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, 2022 December 31, 2021 (Dollars in thousands) Loan portfolio composition Real estate loans: Residential $ 75,488 $ 69,199 Commercial 9,216,194 8,816,080 Construction 213,211 220,652 Total real estate loans 9,504,893 9,105,931 Commercial business * 5,124,421 4,208,674 Residential mortgage 823,809 579,626 Consumer and other 38,064 58,512 Loans receivable 15,491,187 13,952,743 Allowance for credit losses (160,561) (140,550) Loans receivable, net of allowance for credit losses $ 15,330,626 $ 13,812,193 __________________________________ * Commercial business loans as of September 30, 2022 and December 31, 2021 include $5.9 million and $228.1 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, and purchase accounting fair value adjustments. The Company had net deferred fees of $9.3 million and $6.2 million at September 30, 2022 and December 31, 2021, respectively. Net loan fees related to SBA Paycheck Protection Program (“PPP”) loans totaled $130 thousand at September 30, 2022 compared to $6.7 million at December 31, 2021 and included fees from the origination of SBA PPP loans net of deferred origination costs. 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 includes 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 increased $1.54 billion from December 31, 2021 to $15.49 billion as of September 30, 2022. The increase in loans receivable during the nine months ended September 30, 2022 was due to an increase in all loan types apart from consumer and other loans. Record loan originations in 2022 contributed to the growth of the Company’s loan portfolio as of September 30, 2022 compared to December 31, 2021. The Company had $42.0 million in loans held for sale as of September 30, 2022 compared to $99.0 million at December 31, 2021. Loans held for sale at September 30, 2022 consisted of $41.1 million in SBA guaranteed loans and $900 thousand in residential mortgage loans. The tables below detail the activity in the allowance for credit losses (“ACL”) by portfolio segment for the three and nine months ended September 30, 2022 and 2021. Recoveries for the nine months ended September 30, 2022 included $17.3 million in recoveries from a single lending relationship that had $29.6 million in charge-offs in the third quarter of 2021. Real Estate Commercial Business Residential Mortgage Consumer and Other Total (Dollars in thousands) Three Months Ended September 30, 2022 Balance, beginning of period $ 99,824 $ 44,852 $ 6,079 $ 825 $ 151,580 Provision (credit) for credit losses 109 8,276 837 (22) 9,200 Loans charged off (185) (262) (22) (81) (550) Recoveries of charge offs 176 147 — 8 331 Balance, end of period $ 99,924 $ 53,013 $ 6,894 $ 730 $ 160,561 Nine Months Ended September 30, 2022 Balance, beginning of period $ 108,440 $ 27,811 $ 3,316 $ 983 $ 140,550 Provision (credit) for credit losses (25,433) 23,327 3,600 (94) 1,400 Loans charged off (1,936) (611) (22) (196) (2,765) Recoveries of charge offs 18,853 2,486 — 37 21,376 Balance, end of period $ 99,924 $ 53,013 $ 6,894 $ 730 $ 160,561 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 The following tables break out the allowance for credit losses and loan balance by measurement methodology at September 30, 2022 and December 31, 2021: September 30, 2022 Real Estate Commercial Business Residential Mortgage Consumer and Other Total (Dollars in thousands) Allowance for credit losses: Individually evaluated $ 2,956 $ 4,207 $ 15 $ 21 $ 7,199 Collectively evaluated 96,968 48,806 6,879 709 153,362 Total $ 99,924 $ 53,013 $ 6,894 $ 730 $ 160,561 Loans outstanding: Individually evaluated $ 62,936 $ 17,553 $ 8,731 $ 429 $ 89,649 Collectively evaluated 9,441,957 5,106,868 815,078 37,635 15,401,538 Total $ 9,504,893 $ 5,124,421 $ 823,809 $ 38,064 $ 15,491,187 December 31, 2021 Real Estate Commercial Business Residential Mortgage Consumer and Other Total (Dollars in thousands) Allowance for credit losses: Individually evaluated $ 2,025 $ 3,056 $ 11 $ 23 $ 5,115 Collectively evaluated 106,415 24,755 3,305 960 135,435 Total $ 108,440 $ 27,811 $ 3,316 $ 983 $ 140,550 Loans outstanding: Individually evaluated $ 83,347 $ 19,407 $ 3,470 $ 409 $ 106,633 Collectively evaluated 9,022,584 4,189,267 576,156 58,103 13,846,110 Total $ 9,105,931 $ 4,208,674 $ 579,626 $ 58,512 $ 13,952,743 As of September 30, 2022 and December 31, 2021, reserves for unfunded loan commitments recorded in other liabilities were $1.2 million and $1.1 million, respectively. For the three months ended September 30, 2022, the Company recorded a credit for unfunded commitments in credit related expenses totaling $250 thousand and recorded for the nine months ended September 30, 2022, additions to reserves for unfunded commitments totaling $130 thousand. For the three and nine months ended September 30, 2021, the Company recorded additions to reserves for unfunded commitments totaling $0 and $105 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 amortized cost 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, 2022 and December 31, 2021. September 30, 2022 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 20,546 4,687 25,233 — Hotel & motel 5,815 4,062 9,877 4,618 Gas station & car wash 2,847 1,011 3,858 — Mixed use 781 3,258 4,039 — Industrial & warehouse 129 919 1,048 — Other 1,830 1,922 3,752 — Real estate – construction — — — — Commercial business 1,625 6,050 7,675 419 Residential mortgage 5,967 2,764 8,731 — Consumer and other — 358 358 269 Total $ 39,540 $ 25,031 $ 64,571 $ 5,306 December 31, 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 7,586 2,604 10,190 — Hotel & motel 5,471 6,564 12,035 — Gas station & car wash 575 1,267 1,842 — Mixed use 5,307 1,412 6,719 — Industrial & warehouse 687 1,897 2,584 — Other 1,233 5,153 6,386 215 Real estate – construction — — — — Commercial business 4,726 6,299 11,025 1,494 Residential mortgage 275 3,195 3,470 — Consumer and other — 365 365 422 Total $ 25,860 $ 28,756 $ 54,616 $ 2,131 __________________________________ (1) Total nonaccrual loans exclude the guaranteed portion of SBA loans that are in liquidation totaling $9.9 million and $19.5 million, at September 30, 2022 and December 31, 2021, respectively. The following table presents the amortized cost of collateral dependent loans as of September 30, 2022 and December 31, 2021: September 30, 2022 December 31, 2021 Real Estate Collateral Other Collateral Total Real Estate Collateral Other Collateral Total (Dollars in thousands) Real estate – residential $ — $ — $ — $ — $ — $ — Real estate – commercial 47,272 — 47,272 65,590 — 65,590 Real estate – construction — — — — — — Commercial business 1,626 5,795 7,421 1,767 6,615 8,382 Residential mortgage 5,967 — 5,967 — — — Consumer and other — — — — — — Total $ 54,865 $ 5,795 $ 60,660 $ 67,357 $ 6,615 $ 73,972 Collateral on loans is a significant portion of what secures collateral dependent loans and significant changes to the fair value of the collateral can potentially impact ACL. During the nine months ended September 30, 2022, the Company did not have any significant changes to the extent to which collateral secures its collateral dependent loans due to general deterioration or from other factors. Accrued interest receivables on loans totaled $35.7 million at September 30, 2022 and $36.2 million at December 31, 2021. With the adoption of CECL, the Company elected not to consider accrued interest receivable in its estimates of expected credit losses because the Company writes off uncollectible accrued interest receivable in a timely manner. The Company considers writing off accrued interest amounts once the amounts become 90 days past due to be considered within a timely manner. The Company has elected to write off accrued interest receivables by reversing interest income. The following table presents interest income reversals, due to loans being placed on nonaccrual status, by loan segment for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in thousands) Real estate $ 154 $ 1,071 $ 1,406 $ 2,761 Commercial business 21 12 47 49 Residential mortgage 153 — 292 (4) Consumer and other — — — — Total $ 328 $ 1,083 $ 1,745 $ 2,806 The following table presents the amortized cost of past due loans, including nonaccrual loans past due 30 or more days, by the number of days past due as of September 30, 2022 and December 31, 2021 by class of loans: September 30, 2022 December 31, 2021 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 5,086 — 5,412 10,498 1,250 927 9,167 11,344 Hotel & motel 222 4,708 8,456 13,386 9,320 4,148 4,760 18,228 Gas station & car wash — — 1,093 1,093 575 — 832 1,407 Mixed use — — 3,659 3,659 1,124 — 5,625 6,749 Industrial & warehouse 32 86 408 526 247 — 785 1,032 Other — 236 2,021 2,257 1,198 6,522 3,185 10,905 Real estate – construction — — — — — — — — Commercial business 6,070 958 3,132 10,160 1,792 2,362 6,482 10,636 Residential mortgage 1,764 241 4,795 6,800 14,177 — 3,099 17,276 Consumer and other 273 46 627 946 59 21 787 867 Total Past Due $ 13,447 $ 6,275 $ 29,603 $ 49,325 $ 29,742 $ 13,980 $ 34,722 $ 78,444 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. The following table presents the amortized cost basis of loans receivable by class, credit quality indicator, and year of origination as of September 30, 2022 and December 31, 2021. September 30, 2022 Term Loan by Origination Year Revolving Loans Total 2022 2021 2020 2019 2018 Prior (Dollars in thousands) Real Estate - Residential Pass / not rated $ 14,306 $ 25,324 $ 9,743 $ 9,085 $ 3,990 $ 7,146 $ 4,670 $ 74,264 Special mention — — — — — — — — Substandard — — — — 662 562 — 1,224 Doubtful / loss — — — — — — — — Subtotal $ 14,306 $ 25,324 $ 9,743 $ 9,085 $ 4,652 $ 7,708 $ 4,670 $ 75,488 Real Estate - Commercial Pass / not rated $ 2,083,073 $ 2,195,049 $ 1,328,885 $ 1,055,329 $ 1,039,822 $ 1,272,491 $ 93,323 $ 9,067,972 Special mention — 11,640 1,714 — 4,529 3,871 202 21,956 Substandard 1,017 8,716 2,737 19,041 21,684 72,794 277 126,266 Doubtful / loss — — — — — — — — Subtotal $ 2,084,090 $ 2,215,405 $ 1,333,336 $ 1,074,370 $ 1,066,035 $ 1,349,156 $ 93,802 $ 9,216,194 Real Estate - Construction Pass / not rated $ 1,435 $ 38,964 $ 62,814 $ 35,424 $ 8,053 $ 4,607 $ 89 $ 151,386 Special mention — — — — — 16,144 — 16,144 Substandard 45,681 — — — — — — 45,681 Doubtful / loss — — — — — — — — Subtotal $ 47,116 $ 38,964 $ 62,814 $ 35,424 $ 8,053 $ 20,751 $ 89 $ 213,211 Commercial Business Pass / not rated $ 1,920,005 $ 1,214,335 $ 327,471 $ 351,613 $ 74,395 $ 103,832 $ 1,069,033 $ 5,060,684 Special mention — 20,390 13,621 119 2,099 485 4,585 41,299 Substandard 252 3,214 6,324 2,229 1,206 5,268 3,945 22,438 Doubtful / loss — — — — — — — — Subtotal $ 1,920,257 $ 1,237,939 $ 347,416 $ 353,961 $ 77,700 $ 109,585 $ 1,077,563 $ 5,124,421 Residential Mortgage Pass / not rated $ 346,195 $ 289,014 $ 1,395 $ 34,293 $ 65,713 $ 78,468 $ — $ 815,078 Special mention — — — — — — — — Substandard — — — 107 387 8,237 — 8,731 Doubtful / loss — — — — — — — — Subtotal $ 346,195 $ 289,014 $ 1,395 $ 34,400 $ 66,100 $ 86,705 $ — $ 823,809 Consumer and Other Pass / not rated $ 2,837 $ 1,047 $ 3,816 $ 1,355 $ 1,185 $ 7,026 $ 20,425 $ 37,691 Special mention — — — — — — — — Substandard — — — — — 373 — 373 Doubtful / loss — — — — — — — — Subtotal $ 2,837 $ 1,047 $ 3,816 $ 1,355 $ 1,185 $ 7,399 $ 20,425 $ 38,064 Total Loans Pass / not rated $ 4,367,851 $ 3,763,733 $ 1,734,124 $ 1,487,099 $ 1,193,158 $ 1,473,570 $ 1,187,540 $ 15,207,075 Special mention — 32,030 15,335 119 6,628 20,500 4,787 79,399 Substandard 46,950 11,930 9,061 21,377 23,939 87,234 4,222 204,713 Doubtful / loss — — — — — — — — Total $ 4,414,801 $ 3,807,693 $ 1,758,520 $ 1,508,595 $ 1,223,725 $ 1,581,304 $ 1,196,549 $ 15,491,187 December 31, 2021 Term Loan by Origination Year Revolving Loans Total 2021 2020 2019 2018 2017 Prior (Dollars in thousands) Real Estate - Residential Pass / not rated $ 26,093 $ 10,471 $ 11,442 $ 4,952 $ 2,987 $ 7,260 $ 4,403 $ 67,608 Special mention — — — 534 — 924 — 1,458 Substandard — — — 133 — — — 133 Doubtful / loss — — — — — — — — Subtotal $ 26,093 $ 10,471 $ 11,442 $ 5,619 $ 2,987 $ 8,184 $ 4,403 $ 69,199 Real Estate - Commercial Pass / not rated $ 2,451,662 $ 1,415,909 $ 1,252,851 $ 1,238,425 $ 883,790 $ 1,086,182 $ 89,501 $ 8,418,320 Special mention 5,553 8,882 39,567 20,203 27,204 73,090 5,970 180,469 Substandard 7,436 7,718 17,533 25,330 53,000 105,995 279 217,291 Doubtful / loss — — — — — — — — Subtotal $ 2,464,651 $ 1,432,509 $ 1,309,951 $ 1,283,958 $ 963,994 $ 1,265,267 $ 95,750 $ 8,816,080 Real Estate - Construction Pass / not rated $ 16,545 $ 67,628 $ 32,044 $ 32,908 $ 8,292 $ 5,685 $ 89 $ 163,191 Special mention — — — 45,996 5,074 6,391 — 57,461 Substandard — — — — — — — — Doubtful / loss — — — — — — — — Subtotal $ 16,545 $ 67,628 $ 32,044 $ 78,904 $ 13,366 $ 12,076 $ 89 $ 220,652 Commercial Business Pass / not rated $ 1,755,104 $ 431,145 $ 461,460 $ 98,812 $ 53,629 $ 70,294 $ 1,299,372 $ 4,169,816 Special mention 1,379 523 4,780 2,897 550 5,083 2,594 17,806 Substandard 3,796 941 2,308 1,651 3,803 3,461 5,092 21,052 Doubtful / loss — — — — — — — — Subtotal $ 1,760,279 $ 432,609 $ 468,548 $ 103,360 $ 57,982 $ 78,838 $ 1,307,058 $ 4,208,674 Residential Mortgage Pass / not rated $ 282,191 $ 1,420 $ 40,377 $ 112,743 $ 85,446 $ 53,979 $ — $ 576,156 Special mention — — — — — — — — Substandard 275 — 128 394 541 2,132 — 3,470 Doubtful / loss — — — — — — — — Subtotal $ 282,466 $ 1,420 $ 40,505 $ 113,137 $ 85,987 $ 56,111 $ — $ 579,626 Consumer and Other Pass / not rated $ 19,203 $ 5,347 $ 1,783 $ 1,699 $ 1,769 $ 6,165 $ 22,095 $ 58,061 Special mention — — — — — — — — Substandard — — — — — 451 — 451 Doubtful / loss — — — — — — — — Subtotal $ 19,203 $ 5,347 $ 1,783 $ 1,699 $ 1,769 $ 6,616 $ 22,095 $ 58,512 Total Loans Pass / not rated $ 4,550,798 $ 1,931,920 $ 1,799,957 $ 1,489,539 $ 1,035,913 $ 1,229,565 $ 1,415,460 $ 13,453,152 Special mention 6,932 9,405 44,347 69,630 32,828 85,488 8,564 257,194 Substandard 11,507 8,659 19,969 27,508 57,344 112,039 5,371 242,397 Doubtful / loss — — — — — — — — Total $ 4,569,237 $ 1,949,984 $ 1,864,273 $ 1,586,677 $ 1,126,085 $ 1,427,092 $ 1,429,395 $ 13,952,743 For the three and nine months ended September 30, 2022 and the twelve months ended December 31, 2021, 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, 2022 and 2021 is presented in the following table: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Transfer of loans held for investment to held for sale (Dollars in thousands) Real estate - commercial $ 36,704 $ 107,191 $ 192,190 $ 278,366 Commercial business 10,328 78,990 27,097 88,650 Residential mortgage — 7,018 — 7,018 Total $ 47,032 $ 193,199 $ 219,287 $ 374,034 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 differentiates its loan segments based on shared risk characteristics for which allowance for credit losses is measured on a collective basis. Risk Characteristics Real estate Property type, location, owner occupied status Commercial business Delinquency status, risk rating, industry type Residential mortgage FICO score, LTV, delinquency status, maturity date, collateral value, location Consumer and other Historical losses 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. Included in the quantitative portion of the analysis of the allowance for credit losses are key inputs including borrowers’ net operating income, debt coverage ratios, real estate collateral values, as well as key inputs that are more subjective or require management’s judgement including key macroeconomic variables from Moody’s forecast scenarios including GDP, unemployment rates, interest rates, and commercial real estate prices. These key inputs are utilized in the Company’s models to develop PD and LGD assumptions used in the calculation of estimated quantitative losses. 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 2% of the Company’s total loan portfolio as of September 30, 2022. 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. As of September 30, 2022, the Company utilized the Consensus economic forecast scenario from Moody’s as it best aligned with management’s expectations of future forecasts. The Company also utilized Moody’s Consensus economic forecast for the calculation of the December 31, 2021 ACL. The Consensus economic forecast projects that GDP growth will decline to less than 1.0% in 2023 then grow to over 2.0% by the end of 2024 with unemployment rising to the peak of 4.0% in 2023 and 2024. Commercial real estate prices in the Consensus scenario is expected to see a substantial reduction with the commercial real estate price index declining to -0.4% for 2023 before increasing to 4.5% for 2024. 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 $1.0 million, 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 $1.0 million 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 an estimated funding rate to allocate an 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, 2022 and December 31, 2021: September 30, 2022 Real Estate – Real Estate – Real Estate – Commercial Residential Consumer Total (Dollars in thousands) Individually evaluated loans $ — $ 62,936 $ — $ 17,553 $ 8,731 $ 429 $ 89,649 ACL on individually evaluated loans $ — $ 2,956 $ — $ 4,207 $ 15 $ 21 $ 7,199 Individually evaluated loans ACL coverage N/A 4.70 % N/A 23.97 % 0.17 % 4.90 % 8.03 % Collectively evaluated loans $ 75,488 $ 9,153,258 $ 213,211 $ 5,106,868 $ 815,078 $ 37,635 $ 15,401,538 ACL on collectively evaluated loans $ 850 $ 94,579 $ 1,539 $ 48,806 $ 6,879 $ 709 $ 153,362 Collectively evaluated loans ACL coverage 1.13 % 1.03 % 0.72 % 0.96 % 0.84 % 1.88 % 1.00 % Total loans $ 75,488 $ 9,216,194 $ 213,211 $ 5,124,421 $ 823,809 $ 38,064 $ 15,491,187 Total ACL $ 850 $ 97,535 $ 1,539 $ 53,013 $ 6,894 $ 730 $ 160,561 Total ACL to total loans 1.13 % 1.06 % 0.72 % 1.03 % 0.84 % 1.92 % 1.04 % December 31, 2021 Real Estate – Real Estate – Real Estate – Commercial Residential Consumer Total (Dollars in thousands) Individually evaluated loans $ — $ 83,347 $ — $ 19,407 $ 3,470 $ 409 $ 106,633 ACL on individually evaluated loans $ — $ 2,025 $ — $ 3,056 $ 11 $ 23 $ 5,115 Individually evaluated loans ACL coverage N/A 2.43 % N/A 15.75 % 0.32 % 5.62 % 4.80 % Collectively evaluated loans $ 69,199 $ 8,732,733 $ 220,652 $ 4,189,267 $ 576,156 $ 58,103 $ 13,846,110 ACL on collectively evaluated loans $ 729 $ 104,145 $ 1,541 $ 24,755 $ 3,305 $ 960 $ 135,435 Collectively evaluated loans ACL coverage 1.05 % 1.19 % 0.70 % 0.59 % 0.57 % 1.65 % 0.98 % Total loans $ 69,199 $ 8,816,080 $ 220,652 $ 4,208,674 $ 579,626 $ 58,512 $ 13,952,743 Total ACL $ 729 $ 106,170 $ 1,541 $ 27,811 $ 3,316 $ 983 $ 140,550 Total ACL to total loans 1.05 % 1.20 % 0.70 % 0.66 % 0.57 % 1.68 % 1.01 % 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, 2022, TDR loans totaled $53.6 million, compared to $65.5 million at December 31, 2021. The balance of loans with modified terms due to COVID-19 as of September 30, 2022 totaled $800 thousand compared to $22.8 million at December 31, 2021. The 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, 2022 and December 31, 2021, 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, 2022, there was only one remaining commercial real estate loan modified due to COVID-19 (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 amortized cost of TDR loans on accrual and nonaccrual status by type of concession as of September 30, 2022 and December 31, 2021 is presented below: September 30, 2022 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 $ 5,410 $ 532 $ — $ 15 $ 23,369 $ 267 $ — $ — $ 29,593 Maturity / amortization concession 4,979 9,193 — 257 113 2,572 — 114 17,228 Rate concession 5,062 196 — — 100 1,401 — — 6,759 Total $ 15,451 $ 9,921 $ — $ 272 $ 23,582 $ 4,240 $ — $ 114 $ 53,580 December 31, 2021 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 $ 23,196 $ 790 $ — $ 16 $ 7,533 $ 420 $ — $ — $ 31,955 Maturity / amortization concession 15,449 7,284 — 183 269 3,109 — 117 26,411 Rate concession 5,161 339 — — 234 1,413 — — 7,147 Total $ 43,806 $ 8,413 $ — $ 199 $ 8,036 $ 4,942 $ — $ 117 $ 65,513 TDR loans on accrual |