Loans Receivable and Allowance for Credit Losses | Loans Receivable and Allowance for Credit Losses The following is a summary of loans receivable by major category: September 30, 2021 December 31, 2020 Loan portfolio composition (Dollars in thousands) Real estate loans: Residential $ 60,051 $ 54,795 Commercial 8,602,519 8,425,959 Construction 246,087 291,380 Total real estate loans 8,908,657 8,772,134 Commercial business * 3,857,879 4,157,787 Residential mortgage 599,781 582,232 Consumer and other 52,374 51,060 Loans receivable 13,418,691 13,563,213 Allowance for credit losses (136,774) (206,741) Loans receivable, net of allowance for credit losses $ 13,281,917 $ 13,356,472 __________________________________ * Commercial business loans as of September 30, 2021 and December 31, 2020 include $336.6 million and $452.7 million, respectively, in SBA Paycheck Protection Program loans Loans receivable is stated at the amount of unpaid principal, adjusted for net deferred fees and costs, premiums and discounts, purchase accounting fair value adjustments, and allowance for credit losses. The Company had net deferred fees of $8.5 million and $3.6 million at September 30, 2021 and December 31, 2020, respectively. Net loan fees related to SBA Paycheck Protection Program (“PPP”) loans totaled $11.2 million at September 30, 2021 compared to $6.4 million at December 31, 2020 and included fees from the origination of SBA PPP loans net of deferred origination costs. The increase in deferred fees for SBA PPP loans was primarily due to the origination of $324.5 million in second round SBA PPP loans during the nine months ended September 30, 2021. The loan portfolio consists of four segments: real estate, commercial business, residential mortgage, and consumer and other loans. Real estate loans are extended for the purchase and refinance of commercial real estate and are generally secured by first deeds of trust and are collateralized by residential or commercial properties. Commercial business loans are loans provided to businesses for various purposes such as for working capital, purchasing inventory, debt refinancing, business acquisitions, international trade finance activities, and other business related financing needs and also include warehouse lines of credit and SBA PPP loans. Residential mortgage loans are extended for personal, family, or household use and are secured by a mortgage or deed of trust. Consumer and other loans consist of home equity, credit card, and other personal loans. Loans receivable declined $144.5 million from December 31, 2020 to $13.42 billion as of September 30, 2021. The decline in loans receivable during the nine months ended September 30, 2021 was largely impacted by a $344.4 million decline in warehouse lines of credit, offset by an increase in multifamily commercial real estate loans of $172.7 million during the same period. During the nine months ended September 30, 2021, the Company sold $148.9 million as part of its strategic plan to improve the credit quality of the loan portfolio. The Company also purchased $215.0 million in adjustable rate mortgages during the nine months ended September 30, 2021. The Company had $179.1 million in loans held for sale as of September 30, 2021 compared to $17.7 million at December 31, 2020. Loans held for sale at September 30, 2021 included $131.2 million in loans rated substandard which were transferred from loans receivable during the three months ended September 30, 2021. These loans are expected to be sold during the fourth quarter of 2021. The tables below details the activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2021 and 2020. Charge offs for the three and nine months ended September 30, 2021 included $2.9 million and $14.7 million, respectively, in loan charge offs that resulted from the strategic sale of loans with elevated credit risk. There were no such sales for the three and nine months ended September 30, 2020. Charge offs for the three and nine months ended September 30, 2021 also included $10.7 million in charge offs of criticized loans that were transferred to loans held for sale during the third quarter of 2021. Accrued interest receivables on loans totaled $41.8 million at September 30, 2021 and $54.6 million at December 31, 2020. The Company set aside an allowance on loan accrued interest receivables of $320 thousand at September 30, 2021 and $1.0 million at December 31, 2020. Real Estate Commercial Business Residential Mortgage Consumer and Other Total (Dollars in thousands) Three Months Ended September 30, 2021 Balance, beginning of period $ 155,253 $ 29,500 $ 3,612 $ 1,087 $ 189,452 Provision (credit) for credit losses (9,142) (1,011) — 153 (10,000) Loans charged off (41,655) (1,895) (923) (110) (44,583) Recoveries of charge offs 1,113 778 — 14 1,905 Balance, end of period $ 105,569 $ 27,372 $ 2,689 $ 1,144 $ 136,774 Nine Months Ended September 30, 2021 Balance, beginning of period $ 162,196 $ 39,155 $ 4,227 $ 1,163 $ 206,741 Provision (credit) for credit losses (2,570) (10,565) (615) 50 (13,700) Loans charged off (56,645) (3,077) (923) (251) (60,896) Recoveries of charge offs 2,588 1,859 — 182 4,629 Balance, end of period $ 105,569 $ 27,372 $ 2,689 $ 1,144 $ 136,774 Real Estate Commercial Business Residential Mortgage Consumer and Other Total (Dollars in thousands) Three Months Ended September 30, 2020 Balance, beginning of period $ 119,030 $ 35,493 $ 5,868 $ 1,380 $ 161,771 Provision (credit) for credit losses 15,748 7,265 (1,169) 156 22,000 Loans charged off (5,313) (800) — (237) (6,350) Recoveries of charge offs 159 2,251 — 18 2,428 Balance, end of period $ 129,624 $ 44,209 $ 4,699 $ 1,317 $ 179,849 Nine Months Ended September 30, 2020 Balance, beginning of period $ 53,593 $ 33,032 $ 5,925 $ 1,594 $ 94,144 CECL day 1 adoption 27,791 (1,022) (543) (26) 26,200 Provision (credit) for credit losses 55,773 11,663 (683) 747 67,500 Loans charged off (7,884) (4,294) — (1,033) (13,211) Recoveries of charge offs 351 4,830 — 35 5,216 Balance, end of period $ 129,624 $ 44,209 $ 4,699 $ 1,317 $ 179,849 The following tables break out the allowance for credit losses and loan balance by measurement methodology at September 30, 2021 and December 31, 2020: September 30, 2021 Real Estate Commercial Business Residential Mortgage Consumer and Other Total (Dollars in thousands) Allowance for credit losses: Individually evaluated $ 3,025 $ 3,376 $ 9 $ 27 $ 6,437 Collectively evaluated 102,544 23,996 2,680 1,117 130,337 Total $ 105,569 $ 27,372 $ 2,689 $ 1,144 $ 136,774 Loans outstanding: Individually evaluated $ 72,776 $ 19,660 $ 1,599 $ 261 $ 94,296 Collectively evaluated 8,835,881 3,838,219 598,182 52,113 13,324,395 Total $ 8,908,657 $ 3,857,879 $ 599,781 $ 52,374 $ 13,418,691 December 31, 2020 Real Estate Commercial Business Residential Mortgage Consumer and Other Total (Dollars in thousands) Allowance for credit losses: Individually evaluated $ 3,683 $ 3,575 $ 25 $ 42 $ 7,325 Collectively evaluated 158,513 35,580 4,202 1,121 199,416 Total $ 162,196 $ 39,155 $ 4,227 $ 1,163 $ 206,741 Loans outstanding: Individually evaluated $ 93,476 $ 25,706 $ 3,416 $ 605 $ 123,203 Collectively evaluated 8,678,658 4,132,081 578,816 50,455 13,440,010 Total $ 8,772,134 $ 4,157,787 $ 582,232 $ 51,060 $ 13,563,213 As of September 30, 2021 and December 31, 2020, reserves for unfunded loan commitments recorded in other liabilities were $1.4 million and $1.3 million, respectively. For the three and nine months ended September 30, 2021, the Company recorded additions to reserves for unfunded commitments recorded in credit related expenses totaling $0 and $105 thousand, respectively. For the three and nine months ended September 30, 2020, the Company recorded additions to reserves for unfunded commitments recorded in credit related expenses totaling $0 and $660 thousand, respectively. Generally, loans are placed on nonaccrual status if principal and/or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to customers whose financial conditions have deteriorated are considered for nonaccrual status whether or not the loan is 90 days or more past due. Generally, payments received on nonaccrual loans are recorded as principal reductions. Loans are returned to accrual status only when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company does not recognize interest income while loans are on nonaccrual status. The tables below represent the recorded investment of nonaccrual loans and loans past due 90 or more days and still on accrual status by class of loans and broken out by loans with a recorded ACL and those without a recorded ACL as of September 30, 2021 and December 31, 2020. September 30, 2021 Nonaccrual with No ACL Nonaccrual with an ACL Total Nonaccrual (1) Accruing Loans Past Due 90 or More Days (Dollars in thousands) Real estate – residential $ — $ — $ — $ — Real estate – commercial Retail 4,542 2,831 7,373 — Hotel & motel 4,241 9,576 13,817 — Gas station & car wash 575 1,433 2,008 — Mixed use — 6,954 6,954 1,704 Industrial & warehouse 2,013 2,314 4,327 — Other 888 6,306 7,194 1,889 Real estate – construction — — — — Commercial business 4,951 6,040 10,991 500 Residential mortgage — 1,599 1,599 392 Consumer and other — 117 117 82 Total $ 17,210 $ 37,170 $ 54,380 $ 4,567 December 31, 2020 Nonaccrual with No ACL Nonaccrual with an ACL Total Nonaccrual (1) Accruing Loans Past Due 90 or More Days (Dollars in thousands) Real estate – residential $ — $ — $ — $ — Real estate – commercial Retail 3,262 8,530 11,792 478 Hotel & motel 15,311 2,195 17,506 — Gas station & car wash 151 1,493 1,644 — Mixed use 1,883 788 2,671 — Industrial & warehouse 5,443 1,022 6,465 — Other 7,230 1,419 8,649 — Real estate – construction — 18,723 18,723 — Commercial business 5,319 8,592 13,911 — Residential mortgage 1,440 1,976 3,416 — Consumer and other — 461 461 136 Total $ 40,039 $ 45,199 $ 85,238 $ 614 __________________________________ (1) Total nonaccrual loans exclude the guaranteed portion of SBA loans that are in liquidation totaling $20.6 million and $26.5 million, at September 30, 2021 and December 31, 2020, respectively. The following table presents the amortized cost basis of collateral-dependent loans as of September 30, 2021 and December 31, 2020: September 30, 2021 Real Estate Collateral Other Collateral Total (Dollars in thousands) Real estate – residential $ — $ — $ — Real estate – commercial 44,061 — 44,061 Real estate – construction — — — Commercial business 1,992 6,463 8,455 Residential mortgage — — — Consumer and other — — — Total $ 46,053 $ 6,463 $ 52,516 December 31, 2020 Real Estate Collateral Other Collateral Total (Dollars in thousands) Real estate – residential $ — $ — $ — Real estate – commercial 55,945 — 55,945 Real estate – construction 8,122 — 8,122 Commercial business 7,818 6,312 14,130 Residential mortgage 1,440 — 1,440 Consumer and other 15 — 15 Total $ 73,340 $ 6,312 $ 79,652 Interest income reversals due to loans being placed on nonaccrual status were $1.1 million and $76 thousand for the three months ended September 30, 2021 and 2020, respectively. Nonaccrual interest income reversals for the nine months ended September 30, 2021 and 2020 were $2.8 million and $611 thousand, respectively. The following table presents the recorded investment of past due loans, including nonaccrual loans past due 30 or more days, by the number of days past due as of September 30, 2021 and December 31, 2020 by class of loans: As of September 30, 2021 As of December 31, 2020 30-59 Days 60-89 Days 90 or More Days Total 30-59 Days 60-89 Days 90 or More Days Total (Dollars in thousands) Real estate – residential $ — $ — $ — $ — $ — $ — $ — $ — Real estate – commercial Retail 2,364 3,354 4,336 10,054 852 8,141 10,276 19,269 Hotel & motel 425 1,522 9,615 11,562 62 1,401 14,744 16,207 Gas station & car wash — — 607 607 619 2,668 563 3,850 Mixed use 1,037 5,307 2,225 8,569 116 — 1,269 1,385 Industrial & warehouse 145 2,110 2,453 4,708 137 — 3,830 3,967 Other 2,034 1,235 3,838 7,107 2,738 545 3,000 6,283 Real estate – construction — — — — 8,122 — — 8,122 Commercial business 9,241 233 8,411 17,885 816 3,683 4,700 9,199 Residential mortgage 195 — 1,322 1,517 4,841 — 2,263 7,104 Consumer and other 28 15 82 125 797 21 595 1,413 Total Past Due $ 15,469 $ 13,776 $ 32,889 $ 62,134 $ 19,100 $ 16,459 $ 41,240 $ 76,799 The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. Homogeneous loans (i.e., home mortgage loans, home equity lines of credit, overdraft loans, express business loans, and automobile loans) are not risk rated and credit risk is analyzed largely by the number of days past due. This analysis is performed at least on a quarterly basis. The definitions for risk ratings are as follows: • Pass: Loans that meet a preponderance or more of the Company’s underwriting criteria and evidence an acceptable level of risk. • Special Mention: Loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. • Substandard: Loans that are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. Loans in this classification have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. • Doubtful: Loans that have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. In 2021, the Company completed the sale of $148.9 million in loans, most of which had elevated credit risk or were likely to exhibit credit issues in the future. Of the loans with elevated credit risk sold, $68.4 million were rated as special mention and $56.2 million were rated as substandard. The following table presents the amortized cost basis of loans receivable by class, credit quality indicator, and year of origination as of September 30, 2021 and December 31, 2020. As of September 30, 2021 Term Loan by Origination Year Revolving Loans Total 2021 2020 2019 2018 2017 Prior (Dollars in thousands) Real Estate - Residential Pass / not rated $ 16,184 $ 11,789 $ 11,747 $ 5,514 $ 3,796 $ 8,017 $ 2,281 $ 59,328 Special mention — — — — — 361 228 589 Substandard — — — 134 — — — 134 Doubtful / loss — — — — — — — — Subtotal $ 16,184 $ 11,789 $ 11,747 $ 5,648 $ 3,796 $ 8,378 $ 2,509 $ 60,051 Real Estate - Commercial Pass / not rated $ 1,738,636 $ 1,452,247 $ 1,280,364 $ 1,318,119 $ 965,008 $ 1,314,555 $ 101,893 $ 8,170,822 Special mention 6,357 8,263 49,900 19,138 46,715 79,561 5,971 215,905 Substandard 6,479 877 15,852 29,462 43,805 119,317 — 215,792 Doubtful / loss — — — — — — — — Subtotal $ 1,751,472 $ 1,461,387 $ 1,346,116 $ 1,366,719 $ 1,055,528 $ 1,513,433 $ 107,864 $ 8,602,519 Real Estate - Construction Pass / not rated $ 7,048 $ 59,503 $ 29,414 $ 40,788 $ 25,912 $ 15,983 $ 10,794 $ 189,442 Special mention — — — 45,950 4,708 5,987 — 56,645 Substandard — — — — — — — — Doubtful / loss — — — — — — — — Subtotal $ 7,048 $ 59,503 $ 29,414 $ 86,738 $ 30,620 $ 21,970 $ 10,794 $ 246,087 Commercial Business Pass / not rated $ 1,193,990 $ 545,116 $ 452,416 $ 138,691 $ 75,851 $ 82,834 $ 1,309,437 $ 3,798,335 Special mention 1,134 401 13,667 1,469 3,242 10,343 3,371 33,627 Substandard 1,665 1,150 1,764 1,999 4,818 5,650 8,871 25,917 Doubtful / loss — — — — — — — — Subtotal $ 1,196,789 $ 546,667 $ 467,847 $ 142,159 $ 83,911 $ 98,827 $ 1,321,679 $ 3,857,879 Residential Mortgage Pass / not rated $ 253,561 $ 3,824 $ 45,251 $ 140,682 $ 95,657 $ 59,206 $ — $ 598,181 Special mention — — — — — — — — Substandard — — 128 195 541 736 — 1,600 Doubtful / loss — — — — — — — — Subtotal $ 253,561 $ 3,824 $ 45,379 $ 140,877 $ 96,198 $ 59,942 $ — $ 599,781 Consumer and Other Pass / not rated $ 12,153 $ 5,671 $ 1,868 $ 1,670 $ 1,901 $ 7,512 $ 21,358 $ 52,133 Special mention — — — — — — — — Substandard — — — — — 241 — 241 Doubtful / loss — — — — — — — — Subtotal $ 12,153 $ 5,671 $ 1,868 $ 1,670 $ 1,901 $ 7,753 $ 21,358 $ 52,374 Total Loans Pass / not rated $ 3,221,572 $ 2,078,150 $ 1,821,060 $ 1,645,464 $ 1,168,125 $ 1,488,107 $ 1,445,763 $ 12,868,241 Special mention 7,491 8,664 63,567 66,557 54,665 96,252 9,570 306,766 Substandard 8,144 2,027 17,744 31,790 49,164 125,944 8,871 243,684 Doubtful / loss — — — — — — — — Total $ 3,237,207 $ 2,088,841 $ 1,902,371 $ 1,743,811 $ 1,271,954 $ 1,710,303 $ 1,464,204 $ 13,418,691 December 31, 2020 Term Loan by Origination Year Revolving Loans Total 2020 2019 2018 2017 2016 Prior (Dollars in thousands) Real Estate - Residential Pass / not rated $ 15,158 $ 13,924 $ 7,587 $ 4,316 $ 6,800 $ 3,460 $ 3,104 $ 54,349 Special mention — — — — — — 227 227 Substandard — — 139 — — 80 — 219 Doubtful / loss — — — — — — — — Subtotal $ 15,158 $ 13,924 $ 7,726 $ 4,316 $ 6,800 $ 3,540 $ 3,331 $ 54,795 Real Estate - Commercial Pass / not rated $ 1,548,595 $ 1,554,980 $ 1,533,802 $ 1,240,973 $ 767,318 $ 1,262,125 $ 130,595 $ 8,038,388 Special mention — 2,805 24,569 10,694 8,031 32,048 1,600 79,747 Substandard 126 14,233 28,938 37,174 50,371 173,788 3,194 307,824 Doubtful / loss — — — — — — — — Subtotal $ 1,548,721 $ 1,572,018 $ 1,587,309 $ 1,288,841 $ 825,720 $ 1,467,961 $ 135,389 $ 8,425,959 Real Estate - Construction Pass / not rated $ 35,743 $ 45,290 $ 103,794 $ 60,996 $ 5,740 $ 10,099 $ — $ 261,662 Special mention — — — — 5,771 5,224 — 10,995 Substandard — — — 10,601 — 8,122 — 18,723 Doubtful / loss — — — — — — — — Subtotal $ 35,743 $ 45,290 $ 103,794 $ 71,597 $ 11,511 $ 23,445 $ — $ 291,380 Commercial Business Pass / not rated $ 1,294,368 $ 584,453 $ 224,447 $ 117,708 $ 77,209 $ 43,674 $ 1,686,428 $ 4,028,287 Special mention 5,996 27,693 30,852 14,629 6,388 3,139 5,172 93,869 Substandard 2,430 1,323 5,539 4,394 6,158 5,463 10,323 35,630 Doubtful / loss — — 1 — — — — 1 Subtotal $ 1,302,794 $ 613,469 $ 260,839 $ 136,731 $ 89,755 $ 52,276 $ 1,701,923 $ 4,157,787 Residential Mortgage Pass / not rated $ 5,733 $ 90,958 $ 217,343 $ 168,827 $ 55,246 $ 40,554 $ — $ 578,661 Special mention — — — — — — — — Substandard — 122 536 561 1,715 637 — 3,571 Doubtful / loss — — — — — — — — Subtotal $ 5,733 $ 91,080 $ 217,879 $ 169,388 $ 56,961 $ 41,191 $ — $ 582,232 Consumer and Other Pass / not rated $ 8,309 $ 2,463 $ 1,818 $ 2,321 $ 4,756 $ 2,811 $ 27,890 $ 50,368 Special mention — — — 103 — — — 103 Substandard — — — — 55 532 2 589 Doubtful / loss — — — — — — — — Subtotal $ 8,309 $ 2,463 $ 1,818 $ 2,424 $ 4,811 $ 3,343 $ 27,892 $ 51,060 Total Loans Pass / not rated $ 2,907,906 $ 2,292,068 $ 2,088,791 $ 1,595,141 $ 917,069 $ 1,362,723 $ 1,848,017 $ 13,011,715 Special mention 5,996 30,498 55,421 25,426 20,190 40,411 6,999 184,941 Substandard 2,556 15,678 35,152 52,730 58,299 188,622 13,519 366,556 Doubtful / loss — — 1 — — — — 1 Total $ 2,916,458 $ 2,338,244 $ 2,179,365 $ 1,673,297 $ 995,558 $ 1,591,756 $ 1,868,535 $ 13,563,213 For the three and nine months ended September 30, 2021 and the twelve months ended December 31, 2020, there were no revolving loans converted to term loans. The Company may reclassify loans held for investment to loans held for sale in the event that the Company plans to sell loans that were originated with the intent to hold to maturity. Loans transferred from held for investment to held for sale are carried at the lower of cost or fair value. The breakdown of loans by type that were reclassified from held for investment to held for sale for the three and nine months ended September 30, 2021 and 2020 is presented in the following table: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Transfer of loans held for investment to held for sale (Dollars in thousands) Real estate - commercial $ 107,191 $ — $ 278,366 $ — Commercial business 78,990 — 88,650 — Residential mortgage 7,018 — 7,018 1,002 Total $ 193,199 $ — $ 374,034 $ 1,002 On January 1, 2020 the Company adopted ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”, or CECL. The Company calculates its ACL by estimating expected credit losses on a collective basis for loans that share similar risk characteristics. Loans that do not share similar risk characteristics with other loans are evaluated for credit losses on an individual basis. The Company uses a combination of a modeled and non-modeled approach that incorporates current and future economic conditions to estimate lifetime expected losses on a collective basis. The Company uses Probability of Default (“PD”), Loss Given Default (“LGD”), and Exposure at Default (“EAD”) methodologies with quantitative factors and qualitative considerations in calculation of the allowance for credit losses for collectively assessed loans. The Company uses a reasonable and supportable period of 2 years at which point loss assumptions revert back to historical loss information by means of 1 year reversion period. The ACL for the Company’s construction, credit card, and certain consumer loans is calculated based on a non-modeled approach utilizing historical loss rates to estimate losses. A non-modeled approach was chosen for these loans as fewer data points exist which could result in high levels of estimated loss volatility under a modeled approach. In aggregate, non-modeled loans represented less than 3% of the Company’s total loan portfolio as of September 30, 2021. The Company’s Economic Forecast Committee (“EFC”) reviews economic forecast scenarios that are incorporated in the Company’s ACL. The EFC reviews multiple scenarios provided to the Company by an independent third party and chooses a single scenario that best aligns with management’s expectation of future economic conditions. The forecast scenario contains certain macroeconomic variables that are incorporated into the Company’s modeling process, including GDP, unemployment rates, interest rates, and commercial real estate prices. As of September 30, 2021, the Company chose a forecast scenario that incorporates the effect of the COVID-19 pandemic and the expected economic recovery into estimates of future economic conditions. The forecast improved compared to forecasts used during the second quarter of 2021 with an overall increase in projected GDP growth and projected commercial real estate prices. The improvement to the economic forecasts reflect the current and projected effects of government stimulus packages, ongoing COVID-19 vaccinations, and the reopening of many businesses throughout the United States. Additionally, in order to systematically quantify the credit risk impact of other trends and changes within the loan portfolio, the Company utilizes qualitative adjustments to the modeled and non-modeled estimated loss approaches. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the Loss Migration Ratio by as much as 25 basis points for each loan type pool. This matrix considers the following seven factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council (“FFIEC”) Interagency Policy Statement on the Allowance for Loan and Lease Losses, updated to reflect the adoption of CECL: • Changes in lending policies and procedures, including underwriting standards and collection, charge off, and recovery practices; • Changes in the nature and volume of the loan portfolio; • Changes in the experience, ability, and depth of lending management and staff; • Changes in the trends of the volume and severity of past due loans, classified loans, nonaccrual loans, troubled debt restructurings, and other loan modifications; • Changes in the quality of the loan review system and the degree of oversight by the Directors; • The existence and effect of any concentrations of credit and changes in the level of such concentrations; and • The effect of external factors, such as competition, legal requirements, and regulatory requirements on the level of estimated losses in the loan portfolio. For loans which do not share similar risk characteristics such as nonaccrual and TDR loans above $500 thousand, the Company evaluates these loans on an individual basis in accordance with ASC 326. These nonaccrual and TDR loans are considered to have different risk profiles than performing loans and therefore are evaluated separately. The Company decided to collectively assess TDRs and nonaccrual loans with balances below $500 thousand along with the performing and accrual loans in order to reduce the operational burden of individually assessing small TDR and nonaccrual loans with immaterial balances. For individually assessed loans, the ACL is measured using either 1) the present value of future cash flows discounted at the loan’s effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral, if the loan is collateral dependent. For the collateral dependent loans, the Company obtains a new appraisal to determine the fair value of collateral. The appraisals are based on an “as-is” valuation. To ensure that appraised values remain current, the Company either obtains updated appraisals every twelve months from a qualified independent appraiser or an internal evaluation of the collateral is performed by qualified personnel. If the third party market data indicates that the value of the collateral property has declined since the most recent valuation date, management adjusts the value of the property downward to reflect current market conditions. If the fair value of the collateral is less than the amortized balance of the loan, the Company recognizes an ACL with a corresponding charge to the provision for credit losses. The Company maintains a separate ACL for its off-balance sheet unfunded loan commitments. The Company uses a funding rate to allocate the allowance to undrawn exposures. This funding rate is used as a credit conversion factor to capture how much undrawn lines of credit can potentially become drawn at any point. The funding rate is determined based on a lookback period of 8 quarters. Credit loss is not estimated for off-balance sheet credit exposures that are unconditionally cancellable by the Company. The following tables present a breakdown of loans by recorded ACL, broken out by loans evaluated individually and collectively at September 30, 2021 and December 31, 2020: As of September 30, 2021 Real Estate – Real Estate – Real Estate – Commercial Residential Consumer Total (Dollars in thousands) Individually evaluated loans $ — $ 72,776 $ — $ 19,660 $ 1,599 $ 261 $ 94,296 ACL on individually evaluated loans $ — $ 3,025 $ — $ 3,376 $ 9 $ 27 $ 6,437 Individually evaluated loans ACL coverage N/A 4.16 % N/A 17.17 % 0.56 % 10.34 % 6.83 % Collectively evaluated loans $ 60,051 $ 8,529,743 $ 246,087 $ 3,838,219 $ 598,182 $ 52,113 $ 13,324,395 ACL on collectively evaluated loans $ 371 $ 100,536 $ 1,637 $ 23,996 $ 2,680 $ 1,117 $ 130,337 Collectively evaluated loans ACL coverage 0.62 % 1.18 % 0.67 % 0.63 % 0.45 % 2.14 % 0.98 % Total loans $ 60,051 $ 8,602,519 $ 246,087 $ 3,857,879 $ 599,781 $ 52,374 $ 13,418,691 Total ACL $ 371 $ 103,561 $ 1,637 $ 27,372 $ 2,689 $ 1,144 $ 136,774 Total ACL to total loans 0.62 % 1.20 % 0.67 % 0.71 % 0.45 % 2.18 % 1.02 % As of December 31, 2020 Real Estate – Real Estate – Real Estate – Commercial Residential Consumer Total (Dollars in thousands) Individually evaluated loans $ — $ 74,753 $ 18,723 $ 25,706 $ 3,416 $ 605 $ 123,203 ACL on individually evaluated loans $ — $ 2,862 $ 821 $ 3,575 $ 25 $ 42 $ 7,325 Individually evaluated loans ACL coverage N/A 3.83 % 4.38 % 13.91 % 0.73 % 6.94 % 5.95 % Collectively evaluated loans $ 54,795 $ 8,351,206 $ 272,657 $ 4,132,081 $ 578,816 $ 50,455 $ 13,440,010 ACL on collectively evaluated loans $ 391 $ 156,665 $ 1,457 $ 35,580 $ 4,202 $ 1,121 $ 199,416 Collectively evaluated loans ACL coverage 0.71 % 1.88 % 0.53 % 0.86 % 0.73 % 2.22 % 1.48 % Total loans $ 54,795 $ 8,425,959 $ 291,380 $ 4,157,787 $ 582,232 $ 51,060 $ 13,563,213 Total ACL $ 391 $ 159,527 $ 2,278 $ 39,155 $ 4,227 $ 1,163 $ 206,741 Total ACL to total loans 0.71 % 1.89 % 0.78 % 0.94 % 0.73 % 2.28 % 1.52 % Under certain circumstances, the Company provides borrowers relief through loan modifications. These modifications are either temporary in nature (“temporary modifications”) or are more substantive. The temporary modifications generally consist of interest only payments for a three six TDR loans are individually evaluated in accordance with ASC 310 and ASC 326. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on their debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy. At September 30, 2021, total TDR loans were $54.4 million, compared to $51.6 million at December 31, 2020. The balance of loans with modified terms due to COVID-19 as of September 30, 2021 totaled $122.0 million. The majority of these loans were modified in accordance with Section 4013 of the CARES Act. The CARES Act provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to TDR for a limited period of time to account for the effects of COVID-19 if (i) the loan modification is made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. As such, all modified loans that met the criteria outlined within Section 4013 of the CARES Act were not classified as TDR loans as of September 30, 2021 and December 31, 2020, unless the loans were TDR prior to the COVID-19 modification or borrowers were identified to be experiencing financial difficulty prior to the COVID-19 pandemic. As of September 30, 2021, real estate loans accounted for approximately 95% of the loans modified due to hardship from the COVID-19 pandemic. The modifications consisted of full payment deferrals, interest only payments, and a hybrid of full payment deferrals for a period of time followed by interest only payments (see “COVID-19 Related Loan Modifications” in the Financial Condition section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information). A summary of the recorded investment of TDR loans on accrual and nonaccrual status by type of concession as of September 30, 2021 and December 31, 2020 is presented below: As of September 30, 2021 TDR Loans on Accrual Status TDR Loans on Nonaccrual Status Total TDRs Real Estate Commercial Business Residential Mortgage Other Real Estate Commercial Business Residential Mortgage Other (Dollars in thousands) Payment concession $ 8,034 $ 808 $ — $ 55 $ 9,145 $ 473 $ — $ — $ 18,515 Maturity / amortization concession 17,567 7,275 — 158 285 3,257 — 117 28,659 Rate concession 5,254 358 — — 244 1,417 — — 7,273 Total $ 30,855 $ 8,441 $ — $ 213 $ 9,674 $ 5,147 $ — $ 117 $ 54,447 As of December 31, 2020 TDR Loans on Accrual Status TDR Loans on Nonaccrual Status Total Real Estate Commercial Business Residential Mortgage Other Real Estate Commercial Business Residential Mortgage Other (Dollars in thousands) Payment concession $ 8,328 $ 814 $ — $ 58 $ 7,074 $ 471 $ — $ — $ 16,745 Maturity / amortization concession 11,331 10,219 — 114 925 3,814 — 117 26,520 Rate concession 6,112 378 — — 424 1,430 — — 8,344 Total $ 25,771 $ 11,411 $ — $ 172 $ 8 |