		116		(402)		2		601		(49)		552
Ending balance	$	28,065	$	3,005	$	802	$	285	$	2,705	$	11	$	34,873	$	4,158	$	39,031


	Six Months Ended June 30, 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)		—		—		(12)		—		(33)		(2,411)		(2,444)
Recoveries	19		2		1		—		28		2		52				52
Provisions (credit)	(4,535)		(811)		(17)		(34)		(211)		(5)		(5,613)		(462)		(6,075)
Ending balance	$	26,540	$	4,610	$	663	$	259	$	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.

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 credit losses that is allocated to each loan portfolio segment, at June 30, 2022 and December 31, 2021 (in thousands):


	June 30, 2022
	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:
Ending balance: individually evaluated for impairment	$	16	$	—	$	3	$	—	$	18	$	—	$	37	$	—	$	37
Ending balance: collectively evaluated for impairment	28,048		3,005		800		285		2,687		11		34,836		—		34,836
Ending balance: PCD loans evaluated for impairment (2)	—		—		—		—		—		—		—		4,158		4,158
Loans, net:
Ending balance	$	3,621,188	$	185,376	$	137,868	$	18,555	$	133,422	$	2,312	$	4,098,721	$	13,136	$	4,111,857
Ending balance: individually evaluated for impairment	8,679		692		28		—		99				9,498		—		9,498
Ending balance: collectively evaluated for impairment	3,612,509		184,684		137,840		18,555		121,374		2,312		4,077,274		—		4,077,274
Ending balance: PCD loans evaluated for impairment (2)	—		—		—		—		—		—		—		13,136		13,136
PPP loans not evaluated for impairment (3)	—		—		—		—		11,949		—		11,949		—		11,949


	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:
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.