Loans Receivable Held for Investment

3 Months Ended

Mar. 31, 2023

Loans Receivable Held for Investment [Abstract]

Loans Receivable Held for Investment

NOTE 4 – Loans Receivable Held for Investment

Loans receivable held for investment were as follows as of the dates indicated:

	March 31, 2023			December 31, 2022
	(In thousands)
Real estate:
Single family	$	29,216		$	30,038
Multi-family		509,514			502,141
Commercial real estate		129,031			114,574
Church		13,983			15,780
Construction		59,143			40,703
Commercial – other		37,354			64,841
SBA loans (1)		3,565			3,601
Consumer		10			11
Gross loans receivable before deferred loan costs and premiums		781,816			771,689
Unamortized net deferred loan costs and premiums		1,532			1,755
Gross loans receivable		783,348			773,444
Credit and interest marks on purchased loans, net		(1,010	)		(1,010	)
Allowance for credit losses (2)		(6,285	)		(4,388	)
Loans receivable, net	$	776,053		$	768,046

(1) Including Paycheck Protection Program (PPP) loans.

(2) The allowance for credit losses as of December 31, 2022 was accounted for under ASC 450 and ASC 310, which is reflective of probable incurred losses as of the date of the consolidated statement of financial condition. Effective January 1, 2023, the allowance for credit losses is accounted for under ASC 326, which is reflective of estimated expected lifetime credit losses.

As of both March 31, 2023 and December 31, 2022, the commercial loan category above included $2.7 million of loans issued under the SBA’s PPP. PPP loans have terms of two to five years and earn interest at 1%. PPP loans are fully guaranteed by the SBA and have virtually no risk of loss. The Company expects the vast majority of the PPP loans to be fully forgiven by the SBA.

Prior to the adoption of ASC 326, loans that were purchased in a business combination that showed evidence of credit deterioration since their origination and for which it was probable, at acquisition, that not all contractually required payments would be collected were classified as purchased-credit impaired (“PCI”). The Company accounted for PCI loans and associated income recognition in accordance with ASC Subtopic 310-30 – Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Upon acquisition, the Company measured the amount by which the undiscounted expected cash future flows on PCI loans exceeded the estimated fair value of the loan as the “accretable yield,” representing the amount of estimated future interest income on the loan. The amount of accretable yield was re-measured at each financial reporting date, representing the difference between the remaining undiscounted expected cash flows and the current carrying value of the PCI loan. The accretable yield on PCI loans was recognized in interest income using the interest method.

Following the adoption of ASC 326 on January 1, 2023, the Company analyzes all acquired loans at the time of acquisition for more-than-insignificant deterioration in credit quality since their origination date. Such loans are classified as purchased credit deteriorated (“PCD”) loans. Acquired loans classified as PCD are recorded at an initial amortized cost, which is comprised of the purchase price of the loans and the initial ACL determined for the loans, which is added to the purchase price, and any resulting discount or premium related to factors other than credit. PCI loans were considered to be PCD loans at the date of adoption of ASC 326. The Company accounts for interest income on PCD loans using the interest method, whereby any purchase discounts or premiums are accreted or amortized into interest income as an adjustment of the loan’s yield. An accretable yield is not determined for PCD loans.

As part of the CFBanc merger, the Company acquired PCI loans. Prior to the CFBanc merger, there were no such acquired loans. The carrying amount of those loans was as follows:

	March 31, 2023		December 31, 2022
Real estate:	(In thousands)
Single family	$	68	$	68
Commercial – other		57		57
	$	125	$	125

The following table summarizes the discount on the PCI loans for the three months ended:

	March 31, 2023		March 31, 2022
	(In thousands)
Balance at the beginning of the period	$	165	$	883
Deduction due to payoffs		–		(707	)
Accretion		–		(11	)
Balance at the end of the period	$	165	$	165

Effective January 1, 2023, the Company accounts for credit losses on loans in accordance with ASC 326 – Financial Instruments-Credit Losses, to determine the ACL. ASC 326 requires the Company to recognize estimates for lifetime losses on loans and off-balance sheet loan commitments at the time of origination or acquisition. The recognition of losses at origination or acquisition represents the Company’s best estimate of the lifetime expected credit loss associated with a loan given the facts and circumstances associated with the particular loan, and involves the use of significant management judgement and estimates, which are subject to change based on management’s on-going assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. The Company uses the WARM method when determining estimates for the ACL for each of its portfolio segments. The weighted average remaining life, including the effect of estimated prepayments, is calculated for each loan pool on a quarterly basis. The Company then estimates a loss rate for each pool using both its own historical loss experience and the historical losses of a group of peer institutions during the period from 2004 through the most recent quarter.

The Company’s ACL model also includes adjustments for qualitative factors, where appropriate. Qualitative adjustments may be related to and include, but are not limited to factors such as: (i) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices; (ii) changes in international, national, regional, and local conditions; (iii) changes in the nature and volume of the portfolio and terms of loans; (iv) changes in the experience, depth, and ability of lending management; (v) changes in the volume and severity of past due loans and other similar conditions; (vi) changes in the quality of the organization’s loan review system; (vii) changes in the value of underlying collateral for collateral dependent loans; (viii) the existence and effect of any concentrations of credit and changes in the levels of such concentrations; and (ix) the effect of other external factors (i.e., competition, legal and regulatory requirements) on the level of estimated credit losses. These qualitative factors incorporate the concept of reasonable and supportable forecasts, as required by ASC 326.

The following tables summarize the activity in the allowance for credit losses on loans for the period indicated:

	March 31, 2023
	Beginning Balance		Impact of CECL Adoption			Charge-offs		Recoveries		Provision (benefit)			Ending Balance
	(In thousands)
Loans receivable held for investment:
Single family	$	109	$	214		$	–	$	–	$	(62	)	$	261
Multi-family		3,273		603			–		–		56			3,932
Commercial real estate		449		466			–		–		97			1,012
Church		65		37			–		–		(10	)		92
Construction		313		219			–		–		61			593
Commercial - other		175		254			–		–		(72	)		357
SBA loans		–		20			–		–		18			38
Consumer		4		(4	)		–		–		–			–
Total	$	4,388	$	1,809		$	–	$	–	$	88		$	6,285

The following tables present the activity in the allowance for loan losses by loan type for the period indicated:

	For the Three Months Ended March 31, 2022
	Real Estate
	Single Family		Multi- Family		Commercial Real Estate			Church			Construction		Commercial - Other		Consumer		Total
	(In thousands)
Beginning balance	$	145	$	2,657	$	236		$	103		$	212	$	23	$	15	$	3,391
Provision for (recapture of) loan losses		12		114		(20	)		(40	)		25		57		–		148
Recoveries		–		–		–			–			–		–		–		–
Loans charged off		–		–		–			–			–		–		–		–
Ending balance	$	157	$	2,771	$	216		$	63		$	237	$	80		15		3,539

The increase in ACL during the quarter was due to the implementation of the CECL methodology adopted by the Bank effective January 1, 2023, which increased the ACL by $1.8 million. In addition, the Bank recorded an additional increase in the provision for credit losses of $88 thousand during the first quarter of 2023 related to growth in the portfolio. The CECL methodology includes estimates of expected loss rates in the future, whereas the former Allowance for Loan and Lease methodology did not.

Prior to the Company’s adoption of ASC 326 on January 1, 2023, the Company maintained an allowance for loan losses (“ALLL”) in accordance with ASC 310 and ASC 450 that covered estimated credit losses on individually evaluated loans that were determined to be impaired, as well as estimated probable incurred losses inherent in the remainder of the loan portfolio.

Beginning on January 1, 2023, the Company evaluates loans collectively for purposes of determining the ACL in accordance with ASC 326. Collective evaluation is based on aggregating loans deemed to possess similar risk characteristics. In certain instances, the Company may identify loans that it believes no longer possess risk characteristics similar to other loans in the loan portfolio. These loans are typically identified from those that have exhibited deterioration in credit quality, since the specific attributes and risks associated with such loans tend to become unique as the credit deteriorates. Such loans are typically nonperforming, downgraded to substandard or worse, and/or are deemed collateral dependent, where the ultimate repayment of the loan is expected to come from the operation of or eventual sale of the collateral. Loans that are deemed by management to no longer possess risk characteristics similar to other loans in the portfolio, or that have been identified as collateral dependent, are evaluated individually for purposes of determining an appropriate lifetime ACL. The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent, which requires evaluation based on the estimated fair value of the underlying collateral, less estimated selling costs. The Company may increase or decrease the ACL for collateral dependent loans based on changes in the estimated fair value of the collateral.

The following table presents collateral dependent loans by collateral type as of the date indicated:

	March 31, 2023
	Single Family		Condominium		Church		Business Assets		Total
Real estate:	(In thousands)
Single family	$	53	$	112	$	–	$	–	$	165
Commercial real estate		–		–		78		–		78
Church		–		–		695		–		695
Commercial – other		–		–		–		281		281
Total	$	53	$	112	$	773	$	281	$	1,219

At March 31, 2023, $1.2 million of individually evaluated loans were evaluated based on the underlying value of the collateral and no individually evaluated loans were evaluated using a discounted cash flow approach. The Company had no individually evaluated loans on nonaccrual status at March 31, 2023.

Prior to the adoption of ASC 326 on January 1, 2023, the Company classified loans as impaired when, based on current information and events, it was probable that the Company would be unable to collect all amounts due according to the contractual terms of the loan agreement or it was determined that the likelihood of the Company receiving all scheduled payments, including interest, when due was remote. Credit losses on impaired loans were determined separately based on the guidance in ASC 310. Beginning January 1, 2023, the Company accounts for credit losses on all loans in accordance with ASC 326, which eliminates the concept of an impaired loan within the context of determining credit losses, and requires all loans to be evaluated for credit losses collectively based on similar risk characteristics. Loans are only evaluated individually when they are deemed to no longer possess similar risk characteristics with other loans in the loan portfolio.

The following tables present the balance in the allowance for loan losses and the recorded investment (unpaid contractual principal balance less charge-offs, less interest applied to principal, plus unamortized deferred costs and premiums) by loan type and based on impairment method as of the date indicated:

	December 31, 2022
	Real Estate
	Single Family		Multi- Family		Commercial Real Estate		Church		Construction		Commercial - Other		Consumer		Total
	(In thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3	$	–	$	–	$	4	$	–	$	–	$	–	$	7
Collectively evaluated for impairment		106		3,273		449		61		313		175		4		4,381
Total ending allowance balance	$	109	$	3,273	$	449	$	65	$	313	$	175	$	4	$	4,388
Loans:
Loans individually evaluated for impairment	$	57	$	–	$	–	$	1,655	$	–	$	–	$	–	$	1,712
Loans collectively evaluated for impairment		20,893		462,539		63,929		9,008		38,530		29,558		11		624,468
Subtotal		20,950		462,539		63,929		10,663		38,530		29,558		11		626,180
Loans acquired in the Merger		9,088		41,357		50,645		5,117		2,173		38,884		–		147,264
Total ending loans balance	$	30,038	$	503,896	$	114,574	$	15,780	$	40,703	$	68,442	$	11	$	773,444

The following table presents information related to loans individually evaluated for impairment by loan type as of the date indicated:

	December 31, 2022
	Unpaid Principal Balance		Recorded Investment		Allowance for  Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Church	$	1,572	$	1,572	$	–
With an allowance recorded:
Single family		57		57		3
Church		83		83		4
Total	$	1,712	$	1,712	$	7

The recorded investment in loans excludes accrued interest receivable due to immateriality.  For purposes of this disclosure, the unpaid principal balance is not reduced for net charge-offs.

The following tables present the monthly average of loans individually evaluated for impairment by loan type and the related interest income for the period indicated:

	Three Months Ended March 31, 2022
	Average Recorded Investment		Cash Basis Interest Income Recognized
	(In thousands)
Single family	$	64	$	1
Multi-family		279		5
Church		2,535		25
Total	$	2,878	$	31

The following tables present the aging of the recorded investment in past due loans by loan type as of the dates indicated:

	March 31, 2023
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
	(In thousands)
Loans receivable held for investment:
Single family	$	–	$	–	$	–	$	–	$	29,216	$	29,216
Multi-family		406		–		–		406		510,640		511,046
Commercial real estate		–		–		–		–		129,031		129,031
Church		–		–		–		–		13,983		13,983
Construction		–		–		–		–		59,143		59,143
Commercial - other		–		–		–		–		37,354		37,354
SBA loans		–		–		–		–		3,565		3,565
Consumer		–		–		–		–		10		10
Total	$	406	$	–	$	–	$	406	$	782,942	$	783,348

December 31, 2022

30-59 Days Past Due

60-89 Days Past Due

Greater than 90 Days Past Due

Total Past Due

Current

Total

(In thousands)

Loans receivable held for investment:

Single family

$

–

$

–

$

–

$

–

$

30,038

$

30,038

Multi-family

–

–

–

–

503,896

503,896

Commercial real estate

–

–

–

–

114,574

114,574

Church

–

–

–

–

15,780

15,780

Construction

–

–

–

–

40,703

40,703

Commercial - other

–

–

–

–

64,841

64,841

SBA loans

–

–

–

–

3,601

3,601

Consumer

–

–

–

–

11

11

Total

$

–

$

–

$

–

$

–

$

773,444

$

773,444

The following table presents the recorded investment in non-accrual loans by loan type as of the dates indicated:

	March 31, 2023		December 31, 2022
	(In thousands)
Loans receivable held for investment:
Church	$	–	$	144
Total non-accrual loans	$	–	$	144

Cash-basis interest income recognized represents interest recoveries on non-accrual loans that were paid off and, prior to the adoption of ASC 326, cash received for interest payments on accruing impaired loans. Interest payments collected on non-accrual loans are characterized as payments of principal rather than payments of the outstanding accrued interest on the loans until the remaining principal on the non-accrual loans is considered to be fully collectible or paid off. When a loan is returned to accrual status, the interest payments that were previously applied to principal are amortized over the remaining life of the loan. Foregone interest income that would have been recognized had loans performed in accordance with their original terms amounted to $17 thousand for the three months ended March 31, 2022, and were not included in the consolidated statement of operations and comprehensive loss. There was no foregone interest income on non-accrual loans for the three months ended March 31, 2023. The Company recognized interest income on nonaccrual loans of $286 thousand during the three months ended March 31, 2023. The Company did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2022.

There were no loans 90 days or more delinquent that were accruing interest as of March 31, 2023 or December 31, 2022.

Modified Loans to Troubled Borrowers

On January 1, 2023, the Company adopted ASU 2022-02, which introduces new reporting requirements for modifications of loans to borrowers experiencing financial difficulty. GAAP requires that certain types of modifications of loans in response to a borrower’s financial difficulty be reported, which consist of the following: (i) principal forgiveness, (ii) interest rate reduction, (iii) other-than-insignificant payment delay, (iv) term extension, or (v) any combination of the foregoing. The ACL for loans that were modified in response to a borrower’s financial difficulty is measured on a collective basis, as with other loans in the loan portfolio, unless management determines that such loans no longer possess risk characteristics similar to others in the loan portfolio. In those instances, the ACL for such loans is determined through individual evaluation. There were no loan modifications to borrowers that were experiencing financial difficulty during the three months ended March 31, 2023.

Troubled Debt Restructurings (TDRs)

Prior to the adoption of ASU 2022-02 – Financial Instruments-Credit Losses: Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023, the Company accounted for TDRs in accordance with ASC 310-40. When a loan to a borrower that was experiencing financial difficulty was modified in response to that difficulty, the loan was classified as a TDR. At December 31, 2022, loans classified as TDRs totaled $1.7 million, of which $144 thousand were included in non-accrual loans and $1.6 million were on accrual status.  The Company had allocated $7 thousand of specific reserves for accruing TDRs as of December 31, 2022.  TDRs on accrual status were comprised of loans that were accruing at the time of restructuring or loans that have complied with the terms of their restructured agreements for a satisfactory period of time and for which the Company anticipates full repayment of both principal and interest.  TDRs that were on non-accrual status could be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments, as modified.

ASU 2022-02 eliminated the concept of TDRs in current GAAP, and therefore, beginning January 1, 2023, the Company no longer reports loans modified as TDRs except for those loans modified and reported as TDRs in prior period financial information under previous GAAP.

Credit Quality Indicators

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, credit documentation, public information, and current economic trends, among other factors.  For single family residential, consumer, and other smaller balance homogenous loans, a credit grade is established at inception, and generally only adjusted based on performance.  Information about payment status is disclosed elsewhere herein.  The Company analyzes all other loans individually by classifying the loans as to credit risk.  This analysis is performed at least on a quarterly basis.  The Company uses the following definitions for risk ratings:

● Watch.  Loans classified as watch exhibit weaknesses that could threaten the current net worth and paying capacity of the obligors.  Watch graded loans are generally performing and are not more than 59 days past due. A watch rating is used when a material deficiency exists, but correction is anticipated within an acceptable time frame.

● 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.

● Loss.  Loans classified as loss are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans.  Pass rated loans are generally well protected by the current net worth and paying capacity of the obligor and/or by the value of the underlying collateral.  Pass rated loans are not more than 59 days past due and are generally performing in accordance with the loan terms. 

The following table stratifies the loans held for investment portfolio by the Company’s internal risk grading, and by year of origination as of the date indicated:

	Term Loans Amortized Cost Basis by Origination Year - As of March 31, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
	(In thousands)
Single family:
Pass	$	–	$	2,517	$	2,663	$	4,399	$	1,833	$	16,798	$	–	$	28,210
Watch		–		–		–		–		–		349		–		349
Special Mention		–		–		–		–		–		258		–		258
Substandard		–		–		–		–		–		399		–		399
Total	$	–	$	2,517	$	2,663	$	4,399	$	1,833	$	17,804	$	–	$	29,216
Multi-family:
Pass	$	13,179	$	187,621	$	154,166	$	27,839	$	46,232	$	57,980	$	–	$	487,017
Watch		–		3,300		915		–		–		3,453		–		7,668
Special Mention		–		–		–		–		–		1,775		–		1,775
Substandard		–		–		–		–		760		13,826		–		14,586
Total	$	13,179	$	190,921	$	155,081	$	27,839	$	46,992	$	77,034	$	–	$	511,046
Commercial real estate:
Pass	$	2,835	$	22,571	$	26,181	$	30,678	$	6,430	$	32,719	$	–	$	121,414
Watch		–		432		–		–		740		1,101		–		2,273
Special Mention		–		–		–		–		–		–		–		–
Substandard		–		–		–	$	–	$	–		5,344	$	–	$	5,344
Total	$	2,835	$	23,003	$	26,181	$	30,678	$	7,170	$	39,164	$	–	$	129,031
Church:
Pass	$	–	$	–	$	2,247	$	1,785	$	–	$	7,188	$	–	$	11,220
Watch		–		–		–		–		649		1,120		–		1,769
Special Mention		–		–		–		–		–		–		–		–
Substandard		–		–		–		–		–		994		–		994
Total	$	–	$	–	$	2,247	$	1,785	$	649	$	9,302	$	–	$	13,983
Construction:
Pass	$	995	$	–	$	1,219	$	–	$	–	$	2,154	$	–	$	4,368
Watch		17,495		30,012		7,268		–		–		–		–		54,775
Special Mention		–		–		–		–		–		–		–		–
Substandard		–		–		–		–		–		–		–		–
Total	$	18,490	$	30,012	$	8,487	$	–	$	–	$	2,154	$	–	$	59,143
Commercial – others:
Pass	$	–	$	7,611	$	175	$	1,404	$	4,300	$	5,784	$	6,568	$	25,842
Watch		–		1,205		107		1,500		2,250		5,532		637		11,231
Special Mention		–		–		–		–		–		–		–		–
Substandard		–		–		–		–		–		281		–		281
Total	$	–	$	8,816	$	282	$	2,904	$	6,550	$	11,597	$	7,205	$	37,354
SBA:
Pass	$	–	$	148	$	2,723	$	–	$	28	$	128	$	–	$	3,027
Watch		–		–		–		–		–		–		–		–
Special Mention		–		–		–		538		–		–		–		538
Substandard		–		–		–		–		–		–		–		–
Total	$	–	$	148	$	2,723	$	538	$	28	$	128	$	–	$	3,565
Consumer:
Pass	$	10	$	–	$	–	$	–	$	–	$	–	$	–	$	10
Watch		–		–		–		–		–		–		–		–
Special Mention		–		–		–		–		–		–		–		–
Substandard		–		–		–		–		–		–		–		–
Total	$	10	$	–	$	–	$	–	$	–	$	–	$	–	$	10
Total loans:
Pass	$	17,019	$	220,468	$	189,374	$	66,105	$	58,823	$	122,751	$	6,568	$	681,108
Watch		17,495		34,949		8,290		1,500		3,639		11,555		637		78,065
Special Mention		–		–		–		538		–		2,033		–		2,571
Substandard		–		–		–		–		760		20,844		–		21,604
Total loans	$	34,514	$	255,417	$	197,664	$	68,143	$	63,222	$	157,183	$	7,205	$	783,348

The following table stratifies the loan portfolio by the Company’s internal risk rating as of the date indicated:

	December 31, 2022
	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total
Single family	$	29,022	$	354	$	260	$	402	$	–	$	–	$	30,038
Multi-family		479,182		9,855		14,859		–		–		–		503,896
Commercial real estate		104,066		4,524		1,471		4,513		–		–		114,574
Church		14,505		728		–		547		–		–		15,780
Construction		2,173		38,530		–		–		–		–		40,703
Commercial – others		53,396		11,157		–		288		–		–		64,841
SBA		3,032		569		–		–		–		–		3,601
Consumer		11		–		–		–		–		–		11
Total	$	685,387	$	65,717	$	16,590	$	5,750	$	–	$	–	$	773,444

Allowance for Credit Losses for Off-Balance Sheet Commitments

The Company maintains an allowance for credit losses on off-balance sheet commitments related to unfunded loans and lines of credit, which is included in other liabilities of the consolidated statements of financial condition. Upon the Company’s adoption of ASC 326 on January 1, 2023, the Company applies an expected credit loss estimation methodology for off-balance sheet commitments. This methodology is commensurate with the methodology applied to each respective segment of the loan portfolio in determining the ACL for loans held-for-investment. The loss estimation process includes assumptions for the probability that a loan will fund, as well as the expected amount of funding. These assumptions are based on the Company’s own historical internal loan data.

The allowance for off-balance sheet commitments was $367 thousand and $412 thousand at March 31, 2023 and December 31, 2022, respectively.