ALLOWANCE FOR CREDIT LOSSES

9 Months Ended

Sep. 30, 2023

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 $20.3 million at September 30, 2023 and $22.8 million at December 31, 2022.

The following tables present the loan balances by segment, and the corresponding balances in the allowance as of September 30, 2023 and December 31, 2022. The allowance was based on the CECL methodology.


	September 30, 2023
			Ending ACL
			Attributable				Ending ACL
	Total		To		Total		Attributable
	Individually		Individually		Loans		To Loans				Total
	Evaluated		Evaluated		Collectively		Collectively		Total		Ending
(In thousands)	Loans		Loans		Evaluated		Evaluated		Loans		ACL
Primary residential mortgage	$	357	$	—	$	585,396	$	3,263	$	585,753	$	3,263
Junior lien loan on residence		—		—		38,084		154		38,084		154
Multifamily property		18,868		2,142		1,852,985		8,440		1,871,853		10,582
Owner-occupied commercial real estate		—		—		259,304		4,662		259,304		4,662
Investment commercial real estate		9,903		—		1,040,392		13,525		1,050,295		13,525
Commercial and industrial		30,810		4,843		1,303,001		27,291		1,333,811		32,134
Lease financing		10,246		1,071		252,438		1,896		262,684		2,967
Construction		—		—		21,328		552		21,328		552
Consumer and other loans		—		—		60,048		753		60,048		753
Total ACL	$	70,184	$	8,056	$	5,412,976	$	60,536	$	5,483,160	$	68,592


	December 31, 2022
			Ending ACL
			Attributable				Ending ACL
	Total		To		Total		Attributable
	Individually		Individually		Loans		To Loans				Total
	Evaluated		Evaluated		Collectively		Collectively		Total		Ending
(In thousands)	Loans		Loans		Evaluated		Evaluated		Loans		ACL
Primary residential mortgage	$	374	$	—	$	527,410	$	2,894	$	527,784	$	2,894
Junior lien loan on residence		—		—		38,265		154		38,265		154
Multifamily property		—		—		1,863,915		8,849		1,863,915		8,849
Owner-occupied commercial real estate		—		—		272,009		4,835		272,009		4,835
Investment commercial real estate		11,208		1,208		1,032,917		14,272		1,044,125		15,480
Commercial and industrial		3,385		299		1,191,277		25,231		1,194,662		25,530
Lease financing		1,765		—		286,801		2,314		288,566		2,314
Construction		—		—		9,936		236		9,936		236
Consumer and other loans		—		—		42,319		537		42,319		537
Total ACL	$	16,732	$	1,507	$	5,264,849	$	59,322	$	5,281,581	$	60,829

Individually evaluated loans include nonaccrual loans of $70.0 million at September 30, 2023 and $15.8 million at December 31, 2022. Individually evaluated loans did not include any performing modified loans at September 30, 2023. An allowance of $205,000 was allocated to modified loans at September 30, 2023. All accruing modified loans were paying in accordance with their modified terms as of September 30, 2023. The Company has not committed to lend additional amounts as of September 30, 2023 to customers with outstanding loans that are classified as modified loans.

The allowance for credit losses was $68.6 million as of September 30, 2023, compared to $60.8 million at December 31, 2022. The increase in the allowance for credit losses (“ACL”) was primarily related to specific reserves of $5.5 million for two freight related credits totaling $33.4 million that were transferred to nonaccrual status during the third quarter of 2023. The remaining reserve was due to the provision for credit losses related to loan growth of $51.7 million. The allowance for credit losses as a percentage of loans was 1.25 percent at September 30, 2023, compared to 1.15 percent at December 31, 2022.

Under Topic 326, the Company's methodology for determining the ACL on loans is based upon key assumptions, including historic net charge-offs, 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, 2023 and December 31, 2022:


	September 30, 2023
							Average
	Unpaid						Individually
	Principal		Recorded		Related		Evaluated
(In thousands)	Balance		Investment (A)		Allowance		Loans
With no related allowance recorded:
Primary residential mortgage	$	405	$	357	$	—	$	410
Investment commercial real estate		12,500		9,903		—		4,411
Multifamily property		9,153		9,153		—		4,068
Commercial and industrial		4,637		2,460		—		1,900
Lease financing		1,178		1,110		—		1,407
Total loans with no related allowance	$	27,873	$	22,983	$	—	$	12,196
With related allowance recorded:
Multifamily property	$	9,715	$	9,715	$	2,142	$	8,074
Commercial and industrial		28,542		28,350		4,843		4,290
Lease financing		9,246		9,136		1,071		1,015
Total loans with related allowance	$	47,503	$	47,201	$	8,056	$	13,379
Total loans individually evaluated	$	75,376	$	70,184	$	8,056	$	25,575
(A) Reflects unpaid principal balance net of charge-offs.


	December 31, 2022
							Average
	Unpaid						Individually
	Principal		Recorded		Related		Evaluated
(In thousands)	Balance		Investment (A)		Allowance		Loans
With no related allowance recorded:
Primary residential mortgage	$	415	$	374	$	—	$	249
Commercial and industrial		3,868		1,836		—		539
Lease financing		1,792		1,765		—		444
Total loans with no related allowance	$	6,075	$	3,975	$	—	$	1,232
With related allowance recorded:
Investment commercial real estate	$	12,500	$	11,208	$	1,208	$	12,402
Commercial and industrial		1,555		1,549		299		174
Total loans with related allowance	$	14,055	$	12,757	$	1,507	$	12,576
Total loans individually evaluated for impairment	$	20,130	$	16,732	$	1,507	$	13,808
(A) Reflects unpaid principal balance net of charge-offs.

Interest income recognized on individually evaluated loans for the three and nine months ended September 30, 2023 and 2022 was not material. The Company did not recognize any income on non-accruing impaired loans for the three and nine months ended September 30, 2023 and 2022.

The activity in the allowance for credit losses for the three months ended September 30, 2023 and September 30, 2022 is summarized below:


	July 1,										September 30,
	2023										2023
	Beginning							Provision			Ending
(In thousands)	ACL		Charge-offs			Recoveries		(Credit) (A)			ACL
Primary residential mortgage	$	3,148	$	—		$	—	$	115		$	3,263
Junior lien loan on residence		151		—			—		3			154
Multifamily property		10,537		—			—		45			10,582
Owner-occupied commercial real estate		4,708		—			—		(46	)		4,662
Investment commercial real estate		13,548		—			—		(23	)		13,525
Commercial and industrial		27,433		—			—		4,701			32,134
Lease financing		2,063		—			—		904			2,967
Construction		421		—			—		131			552
Consumer and other loans		695		(57	)		1		114			753
Total ACL	$	62,704	$	(57	)	$	1	$	5,944		$	68,592

(A)

Provision to roll forward the ACL excludes a credit of $88,000 for off-balance sheet commitments.


	July 1,										September 30,
	2022										2022
	Beginning							Provision			Ending
(In thousands)	ACL		Charge-offs			Recoveries		(Credit) (A)			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		359		—			—		(231	)		128
Consumer and other loans		589		(19	)		—		(74	)		496
Total ACL	$	59,022	$	(19	)	$	15	$	665		$	59,683

(A)

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, 2023 and 2022 is summarized below:


	January 1,										September 30,
	2023										2023
	Beginning							Provision			Ending
(In thousands)	ACL		Charge-offs			Recoveries		(Credit) (A)			ACL
Primary residential mortgage	$	2,894	$	—		$	—	$	369		$	3,263
Junior lien loan on residence		154		—			—		—			154
Multifamily property		8,849		—			—		1,733			10,582
Owner-occupied commercial real estate		4,835		—			—		(173	)		4,662
Investment commercial real estate		15,480		(1,199	)		—		(756	)		13,525
Commercial and industrial		25,530		—			—		6,604			32,134
Lease financing		2,314		—			—		653			2,967
Construction		236		—			—		316			552
Consumer and other loans		537		(118	)		6		328			753
Total ACL	$	60,829	$	(1,317	)	$	6	$	9,074		$	68,592

(A)

Provision to roll forward the ACL excludes a credit of $9,000 for off-balance sheet commitments.


	December 31,
	2021
	Prior to													September 30,
	Adoption		Impact of											2022
	of		Adopting								Provision			Ending
(In thousands)	Topic 326		Topic 326			Charge-offs			Recoveries		(Credit) (A)			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		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

(A)

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

Allowance for Credit Losses on Off-Balance Sheet Commitments

The following tables present the activity in the ACL for off-balance sheet commitments for the three months ended September 30, 2023 and 2022:


	July 1,
	2023					September 30,
	Beginning		Provision			2023
(In thousands)	ACL		(Credit)			Ending ACL
Off balance sheet commitments	$	831	$	(88	)	$	743
Total ACL	$	831	$	(88	)	$	743


	July 1,
	2022					September 30,
	Beginning		Provision			2022
(In thousands)	ACL		(Credit)			Ending ACL
Off balance sheet commitments	$	991	$	(66	)	$	925
Total ACL	$	991	$	(66	)	$	925

The following tables present the activity in the ACL for off-balance sheet commitments for the nine months ended September 30, 2023 and 2022:


	January 1,
	2023					September 30,
	Beginning		Provision			2023
(In thousands)	ACL		(Credit)			Ending ACL
Off balance sheet commitments	$	752	$	(9	)	$	743
Total ACL	$	752	$	(9	)	$	743


	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