LOANS AND LEASES

9 Months Ended

Sep. 30, 2022

3. LOANS AND LEASES

Loans outstanding, excluding those held for sale, by general ledger classification, as of September 30, 2022 and December 31, 2021, consisted of the following:


			% of					% of
	September 30,		Totals			December 31,		Total
(Dollars in thousands)	2022		Loans			2021		Loans
Residential mortgage	$	517,755		10.00	%	$	498,300		10.37	%
Multifamily mortgage		1,856,675		35.87			1,595,866		33.20
Commercial mortgage		638,903		12.34			662,626		13.78
Commercial loans (including equipment financing) (1)		2,084,998		40.27			1,955,157		40.67
Commercial construction		4,817		0.09			20,044		0.42
Home equity lines of credit		36,375		0.70			40,803		0.85
Consumer loans, including fixed rate home equity loans		37,412		0.72			33,687		0.70
Other loans		259		0.01			238		0.01
Total loans	$	5,177,194		100.00	%	$	4,806,721		100.00	%

(1)

Includes PPP loans of $1.9 million at September 30, 2022 and $13.8 million at December 31, 2021.

In determining an appropriate amount for the allowance, the Bank segments and aggregated the loan portfolio based on common characteristics. The following pool segments identified as of September 30, 2022 are based on the CECL methodology:


			% of
	September 30,		Totals
(Dollars in thousands)	2022		Loans
Primary residential mortgage	$	520,276		10.06	%
Junior lien loan on residence		40,216		0.78
Multifamily property		1,856,675		35.89
Owner-occupied commercial real estate		256,891		4.96
Investment commercial real estate		1,035,254		20.01
Commercial and industrial (1)		1,106,927		21.40
Lease financing		304,256		5.88
Construction		10,384		0.20
Consumer and other		42,506		0.82
Total loans		5,173,385		100.00	%
Net deferred costs		3,809
Total loans including net deferred costs	$	5,177,194

(1) Includes PPP loans of $1.9 million at September 30, 2022.

The portfolio classes identified as of December 31, 2021 are based on the incurred loss methodology and are segmented by federal Call Report codes:


			% of
	December 31,		Total
(Dollars in thousands)	2021		Loans
Primary residential mortgage	$	500,243		10.42	%
Home equity lines of credit		40,803		0.85
Junior lien loan on residence		3,191		0.07
Multifamily property		1,595,866		33.23
Owner-occupied commercial real estate		252,603		5.26
Investment commercial real estate		1,003,979		20.90
Commercial and industrial (1)		992,332		20.66
Lease financing		345,868		7.20
Farmland/agricultural production		6,871		0.14
Commercial construction loans		20,174		0.42
Consumer and other loans		40,828		0.85
Total loans		4,802,758		100.00	%
Net deferred costs		3,963
Total loans including net deferred costs	$	4,806,721

(1)

Includes PPP loans of $13.8 million at December 31, 2021.

The following tables present the recorded investment in nonaccrual and loans past due 90 days or over still on accrual by class of loans as of September 30, 2022 and December 31, 2021:


	September 30, 2022
			Loans Past Due
			90 Days or Over
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	2,527	$	—
Owner-occupied commercial real estate		263		—
Investment commercial real estate		12,429		—
Commercial and industrial		505		—
Total	$	15,724	$	—


	December 31, 2021
			Loans Past Due
			90 Days or Over
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	1,851	$	—
Junior lien loan on residence		18		—
Owner-occupied commercial real estate		458		—
Investment commercial real estate		12,750		—
Commercial and industrial		496		—
Total	$	15,573	$	—

The following tables present the aging of the recorded investment in past due loans as of September 30, 2022 and December 31, 2021 by class of loans, excluding nonaccrual loans:


	September 30, 2022
	30-59		60-89		90 Days or
	Days		Days		Greater		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	323	$	—	$	—	$	323
Commercial and industrial		6,925		—		—		6,925
Total	$	7,248	$	—	$	—	$	7,248


	December 31, 2021
	30-59		60-89		90 Days or
	Days		Days		Greater		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	639	$	—	$	—	$	639
Commercial and industrial		7,825		142		—		7,967
Total	$	8,464	$	142	$	—	$	8,606

Credit Quality Indicators:

The Company places all commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.

In addition, the Bank has engaged an independent loan review firm to validate risk ratings and to ensure compliance with our policies and procedures. This review of the following types of loans is performed quarterly:

•

A large sample of relationships or new lending to existing relationships greater than $1,000,000 booked since the prior review;

•

All criticized and classified rated borrowers with relationship exposure of more than $500,000;

•

A large sample of Pass-rated (including Pass Watch) borrowers with total relationships in excess of $1,000,000 and a small sample of Pass related relationships less than $1,000,000;

•

All leveraged loans of $1,000,000 or greater;

•

At least two borrowing relationships managed by each commercial banker;

•

Any new Regulation “O” loan commitments over $1,000,000; and

•

Any other credits requested by Bank senior management or a member of the Board of Directors and any borrower for which the reviewer determines a review is warranted based upon knowledge of the portfolio, local events, industry stresses, etc.

The review excludes borrowers with commitments of less than $500,000.

The Company uses the following regulatory definitions for criticized and classified risk ratings:

Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard: These loans 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: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

With the adoption of CECL, loans that are in the process of or expected to be in foreclosure are deemed to be collateral dependent with respect to measuring potential loss and allowance adequacy and are individually evaluated by Management. Loans that do not share common risk characteristics are also evaluated on an individual basis. All other loans are evaluated using a non-linear discounted cashflow methodology for measuring potential loss and allowance adequacy.

The following is a summary of the credit risk profile of loans by internally assigned grade as of September 30, 2022 based on originations for the periods indicated; the years represent the year of origination for non-revolving loans:


	Grade as of September 30, 2022 for Loans Originated During
											2017				Revolving-
(In thousands)	2022		2021		2020		2019		2018		and Prior		Revolving		Term		Total
Primary residential mortgage:
Pass	$	91,142	$	94,871	$	63,091	$	38,422	$	28,052	$	201,286	$	—	$	694	$	517,558
Special mention		—		—		—		—		—		98		—		—		98
Substandard		—		—		554		1,062		282		722		—		—		2,620
Doubtful		—		—		—		—		—		—		—		—		—
Total primary residential mortgages		91,142		94,871		63,645		39,484		28,334		202,106		—		694		520,276

Junior lien loan on residence:
Pass		1,545		185		46		664		354		1,047		35,867		—		39,708
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		508		—		508
Doubtful		—		—		—		—		—		—		—		—		—
Total junior lien loan on residence		1,545		185		46		664		354		1,047		36,375		—		40,216

Multifamily property:
Pass		449,363		683,097		118,815		229,869		43,062		317,365		981		1,830		1,844,382
Special mention		—		—		—		2,860		—		3,518		—		—		6,378
Substandard		—		—		—		—		—		5,915		—		—		5,915
Doubtful		—		—		—		—		—		—		—		—		—
Total multifamily property		449,363		683,097		118,815		232,729		43,062		326,798		981		1,830		1,856,675

Owner-occupied commercial real estate:
Pass		12,216		44,107		20,990		12,335		22,587		134,701		764		8,739		256,439
Special mention		—		—		—		—		—		189		—		—		189
Substandard		—		—		—		—		—		263		—		—		263
Doubtful		—		—		—		—		—		—		—		—		—
Total owner-occupied commercial real estate		12,216		44,107		20,990		12,335		22,587		135,153		764		8,739		256,891

Investment commercial real estate:
Pass		149,630		155,537		64,245		168,225		93,927		317,770		7,128		21,831		978,293
Special mention		—		—		—		13,069		—		13,379		—		14,588		41,036
Substandard		12,429		—		—		3,496		—		—		—		—		15,925
Doubtful		—		—		—		—		—		—		—		—		—
Total investment commercial real estate		162,059		155,537		64,245		184,790		93,927		331,149		7,128		36,419		1,035,254

Commercial and industrial:
Pass		277,681		250,700		87,541		89,923		30,915		6,107		298,246		33,082		1,074,195
Special mention		16,333		1,788		2,322		4,265		194		—		7,325		—		32,227
Substandard		—		—		—		—		283		186		36		—		505
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial and industrial		294,014		252,488		89,863		94,188		31,392		6,293		305,607		33,082		1,106,927

Lease financing:
Pass		51,120		76,975		61,758		56,022		34,009		20,422		—		—		300,306
Special mention		2,179		—		—		—		—		—		—		—		2,179
Substandard		—		—		—		1,771		—		—		—		—		1,771
Doubtful		—		—		—		—		—		—		—		—		—
Total lease financing		53,299		76,975		61,758		57,793		34,009		20,422		—		—		304,256

Construction loans:


Pass		—		—		—		1,444		—		—		4,848		4,092		10,384
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial construction loans		—		—		—		1,444		—		—		4,848		4,092		10,384

Consumer and other loans:
Pass		—		396		200		13		—		5,980		32,661		3,256		42,506
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total consumer and other loans		—		396		200		13		—		5,980		32,661		3,256		42,506

Total:
Pass		1,032,697		1,305,868		416,686		596,917		252,906		1,004,678		380,495		73,524		5,063,771
Special mention		18,512		1,788		2,322		20,194		194		17,184		7,325		14,588		82,107
Substandard		12,429		—		554		6,329		565		7,086		544		—		27,507
Doubtful		—		—		—		—		—		—		—		—		—
Total Loans	$	1,063,638	$	1,307,656	$	419,562	$	623,440	$	253,665	$	1,028,948	$	388,364	$	88,112	$	5,173,385

As of December 31, 2021, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows:


			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	494,444	$	557	$	5,242	$	—
Home equity lines of credit		40,274		—		529		—
Junior lien loan on residence		3,173		—		18		—
Multifamily property		1,579,776		7,720		8,370		—
Owner-occupied commercial real estate		251,229		663		711		—
Investment commercial real estate		901,877		87,297		14,805		—
Commercial and industrial		951,127		20,178		21,027		—
Lease financing		345,868		—		—		—
Farmland/agricultural production		6,871		—		—		—
Commercial construction loans		20,099		75		—		—
Consumer and other loans		40,828		—		—		—
Total	$	4,635,566	$	116,490	$	50,702	$	—

At September 30, 2022, $13.0 million of substandard loans were also considered individually evaluated, compared to $15.7 million at December 31, 2021.

Loan Modifications:

The CARES Act allowed financial institutions to suspend application of certain current TDR accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria were met. This relief could be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that deferred or delayed the payment of principal or interest or changed the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40.

As of September 30, 2022, the Bank had modified 542 loans under the CARES Act with a balance of $947.0 million resulting in the deferral of principal and/or interest. There are no outstanding deferrals as of September 30, 2022.

Troubled Debt Restructurings:

The Company has allocated $2.4 million of specific reserves on TDRs as of September 30, 2022. The Company did not allocate specific reserves to customers whose loan terms had been modified TDRs as of December 31, 2021. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.

There were no loans modified as TDRs during the three-month period ended September 30, 2022.

The following table presents loans by class modified as TDRs during the three-month period ended September 30, 2021:


			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Loans		Investment		Investment
Investment commercial real estate		2	$	455	$	455
Total		2	$	455	$	455

The following table presents loans by class modified as TDRs during the nine-month period ended September 30, 2022:


			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Loans		Investment		Investment
Investment commercial real estate		1	$	12,429	$	12,429
Total		1	$	12,429	$	12,429

The following table presents loans by class modified as TDRs during the nine-month period ended September 30, 2021:


			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Loans		Investment		Investment
Primary residential mortgage		3	$	1,277	$	1,277
Commercial and industrial		1		2,194		2,194
Total		4	$	3,471	$	3,471

The identification of the TDRs did not have a material impact on the allowance for credit losses.

The following table presents loans by class modified as TDRs that failed to comply with the modified terms in the twelve months following modification and resulted in a payment default at September 30, 2022:


	Number of		Recorded
(Dollars in thousands)	Loans		Investment
Primary residential mortgage		1	$	145
Total		1	$	145


			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Loans		Investment		Investment
Primary residential mortgage		1	$	221	$	221
Total		1	$	221	$	221

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. The modification of the terms of such loans may include one or more of the following: (1) a reduction of the stated interest rate of the loan to a rate that is lower than the current market rate for new debt with similar risk; (2) an extension of an interest only period for a predetermined period of time; (3) an extension of the maturity date; or (4) an extension of the amortization period over which future payments will be computed. At the time a loan is restructured, the Bank performs a full underwriting analysis, which includes, at a minimum, obtaining current financial statements and tax returns, copies of all leases, and an updated independent appraisal of the property. A loan will continue to accrue interest if it can be reasonably determined that the borrower should be able to perform under the modified terms, that the loan has not been chronically delinquent (both to debt service and real estate taxes) or in nonaccrual status since its inception, and that there have been no charge-offs on the loan. Restructured loans with previous charge-offs would not accrue interest at the time of the TDR. At a minimum, six consecutive months of contractual payments would need to be made on a restructured loan before returning it to accrual status. Once a loan is classified as a TDR, the loan is reported as a TDR until the loan is paid in full, sold or charged-off. In rare circumstances, a loan may be removed from TDR status if it meets the requirements of ASC 310-40-50-2.