Loans Receivable and Allowance for Credit Losses |
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Loans and Leases Receivable Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans Receivable and Allowance for Credit Losses | Loans Receivable and Allowance for Credit Losses The following table presents the composition of the Company’s loans held-for-investment outstanding as of December 31, 2021 and 2020:
(1)Includes PPP loans of $534.2 million and $1.57 billion as of December 31, 2021 and 2020, respectively. (2)Includes net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(50.7) million and $(58.8) million as of December 31, 2021 and 2020, respectively. Net origination fees related to PPP loans were $(5.7) million and $(12.7) million as of December 31, 2021 and 2020, respectively. Loans held-for-investment accrued interest receivable was $107.4 million and $107.5 million as of December 31, 2021 and 2020, respectively, and is included in Other assets on the Consolidated Balance Sheet. For the Company’s accounting policy on accrued interest receivable related to loans held-for-investment, see Note 1 — Summary of Significant Accounting Policies — Loans Held-for-Investment to the Consolidated Financial Statements in this Form 10-K. The Company’s FRBSF and FHLB borrowings are primarily secured by loans held-for-investment. Loans held-for-investment totaling $27.67 billion and $23.26 billion, respectively, were pledged to secure borrowings and provide additional borrowing capacity as of December 31, 2021 and 2020. Credit Quality Indicators All loans are subject to the Company’s credit review and monitoring process. For the commercial loan portfolio, loans are risk rated based on an analysis of the borrower’s current payment performance or delinquency, repayment sources, financial and liquidity factors, including industry and geographic considerations. For a majority of the consumer loan portfolio, payment performance or delinquency is the driving indicator for the risk ratings. The Company utilizes internal credit risk ratings to assign each individual loan a risk rating of 1 through 10: •Pass — loans risk rated 1 through 5 are assigned an internal risk rating category of “Pass.” Loans risk rated 1 are typically loans fully secured by cash. Pass loans have sufficient sources of repayment to repay the loan in full, in accordance with all terms and conditions. •Special mention — loans assigned a risk rating of 6 have potential weaknesses that warrant closer attention by management; these are assigned an internal risk rating category of “Special Mention.” •Substandard — loans assigned a risk rating of 7 or 8 have well-defined weaknesses that may jeopardize the full and timely repayment of the loan; these are assigned an internal risk rating category of “Substandard.” •Doubtful — loans assigned a risk rating of 9 have insufficient sources of repayment and a high probability of loss; these are assigned an internal risk rating category of “Doubtful.” •Loss — loans assigned a risk rating of 10 are uncollectible and of such little value that they are no longer considered bankable assets; these are assigned an internal risk rating category of “Loss.” Loan exposures categorized as criticized consist of special mention, substandard, doubtful and loss categories. The Company reviews the internal risk ratings of its loan portfolio on a regular basis, and adjusts the ratings based on changes in the borrowers’ financial status and the collectability of the loans. The following tables summarize the Company’s loans held-for-investment by loan portfolio segments, internal risk ratings and vintage year as of December 31, 2021 and 2020. The vintage year is the year of origination, renewal or major modification.
(1)As of December 31, 2021 and 2020, $1.6 million and $747 thousand, respectively, of nonaccrual loans whose payments are guaranteed by the Federal Housing Administration were classified with a “Pass” rating. Revolving loans that are converted to term loans presented in the table above are excluded from the term loans by vintage year columns. During the years ended December 31, 2021 and 2020, HELOCs totaling $54.1 million and $145.0 million, respectively, were converted to term loans. During the year ended December 31, 2021, one C&I revolving loan totaling $78 thousand and three CRE revolving loans totaling $6.4 million were converted to term loans. In comparison, four C&I revolving loans totaling $23.9 million were converted to term loans during the year ended December 31, 2020. Nonaccrual and Past Due Loans Loans that are 90 or more days past due are generally placed on nonaccrual status, unless the loan is well-collateralized and in the process of collection. Loans that are less than 90 days past due but have identified deficiencies, such as when the full collection of principal or interest becomes uncertain, are also placed on nonaccrual status. Payment deferral activities instituted in response to the COVID-19 pandemic could delay the recognition of delinquencies for customers who otherwise would have moved into nonaccrual status. The following tables present the aging analysis of total loans held-for-investment as of December 31, 2021 and 2020:
(1)As of both December 31, 2021 and 2020, loans in payment deferral programs offered in response to the COVID-19 pandemic that are performing according to their modified terms are generally not considered delinquent, and are included in the “Current Accruing Loans” column. The following table presents amortized cost of loans on nonaccrual status for which there was no related allowance for loan losses as of both December 31, 2021 and 2020. Nonaccrual loans may not have an allowance for credit losses if there is no loss expectation since the loan balances are well secured by the collateral value.
Foreclosed Assets The Company acquires assets from borrowers through loan restructurings, workouts, and foreclosures. Assets acquired may include real properties (e.g., residential real estate, land, and buildings) and commercial and personal properties. The Company recognizes foreclosed assets upon receiving assets in satisfaction of a loan (e.g., taking legal title or physical possession). Foreclosed assets, consisting of OREO and other nonperforming assets, are included in Other assets on the Consolidated Balance Sheet. The Company had $10.3 million in foreclosed assets as of December 31, 2021, compared with $19.7 million as of December 31, 2020. The Company commences the foreclosure process on consumer mortgage loans after a borrower becomes more than 120 days delinquent in accordance with the Consumer Financial Protection Bureau guidelines. The carrying values of consumer real estate loans that were in the process of active or suspended foreclosure were $7.3 million and $4.1 million as of December 31, 2021 and 2020, respectively. In response to the COVID-19 pandemic, the Company has suspended certain mortgage foreclosure activities in connection with its actions to support its customers throughout 2021 and 2020. In addition, certain other foreclosures are awaiting for the end of government-mandated foreclosure moratoriums in certain states. Troubled Debt Restructurings TDRs are individually evaluated, and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulties. A TDR is a modification of the terms of a loan when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not have otherwise considered. Beginning in March 2020, the Company has implemented various commercial and consumer loan modification programs to provide its borrowers relief from the economic impacts of the COVID-19 pandemic. These COVID-related modifications are generally not classified as TDRs due to the relief under the CARES Act and the Interagency Statement, and therefore are not included in the discussion below. Assistance provided in response to the COVID-19 pandemic could delay the recognition of delinquencies, nonaccrual status, and net charge-offs for those borrowers who would have otherwise moved into past due or nonaccrual status. See Note 1 — Summary of Significant Accounting Policies — Troubled Debt Restructurings to the Consolidated Financial Statements in this Form 10-K for additional information related to TDR. The following tables present the additions to TDRs for the years ended December 31, 2021, 2020 and 2019:
(1)Includes subsequent payments after modification and reflects the balance as of December 31, 2021, 2020 and 2019. (2)Includes charge-offs and specific reserves recorded since the modification date. The following tables present the TDR post-modifications outstanding balances for the years ended December 31, 2021, 2020 and 2019 by modification type:
(1)Includes forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payments to interest payments only. (2)Includes principal and interest deferments or reductions. (3)Includes primarily funding to secure additional collateral and provides liquidity to collateral-dependent C&I loans. After a loan is modified as a TDR, the Company continues to monitor its performance under its most recent restructured terms. A TDR may become delinquent and result in payment default (generally 90 days past due) subsequent to restructuring. The following table presents the information on loans that entered into payment default during the years ended December 31, 2021, 2020 and 2019 that were modified as TDRs during the 12 months preceding payment default:
As of December 31, 2021 and 2020, the remaining commitments to lend additional funds to borrowers whose terms of their outstanding owed balances were modified as TDRs were $5.0 million and $3.0 million, respectively. Allowance for Credit Losses The Company has an allowance framework under ASU 2016-13 for all financial assets measured at amortized cost and certain off-balance sheet credit exposures. The Company’s allowance for credit losses, which includes both the allowance for loan losses and the allowance for unfunded credit commitments, is calculated with the objective of maintaining a reserve sufficient to absorb losses inherent in our credit portfolios. The measurement of the allowance for credit losses is based on management’s best estimate of lifetime expected credit losses, and periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors. The allowance for credit losses is deducted from the amortized cost basis of a financial asset or a group of financial assets so that the balance sheet reflects the net amount the Company expects to collect. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred fees and costs, and escrow advances. Subsequent changes in expected credit losses are recognized in net income as a provision for, or a reversal of, credit loss expense. The allowance for credit losses estimation involves procedures to consider the unique risk characteristics of the portfolio segments. The majority of the Company’s credit exposures share risk characteristics with other similar exposures and are collectively evaluated. The collectively evaluated loans cover performing risk-rated loans and unfunded credit commitments. If an exposure does not share risk characteristics with other exposures, the Company generally estimates expected credit losses on an individual basis. These individually assessed loans include TDR and nonaccrual loans. Allowance for Collectively Evaluated Loans The allowance for collectively evaluated loans consists of a quantitative component that assesses the different risk factors considered in our models and a qualitative component that considers risk factors external to the models. Each of these components are described below. •Quantitative Component — The Company applies quantitative methods to estimate loan losses by considering a variety of factors such as historical loss experience, the current credit quality of the portfolio, and an economic outlook over the life of the loan. The Company incorporates forward-looking information using macroeconomic scenarios which include variables that are considered key drivers of increases and decreases in credit losses. The Company utilizes a probability-weighted, multiple-scenario forecast approach. These scenarios may consist of a base forecast representing management's view of the most likely outcome, combined with downside or upside scenarios reflecting possible worsening or improving economic conditions. The quantitative models incorporate a probability-weighted calculation of these macroeconomic scenarios over a reasonable and supportable forecast period. If the life of the loans extends beyond the reasonable and supportable forecast period, the Company will consider historical experience or long-run macroeconomic trends over the remaining lives of the loans to estimate the allowance for loan losses. For the year ended December 31, 2021, the reasonable and supportable forecast period, key credit risk characteristics and macroeconomic variables to estimate the expected credit losses of the C&I segment were modified due to model enhancement. There were no changes to the overall model methodology. For the year ended December 31, 2020, there were no changes to the reasonable and supportable forecast period, and reversion to historical loss experience method. The following table provides key credit risk characteristics and macroeconomic variables that the Company uses to estimate the expected credit losses by portfolio segment:
(1)Due to model enhancements, the risk characteristic related to “time-to-maturity” was changed to “age”; while macroeconomic variables related to “unemployment rate and two- and ten-year U.S. Treasury spread” were changed to “VIX and BBB Spread” during the year ended December 31, 2021. (2)Macroeconomic variables are included in the qualitative estimate. Allowance for Loan Losses for the Commercial Loan Portfolio The Company’s C&I lifetime loss rate model estimates credit losses by estimating a loss rate expected over the life of a loan. This loss rate is applied to the amortized cost basis, excluding accrued interest receivable, to determine expected credit losses. The lifetime loss rate model’s reasonable and supportable period spans 11 quarters, thereafter immediately reverting to the historical average loss rate, expressed through the loan-level lifetime loss rate. For CRE, multifamily residential, and construction and land loans, projected probability of defaults (“PDs”) and loss given defaults (“LGDs”) are applied to the estimated exposure at default, considering the term and payment structure of the loan, to generate estimates of expected loss at the loan level. The forecast of future economic conditions returns to long-run historical economic trends within the reasonable and supportable period. In order to estimate the life of a loan under both models, the contractual term of the loan is adjusted for estimated prepayments based on historical prepayment experience. Allowance for Loan Losses for the Consumer Loan Portfolio For single-family residential and HELOC loans, projected PDs and LGDs are applied to the estimated exposure at default, considering the term and payment structure of the loan, to generate estimates of expected loss at the loan level. The forecast of future economic conditions returns to long-run historical economic trends after the reasonable and supportable period. In order to estimate the life of a loan for the single-family residential and HELOC portfolios, the contractual term of the loan is adjusted for estimated prepayments based on historical prepayment experience. For other consumer loans, the Company uses a loss rate approach. •Qualitative Component — The Company also considers the following qualitative factors in the determination of the collectively evaluated allowance, if these factors have not already been captured by the quantitative model. Such qualitative factors may include, but are not limited to: –Loan growth trends; –The volume and severity of past due financial assets, and the volume and severity of adversely classified financial assets; –The Company’s lending policies and procedures, including changes in lending strategies, underwriting standards, collection, write-off and recovery practices; –Knowledge of a borrower’s operations; –The quality of the Company’s credit review system; –The experience, ability and depth of the Company’s management, lending associates and other relevant associates; –The effect of other external factors such as the regulatory and legal environments and changes in technology; –Actual and expected changes in international, national, regional, and local economic and business conditions in which the Company operates; and –Risk factors in certain industry sectors not captured by the quantitative models. The magnitude of the impact of these factors on the Company’s qualitative assessment of the allowance for credit losses changes from period to period according to changes made by management in its assessment of these factors. The extent to which these factors change may be dependent on whether they are already reflected in quantitative loss estimates during the current period and the extent to which changes in these factors diverge from period to period. While the Company’s allowance methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between expected and actual outcomes. The Company may hold additional qualitative reserves that are designed to provide coverage for losses attributable to such risk. Allowance for Individually Evaluated Loans When a loan no longer shares similar risk characteristics with other loans, such as in the case of certain nonaccrual or TDR loans, the Company estimates the allowance for loan losses on an individual loan basis. The allowance for loan losses for individually evaluated loans is measured as the difference between the recorded value of the loans and their fair value. For loans evaluated individually, the Company uses one of three different asset valuation measurement methods: (1) the fair value of collateral less costs to sell; (2) the present value of expected future cash flows; or (3) the loan's observable market price. If an individually evaluated loan is determined to be collateral dependent, the Company applies the fair value of the collateral less costs to sell method. If an individually evaluated loan is determined not to be collateral dependent, the Company uses the present value of future cash flows or the observable market value of the loan. •Collateral-Dependent Loans — The allowance of a collateral-dependent loan is limited to the difference between the recorded value and fair value of the collateral less cost of disposal or sale. As of December 31, 2021, collateral-dependent commercial and consumer loans totaled $37.0 million and $14.0 million, respectively. In comparison, collateral-dependent commercial and consumer loans totaled $97.2 million and $17.3 million as of December 31, 2020, respectively. The Company's commercial collateral-dependent loans were secured by real estate or other collateral. The Company's consumer collateral-dependent loans were all residential mortgage loans, secured by the underlying real estate. As of both December 31, 2021 and 2020, the collateral value of the properties securing the collateral dependent loans, net of selling costs, exceeded the recorded value of the loans. The following tables summarize the activity in the allowance for loan losses by portfolio segments for the years ended December 31, 2021, 2020 and 2019:
The following table summarizes the activities in the allowance for unfunded credit commitments for the years ended December 31, 2021, 2020 and 2019:
The allowance for credit losses as of December 31, 2021, was $569.1 million, a decrease of $84.5 million or 13% compared with $653.6 million as of December 31, 2020. The change in the allowance for credit losses was comprised of a net decrease of $78.4 million in the allowance for loan losses and a decrease of $6.1 million in the allowance for unfunded credit commitments. An improved macroeconomic outlook resulted in an overall decrease in the required allowance for credit losses as of December 31, 2021, leading to a $35.0 million reversal of credit losses for the year ended December 31, 2021. The allowance for unfunded credit commitments is maintained at a level that management believes to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities. See Note 12 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-K for additional information related to unfunded credit reserves. Loans Held-for-Sale As of December 31, 2021 and 2020, loans held-for-sale of $635 thousand and $1.8 million consisted of single-family residential loans. Refer to Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Loans Held-for-Sale to the Consolidated Financial Statements in this Form 10-K for additional details related to the Company’s loans held-for-sale. Loan Transfers, Sales and Purchases The Company purchases and sells loans in the secondary market in the ordinary course of business. Purchased loans may be transferred from held-for-investment to held-for-sale, and write-downs to allowance for loan losses are recorded, when appropriate. The following tables provide information on the carrying value of loans transferred, loans sold and purchased for the held-for-investment portfolio, during the years ended December 31, 2021, 2020 and 2019:
(1)Includes write-downs of $12.2 million, $2.8 million and $789 thousand to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for the years ended December 31, 2021, 2020 and 2019, respectively. (2)Includes originated loans sold of $413.1 million, $400.4 million and $230.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Originated loans sold consist primarily of C&I for all periods. (3)Includes $208.4 million, $11.8 million and $66.5 million of purchased loans sold in the secondary market for the years ended December 31, 2021, 2020 and 2019, respectively. (4)Net gains on sales of loans were $8.9 million, $4.5 million and $4.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. (5)C&I loan purchases consisted primarily of syndicated C&I term loans.
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