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Allowance for Credit Losses

6 Months Ended

Jun. 30, 2021

Allowance for Credit Losses Methodology

In accordance with CECL, the ACL represents management's estimate of lifetime credit losses for assets within its scope, specifically loans and leases and unfunded commitments. To calculate the ACL, management uses models to estimate the PD and LGD for loans utilizing inputs that include forecasted future economic conditions and that are dependent upon specific macroeconomic variables relevant to each of the Bank's loan and lease portfolios. Moody's Analytics, a third party, provided the historical and forward-looking macroeconomic data utilized in the models used to calculate the ACL.

For ACL calculation purposes, the Bank considered the financial and economic environment at the time of assessment and economic scenarios that differed in the levels of severity and sensitivity to the ACL results. At each measurement date, the Bank selects the scenario that reflects its view of future economic conditions and is determined to be the most probable outcome.

All forecasts are updated for each variable where applicable and incorporated as relevant into the ACL calculation. Actual credit loss results and the timing thereof will differ from the estimate of credit losses, either in a strong economy or a recession, as the portfolio will change through time due to growth, risk mitigation actions and other factors. In addition, the scenarios used will differ and change through time as economic conditions change. Economic scenarios might not capture deterioration or improvement in the economy timely enough for the Bank to be able to adequately assess the impact to the ACL.

Select macroeconomic variables are projected over the forecast period, and they could have a material impact in determining the ACL. As the length of the forecast period increases, information about the future becomes less readily available and projections are inherently less certain.

The following is a discussion of the changes in the factors that influenced management's current estimate of expected credit losses. The changes in the ACL estimate for all portfolio segments, during the three and six months ended June 30, 2021, were primarily related to changes in the economic assumptions. The Bank opted to use Moody's Analytics' May consensus economic forecast for estimating the ACL as of June 30, 2021. This scenario is based on Moody's Analytics' review of a variety of surveys of baseline forecasts of the U.S. economy. These surveys vary in date of latest vintage, number of updates per year, list of variables forecast, duration of forecast, frequency of data (quarterly or annual), and the number of respondents. In the preparation of the Moody's Analytics consensus forecast, the focus is on the next three to five years, since that is the most typical duration in the surveyed results. Moody's Analytics' approach is to give greater consideration to the most recently produced forecasts, since they will include the most up-to-date historical information, and to those variables for which the number of surveyed responses is largest.

In the consensus scenario selected, the probability that the economy will perform better than this consensus is equal to the probability that it will perform worse and included the following factors:

•U.S. real GDP annualized growth of 7.4% in 2021;

•U.S. unemployment rate average of 5.5% in 2021 with return to less than 5.0% unemployment by Q4 2021;

•COVID infections abate in June 2021;

•Federal Reserve to keep target range for the Fed Funds rate at 0.0% to 0.25% until early 2023.

The Bank uses an additional scenario that differs in terms of severity within the variables, both favorable and unfavorable, to assess sensitivity in the ACL results and to inform qualitative adjustments. The Bank selected the Moody's Analytics' May S2 scenario for this analysis. In the scenario selected, there is a 75% probability that the economy will perform better, broadly speaking, and a 25% probability that it will perform worse; and the scenario includes the following factors:

•New cases, hospitalizations and deaths from COVID-19 diminish more slowly than anticipated, delaying the reopening of some businesses in some areas of the country;

•The stimulus is less effective than expected because of slower consumer spending. More of the funds end up in savings and thus fiscal multipliers are smaller than assumed in the consensus scenario;

•U.S. real GDP annualized growth of 5.7% in 2021;

•U.S. unemployment rate average of 6.3% in 2021 with return to less than 5.0% unemployment by Q3 2022;

•COVID infections abate in October 2021;

•Federal Reserve to keep target range for the Fed Funds rate near 0.0% until Q2 2024.

The results using the comparison scenario for sensitivity analysis were reviewed by management and were considered when evaluating the qualitative factors adjustments.

The ACL is measured on a collective (pool) basis when similar characteristics exist. The Company has selected models at the portfolio level using a risk-based approach, with larger, more complex portfolios having more complex models. Except as noted below, the macroeconomic variables that are inputs to the models are reasonable and supportable over the life of the loans in that they reasonably project the key economic variables in the near term and then converge to a long run equilibrium trend. These models produce reasonable and supportable estimates of loss over the life of the loans as the projected credit losses will also converge to a steady state in line with the variables applied. The Company measures the ACL using the following methods:

Commercial Real Estate: Non-owner occupied commercial real estate, multifamily, and construction loans are analyzed using a model that uses four primary property variables: net operating income, property value, property type, and location. For PD estimation, the model simulates potential future paths of net operating income given commercial real estate market factors determined from macroeconomic and regional commercial real estate forecasts. Using the resulting expected debt service coverage ratios, together with predicted loan-to-values and other variables, the model estimates PD from the range of conditional possibilities. In addition, the model estimates maturity PD capturing refinance default risk to produce a total PD for the loan. The model estimates LGD, inclusive of principal loss and liquidation expenses, empirically using predicted loan-to-value as well as certain market and other factors. The LGD calculation also includes a separate maturity risk component. The primary economic drivers in the model are GDP growth, U.S. unemployment rate, and 10-Year Treasury yield. These economic drivers are translated into a forecast provided by Moody's Analytics' REIS of real estate metrics, such as rental rates, vacancies and cap rates. The model produces PD and LGD on a quarter-by-quarter basis for the life of loan.

The owner-occupied commercial real-estate portfolio utilizes a top-down macroeconomic model using linear regression. This model produces portfolio level quarterly net charge-off rates for 10 years and carries forward the last quarter's projected expected loss percentage to remaining periods. The primary economic drivers for this model are the 7-year A vs Aa corporate bond spread and S&P 500 corporate after-tax profits.

Commercial: Non-homogeneous commercial loans and leases and residential development loans are analyzed in a multi-step process. An initial PD is estimated using a model driven by an obligor's selected financial statement ratios, together with cycle-adjusting information based on the obligor's state and industry. An initial LGD is derived separately based on collateral type using collateral value and a haircut to reflect the loss in liquidation. Another model then applies an auto-regression technique to the initial PD and LGD metrics to estimate the PD and LGD curves according to the macroeconomic scenario over a one-year reasonable and supportable forecast. The primary economic drivers in the model are the S&P 500 Stock Price Index, S&P 500 Market Volatility Index, U.S. unemployment rate, as well as appropriate yield curves and credit spreads. This model utilizes output reversion methodology, which, after one year, reverts on a straight-line basis over two years to long-term PD estimated using financial statement ratios of each obligor.

The model for the homogeneous lease and equipment finance agreement portfolio uses lease and equipment finance agreement information, such as origination and performance, as well as macroeconomic variables to calculate PD and LGD values. The PD calculation is based on survival analysis while LGD is calculated using a two-step regression. The model calculates LGD using an estimate of the probability that a defaulted lease or equipment finance agreement will have a loss, and an estimate of the loss amount. The primary economic drivers for the model are GDP, U.S. unemployment rate, and a home price growth index. The model produces PD and LGD curves at the lease or equipment finance agreement level for each month in the forecast horizon.

Residential: The models for residential real estate and home equity lines of credit utilize loan level variables, such as origination and performance, as well as macroeconomic variables to calculate PD and LGD. The U.S. unemployment rate and home price growth rate indexes are primary economic drivers in both the residential real estate and HELOC models. In addition, the prime rate is also a primary driver in the HELOC model. The models focus on establishing an empirical relationship between default probabilities and a set of loan-level, borrower, and macroeconomic credit risk drivers. The LGD calculation for residential real estate is based on an estimate of the probability that a defaulted loan will have a loss, and then an estimate of the loss amount. HELOCs utilize the same model using residential real estate LGD values to assign loans to cohorts based on FICO scores and loan age. The model produces PD and LGD curves at the loan level for each quarter in the forecast horizon.

Consumer: Historical net charge-off information as well as economic forecast assumptions are used to project loss rates for the Consumer segment.

All loans and leases that have not been modeled receive a loss rate via an extrapolated rate methodology. The loans and leases receiving an extrapolated rate are typically newly originated loans and leases or loans and leases without the granularity of data necessary to be modeled. Based on the vintage year, credit classification, and reporting category of the modeled loans and leases, a loss factor is calculated and applied to the non-modeled loans and leases.

Along with the quantitative factors produced by the above models, management also considers prepayment speeds and qualitative factors when determining the ACL. The Company uses a prepayment model that forecasts the constant prepayment rates based on institution specific data. Below are the nine qualitative factors considered where applicable:

•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.

•Changes in national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.

•Changes in the nature and volume of the portfolio and in the terms of loans and leases.

•Changes in the experience, ability, and depth of lending management and other relevant staff.

•Changes in the volume and severity of past due loans and leases, the volume of non-accrual loans and leases, and the volume and severity of adversely classified or graded loans and leases.

•Changes in the quality of the Bank's credit review system.

•Changes in the value of the underlying collateral for collateral-dependent loans and leases.

•The existence and effect of any concentrations of credit, and changes in the level of such concentrations.

•The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Bank's existing portfolio.

The Company evaluated each qualitative factor as of June 30, 2021, and made certain qualitative adjustments to the amounts indicated by the models as considered necessary to adequately reflected the significant changes in credit conditions and overall portfolio risk.

Loss factors from the models, prepayment speeds, and qualitative factors are input into the Company's CECL accounting application which aggregates the information. The Company then uses two methods to calculate the current expected credit loss: 1) the discounted cash flow method, which is used for all loans except lines of credit and 2) the non-discounted cash flow method which is used for lines of credit due to difficulty of calculating an effective interest rate when lines have yet to be drawn on. The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses adjusted for prepayments. The difference in the net present value and the amortized cost of the asset will result in the required allowance. The non-discounted cash flow method uses the exposure at default, along with the expected credit losses adjusted for prepayments to calculate the required allowance.

The following tables summarize activity related to the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2021 and 2020:


	Three Months Ended June 30, 2021
(in thousands)	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Allowance for credit losses on loans and leases
Balance, beginning of period	$	154,475	$	128,838	$	21,090	$	6,880	$	311,283

(Recapture) provision for credit losses for loans and leases	(25,484)		5,964		3,997		(2,252)		(17,775)

Charge-offs	(129)		(16,093)		—		(857)		(17,079)
Recoveries	89		2,681		209		479		3,458
Net (charge-offs) recoveries	(40)		(13,412)		209		(378)		(13,621)
Balance, end of period	$	128,951	$	121,390	$	25,296	$	4,250	$	279,887
Reserve for unfunded commitments
Balance, beginning of period	$	15,668	$	1,801	$	1,288	$	1,003	$	19,760

(Recapture) provision for credit losses on unfunded commitments	(5,574)		344		422		(413)		(5,221)
Balance, end of period	10,094		2,145		1,710		590		14,539
Total allowance for credit losses	$	139,045	$	123,535	$	27,006	$	4,840	$	294,426

	Six Months Ended June 30, 2021
(in thousands)	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Allowance for credit losses on loans and leases
Balance, beginning of period	$	141,710	$	150,864	$	27,964	$	7,863	$	328,401
(Recapture) provision for credit losses for loans and leases	(13,058)		1,461		(2,915)		(2,737)		(17,249)

Charge-offs	(170)		(35,707)		(70)		(2,047)		(37,994)
Recoveries	469		4,772		317		1,171		6,729
Net recoveries (charge-offs)	299		(30,935)		247		(876)		(31,265)
Balance, end of period	$	128,951	$	121,390	$	25,296	$	4,250	$	279,887
Reserve for unfunded commitments
Balance, beginning of period	15,360		2,190		1,661		1,075		20,286
(Recapture) provision for credit losses on unfunded commitments	(5,266)		(45)		49		(485)		(5,747)
Balance, end of period	10,094		2,145		1,710		590		14,539
Total allowance for credit losses	$	139,045	$	123,535	$	27,006	$	4,840	$	294,426


	Three Months Ended June 30, 2020
(in thousands)	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Allowance for credit losses on loans and leases
Balance, beginning of period	$	99,778	$	146,607	$	34,251	$	10,784	$	291,420
Provision for credit losses for loans and leases	52,890		21,301		6,157		1,136		81,484
Charge-offs	—		(17,549)		(143)		(1,761)		(19,453)
Recoveries	160		2,256		283		595		3,294
Net recoveries (charge-offs)	160		(15,293)		140		(1,166)		(16,159)
Balance, end of period	$	152,828	$	152,615	$	40,548	$	10,754	$	356,745
Reserve for unfunded commitments
Balance, beginning of period	$	15,760	$	2,927	$	1,741	$	499	$	20,927
Provision (recapture) for credit losses on unfunded commitments	5,048		(6)		320		79		5,441
Balance, end of period	20,808		2,921		2,061		578		26,368
Total allowance for credit losses	$	173,636	$	155,536	$	42,609	$	11,332	$	383,113

	Six Months Ended June 30, 2020
(in thousands)	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Allowance for credit losses on loans and leases
Balance, beginning of period	$	50,847	$	73,820	$	24,714	$	8,248	$	157,629
Impact of CECL adoption	5,077		44,009		2,099		(1,186)		49,999
Adjusted balance, beginning of period	55,924		117,829		26,813		7,062		207,628
Provision for credit losses for loans and leases	96,498		70,974		13,342		6,172		186,986
Charge-offs	—		(40,157)		(154)		(3,597)		(43,908)
Recoveries	406		3,969		547		1,117		6,039
Net recoveries (charge-offs)	406		(36,188)		393		(2,480)		(37,869)
Balance, end of period	$	152,828	$	152,615	$	40,548	$	10,754	$	356,745
Reserve for unfunded commitments
Balance, beginning of period	$	534	$	2,539	$	149	$	1,884	$	5,106
Impact of CECL adoption	4,030		(487)		1,267		(1,572)		3,238
Adjusted balance, beginning of period	4,564		2,052		1,416		312		8,344
Provision for credit losses on unfunded commitments	16,244		869		645		266		18,024
Balance, end of period	20,808		2,921		2,061		578		26,368
Total allowance for credit losses	$	173,636	$	155,536	$	42,609	$	11,332	$	383,113

The following table presents the unfunded commitments for the period ended June 30, 2021 and 2020:


(in thousands)	Total
Unfunded loan and lease commitments
June 30, 2021	$	6,022,792
June 30, 2020	$	5,849,611

Asset Quality and Non-Performing Loans and Leases

The Bank manages asset quality and controls credit risk through diversification of the loan and lease portfolio and the application of policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank's Credit Quality Administration is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of non-performing, past due loans and leases and larger credits, designed to identify potential charges to the allowance for credit losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan and lease portfolio, prevailing economic conditions and other factors.

Loans and Leases Past Due and Non-Accrual Loans and Leases

Typically, loans in a non-accrual status will not have an allowance for credit loss as they will be written down to their net realizable value or charged-off. However, the net realizable value for homogeneous leases and equipment finance agreements is determined by the LGD calculated by the CECL model and therefore leases and equipment finance agreements on non-accrual will have an allowance for credit losses until they become 181 days past due, at which time they are charged-off. The Company recognized no interest income on non-accrual loans and leases during the three and six months ended June 30, 2021 and 2020.

Due to the deterioration of the U.S. economy resulting from the COVID-19 pandemic, the Company has had an increase in loan payment deferral and forbearance requests. Once a deferral or forbearance request is received, a late charge waiver is put in place and payments are suspended for an agreed-upon period. Accrued and unpaid interest during the deferral period will be collected upon the expiration of the deferral or on a regular repayment schedule at the end of the deferral period. For certain loan types, the maturity date may be extended to allow for full amortization. In accordance with various government-mandated programs, these loans are generally classified based on their past due status prior to their deferral period, so they are classified as performing loans that accrue interest. As of June 30, 2021, loans of approximately $167.3 million are currently deferred under various federal and state guidelines and are classified as current as their contractual payments have been deferred. These deferred loans do not include deferrals of delinquent repurchased GNMA loans as the credit risk of these loans are guaranteed by government programs such as Federal Housing Agency, Veterans Affairs, and USDA Rural Development. At June 30, 2021, approximately $150.6 million of GNMA repurchased loans were on deferral. At December 31, 2020, the Bank had $355.5 million in deferred loans under various federal and state guidelines, excluding GNMA repurchased loans on deferral of $177.7 million.

The following tables present the carrying value of the loans and leases past due, by loan and lease class, as of June 30, 2021 and December 31, 2020:


	June 30, 2021
(in thousands)	Greater than 30 to 59 Days Past Due		60 to 89 Days Past Due		Greater than 90 Days and Accruing		Total Past Due		Non-Accrual (1)		Current		Total Loans and Leases
Commercial real estate
Non-owner occupied term, net	$	—	$	434	$	—	$	434	$	3,563	$	3,576,389	$	3,580,386
Owner occupied term, net	224		1,797		1		2,022		5,471		2,390,833		2,398,326
Multifamily, net	578		—		—		578		—		3,553,126		3,553,704
Construction & development, net	—		—		—		—		—		857,866		857,866
Residential development, net	—		—		—		—		—		193,904		193,904
Commercial
Term, net	265		141		8		414		3,875		3,743,980		3,748,269
Lines of credit & other, net	194		3,080		1		3,275		124		905,119		908,518
Leases & equipment finance, net	8,933		7,966		2,246		19,145		7,640		1,410,587		1,437,372
Residential
Mortgage, net	1,422		3,117		24,888		29,427		—		4,116,005		4,145,432
Home equity loans & lines, net	1,195		141		1,760		3,096		—		1,115,182		1,118,278
Consumer & other, net	802		357		240		1,399		—		200,285		201,684
Total, net of deferred fees and costs	$	13,613	$	17,033	$	29,144	$	59,790	$	20,673	$	22,063,276	$	22,143,739

(1) Loans and leases on non-accrual with an amortized cost basis of $20.7 million had a related allowance for credit losses of $6.3 million at June 30, 2021.


	December 31, 2020
(in thousands)	Greater than 30 to 59 Days Past Due		60 to 89 Days Past Due		Greater than 90 Days and Accruing		Total Past Due		Non-Accrual (1)		Current and Other		Total Loans and Leases
Commercial real estate
Non-owner occupied term, net	$	1,214	$	21,309	$	815	$	23,338	$	3,809	$	3,478,655	$	3,505,802
Owner occupied term, net	182		103		208		493		5,984		2,327,468		2,333,945
Multifamily, net	—		215		—		215		—		3,348,981		3,349,196
Construction & development, net	3,991		—		—		3,991		—		824,487		828,478
Residential development, net	—		—		—		—		—		192,761		192,761
Commercial
Term, net	562		—		4		566		2,205		4,021,696		4,024,467
Lines of credit & other, net	1,491		2,667		7		4,165		336		858,259		862,760
Leases & equipment finance, net	14,242		18,220		4,796		37,258		18,742		1,400,630		1,456,630
Residential
Mortgage, net	1,587		3,912		27,713		33,212		—		3,838,694		3,871,906
Home equity loans & lines, net	844		544		2,463		3,851		—		1,132,213		1,136,064
Consumer & other, net	678		286		355		1,319		—		216,039		217,358
Total, net of deferred fees and costs	$	24,791	$	47,256	$	36,361	$	108,408	$	31,076	$	21,639,883	$	21,779,367

(1) Loans and leases on non-accrual with an amortized cost basis of $31.1 million had a related allowance for credit losses of $16.7 million at December 31, 2020.

Collateral Dependent Loans and Leases

Loans are classified as collateral dependent when it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes the amortized cost basis of the collateral dependent loans and leases by the type of collateral securing the assets as of June 30, 2021. There have been no significant changes in the level of collateralization from the prior periods.


(in thousands)	Residential Real Estate		Commercial Real Estate		General Business Assets		Other		Total
Commercial real estate
Non-owner occupied term, net	$	—	$	3,259	$	—	$	—	$	3,259
Owner occupied term, net	—		5,005		—		—		5,005



Commercial
Term, net	424		547		669		1,863		3,503
Line of credit & other, net	—		—		40		86		126
Leases & equipment finance, net	—		—		7,640		—		7,640
Residential
Mortgage, net	28,116		—		—		—		28,116
Home equity loans & lines, net	3,101		—		—		—		3,101

Total net of deferred fees and costs	$	31,641	$	8,811	$	8,349	$	1,949	$	50,750

Troubled Debt Restructurings

At June 30, 2021 and December 31, 2020, troubled debt restructured loans of $13.1 million and $15.0 million, respectively, were classified as accruing TDR loans. The TDRs were granted in response to borrower financial difficulties, and generally provide for a temporary modification of loan repayment terms. In order for a new TDR loan to be considered for accrual status, the loan's collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow.

The following tables present TDR loans by accrual versus non-accrual status and by portfolio segment as of June 30, 2021 and December 31, 2020:


	June 30, 2021
(in thousands)	Accrual Status		Non-Accrual Status		Total Modification		# of Contracts
Commercial real estate, net	$	1,288	$	79	$	1,367	7

Residential, net	11,753		—		11,753		68
Consumer & other, net	31		—		31		5
Total, net of deferred fees and costs	$	13,072	$	79	$	13,151	80

	December 31, 2020
(in thousands)	Accrual Status		Non-Accrual Status		Total Modification		# of Contracts
Commercial real estate, net	$	1,345	$	289	$	1,634	7
Commercial, net	1,231		—		1,231		1
Residential, net	12,415		—		12,415		75

Total, net of deferred fees and costs	$	14,991	$	289	$	15,280	83

The following table presents loans that were determined to be TDRs during the three and six months ended June 30, 2021 and 2020:


	Three Months Ended				Six Months Ended
(in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020

Commercial, net	$	—	$	8,508	$	—	$	8,508
Residential, net	2,532		756		4,242		6,434
Consumer & other, net	9		50		36		74
Total, net of deferred fees and costs	$	2,541	$	9,314	$	4,278	$	15,016

Credit Quality Indicators

Management regularly reviews loans and leases in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading. In addition, the board reviews and approves the credit quality indicators each year. The Bank differentiates its lending portfolios into homogeneous and non-homogeneous loans and leases. Homogeneous loans and leases are risk rated on a single risk rating scale based on the past due status of the loan or lease.

The Bank's risk rating methodology for its non-homogeneous loans and leases uses a dual risk rating approach to assess the credit risk. This approach uses two scales to provide a comprehensive assessment of credit default risk and recovery risk. The probability of default scale measures a borrower's credit default risk using risk ratings ranging from 1 to 16, where a higher rating represents higher risk. For non-homogeneous loans and leases, PD ratings of 1 through 9 are "pass" grades, while PD ratings of 10 and 11 are "watch" grades. PD ratings of 12-16 correspond to the regulatory-defined categories of special mention (12), substandard (13-14), doubtful (15), and loss (16). The loss given default scale measures the amount of loss that may not be recovered in the event of a default, using six alphabetic ratings from A-F, where a higher rating represents higher risk. The LGD scale quantifies recovery risk associated with an event of default and predicts the amount of loss that would be incurred on a loan or lease if a borrower were to experience a major default and includes variables that may be external to the borrower, such as industry, geographic location, and credit cycle stage. It could also include variables specific to the borrower such as their probability of default and bankruptcies as well as variables specific to the loan or lease, including collateral valuation, covenant structure and debt type. The product of the borrower's PD and a loan or lease LGD is the loan or lease expected loss, expressed as a percentage. This provides a common language of credit risk across different loans.

The PD scale estimates the likelihood that a borrower will experience a major default on any of its debt obligations within a specified time period. Examples of major defaults include payments 90 days or more past due, non-accrual classification, bankruptcy filing, or a full or partial charge-off of a loan or lease. As such, the PD scale represents the credit quality indicator for non-homogeneous loans and leases.

The credit quality indicator rating categories follow regulatory classification and can be generally described by the following groupings for loans and leases:

Pass/Watch—A pass loan or lease is a loan or lease with a credit risk level acceptable to the Bank for extending credit and maintaining normal credit monitoring. A watch loan or lease is considered pass rated but has a heightened level of unacceptable default risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower risk rating would be appropriate within a short period of time.

Special Mention—A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. These borrowers have an elevated probability of default but not to the point of a substandard classification.

Substandard—A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful—Loans or leases classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable.

Loss—Loans or leases classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

The following tables represent the amortized costs basis of the loans and leases by credit classification and vintage year by loan and lease class of financing receivable as of June 30, 2021 and December 31, 2020:


(in thousands)		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving to Non-Revolving Loans Amortized Cost
	June 30, 2021	2021		2020		2019		2018		2017		Prior						Total
Commercial real estate:
Non-owner occupied term, net
Credit quality indicator:
	Pass/Watch	$	367,243	$	461,782	$	649,801	$	459,252	$	344,447	$	1,101,517	$	1,438	$	4,086	$	3,389,566
	Special mention	10,800		2,232		5,828		40,838		2,768		60,785		—		—		123,251
	Substandard	831		2,034		2,637		20,911		3,128		37,784		—		—		67,325
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		244		—		—		244
Total non-owner occupied term, net		$	378,874	$	466,048	$	658,266	$	521,001	$	350,343	$	1,200,330	$	1,438	$	4,086	$	3,580,386
Owner occupied term, net
Credit quality indicator:
	Pass/Watch	$	329,351	$	260,024	$	389,611	$	289,634	$	303,909	$	740,316	$	5,205	$	759	$	2,318,809
	Special mention	557		897		7,579		20,882		10,196		18,878		—		—		58,989
	Substandard	—		—		891		2,891		211		16,027		—		—		20,020
	Doubtful	—		—		—		—		—		78		—		—		78
	Loss	—		—		—		—		—		430		—		—		430
Total owner occupied term, net		$	329,908	$	260,921	$	398,081	$	313,407	$	314,316	$	775,729	$	5,205	$	759	$	2,398,326
Multifamily, net
Credit quality indicator:
	Pass/Watch	$	603,948	$	369,149	$	843,505	$	499,080	$	495,286	$	705,357	$	22,941	$	2,940	$	3,542,206
	Special mention	—		—		—		—		—		2,095		—		—		2,095
	Substandard	—		—		—		—		9,403		—		—		—		9,403
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		—		—		—		—
Total multifamily, net		$	603,948	$	369,149	$	843,505	$	499,080	$	504,689	$	707,452	$	22,941	$	2,940	$	3,553,704
Construction & development, net
Credit quality indicator:
	Pass/Watch	$	47,913	$	278,333	$	282,973	$	159,126	$	67,967	$	214	$	—	$	—	$	836,526
	Special mention	—		1,635		—		11,693		—		—		—		—		13,328
	Substandard	—		—		—		8,012		—		—		—		—		8,012
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		—		—		—		—
Total construction & development, net		$	47,913	$	279,968	$	282,973	$	178,831	$	67,967	$	214	$	—	$	—	$	857,866
Residential development, net
Credit quality indicator:
	Pass/Watch	$	11,419	$	19,512	$	—	$	—	$	—	$	—	$	155,115	$	7,858	$	193,904
	Special mention	—		—		—		—		—		—		—		—		—
	Substandard	—		—		—		—		—		—		—		—		—
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		—		—		—		—
Total residential development, net		$	11,419	$	19,512	$	—	$	—	$	—	$	—	$	155,115	$	7,858	$	193,904

Total commercial real estate		$	1,372,062	$	1,395,598	$	2,182,825	$	1,512,319	$	1,237,315	$	2,683,725	$	184,699	$	15,643	$	10,584,186


(in thousands)		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving to Non-Revolving Loans Amortized Cost
	June 30, 2021	2021		2020		2019		2018		2017		Prior						Total
Commercial:
Term, net
Credit quality indicator:
	Pass/Watch	$	1,033,785	$	962,345	$	262,608	$	256,230	$	194,263	$	261,426	$	642,063	$	22,184	$	3,634,904
	Special mention	15,000		235		—		29,674		613		1,649		27,087		1,750		76,008
	Substandard	18,491		11		1,800		1,454		6,720		1,572		—		5,952		36,000
	Doubtful	—		6		—		417		932		2		—		—		1,357
	Loss	—		—		—		—		—		—		—		—		—
Total term, net		$	1,067,276	$	962,597	$	264,408	$	287,775	$	202,528	$	264,649	$	669,150	$	29,886	$	3,748,269
Lines of credit & other, net
Credit quality indicator:
	Pass/Watch	$	20,553	$	18,984	$	17,698	$	18,413	$	379	$	2,019	$	799,448	$	4,003	$	881,497
	Special mention	—		—		—		134		—		249		15,318		2,106		17,807
	Substandard	—		489		441		—		85		958		3,167		4,072		9,212
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		—		1		1		2
Total lines of credit & other, net		$	20,553	$	19,473	$	18,139	$	18,547	$	464	$	3,226	$	817,934	$	10,182	$	908,518
Leases & equipment finance, net
Credit quality indicator:
	Pass/Watch	$	314,467	$	404,999	$	360,495	$	184,314	$	84,164	$	49,925	$	—	$	—	$	1,398,364
	Special mention	1,254		1,954		3,269		3,067		731		331		—		—		10,606
	Substandard	893		6,407		2,394		6,947		1,012		882		—		—		18,535
	Doubtful	475		2,226		3,293		1,498		529		238		—		—		8,259
	Loss	—		355		716		293		198		46		—		—		1,608
Total leases & equipment finance, net		$	317,089	$	415,941	$	370,167	$	196,119	$	86,634	$	51,422	$	—	$	—	$	1,437,372

Total commercial		$	1,404,918	$	1,398,011	$	652,714	$	502,441	$	289,626	$	319,297	$	1,487,084	$	40,068	$	6,094,159

Residential:
Mortgage, net
Credit quality indicator:
	Pass/Watch	$	1,156,224	$	793,299	$	828,396	$	258,517	$	280,694	$	798,874	$	—	$	—	$	4,116,004
	Special mention	248		—		899		496		563		2,334		—		—		4,540
	Substandard	—		591		2,835		1,254		3,087		16,134		—		—		23,901
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		911		—		—		76		—		—		987
Total mortgage, net		$	1,156,472	$	793,890	$	833,041	$	260,267	$	284,344	$	817,418	$	—	$	—	$	4,145,432

Home equity loans & lines, net
Credit quality indicator:
	Pass/Watch	$	123	$	9	$	—	$	19	$	—	$	14,114	$	1,066,462	$	34,455	$	1,115,182
	Special mention	—		—		—		—		—		86		818		432		1,336
	Substandard	—		—		—		—		—		55		1,083		228		1,366
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		192		2		200		394
Total home equity loans & lines, net		$	123	$	9	$	—	$	19	$	—	$	14,447	$	1,068,365	$	35,315	$	1,118,278

Total residential		$	1,156,595	$	793,899	$	833,041	$	260,286	$	284,344	$	831,865	$	1,068,365	$	35,315	$	5,263,710


(in thousands)		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving to Non-Revolving Loans Amortized Cost
	June 30, 2021	2021		2020		2019		2018		2017		Prior						Total
Consumer & other, net:
Credit quality indicator:
	Pass/Watch	$	11,492	$	14,519	$	17,174	$	8,162	$	5,474	$	6,812	$	133,940	$	2,712	$	200,285
	Special mention	—		11		42		7		200		165		632		101		1,158
	Substandard	—		—		18		30		—		33		134		16		231
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		7		3		—		10
Total consumer & other, net		$	11,492	$	14,530	$	17,234	$	8,199	$	5,674	$	7,017	$	134,709	$	2,829	$	201,684

Grand total		$	3,945,067	$	3,602,038	$	3,685,814	$	2,283,245	$	1,816,959	$	3,841,904	$	2,874,857	$	93,855	$	22,143,739


(in thousands)		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving to Non-Revolving Loans Amortized Cost
	December 31, 2020	2020		2019		2018		2017		2016		Prior						Total
Commercial real estate:
Non-owner occupied term, net
Credit quality indicator:
	Pass/Watch	$	496,412	$	677,975	$	489,350	$	379,691	$	338,257	$	932,207	$	2,855	$	4,139	$	3,320,886
	Special mention	13,281		1,432		40,899		2,800		31,699		27,167		—		—		117,278
	Substandard	3,129		2,668		19,951		3,062		19,806		18,586		—		—		67,202
	Doubtful	—		—		—		—		—		103		—		—		103
	Loss	—		—		—		—		—		333		—		—		333
Total non-owner occupied term, net		$	512,822	$	682,075	$	550,200	$	385,553	$	389,762	$	978,396	$	2,855	$	4,139	$	3,505,802
Owner occupied term, net
Credit quality indicator:
	Pass/Watch	$	284,698	$	414,715	$	321,900	$	344,606	$	257,969	$	610,893	$	6,270	$	783	$	2,241,834
	Special mention	3,641		8,373		13,143		7,365		3,425		18,386		—		—		54,333
	Substandard	2,657		1,694		9,868		2,846		4,356		14,609		282		975		37,287
	Doubtful	—		—		—		—		—		61		—		—		61
	Loss	—		—		—		—		—		430		—		—		430
Total owner occupied term, net		$	290,996	$	424,782	$	344,911	$	354,817	$	265,750	$	644,379	$	6,552	$	1,758	$	2,333,945
Multifamily, net
Credit quality indicator:
	Pass/Watch	$	383,871	$	870,871	$	593,076	$	574,185	$	276,108	$	618,031	$	23,282	$	2,956	$	3,342,380
	Special mention	—		—		—		—		—		6,601		—		—		6,601
	Substandard	—		—		—		215		—		—		—		—		215
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		—		—		—		—
Total multifamily, net		$	383,871	$	870,871	$	593,076	$	574,400	$	276,108	$	624,632	$	23,282	$	2,956	$	3,349,196


(in thousands)		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving to Non-Revolving Loans Amortized Cost
	December 31, 2020	2020		2019		2018		2017		2016		Prior						Total
Construction & development, net
Credit quality indicator:
	Pass/Watch	$	146,012	$	283,052	$	255,449	$	127,564	$	—	$	372	$	—	$	—	$	812,449
	Special mention	1,637		—		14,392		—		—		—		—		—		16,029
	Substandard	—		—		—		—		—		—		—		—		—
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		—		—		—		—
Total construction & development, net		$	147,649	$	283,052	$	269,841	$	127,564	$	—	$	372	$	—	$	—	$	828,478
Residential development, net
Credit quality indicator:
	Pass/Watch	$	17,188	$	2,571	$	2,151	$	—	$	—	$	—	$	163,320	$	2,507	$	187,737
	Special mention	—		—		—		—		—		—		5,024		—		5,024
	Substandard	—		—		—		—		—		—		—		—		—
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		—		—		—		—
Total residential development, net		$	17,188	$	2,571	$	2,151	$	—	$	—	$	—	$	168,344	$	2,507	$	192,761

Total commercial real estate		$	1,352,526	$	2,263,351	$	1,760,179	$	1,442,334	$	931,620	$	2,247,779	$	201,033	$	11,360	$	10,210,182

Commercial:
Term, net
Credit quality indicator:
	Pass/Watch	$	2,146,758	$	294,576	$	323,744	$	240,458	$	67,502	$	226,137	$	626,878	$	29,598	$	3,955,651
	Special mention	4,859		548		13,395		1,265		273		1,416		1,036		2,259		25,051
	Substandard	251		1,105		24,845		7,259		1,137		561		—		8,029		43,187
	Doubtful	—		—		—		—		—		578		—		—		578
	Loss	—		—		—		—		—		—		—		—		—
Total term, net		$	2,151,868	$	296,229	$	361,984	$	248,982	$	68,912	$	228,692	$	627,914	$	39,886	$	4,024,467
Lines of credit & other, net
Credit quality indicator:
	Pass/Watch	$	27,503	$	27,395	$	26,731	$	548	$	1,679	$	531	$	709,606	$	5,578	$	799,571
	Special mention	4,033		—		—		1		77		299		42,882		271		47,563
	Substandard	501		472		—		195		377		940		6,958		6,177		15,620
	Doubtful	—		—		—		—		—		—		4		—		4
	Loss	—		—		—		—		—		—		1		1		2
Total lines of credit & other, net		$	32,037	$	27,867	$	26,731	$	744	$	2,133	$	1,770	$	759,451	$	12,027	$	862,760
Leases & equipment finance, net
Credit quality indicator:
	Pass/Watch	$	502,305	$	442,692	$	239,551	$	125,619	$	64,400	$	7,619	$	—	$	—	$	1,382,186
	Special mention	2,321		4,918		7,765		3,797		1,983		99		—		—		20,883
	Substandard	6,999		7,193		11,617		1,945		2,081		157		—		—		29,992
	Doubtful	2,615		8,255		4,834		2,880		1,343		79		—		—		20,006
	Loss	101		1,481		1,015		635		309		22		—		—		3,563
Total leases & equipment finance, net		$	514,341	$	464,539	$	264,782	$	134,876	$	70,116	$	7,976	$	—	$	—	$	1,456,630

Total commercial		$	2,698,246	$	788,635	$	653,497	$	384,602	$	141,161	$	238,438	$	1,387,365	$	51,913	$	6,343,857


(in thousands)		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving to Non-Revolving Loans Amortized Cost
	December 31, 2020	2020		2019		2018		2017		2016		Prior						Total
Residential:
Mortgage, net
Credit quality indicator:
	Pass/Watch	$	809,232	$	1,136,220	$	393,041	$	406,069	$	424,270	$	669,862	$	—	$	—	$	3,838,694
	Special mention	—		397		286		688		946		3,183		—		—		5,500
	Substandard	335		1,398		1,822		4,133		6,381		11,113		—		—		25,182
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		1,314		—		—		—		1,216		—		—		2,530
Total mortgage, net		$	809,567	$	1,139,329	$	395,149	$	410,890	$	431,597	$	685,374	$	—	$	—	$	3,871,906

Home equity loans & lines, net
Credit quality indicator:
	Pass/Watch	$	40	$	—	$	20	$	—	$	259	$	16,575	$	1,077,753	$	37,008	$	1,131,655
	Special mention	—		—		—		—		—		211		1,537		198		1,946
	Substandard	—		—		—		—		—		43		254		233		530
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		182		1,107		644		1,933
Total home equity loans & lines, net		$	40	$	—	$	20	$	—	$	259	$	17,011	$	1,080,651	$	38,083	$	1,136,064

Total residential		$	809,607	$	1,139,329	$	395,169	$	410,890	$	431,856	$	702,385	$	1,080,651	$	38,083	$	5,007,970

Consumer & other, net:
Credit quality indicator:
	Pass/Watch	$	24,408	$	22,802	$	11,372	$	4,170	$	2,582	$	4,101	$	143,813	$	2,789	$	216,037
	Special mention	—		95		79		27		28		3		660		74		966
	Substandard	—		25		—		—		2		—		205		110		342
	Doubtful	—		—		—		—		—		—		—		—		—
	Loss	—		—		—		—		—		10		3		—		13
Total consumer & other, net		$	24,408	$	22,922	$	11,451	$	4,197	$	2,612	$	4,114	$	144,681	$	2,973	$	217,358

Grand total		$	4,884,787	$	4,214,237	$	2,820,296	$	2,242,023	$	1,507,249	$	3,192,716	$	2,813,730	$	104,329	$	21,779,367