LOANS

12 Months Ended

Dec. 31, 2019

3. LOANS

The following table presents loans outstanding, by type of loan, as of December 31:

			% of Total					% of Total
(Dollars in thousands)	2019		Loans			2018		Loans
Residential mortgage	$	549,138		12.50	%	$	571,570		14.55	%
Multifamily mortgage		1,210,003		27.54			1,135,805		28.92
Commercial mortgage		761,244		17.32			702,165		17.88
Commercial loans (including equipment financing)		1,756,477		39.97			1,397,057		35.57
Commercial construction		5,306		0.12			—		—
Home equity lines of credit		57,248		1.30			62,191		1.58
Consumer loans, including fixed rate home equity loans		54,372		1.24			58,678		1.49
Other loans		349		0.01			465		0.01
Total loans	$	4,394,137		100.00	%	$	3,927,931		100.00	%

In determining an appropriate amount for the allowance for loan losses (“ALLL”), the Bank segments and evaluates the loan portfolio based on Federal call report codes. The following portfolio classes have been identified as of December 31:

			% of Total					% of Total
(Dollars in thousands)	2019		Loans			2018		Loans
Primary residential mortgage	$	578,306		13.17	%	$	600,891		15.31	%
Home equity lines of credit		57,248		1.30			62,191		1.58
Junior lien loan on residence		7,011		0.16			7,418		0.19
Multifamily property		1,210,003		27.56			1,135,805		28.94
Owner-occupied commercial real estate		249,419		5.68			261,193		6.65
Investment commercial real estate		1,095,182		24.95			1,001,918		25.53
Commercial and industrial		867,295		19.76			616,838		15.72
Lease financing		258,401		5.89			172,643		4.40
Farmland/Agricultural production		3,043		0.13			149		0.01
Commercial construction		5,520		0.07			86		0.01
Consumer and other		58,213		1.33			65,180		1.66
Total loans	$	4,389,641		100.00	%	$	3,924,312		100.00	%
Net deferred costs		4,496					3,619
Total loans including net deferred costs	$	4,394,137				$	3,927,931

The Company sold one C&I loan which totaled $5.0 million during 2019. Loss on sale of loans sold in 2019 totaled $10,000. The Company sold approximately $131.3 million in multifamily whole loans during 2018. Loss on sale of whole loans sold in 2018 totaled approximately $4.4 million. The Company sold approximately $109.9 million in residential and multifamily whole loans during 2017. Gain on sale of whole loans sold in 2017 totaled approximately $412,000.

The Company, through the Bank, may extend credit to officers, directors and their associates. These loans are subject to the Company’s normal lending policy and Federal Reserve Bank Regulation O.

The following table shows the changes in loans to officers, directors and their associates:

(In thousands)	2019			2018
Balance, beginning of year	$	4,574		$	4,688
New loans		1,345			2,174
Repayments		(1,551	)		(2,288	)
Loans with individuals no longer considered related parties		(204	)		—
Balance, at end of year	$	4,164		$	4,574

The following tables present the loan balances by portfolio segment, based on impairment method, and the corresponding balances in the ALLL as of December 31, 2019 and 2018:

December 31, 2019
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		to Loans		Collectively		to Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	for		Evaluated for		for		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential mortgage	$	6,890	$	215	$	571,416	$	1,875	$	578,306	$	2,090
Home equity lines of credit		3		—		57,245		128		57,248		128
Junior lien loan on residence		19		—		6,992		13		7,011		13
Multifamily property		—		—		1,210,003		6,037		1,210,003		6,037
Owner-occupied commercial real estate		379		—		249,040		2,064		249,419		2,064
Investment commercial real estate		22,605		1,000		1,072,577		14,988		1,095,182		15,988
Commercial and industrial		6,028		1,585		861,267		12,768		867,295		14,353
Lease financing		—		—		258,401		2,642		258,401		2,642
Secured by farmland and agricultural production		—		—		3,043		38		3,043		38
Commercial construction		—		—		5,520		27		5,520		27
Consumer and other		—		—		58,213		296		58,213		296
Total ALLL	$	35,924	$	2,800	$	4,353,717	$	40,876	$	4,389,641	$	43,676

December 31, 2018
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		to Loans		Collectively		to Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	for		Evaluated for		for		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential mortgage	$	9,518	$	262	$	591,373	$	3,244	$	600,891	$	3,506
Home equity lines of credit		255		—		61,936		164		62,191		164
Junior lien loan on residence		36		—		7,382		15		7,418		15
Multifamily property		1,262		—		1,134,543		5,959		1,135,805		5,959
Owner-occupied commercial real estate		1,574		—		259,619		2,614		261,193		2,614
Investment commercial real estate		18,655		—		983,263		14,248		1,001,918		14,248
Commercial and industrial		—		—		616,838		9,839		616,838		9,839
Lease financing		—		—		172,643		1,772		172,643		1,772
Secured by farmland and agricultural production		—		—		149		2		149		2
Commercial construction		—		—		86		1		86		1
Consumer and other		—		—		65,180		384		65,180		384
Total ALLL	$	31,300	$	262	$	3,893,012	$	38,242	$	3,924,312	$	38,504

Impaired loans included nonaccrual loans of $28.9 million at December 31, 2019 and $25.7 million at December 31, 2018. Impaired loans also included performing troubled debt restructured loans of $2.4 million at December 31, 2019 and $4.3 million at December 31, 2018. At December 31, 2019, the allowance allocated to troubled debt restructured loans totaled $2.8 million of which $2.7 million was allocated to nonaccrual loans. At December 31, 2018, the allowance allocated to troubled debt restructured loans totaled $262,000 of which $161,000 was allocated to nonaccrual loans. All accruing troubled debt restructured loans were paying in accordance with restructured terms as of December 31, 2019.

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2019 and 2018:

	December 31, 2019
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	7,310	$	6,071	$	—	$	7,186
Owner-occupied commercial real estate		450		379		—		1,099
Investment commercial real estate		9,663		8,138		—		14,115
Home equity lines of credit		5		3		—		77
Junior lien loan on residence		92		19		—		29
Total loans with no related allowance	$	17,520	$	14,610	$	—	$	22,506
With related allowance recorded:
Primary residential mortgage	$	819	$	819	$	215	$	1,011
Investment commercial real estate		15,064		14,467		1,000		4,832
Commercial and industrial		6,229		6,028		1,585		3,685
Total loans with related allowance	$	22,112	$	21,314	$	2,800	$	9,528
Total loans individually evaluated for impairment	$	39,632	$	35,924	$	2,800	$	32,034

	December 31, 2018
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	9,789	$	8,502	$	—	$	8,042
Owner-occupied commercial real estate		2,741		1,574		—		2,025
Investment commercial real estate		20,179		18,655		—		13,999
Home equity lines of credit		257		255		—		123
Junior lien loan on residence		102		36		—		45
Multifamily property		1,262		1,262		—		105
Total loans with no related allowance	$	34,330	$	30,284	$	—	$	24,339
With related allowance recorded:
Primary residential mortgage	$	1,016	$	1,016	$	262	$	1,144
Total loans with related allowance	$	1,016	$	1,016	$	262	$	1,144
Total loans individually evaluated for impairment	$	35,346	$	31,300	$	262	$	25,483

Interest income recognized on impaired loans during 2019, 2018 and 2017 was not material.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2019 and 2018:

	December 31, 2019
			Loans Past Due Over
			90 Days and Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	4,533	$	—
Home equity lines of credit		3		—
Junior lien loan on residence		19		—
Owner-occupied commercial real estate		379		—
Investment commercial real estate		17,919		—
Commercial and industrial		6,028		—
Total	$	28,881	$	—

	December 31, 2018
			Loans Past Due Over
			90 Days and Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	5,215	$	—
Home equity lines of credit		235		—
Junior lien loan on residence		36		—
Owner-occupied commercial real estate		1,574		—
Investment commercial real estate		18,655		—
Total	$	25,715	$	—

The following tables present the recorded investment in past due loans as of December 31, 2019 and 2018 by class of loans, excluding nonaccrual loans:

	December 31, 2019
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	1,264	$	—	$	—	$	1,264
Home equity lines of credit		80		—		—		80
Commercial and industrial		566		—		—		566
Total	$	1,910	$	—	$	—	$	1,910

	December 31, 2018
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	606	$	491	$	—	$	1,097
Consumer and other		2		—		—		2
Total	$	608	$	491	$	—	$	1,099

Credit Quality Indicators:

The Bank 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 majority of relationships or new lending to existing relationships greater than $1,000,000;

•

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

•

A random sample of borrowers with 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;

•

No borrower with commitments of less than $250,000;

•

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 Bank 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.

Loans that are considered to be impaired are individually evaluated for potential loss and allowance adequacy. Loans not deemed impaired are collectively evaluated for potential loss and allowance adequacy.

The table below presents, based on the most recent analysis performed, the risk category of loans by class of loans for December 31, 2019 and 2018.

December 31, 2019
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	570,353	$	853	$	7,100	$	—
Home equity lines of credit		57,245		—		3		—
Junior lien loan on residence		6,992		—		19		—
Multifamily property		1,209,288		—		715		—
Owner-occupied commercial real estate		247,388		—		2,031		—
Investment commercial real estate		1,053,445		6,325		35,412		—
Commercial and industrial		847,285		6,382		13,628		—
Lease financing		258,401		—		—		—
Secured by farmland and agricultural		3,043		—		—		—
Commercial construction		5,437		83		—		—
Consumer and other loans		58,213		—		—		—
Total	$	4,317,090	$	13,643	$	58,908	$	—

December 31, 2018
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	590,372	$	943	$	9,576	$	—
Home equity lines of credit		61,936		—		255		—
Junior lien loan on residence		7,382		—		36		—
Multifamily property		1,130,926		3,263		1,616		—
Owner-occupied commercial real estate		255,417		249		5,527		—
Investment commercial real estate		948,300		20,756		32,862		—
Commercial and industrial		608,262		417		8,159		—
Lease financing		172,643		—		—		—
Secured by farmland and agricultural		149		—		—		—
Commercial construction		—		86		—		—
Consumer and other loans		64,946		—		234		—
Total	$	3,840,333	$	25,714	$	58,265	$	—

At December 31, 2019, $35.9 million of substandard loans were also considered impaired as compared to $31.2 million at December 31, 2018.

The tables below present a roll forward of the ALLL for the years ended December 31, 2019, 2018 and 2017.

	January 1,										December 31,
	2019										2019
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	3,506	$	(80	)	$	205	$	(1,541	)	$	2,090
Home equity lines of credit		164		—			10		(46	)		128
Junior lien loan on residence		15		—			11		(13	)		13
Multifamily property		5,959		—			—		78			6,037
Owner-occupied commercial real estate		2,614		—			1,060		(1,610	)		2,064
Investment commercial real estate		14,248		—			—		1,740			15,988
Commercial and industrial		9,839		—			17		4,497			14,353
Lease financing		1,772		—			—		870			2,642
Secured by farmland and agricultural		2		—			—		36			38
Commercial construction		1		—			—		26			27
Consumer and other		384		(55	)		4		(37	)		296
Total ALLL	$	38,504	$	(135	)	$	1,307	$	4,000		$	43,676

	January 1,										December 31,
	2018										2018
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	4,085	$	(138	)	$	160	$	(601	)	$	3,506
Home equity lines of credit		221		—			10		(67	)		164
Junior lien loan on residence		12		—			68		(65	)		15
Multifamily property		10,007		—			—		(4,048	)		5,959
Owner-occupied commercial real estate		2,385		(361	)		66		524			2,614
Investment commercial real estate		11,933		(1,335	)		45		3,605			14,248
Commercial and industrial		6,563		(46	)		109		3,213			9,839
Lease financing		884		—			—		888			1,772
Secured by farmland and agricultural		—		—			—		2			2
Commercial construction		1		—			—		—			1
Consumer and other		349		(68	)		4		99			384
Total ALLL	$	36,440	$	(1,948	)	$	462	$	3,550		$	38,504

	January 1,										December 31,
	2017										2017
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	3,666	$	(889	)	$	173	$	1,135		$	4,085
Home equity lines of credit		233		(23	)		62		(51	)		221
Junior lien loan on residence		16		(99	)		26		69			12
Multifamily property		11,192		—			—		(1,185	)		10,007
Owner-occupied commercial real estate		1,774		(734	)		—		1,345			2,385
Investment commercial real estate		10,909		(123	)		23		1,124			11,933
Commercial and industrial		4,164		(76	)		115		2,360			6,563
Lease financing		—		—			—		884			884
Secured by farmland and agricultural		2		—			—		(2	)		—
Commercial construction		9		—			—		(8	)		1
Consumer and other		243		(77	)		4		179			349
Total ALLL	$	32,208	$	(2,021	)	$	403	$	5,850		$	36,440

Troubled Debt Restructurings: The Company has allocated $2.8 million and $262,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2019 and December 31, 2018, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the years ended December 31, 2019, 2018 and 2017, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2019:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		2	$	530	$	530
Commercial and industrial		5		6,028		6,028
Total		7	$	6,558	$	6,558

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2018:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		2	$	909	$	909
Investment commercial real estate		1		15,202		15,202
Total		3	$	16,111	$	16,111

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2017:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		6	$	1,223	$	1,223
Total		6	$	1,223	$	1,223

The identification of the troubled debt restructured loans did not have a significant impact on the allowance for loan losses. In addition, there were no charge-offs as a result of the classification of these loans as troubled debt restructuring during the years ended December 31, 2019, 2018 and 2017.

The following table presents loans by class modified as troubled debt restructurings during the year ended December 31, 2019 for which there was a payment default during the same period:

	Number of		Recorded
(Dollars in thousands)	Contracts		Investment
Primary residential mortgage		1	$	201
Total		1	$	201

There were no payment defaults on loans modified as troubled debt restructurings within twelve months of modification during the year ended December 31, 2018.

The following table presents loans by class modified as troubled debt restructurings during the year ended December 31, 2017 for which there was a payment default during the same period:

	Number of		Recorded
(Dollars in thousands)	Contracts		Investment
Primary residential mortgage		1	$	336
Total		1	$	336

The defaults described above did not have a material impact on the allowance for loan losses during 2019 and 2017.

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 an 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 troubled debt restructuring. 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.