Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the ACL-Loans, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans at amortized cost, interest income is accrued based on the unpaid principal balance.

The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest separately from the related loan balance in the consolidated balance sheets. Accrued interest on loans totaled $26.5 million and $15.4 million at September 30, 2022 and December 31, 2021, respectively.

The Company also elected not to measure an allowance for credit losses for accrued interest receivables. The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest collected on these loans is applied to the principal balance until the loan can be returned to an accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

For all loan portfolio segments, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectable based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations.

When cash payments for accrued interest are received on nonaccrual loans in each loan class, the Company records a reduction in principle on the balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.

The Company offers warehouse lines of credit to fund mortgage loans held for sale from closing until sale to an investor. Under a warehousing arrangement the Company funds a mortgage loan as secured financing. The warehousing arrangement is secured by the underlying mortgages and a combination of deposits, personal guarantees and advance rates. The Company typically holds the collateral until it is sent under a bailee arrangement instructing the investor to send proceeds to the Company. Typical investors are large financial institutions or government agencies. Interest earned from the time of funding to the time of sale is recognized as interest income as accrued. Fees earned agreements are recognized when collected as noninterest income.

(1)

In 2022, the Company started presenting these two loan types on separate lines for reporting purposes.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Mortgage Warehouse Lines of Credit (MTG WHLOC): Under its warehouse program, the Company provides warehouse financing arrangements to approved mortgage companies for the origination and sale of residential mortgage loans and to a lesser extent multi-family loans. Agency eligible, governmental and jumbo residential mortgage loans that are secured by mortgages placed on existing one-to-four family dwellings may be originated or purchased and placed on each mortgage warehouse line.

As a secured repurchase agreement, collateral pledged to the Company secures each individual mortgage until the lender sells the loan in the secondary market. A traditional secured warehouse line of credit typically carries a base interest rate of 30-day London Interbank Offered Rate (“LIBOR”) or the Federal Reserve’s Secured Overnight Financing Rate (“SOFR”), or mortgage note rate and a margin.

Risk is evident if there is a change in the fair value of mortgage loans originated by mortgage bankers in warehouse, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit. However, the warehouse customers are required to hedge the change in value of these loans to mitigate the risk.

Residential Real Estate Loans (RES RE): Real estate loans are secured by owner-occupied 1-4 family residences. Repayment of residential real estate loans is primarily dependent on the personal income and credit rating of the borrowers. First-lien HELOC mortgages included in this segment typically carry a base rate of 30-day LIBOR or the One-Year Constant Maturity Treasury (“CMT”), plus a margin.

Multi-Family Financing (MF FIN): The Company engages in multi-family financing, including construction loans, specializing in originating and servicing loans for multi-family rental properties. In addition, the Company originates loans secured by an assignment of federal income tax credits by partnerships invested in multi-family real estate projects. Construction and land loans are generally based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans are dependent on the cash flow of the property, and may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent agency-eligible financing is obtained. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values

and the local economy in the Company’s market area. Repayment of these loans depends on the successful operation of a business or property and the borrower’s cash flows. Loans included in this segment typically carry a base rate of SOFR that adjusts on a monthly basis and a margin.

Healthcare Financing (HC FIN): The healthcare financing portfolio includes customized loan products for independent living, assisted living, memory care and skilled nursing projects. A variety of loan products are available to accommodate rehabilitation, acquisition, and refinancing of healthcare properties. Credit risk in these loans are primarily driven by local demographics and the expertise of the operators of the facilities. Repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent agency-eligible financing is obtained, as well as successful operation of a business or property and the borrower’s cash flows. Loans included in this segment typically carry a base rate of SOFR that adjusts on a monthly basis and a margin.

Commercial Lending and Commercial Real Estate Loans (CML & CRE): The commercial lending and commercial real estate portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions, as well as loans to commercial customers to finance land and improvements. It also includes loans collateralized by servicing rights and loan sale proceeds of mortgage warehouse customers. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. PPP loans and Small Business Administration (“SBA”) loans are included in this category.

Agricultural Production and Real Estate Loans (AG & AGRE): Agricultural production loans are generally comprised of seasonal operating lines of credit to grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. The Company also offers long term financing to purchase agricultural real estate. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry-developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. The Company is approved to sell agricultural loans in the secondary market through the Federal Agricultural Mortgage Corporation and uses this relationship to manage interest rate risk within the portfolio. Agricultural real estate loans included in this segment are typically structured with a one-year ARM, 3-year ARM or 5-year ARM CMT and a margin. Agriculture production, livestock, and equipment loans are structured with variable rates that are indexed to prime or fixed for terms not exceeding 5 years.

Consumer and Margin Loans (CON & MAR): Consumer loans are those loans secured by household assets. Margin loans are those loans secured by marketable securities. The term and maximum amount for these loans are determined by considering the purpose of the loan, the margin (advance percentage against value) in all collateral, the primary source of repayment, and the borrower’s other related cash flow.

ACL-Loans

The Company adopted CECL on January 1, 2022. CECL replaces the previous “Allowance for Loan and Lease Losses” standard for measuring credit losses. Upon adoption of CECL, the difference in the two measurements was recorded in the ACL-Loans and retained earnings.

The ACL-Loans is the Company’s estimate of expected credit losses. Loans receivable is presented net of the allowance to reflect the principal balance expected to be collected over the contractual term of the loans. This life of loan allowance is established through a provision for credit losses charged to net interest income as loans are recorded in the financial statements. The provision for a reporting period also reflects increases or decreases in the allowance related to changes in credit loss expectations. Actual credit losses are charged against the allowance when management believes the uncollectability of a loan balance, or a portion thereof, is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The ACL-Loans is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans considering relevant available information from internal and external sources, including historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The allowance also incorporates reasonable and supportable forecasts. There have been no changes to the credit quality components used to assess risk during the nine months ended September 30, 2022. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The level of the ACL is believed to be adequate to absorb innate expected future losses in the loan portfolio as of the measurement date.

The ACL-Loans consists of individually evaluated loans and pooled loan components. The Company’s primary portfolio segmentation is by credit risk grade. Loans risk graded substandard and worse are individually evaluated for expected credit losses. For individually evaluated loans that are collateral dependent, an allowance is established when the fair value of the collateral, the loan’s obtainable market price, or the present value of expected future cash flows discounted at the loan’s effective interest rate, is lower than the carrying value of that loan. A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or the sale of the collateral.

To calculate the allowance for expected credit losses on loans risk graded pass through special mention, the loan portfolio is segmented into 14 segments comprised of loans with similar risk characteristics.


Loan Portfolio Segment		ACL-Loans Methodology

Ag loans		Remaining Life Method
Ag real estate loans		Remaining Life Method
Commercial loans		Discounted Cash Flow
Commercial real estate loans		Discounted Cash Flow
Consumer and margin loans		Remaining Life Method
HELOC loans		Discounted Cash Flow
Multi-family healthcare loans		Discounted Cash Flow
Multi-family non-management loans		Discounted Cash Flow
Multi-family construction loans		Discounted Cash Flow
Multi-family loans		Discounted Cash Flow
Residential real estate loans		Discounted Cash Flow
SBA commercial loans		Discounted Cash Flow
SBA real estate commercial loans		Discounted Cash Flow
Single-family warehouse lines of credit		Remaining Life Method

Loan characteristics used in determining the segmentation included the underlying collateral, type or purpose of the loan, and expected credit loss patterns. The estimation of expected credit losses for each segment is primarily based on historical credit loss experience. Given the Company’s modest historical credit loss experience, peer and industry data was incorporated into the measurement. Expected life of loan credit losses are quantified using discounted cash flows and remaining life methodologies. For the ten portfolio segments where the discounted cash flow method was employed, econometric models are utilized to determine a Probability of Default (“PD”). Macroeconomic factors utilized in the modeling process include the national unemployment rate and the home price index. A risk index was then utilized to predict the Loss Given Default (“LGD”). The PD is then multiplied by the LGD to determine the expected loss that is incorporated into the discounted cash flow calculations. Within the discount cash flow calculation, an effective yield of the instrument is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows. An ACL is established for the difference between the instrument’s net present value and amortized cost basis. The remaining life method applies average loss rates for each segment to estimated loan balances for the remaining life of the segment.

The estimate includes a four-quarter reasonable and supportable economic forecast period followed by an eight-quarter, straight-line reversion period to the historical mean for the remaining life of the loans. Model results are supplemented by qualitative adjustments for risk factors relevant in assessing the expected credit losses within the portfolio segments. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that are considered in making qualitative adjustments include (i) changes in the value of underlying collateral for collateral dependent loans, (ii) the effect of other external factors such as regulatory and legal requirements, the impact of (i) changes in national, regional and local economic conditions, (ii) changes in lending policies and procedures, (iii) changes in the volume and severity of past due loans, (iv) changes in the nature and volume of the loan portfolio, (v) changes in the experience, depth and ability of lending management, (vi) the existence and effect of any concentrations in credit, (vii) changes in the quality of the credit review function.

The models utilized and the applicable qualitative adjustments require assumptions and management judgement that can be subjective in nature. The above measurement approach is also used to estimate the expected credit losses associated with unfunded loan commitments, which also incorporates expected utilization rates.

The following tables present, by loan portfolio segment, the activity in the ACL-Loans for the three and nine months ended September 30, 2022:


	For the Three Months Ended September 30, 2022
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	2,422	$	4,910	$	16,364	$	7,936	$	5,195	$	551	$	96	$	37,474
Provision for credit losses		(230)		1,370		(2,365)		1,061		1,821		1		51		1,709
Loans charged to the allowance		—		(4)		—		—		(275)		—		—		(279)
Recoveries of loans previously charged off		—		—		—		—		92		—		—		92
Balance, end of period	$	2,192	$	6,276	$	13,999	$	8,997	$	6,833	$	552	$	147	$	38,996


	For the Nine Months Ended September 30, 2022
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	1,955	$	4,170	$	14,084	$	4,461	$	5,879	$	657	$	138	$	31,344
Impact of adopting CECL		41		275		520		139		(1,277)		(18)		21		(299)
Provision for credit losses		196		1,835		(605)		4,397		2,726		(87)		(4)		8,458
Loans charged to the allowance		—		(4)		—		—		(1,238)		—		(15)		(1,257)
Recoveries of loans previously charged off		—		—		—		—		743		—		7		750
Balance, end of period	$	2,192	$	6,276	$	13,999	$	8,997	$	6,833	$	552	$	147	$	38,996

The Company recorded a provision for credit losses of $2.2 million for the three months ended September 30, 2022. The $2.2 million provision for credit losses consisted of $1.7 million for the ACL-Loans, $0.5 million for the ACL-OBCE’s and $0 for the contingent reserve related to the Freddie Mac-sponsored Q-series securitization transaction.

The Company recorded a provision for credit losses of $10.9 million for the nine months ended September 30, 2022. The $10.9 million provision for credit losses consisted of $8.5 million for the ACL-Loans, $1.2 million for the ACL-OBCE’s, and $1.2 million for the contingent reserve related to the Freddie Mac-sponsored Q-series securitization transaction.

Prior to the adoption of CECL, the Company maintained an allowance for loan losses in accordance with the incurred loss model as disclosed in the Company’s 2021 Annual Report on Form 10-K.

The following tables present the allowance for loan losses for the three and nine months ended September 30, 2021:


	For the Three Months Ended September 30, 2021
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
Allowance for loan losses
Balance, beginning of period	$	2,935	$	3,969	$	11,678	$	4,104	$	5,239	$	611	$	160	$	28,696
Provision for credit losses		(705)		105		1,105		324		296		(2)		(44)		1,079
Loans charged to the allowance		—		—		—		—		(650)		—		—		(650)
Recoveries of loans previously charged off		—		—		—		—		—		—		9		9
Balance, end of period	$	2,230	$	4,074	$	12,783	$	4,428	$	4,885	$	609	$	125	$	29,134


	For the Nine Months Ended September 30, 2021
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
Allowance for loan losses
Balance, beginning of period	$	4,018	$	3,334	$	12,041	$	2,690	$	4,641	$	636	$	140	$	27,500
Provision for credit losses		(1,788)		742		742		1,738		1,046		(27)		(26)		2,427
Loans charged to the allowance		—		(2)		—		—		(802)		—		(6)		(810)
Recoveries of loans previously charged off		—		—		—		—		—		—		17		17
Balance, end of period	$	2,230	$	4,074	$	12,783	$	4,428	$	4,885	$	609	$	125	$	29,134

The following table presents the allowance for loan losses and the recorded investment in loans and impairment method as of December 31, 2021:


	December 31, 2021
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
Allowance for loan losses
Balance, December 31, 2021	$	1,955	$	4,170	$	14,084	$	4,461	$	5,879	$	657	$	138	$	31,344
Ending balance: individually evaluated for impairment	$	—	$	16	$	—	$	—	$	867	$	—	$	7	$	890
Ending balance: collectively evaluated for impairment	$	1,955	$	4,154	$	14,084	$	4,461	$	5,012	$	657	$	131	$	30,454
Loans
Balance, December 31, 2021	$	781,437	$	843,101	$	2,702,042	$	826,157	$	520,199	$	97,060	$	12,667	$	5,782,663
Ending balance individually evaluated for impairment	$	—	$	419	$	36,760	$	—	$	6,055	$	158	$	13	$	43,405
Ending balance collectively evaluated for impairment	$	781,437	$	842,682	$	2,665,282	$	826,157	$	514,144	$	96,902	$	12,654	$	5,739,258

The below table presents the amortized cost basis and ACL-Loans allocated for collateral dependent loans, which are individually evaluated to determine expected credit losses:


	September 30, 2022
	Real Estate		Accounts Receivable / Equipment		Other		Total		ACL-Loans Allocation

	(In thousands)
RES RE	$	196	$	—	$	6	$	202	$	22
MF FIN		36,760		—		—		36,760		167
CML & CRE		—		5,036		745		5,781		611
AG & AGRE		147		—		—		147		1
CON & MAR		—		—		3		3		—
Total collateral dependent loans	$	37,103	$	5,036	$	754	$	42,893	$	801

There has been no significant changes to the types of collateral securing the Company’s collateral dependent loans compared to September 30, 2021.

Internal Risk Categories

In adherence with policy, the Company uses the following internal risk grading categories and definitions for loans:

Average or above – Loans to borrowers of satisfactory financial strength or better. Earnings performance is consistent with primary and secondary sources of repayment that are well defined and adequate to retire the debt in a timely and orderly fashion. These businesses would generally exhibit satisfactory asset quality and liquidity with moderate leverage, average performance to their peer group and experienced management in key positions. These loans are disclosed as “Acceptable and Above” in the following table.

Acceptable – Loans to borrowers involving more than average risk and which contain certain characteristics that require some supervision and attention by the lender. Asset quality is acceptable, but debt capacity is modest and little excess liquidity is available. The borrower may be fully leveraged and unable to sustain major setbacks. Covenants are structured to ensure adequate protection. Borrower’s management may have limited experience and depth. This category includes loans which are highly leveraged due to regulatory constraints, as well as loans involving reasonable exceptions to policy. These loans are disclosed as “Acceptable and Above” in the following table.

Special Mention (Watch) – This is a loan that is sound and collectable but contains potential risk. 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 tables present the credit risk profile of the Company’s loan portfolio based on internal risk rating category as of September 30, 2022 and December 31, 2021:


	As of September 30, 2022
	2022		2021		2020		2019		2018		Prior		Revolving Loans		TOTAL

	(In thousands)
MTG WHLOC
Acceptable and Above	$	—	$	—	$	—	$	—	$	—	$	—	$	815,084	$	815,084
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	815,084	$	815,084
RES RE
Acceptable and Above		12,903		7,999		24,802		3,534		730		10,696		968,275		1,028,939
Special Mention (Watch)		—		—		—		61		74		799		—		934
Substandard		—		—		—		—		—		202		—		202
Total	$	12,903	$	7,999	$	24,802	$	3,595	$	804	$	11,697	$	968,275	$	1,030,075
MF FIN
Acceptable and Above		714,724		742,079		245,382		46,557		7,631		7,287		928,462		2,692,122
Special Mention (Watch)		28,529		5,000		4,539		—		—		—		—		38,068
Substandard		36,760		—		—		—		—		—		—		36,760
Total	$	780,013	$	747,079	$	249,921	$	46,557	$	7,631	$	7,287	$	928,462	$	2,766,950
HC FIN
Acceptable and Above		710,459		310,464		183,047		13,860		—		—		112,288		1,330,118
Special Mention (Watch)		30,051		43,903		15,623		9,980		—		—		—		99,557
Total	$	740,510	$	354,367	$	198,670	$	23,840	$	—	$	—	$	112,288	$	1,429,675
CML & CRE
Acceptable and Above		75,569		87,709		28,353		54,185		12,855		9,111		534,600		802,382
Special Mention (Watch)		45		20		971		124		101		230		1,077		2,568
Substandard		—		1,779		604		75		—		671		2,652		5,781
Total	$	75,614	$	89,508	$	29,928	$	54,384	$	12,956	$	10,012	$	538,329	$	810,731
AG & AGRE
Acceptable and Above		9,782		7,716		15,990		6,010		3,255		20,803		26,608		90,164
Special Mention (Watch)		14		64		471		425		163		408		57		1,602
Substandard		—		—		—		—		—		147		—		147
Total	$	9,796	$	7,780	$	16,461	$	6,435	$	3,418	$	21,358	$	26,665	$	91,913
CON & MAR
Acceptable and Above		4,582		575		345		114		4,683		14		3,356		13,669
Special Mention (Watch)		—		—		21		—		—		3		—		24
Substandard		—		—		—		—		—		3		—		3
Total	$	4,582	$	575	$	366	$	114	$	4,683	$	20	$	3,356	$	13,696

Total Acceptable and Above	$	1,528,019	$	1,156,542	$	497,919	$	124,260	$	29,154	$	47,911	$	3,388,673	$	6,772,478
Total Special Mention (Watch)	$	58,639	$	48,987	$	21,625	$	10,590	$	338	$	1,440	$	1,134	$	142,753
Total Substandard	$	36,760	$	1,779	$	604	$	75	$	—	$	1,023	$	2,652	$	42,893
Total Loans	$	1,623,418	$	1,207,308	$	520,148	$	134,925	$	29,492	$	50,374	$	3,392,459	$	6,958,124


	December 31, 2021
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
Special Mention (Watch)	$	—	$	946	$	27,155	$	66,406	$	2,483	$	3,820	$	21	$	100,831
Substandard		—		419		36,760		—		6,055		158		13		43,405
Acceptable and Above		781,437		841,736		2,638,127		759,751		511,661		93,082		12,633		5,638,427
Total	$	781,437	$	843,101	$	2,702,042	$	826,157	$	520,199	$	97,060	$	12,667	$	5,782,663

The Company did not have any material revolving loans converted to term loans at September 30, 2022.

The Company evaluates the loan risk grading system definitions and ACL-Loans methodology on an ongoing basis. No significant changes were made to either during the past year.

Delinquent Loans

The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2022 and December 31, 2021. There was one loan totaling $36.8 million at September 30, 2022 and December 31, 2021 that had been modified in accordance with the CARES Act and therefore not classified as delinquent. This loan has been granted extended dates to make payments and no payments were due as of September 30, 2022. Also excluded from the tables below are government guaranteed commercial SBA loans totaling $0 and $3.2 million that were 30-59 days past due and government guaranteed commercial SBA loans with balances of $0 and $274,000 that were over 90 days past due as of September 30, 2022 and December 31, 2021, respectively.


	September 30, 2022
	30-59 Days		60-89 Days		Greater Than		Total				Total
	Past Due		Past Due		90 Days		Past Due		Current		Loans

	(In thousands)
MTG WHLOC	$	—	$	—	$	—	$	—	$	815,084	$	815,084
RES RE		627		109		125		861		1,029,214		1,030,075
MF FIN		—		—		—		—		2,766,950		2,766,950
HC FIN		—		—		21,783		21,783		1,407,892		1,429,675
CML & CRE		—		—		3,778		3,778		806,953		810,731
AG & AGRE		59		73		—		132		91,781		91,913
CON & MAR		90		—		5		95		13,601		13,696
	$	776	$	182	$	25,691	$	26,649	$	6,931,475	$	6,958,124


	December 31, 2021
	30-59 Days		60-89 Days		Greater Than		Total				Total
	Past Due		Past Due		90 Days		Past Due		Current		Loans

	(In thousands)
MTG WHLOC	$	—	$	—	$	—	$	—	$	781,437	$	781,437
RES RE		1,252		287		186		1,725		841,376		843,101
MF FIN		—		—		—		—		2,702,042		2,702,042
HC FIN		—		—		—		—		826,157		826,157
CML & CRE		591		8		149		748		519,451		520,199
AG & AGRE		37		21		—		58		97,002		97,060
CON & MAR		43		5		40		88		12,579		12,667
	$	1,923	$	321	$	375	$	2,619	$	5,780,044	$	5,782,663

Impaired Loans

The following table presents impaired loans and specific valuation allowance information based on class level as of December 31, 2021:


	December 31, 2021
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
Impaired loans without a specific allowance:
Recorded investment	$	—	$	372	$	36,760	$	—	$	3,912	$	158	$	4	$	41,206
Unpaid principal balance		—		372		36,760		—		3,912		158		4		41,206
Impaired loans with a specific allowance:		—						—
Recorded investment		—		47		—		—		2,143		—		9		2,199
Unpaid principal balance		—		47		—		—		2,143		—		9		2,199
Specific allowance		—		16		—		—		867		—		7		890
Total impaired loans:
Recorded investment		—		419		36,760		—		6,055		158		13		43,405
Unpaid principal balance		—		419		36,760		—		6,055		158		13		43,405
Specific allowance		—		16		—		—		867		—		7		890

The following table presents by portfolio class, information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2021:


		For the Three Months Ended September 30, 2021
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL


Average recorded investment in impaired loans	$	—	$	595	$	9,190	$	—	$	6,731	$	158	$	6	$	16,680
Interest income recognized		—		30		—		—		82		—		—		112


		For the Nine Months Ended September 30, 2021
	MTG WHLOC		RES RE		MF RE		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL


Average recorded investment in impaired loans	$	—	$	1,885	$	7,352	$	—	$	7,307	$	747	$	7	$	17,298
Interest income recognized		—		57		—		—		341		—		—		398

Nonperforming Loans

Nonaccrual loans, including TDRs that have not met the six-month minimum performance criterion, are reported as nonperforming loans. For all loan classes, it is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until three months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is doubtful under the terms of the loan

agreement. Most generally, this is at 90 or more days past due. The amount of interest income recognized on nonaccrual financial assets during the nine months ended September 30, 2022 was immaterial.

The following table presents the Company’s nonaccrual loans and loans past due 90 days or more and still accruing at September 30, 2022 and December 31, 2021.


	September 30,				December 31,
	2022				2021
			Total Loans >				Total Loans >
			90 Days &				90 Days &
	Nonaccrual		Accruing		Nonaccrual		Accruing

	(In thousands)
RES RE	$	201	$	21	$	362	$	22
MF RE		21,783		—		—		—
CML & CRE		4,393		—		—		149
AG & AGRE		147		—		158		30
CON & MAR		3		2		4		36
	$	26,527	$	23	$	524	$	237

The Company did not have any nonperforming loans without an estimated ACL at September 30, 2022.

No troubled loans were modified during the three or nine months ended September 30, 2022 or 2021. No restructured loans defaulted during the three or nine months ended September 30, 2022 or 2021. Loan modifications or forbearances related to the COVID-19 pandemic will generally not be considered TDRs.

The CARES Act included several provisions designed to help financial institutions like the Company in working with their customers. Section 4013 of the CARES Act, as extended, allows a financial institution to elect to suspend generally accepted accounting principles and regulatory determinations with respect to qualifying loan modifications related to COVID-19 that would otherwise be categorized as a TDR until January 1, 2022. The Company has taken advantage of this provision to extend certain payment modifications to loan customers in need. As of September 30, 2022, the Company has only one loan totaling $36.8 million that was modified during 2020 or 2021 under the CARES Act guidance, that remain on modified terms. The Company modified other loans under the guidance that have since returned to normal repayment status as of September 30, 2022.

There were no residential loans in process of foreclosure as of September 30, 2022 and December 31, 2021.

Significant Loan Sales

Loan Sale and Securitization - 2022 Activity

On September 22, 2022, the Company completed a private securitization by which a $1.2 billion portfolio of multi-family bridge loans was sold into a real estate mortgage investment conduit (“REMIC”) and ultimately sold to investors as securities. The Company purchased one of the securities for a total of $1.0 billion and classified it as a held to maturity security at September 30, 2022. An unaffiliated, third-party institutional investor purchased the remaining subordinate interests and maintains the first-loss position on 13.4% of the losses in the loan portfolio.

As part of the securitization transaction, the Company will be both Master Servicer and Special Servicer of the loans. As Master Servicer and Special Servicer, the Company will have obligations to collect and remit payments of principal and interest, manage payments of taxes and insurance, and otherwise administer the underlying loans.

Beyond servicing the loans, the Company’s ongoing involvement in this transaction is limited to customary obligations of loan sales, including any material breach in representation. In connection with the securitization, the Company received proceeds and accrued interest on loans, net of the acquired securities, of $150.6 million. No allowance for credit losses was recognized in connection with purchase of the security, in accordance with ASC 326.

However, the $4.0 million allowance for credit losses associated with the loans sold was released through the provision for credit losses.

The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance with ASC 860, and a $525,000 net loss on sale was recognized. The net loss on sale included a $5.4 million pricing loss and $4.9 million in transaction expenses partially offset by a $6.7 million positive impact of capitalizing servicing rights associated with this transaction and a $3.2 million release of deferred fees on loans sold.

Freddie Mac Q Series Securitization - 2022 Activity

On May 5, 2022, the Company entered into an arrangement through a third-party trust and Freddie Mac, by which a $214.0 million portfolio of multi-family loans were sold to the trust and ultimately securitized through Freddie Mac and sold to investors. The Company did not purchase any of the securities. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance with ASC 860, and a $2.3 million net gain on sale was recognized, which included establishing a contingent and noncontingent reserve and servicing rights associated with this transaction.

The Company’s ongoing involvement in this transaction is limited to customary obligations of loan sales, including any material breach in representation. In connection with the securitization, the Company also entered into a reimbursement agreement for a first loss position in the underlying loan portfolio, not to exceed 12% of the unpaid principal amount of the loans comprising the securitization pool at settlement, or approximately $25.7 million. A contingent reserve of $1.2 million for estimated losses was established with respect to the first loss obligation on May 5, 2022, which was included in provision for credit losses on the consolidated statement of income and other liabilities on the consolidated balance sheet. A noncontingent reserve of $2.5 million related to the Company’s reimbursement obligation was included in other liabilities on the consolidated balance sheet and offset through gain on sale in the consolidated statement of income. The Company was also required to hold collateral against the reimbursement agreement. Accordingly, $27.0 million of U.S. Treasury securities were acquired as part of the transaction.

As part of the securitization transaction, the Company released all mortgage servicing obligations and rights to Freddie Mac, who was designated as the Master Servicer. Freddie Mac appointed the Company with sub-servicing obligations, which include obligations to collect and remit payments of principal and interest, manage payments of taxes and insurance, and otherwise administer the underlying loans. Accordingly, the Company recognized a mortgage servicing asset of $1.2 million on the sale date.

Freddie Mac Q Series Securitization - 2021 Activity

On May 7, 2021, the Company entered into an arrangement through a third-party trust and Freddie Mac, by which a $262.0 million portfolio of multi-family loans were sold to the trust and ultimately securitized through Freddie Mac and sold to investors. The Company purchased two of the securities for a total of $28.7 million. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance with ASC 860, and a $676,000 net loss on sale was recognized, which included the impact of establishing a risk share allowance and servicing rights associated with this transaction.

Beyond holding the two securities, the Company’s ongoing involvement in this transaction is limited to customary obligations of loan sales, including any material breach in representation. In connection with the securitization and purchase of one of the securities, Merchants maintains a first loss position in the underlying loan portfolio not to exceed 10% of the unpaid principal amount of the loans comprising the securitization pool at settlement, or approximately $26.2 million. Therefore, a reserve of $1.4 million for estimated losses was established with respect to the first loss obligation at May 7, 2021, which was included in other liabilities on the consolidated balance sheets. These estimated losses were consistent with the amount in allowance for loan losses that was released when the loans were sold. If the Company sells one of the securities, this first loss obligation would be eliminated.

As part of the securitization transaction, Merchants released all mortgage servicing obligations and rights to Freddie Mac who was designated as the Master Servicer. As Master Servicer, Freddie Mac appointed the Company with sub-servicing obligations, which include obligations to collect and remit payments of principal and interest, manage payments of taxes and insurance, and otherwise administer the underlying loans. Accordingly, the company recognized a mortgage servicing asset of $730,000 on the sale date.

During the three and nine months ended September 30, 2022, one of these securities was sold at book value resulting in no gain or loss, and the other security was fully amortized resulting in no gain or loss.

Loans Purchased

The Company purchased $289.0 million and $313.0 million of loans during the nine months ended September 30, 2022 and 2021, respectively.