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Note 5 - Loans and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2023

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 5 - LOANS AND ALLOWANCE FOR CREDIT LOSSES

The Company's loan portfolio consists primarily of loans to borrowers within the Southern California metropolitan area, the New York City metropolitan area, the Chicago, Illinois metropolitan area, Las Vegas, Nevada, Edison, New Jersey and Honolulu, Hawaii. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries.

The types of loans in the Company's consolidated balance sheets as of September 30, 2023 and December 31, 2022 were as follows:

*(dollars in thousands)*	*September 30, 2023*			*December 31, 2022*
Loans:⁽¹⁾
Real Estate:
Construction and land development	$	259,778		$	276,876
Commercial real estate ⁽²⁾		1,164,210			1,312,132
Single-family residential mortgages		1,505,307			1,464,108
Commercial:
Commercial and industrial		127,655			201,223
SBA		50,420			61,411
Other:
Other loans		13,582			20,699
Total loans ⁽¹⁾	$	3,120,952		$	3,336,449
Allowance for credit losses		(42,430	)		(41,076	)
Total loans, net	$	3,078,522		$	3,295,373

(1) Net of discounts and deferred fees and costs.

(2) Includes non-farm and non-residential real estate loans, multifamily residential and 1-4 family single family residential loans for a business purpose

Allowance for Credit Losses

The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination. The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheet. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. The Company has elected to utilize a discounted cash flow (“DCF”) approach for all segments except consumer loans and warehouse mortgage loans, for which a remaining life approach was elected.

The Company’s DCF methodology incorporates a probability of default, loss given default and exposure at default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. The use of reasonable and supportable forecasts requires significant judgment, such as selecting unemployment forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon. Management estimates the allowance balance required using past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. The Company’s CECL methodology utilizes a four-quarter reasonable and supportable forecast period, and a four-quarter reversion period. The Company is using the Federal Open Market Committee to obtain forecasts for the unemployment rate, while reverting to a long-run average of each considered economic factor.

The Company uses both internal and external qualitative factors within the CECL model: lending policies, procedures, and strategies; economic conditions; changes in nature and volume of the portfolio; credit staffing and administration experience; problem loan trends; loan review results; collateral values; concentrations; and regulatory and business environment. During the third quarter of 2023, the Company recorded an increase of $1.5 million to ACL and a decrease of $144,000 to allowance for unfunded commitments compared to an increase of $1.8 million to ACL and a decrease of $28,000 to allowance for unfunded commitments during the third quarter of 2022.

The following tables present the balance and activity related to the ACL for held for investment loans by type for the periods presented.

	*For the Three Months Ended September 30,*
	*2023*											*2022*
*(dollars in thousands)*	*Real Estate*			*Commercial*		*Other*			*Total*			*Real Estate*		*Commercial*			*Other*			*Total*
Allowance for credit losses:
Beginning balance	$	40,869		$	1,733	$	490		$	43,092		$	32,105	$	2,646		$	1,538		$	36,289
Provisions		963			809		(228	)		1,544			2,271		(525	)		20			1,766
Charge-offs		(2,150	)		—		(67	)		(2,217	)		—		(5	)		(44	)		(49	)
Recoveries		—			1		10			11			—		169			7			176
Ending allowance balance	$	39,682		$	2,543	$	205		$	42,430		$	34,376	$	2,285		$	1,521		$	38,182

	*For the Nine Months Ended September 30,*
	*2023*												*2022*
*(dollars in thousands)*	*Real Estate*			*Commercial*			*Other*			*Total*			*Real Estate*		*Commercial*			*Other*			*Total*
Allowance for credit losses:
Beginning balance	$	37,935		$	2,425		$	716		$	41,076		$	28,592	$	3,793		$	527		$	32,912
ASU 2016-13 Transition Adjustment		—			—			—			—			1,612		(604	)		1,127			2,135
Adjusted beginning balance	$	37,935		$	2,425		$	716		$	41,076		$	30,204	$	3,189		$	1,654		$	35,047
Provisions		4,389			178			(270	)		4,297			4,172		(1,128	)		4			3,048
Charge-offs		(2,642	)		(62	)		(288	)		(2,992	)		—		(5	)		(146	)		(151	)
Recoveries		—			2			47			49			—		229			9			238
Ending allowance balance	$	39,682		$	2,543		$	205		$	42,430		$	34,376	$	2,285		$	1,521		$	38,182

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Pass - Loans classified as pass include loans not meeting the risk ratings defined below.

Special Mention - Loans classified as special mention have a potential weakness that deserves 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 classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans 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, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table summarizes the Company's loans held for investment as of September 30, 2023 and December 31, 2022 by loan portfolio segments, risk ratings and vintage year. The vintage year is the year of origination, renewal or major modification. Revolving loans that are converted to term loans presented in the table below are excluded from the term loans by vintage year columns.

*(dollars in thousands)*	*Term Loan by Vintage*
September 30, 2023	*2023*		*2022*			*2021*			*2020*			*2019*		*Prior*			*Revolving*		*Revolving Converted to Term During the Period*		*Total*
Real estate:
Construction and land development
Pass	$	198,431	$	34,695		$	10,659		$	3,925		$	195	$	39		$	—	$	—	$	247,944
Special mention		—		—			11,706			—			—		—			—		—		11,706
Substandard		—		—			—			—			—		128			—		—		128
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	198,431	$	34,695		$	22,365		$	3,925		$	195	$	167		$	—	$	—	$	259,778
YTD period charge-offs	$	—	$	—		$	—		$	—		$	—	$	(12	)	$	—	$	—	$	(12	)
YTD period recoveries		—		—			—			—			—		—			—		—		—
Net	$	—	$	—		$	—		$	—		$	—	$	(12	)	$	—	$	—	$	(12	)
Commercial real estate
Pass	$	56,171	$	428,412		$	189,451		$	178,948		$	97,249	$	159,579		$	—	$	—	$	1,109,810
Special mention		—		—			—			—			7,778		4,904			—		—		12,682
Substandard		303		9,800			—			11,514			2,303		17,798			—		—		41,718
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	56,474	$	438,212		$	189,451		$	190,462		$	107,330	$	182,281		$	—	$	—	$	1,164,210
YTD period charge-offs	$	—	$	(2,078	)	$	—		$	(459	)	$	—	$	—		$	—	$	—	$	(2,537	)
YTD period recoveries		—		—			—			—			—		—			—		—		—
Net	$	—	$	(2,078	)	$	—		$	(459	)	$	—	$	—		$	—	$	—	$	(2,537	)
Single-family residential mortgages
Pass	$	147,380	$	601,539		$	243,372		$	127,839		$	85,342	$	276,884		$	1,813	$	—	$	1,484,169
Special mention		—		—			—			—			—		3,862			—		—		3,862
Substandard		—		455			—			4,868			545		11,323			85		—		17,276
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	147,380	$	601,994		$	243,372		$	132,707		$	85,887	$	292,069		$	1,898	$	—	$	1,505,307
YTD period charge-offs	$	—	$	—		$	—		$	(93	)	$	—	$	—		$	—	$	—	$	(93	)
YTD period recoveries		—		—			—			—			—		—			—		—		—
Net	$	—	$	—		$	—		$	(93	)	$	—	$	—		$	—	$	—	$	(93	)
Commercial:
Commercial and industrial																						—
Pass	$	1,524	$	3,448		$	6,582		$	3,021		$	2,186	$	6,943		$	93,638	$	—	$	117,342
Special mention		—		—			—			—			—		—			2,632		—		2,632
Substandard		—		91			—			1,433			10		4,969			1,175		—		7,678
Doubtful		—		—			—			—			—		—			3		—		3
Total	$	1,524	$	3,539		$	6,582		$	4,454		$	2,196	$	11,912		$	97,448	$	—	$	127,655
YTD period charge-offs	$	—	$	—		$	—		$	—		$	—	$	—		$	—	$	—	$	—
YTD period recoveries		—		—			—			—			—		2			—		—		2
Net	$	—	$	—		$	—		$	—		$	—	$	2		$	—	$	—	$	2
SBA
Pass	$	2,812	$	11,066		$	10,146		$	3,079		$	4,607	$	13,934		$	—	$	—	$	45,644
Special mention		—		—			330			—			—		—			—		—		330
Substandard		—		—			—			—			85		4,361			—		—		4,446
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	2,812	$	11,066		$	10,476		$	3,079		$	4,692	$	18,295		$	—	$	—	$	50,420
YTD period charge-offs	$	—	$	—		$	—		$	—		$	—	$	(62	)	$	—	$	—	$	(62	)
YTD period recoveries		—		—			—			—			—		—			—		—		—
Net	$	—	$	—		$	—		$	—		$	—	$	(62	)	$	—	$	—	$	(62	)
Other:
Pass	$	204	$	3,002		$	9,326		$	839		$	39	$	—		$	17	$	—	$	13,427
Special mention		—		—			—			—			—		—			—		—		—
Substandard		—		111			36			8			—		—			—		—		155
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	204	$	3,113		$	9,362		$	847		$	39	$	—		$	17	$	—	$	13,582
YTD period charge-offs	$	—	$	(79	)	$	(199	)	$	(10	)	$	—	$	—		$	—	$	—	$	(288	)
YTD period recoveries		—		—			46			1			—		—			—		—		47
Net	$	—	$	(79	)	$	(153	)	$	(9	)	$	—	$	—		$	—	$	—	$	(241	)
Total by risk rating:
Pass	$	406,522	$	1,082,162		$	469,536		$	317,651		$	189,618	$	457,379		$	95,468	$	—	$	3,018,336
Special mention		—		—			12,036			—			7,778		8,766			2,632		—		31,212
Substandard		303		10,457			36			17,823			2,943		38,579			1,260		—		71,401
Doubtful		—		—			—			—			—		—			3		—		3
Total loans	$	406,825	$	1,092,619		$	481,608		$	335,474		$	200,339	$	504,724		$	99,363	$	—	$	3,120,952
Net charge-offs	$	—	$	(2,157	)	$	(153	)	$	(561	)	$	—	$	(72	)	$	—	$	—	$	(2,943	)

*(dollars in thousands)*	*Term Loan by Vintage*
December 31, 2022	*2022*		*2021*			*2020*		*2019*			*2018*		*Prior*			*Revolving*		*Revolving Converted to Term During the Period*		*Total*
Real estate:
Construction and land development
Pass	$	125,216	$	52,262		$	99,016	$	201		$	—	$	40		$	—	$	—	$	276,735
Special mention		—		—			—		—			—		—			—		—		—
Substandard		—		—			—		—			—		141			—		—		141
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	125,216	$	52,262		$	99,016	$	201		$	—	$	181		$	—	$	—	$	276,876
YTD period charge-offs	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
YTD period recoveries		—		—			—		—			—		—			—		—		—
Net	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
Commercial real estate
Pass	$	479,304	$	293,058		$	195,051	$	110,442		$	73,013	$	117,068		$	—	$	—	$	1,267,936
Special mention		—		—			9,280		—			—		—			—		—		9,280
Substandard		287		—			8,652		2,329			222		23,426			—		—		34,916
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	479,591	$	293,058		$	212,983	$	112,771		$	73,235	$	140,494		$	—	$	—	$	1,312,132
YTD period charge-offs	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
YTD period recoveries		—		—			—		—			—		—			—		—		—
Net	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
Single-family residential mortgages
Pass	$	637,893	$	255,529		$	137,964	$	96,355		$	134,415	$	182,893		$	2,992	$	—	$	1,448,041
Special mention		—		—			—		—			3,925		—			—		—		3,925
Substandard		—		—			3,954		—			7,631		452			105		—		12,142
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	637,893	$	255,529		$	141,918	$	96,355		$	145,971	$	183,345		$	3,097	$	—	$	1,464,108
YTD period charge-offs	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
YTD period recoveries		—		—			—		—			—		—			—		—		—
Net	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
Commercial:
Commercial and industrial																					—
Pass	$	8,038	$	7,513		$	4,448	$	3,470		$	1,016	$	8,827		$	129,483	$	86	$	162,881
Special mention		—		5,987			—		—			1,638		17,805			3,577		—		29,007
Substandard		—		—			1,600		16			—		339			7,380		—		9,335
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	8,038	$	13,500		$	6,048	$	3,486		$	2,654	$	26,971		$	140,440	$	86	$	201,223
YTD period charge-offs	$	—	$	—		$	—	$	(5	)	$	—	$	—		$	—	$	—	$	(5	)
YTD period recoveries		—		—			—		—			—		2			—		—		2
Net	$	—	$	—		$	—	$	(5	)	$	—	$	2		$	—	$	—	$	(3	)
SBA
Pass	$	14,922	$	10,664		$	6,496	$	4,688		$	2,579	$	16,793		$	—	$	—	$	56,142
Special mention		—		—			—		—			—		—			—		—		—
Substandard		—		—			—		91			1,017		4,161			—		—		5,269
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	14,922	$	10,664		$	6,496	$	4,779		$	3,596	$	20,954		$	—	$	—	$	61,411
YTD period charge-offs	$	—	$	—		$	—	$	—		$	—	$	(14	)	$	—	$	—	$	(14	)
YTD period recoveries		—		—			—		—			—		227			—		—		227
Net	$	—	$	—		$	—	$	—		$	—	$	213		$	—	$	—	$	213
Other:
Pass	$	4,224	$	14,684		$	1,505	$	90		$	7	$	—		$	26	$	—	$	20,536
Special mention		—		—			—		—			—		—			—		—		—
Substandard		105		48			10		—			—		—			—		—		163
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	4,329	$	14,732		$	1,515	$	90		$	7	$	—		$	26	$	—	$	20,699
YTD period charge-offs	$	—	$	(237	)	$	—	$	—		$	—	$	—		$	—	$	—	$	(237	)
YTD period recoveries		—		27			2		—			—		—			—		—		29
Net	$	—	$	(210	)	$	2	$	—		$	—	$	—		$	—	$	—	$	(208	)
Total by risk rating:
Pass	$	1,269,597	$	633,710		$	444,480	$	215,246		$	211,030	$	325,621		$	132,501	$	86	$	3,232,271
Special mention		—		5,987			9,280		—			5,563		17,805			3,577		—		42,212
Substandard		392		48			14,216		2,436			8,870		28,519			7,485		—		61,966
Doubtful		—		—			—		—			—		—			—		—		—
Total loans	$	1,269,989	$	639,745		$	467,976	$	217,682		$	225,463	$	371,945		$	143,563	$	86	$	3,336,449
Net (charge-offs)/recoveries	$	—	$	(210	)	$	2	$	(5	)	$	—	$	215		$	—	$	—	$	2

The following tables present the aging of the recorded investment in past due loans at September 30, 2023 and December 31, 2022 by class of loans. Past due loans presented in tables below also include nonaccrual loans.

*(dollars in thousands)*		30-59		60-89	*90 Days*		*Total*		*Loans Not*				*Nonaccrual*
September 30, 2023	*Days*		*Days*		*Or More*		*Past Due*		*Past Due*		*Total Loans*		Loans ⁽¹⁾
Real estate:
Construction and land development	$	—	$	—	$	128	$	128	$	259,650	$	259,778	$	128
Commercial real estate		16,450		—		9,800		26,250		1,137,960		1,164,210		20,330
Single-family residential mortgages		3,531		3,919		10,829		18,279		1,487,028		1,505,307		16,868
Commercial:
Commercial and industrial		244		—		517		761		126,894		127,655		761
SBA		72		129		2,009		2,210		48,210		50,420		2,009
Other:		61		15		23		99		13,483		13,582		50
	$	20,358	$	4,063	$	23,306	$	47,727	$	3,073,225	$	3,120,952	$	40,146
Real estate:
Single-family residential mortgages held for sale	$	—	$	—	$	—	$	—	$	62	$	62	$	—

(1)

Included in total loans.

*(dollars in thousands)*		30-59		60-89	90 Days		Total		Loans Not				Nonaccrual
December 31, 2022	Days		Days		Or More		Past		Past Due		Total		Loans
Real estate:
Construction and land development	$	—	$	—	$	141	$	141	$	276,735	$	276,876	$	141
Commercial real estate		558		240		1,191		1,989		1,310,143		1,312,132		13,189
Single-family residential mortgages		12,764		2,555		4,100		19,419		1,444,689		1,464,108		5,936
Commercial:
Commercial and industrial		—		545		7		552		200,671		201,223		713
SBA		150		1,017		1,228		2,395		59,016		61,411		2,245
Other:		154		76		99		329		20,370		20,699		99
	$	13,626	$	4,433	$	6,766	$	24,825	$	3,311,624	$	3,336,449	$	22,323

(1)

Included in total loans.

The Company has no loans that are 90 days or more past due and still accruing at September 30, 2023 and December 31, 2022.

The following table presents the loans on nonaccrual status as of September 30, 2023 and December 31, 2022:

	*Nonaccrual*
	*With No*
*(dollars in thousands)*	*Allowance*
September 30, 2023	*for Credit Loss*		*Nonaccrual*
Real estate:
Construction and land development	$	128	$	128
Commercial real estate		20,330		20,330
Single-family residential mortgages		16,868		16,868
Commercial:
Commercial and industrial		517		761
SBA		861		2,009
Other:		27		50
Total	$	38,731	$	40,146

	Nonaccrual
	With No
*(dollars in thousands)*	*Allowance*
December 31, 2022	*for Credit Loss*		*Nonaccrual*
Real estate:
Construction and land development	$	141	$	141
Commercial real estate		1,191		13,189
Single-family residential mortgages		5,936		5,936
Commercial:
Commercial and industrial		713		713
SBA		2,245		2,245
Other:		51		99
Total	$	10,277	$	22,323

No interest income on nonaccrual loans was recognized on a cash basis for the three or nine months ended September 30, 2023 and 2022.

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, or interest rate reduction. The Company may provide multiple types of concessions on one loan. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

There were no loans that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023 and the year ended December 31, 2022.

There were no commitments to lend additional amounts at September 30, 2023 and December 31, 2022 to customers with outstanding modified loans. There were no nonaccrual loans that were modified during the past twelve months that had payment defaults during the periods.