ALLOWANCE FOR CREDIT LOSSES

9 Months Ended

Sep. 30, 2022

4. ALLOWANCE FOR CREDIT LOSSES

On January 1, 2022, the Company adopted ASU 2016-13, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. See Note 1, Summary of Significant Accounting Policies for additional information on Topic 326.

The Company does not estimate expected credit losses on accrued interest receivable (“AIR”) on loans, as AIR is reversed or written off when the full collection of the AIR related to a loan becomes doubtful. AIR on loans totaled $16.1 million at September 30, 2022 and $19.1 million at December 31, 2021.

The following table presents the loan balances by segment, and the corresponding balances in the allowance as of September 30, 2022. For the period ended September 30, 2022, the allowance was based on the CECL methodology.


	September 30, 2022
			Ending ACL				Ending ACL
	Total		Attributable		Total		Attributable
	Individually		To Individually		Loans		To Loans				Total
	Evaluated		Evaluated		Collectively		Collectively		Total		Ending
(In thousands)	Loans		Loans		Evaluated		Evaluated		Loans		ACL
Primary residential mortgage	$	133	$	—	$	520,143	$	2,279	$	520,276	$	2,279
Junior lien loan on residence		—		—		40,216		154		40,216		154
Multifamily property		—		—		1,856,675		15,317		1,856,675		15,317
Owner-occupied commercial real estate		263		—		256,628		4,907		256,891		4,907
Investment commercial real estate		12,429		2,429		1,022,825		8,897		1,035,254		11,326
Commercial and industrial		222		—		1,106,705		21,838		1,106,927		21,838
Lease financing		—		—		304,256		3,238		304,256		3,238
Construction loans		—		—		10,384		128		10,384		128
Consumer and other loans		—		—		42,506		496		42,506		496
Total ACL	$	13,047	$	2,429	$	5,160,338	$	57,254	$	5,173,385	$	59,683

The following table presents the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance as of December 31, 2021. For the year ended December 31, 2021, the allowance was calculated based on the incurred loss methodology:


	December 31, 2021
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		To Loans		Collectively		To Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	For		Evaluated for		For		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential mortgage	$	2,242	$	—	$	498,001	$	1,432	$	500,243	$	1,432
Home equity lines of credit		—		—		40,803		83		40,803		83
Junior lien loan on residence		18		—		3,173		5		3,191		5
Multifamily property		—		—		1,595,866		9,806		1,595,866		9,806
Owner-occupied commercial real estate		458		—		252,145		1,998		252,603		1,998
Investment commercial real estate		12,750		4,234		991,229		22,849		1,003,979		27,083
Commercial and industrial		2,584		—		989,748		17,509		992,332		17,509
Lease financing		—		—		345,868		3,440		345,868		3,440
Farmland/agricultural production		—		—		6,871		84		6,871		84
Commercial construction loans		—		—		20,174		42		20,174		42
Consumer and other loans		—		—		40,828		215		40,828		215
Total ALLL	$	18,052	$	4,234	$	4,784,706	$	57,463	$	4,802,758	$	61,697

Individually evaluated loans include nonaccrual loans of $13.0 million at September 30, 2022 and $15.6 million at December 31, 2021. This includes a $12.4 million commercial real estate loan that was placed on nonaccrual status in the third quarter of 2021, which resulted in the Company recording a charge-off of $7.4 million during the fourth quarter of 2021. Individually evaluated loans did not include any performing TDR loans at September 30, 2022 but included $2.5 million of performing TDR loans at December 31, 2021. The allowance allocated to TDR loans totaled $2.4 million at September 30, 2022, of which all was allocated to one nonaccrual loan. At December 31, 2021, there was no allowance allocated to TDR loans. All accruing TDR loans were paying in accordance with restructured terms as of September 30, 2022. The Company has not committed to lend additional amounts as of September 30, 2022 to customers with outstanding loans that are classified as TDR loans.

The allowance for credit losses was $59.7 million as of September 30, 2022, compared to $61.7 million at December 31, 2021. The decline in the allowance for credit losses (“ACL”) was primarily due to the Day 1 reduction of $5.5 million incurred in connection with the implementation of CECL on January 1, 2022 partially offset by the 2022 provision for credit losses of $4.4 million. The allowance for credit losses as a percentage of loans was 1.15 percent and 1.28 percent at September 30, 2022 and December 31, 2021, respectively. The allowance for credit loss ratio declined due to the Day 1 reduction and a 2022 provision for credit losses based on 2022 loan growth in lower risk segments that carry lower ACL coverage.

Under Topic 326, the Company's methodology for determining the ACL on loans is based upon key assumptions, including historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, 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.

The following tables present collateral dependent loans individually evaluated by segment as of September 30, 2022:


	September 30, 2022
	Unpaid						Average
	Principal		Recorded		Related		Individually Evaluated
(In thousands)	Balance		Investment		Allowance		Loans
With no related allowance recorded:
Primary residential mortgage	$	136	$	133	$	—	$	249
Owner-occupied commercial real estate		301		263		—		307
Commercial and industrial		241		222		—		254
Total loans with no related allowance	$	678	$	618	$	—	$	810
With related allowance recorded:
Investment commercial real estate	$	12,500	$	12,429	$	2,429	$	12,531
Total loans with related allowance	$	12,500	$	12,429	$	2,429	$	12,531
Total loans individually evaluated	$	13,178	$	13,047	$	2,429	$	13,341

The following table presents, under previously applicable GAAP, loans individually evaluated for impairment as of December 31, 2021 (the average impaired loans on the following tables represent year to date impaired loans):


	December 31, 2021
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	2,453	$	2,242	$	—	$	1,818
Owner-occupied commercial real estate		492		458		—		540
Junior lien loan on residence		18		18		—		3
Commercial and industrial		4,549		2,584		—		3,153
Total loans with no related allowance	$	7,512	$	5,302	$	—	$	5,514
With related allowance recorded:
Investment commercial real estate	$	19,887	$	12,750	$	4,234	$	6,034
Total loans with related allowance	$	19,887	$	12,750	$	4,234	$	6,034
Total loans individually evaluated for impairment	$	27,399	$	18,052	$	4,234	$	11,548

Interest income recognized on individually evaluated loans for the three and nine months ended September 30, 2022 and 2021 was not material. The Company did not recognize any income on non-accruing impaired loans for the three and nine months ended September 30, 2022 and 2021.

The activity in the allowance for credit losses for the three months ended September 30, 2022 is summarized below:


	July 1,										September 30,
	2022										2022
	Beginning							Provision			Ending
(In thousands)	ACL		Charge-offs			Recoveries		(Credit) (1)			ACL
Primary residential mortgage	$	2,154	$	—		$	15	$	110		$	2,279
Junior lien loan on residence		151		—			—		3			154
Multifamily property		15,790		—			—		(473	)		15,317
Owner-occupied commercial real estate		4,660		—			—		247			4,907
Investment commercial real estate		10,969		—			—		357			11,326
Commercial and industrial		20,998		—			—		840			21,838
Lease financing		3,352		—			—		(114	)		3,238
Construction loans		359		—			—		(231	)		128
Consumer and other loans		589		(19	)		—		(74	)		496
Total ACL	$	59,022	$	(19	)	$	15	$	665		$	59,683

(1) Provision to roll forward the ACL excludes a credit of $66,000 for off-balance sheet commitments.

The activity in the allowance for credit losses for the nine months ended September 30, 2022 is summarized below:


	December 31,													September 30,
	2021													2022
	Prior to adoption		Impact of								Provision			Ending
(In thousands)	of Topic 326		adopting Topic 326			Charge-offs			Recoveries		(Credit) (1)			ACL
Primary residential mortgage	$	1,510	$	717		$	—		$	15	$	37		$	2,279
Junior lien loan on residence		88		83			(3	)		—		(14	)		154
Multifamily property		9,806		4,072			—			—		1,439			15,317
Owner-occupied commercial real estate		1,998		2,902			—			—		7			4,907
Investment commercial real estate		27,083		(13,589	)		(250	)		—		(1,918	)		11,326
Commercial and industrial		17,509		(657	)		—			4		4,982			21,838
Lease financing		3,440		156			—			—		(358	)		3,238
Construction loans		48		361			—			—		(281	)		128
Consumer and other loans		215		419			(46	)		2		(94	)		496
Total ACL	$	61,697	$	(5,536	)	$	(299	)	$	21	$	3,800		$	59,683

(1) Provision to roll forward the ACL excludes a provision of $623,000 for off-balance sheet commitments.

For the accounting policy on the allowance for loan losses that was in effect prior to the adoption of Topic 326, refer to Note 1, Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year-ended December 31, 2021. The

activity in the allowance for loan and lease losses for the three months and nine months ended September 30, 2021 is summarized below:


	July 1,										September 30,
	2021										2021
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	2,167	$	—		$	—	$	(92	)	$	2,075
Home equity lines of credit		123		—			—		(4	)		119
Junior lien loan on residence		8		—			—		(1	)		7
Multifamily property		10,615		—			—		(47	)		10,568
Owner-occupied commercial real estate		2,447		—			—		(154	)		2,293
Investment commercial real estate		27,886		—			—		2,098			29,984
Commercial and industrial		16,565		(19	)		50		(330	)		16,266
Lease financing		3,275		—			—		94			3,369
Farmland/agricultural production		43		—			—		15			58
Commercial construction loans		159		—			—		6			165
Consumer and other loans		217		(4	)		1		15			229
Total ALLL	$	63,505	$	(23	)	$	51	$	1,600		$	65,133


	January 1,										September 30,
	2021										2021
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	2,905	$	(12	)	$	—	$	(818	)	$	2,075
Home equity lines of credit		218		—			85		(184	)		119
Junior lien loan on residence		15		—			—		(8	)		7
Multifamily property		9,945		—			—		623			10,568
Owner-occupied commercial real estate		3,050		—			—		(757	)		2,293
Investment commercial real estate		27,713		—			—		2,271			29,984
Commercial and industrial		19,047		(5,019	)		60		2,178			16,266
Lease financing		3,936		—			—		(567	)		3,369
Farmland/agricultural production		43		—			—		15			58
Commercial construction loans		158		—			—		7			165
Consumer and other loans		279		(24	)		9		(35	)		229
Total ALLL	$	67,309	$	(5,055	)	$	154	$	2,725		$	65,133

Allowance for Credit Losses on Off Balance Sheet Commitments

The following table presets the activity in the ACL for off balance sheet commitments for the nine months ended September 30, 2022:


	December 31,
	2021						September 30,
	Prior to adoption		Impact of		Provision		2022
(In thousands)	of Topic 326		adopting Topic 326		(Credit)		Ending ACL
Off balance sheet commitments	$	—	$	302	$	623	$	925
Total ACL	$	—	$	302	$	623	$	925