NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans, net of deferred costs and fees, consist of the following as of March 31, 2020 and December 31, 2019 (in thousands):


	March 31, 2020		December 31, 2019
Real estate
Commercial	$	1,729,386		$	1,668,236
Construction		41,162			30,827
Multifamily		379,342			375,611
One-to-four family		75,610			82,670
Total real estate loans		2,225,500			2,157,344

Commercial and industrial		482,187			448,619
Consumer		63,112			71,956
Total loans		2,770,799			2,677,919
Deferred fees		(4,700)			(4,970)
Loans, net of deferred fees and unamortized costs		2,766,099			2,672,949
Allowance for loan losses		(30,924)			(26,272)
Balance at the end of the period	$	2,735,175		$	2,646,677

The portfolio segments in the tables below represent the categories that the Bank uses to determine its Allowance for Loan Losses (“ALLL”). As part of the determination of the ALLL for the first quarter of 2020, the Bank considered the effects of COVID-19 on macro-economic conditions such as sharply increasing unemployment rates and the shut-down of all non-essential businesses. The Bank also analyzed the impact of COVID-19 on its primary market, which is the New York metropolitan area, as well as the impact on the Bank’s market sectors and its specific clients (see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report for further discussion on the impact of COVID-19).

As part of its estimation of an adjustment to the ALLL due to COVID-19, the Bank identified those market sectors or industries that were more likely to be affected, such as hospitality, transportation and outpatient care centers. To determine the potential impact on the Bank’s customers, particularly in these industries, management primarily relied on the results of semi-annual stress tests that have been performed for the Bank by a third-party. The scenarios used in these stress tests include significant revenue declines in a borrower’s business as well as reductions in its operating cash flows and the impact on its ability to repay its loans. Using the stress test results, management estimated the probability of default and loss-given-default for the various loan categories at March 31, 2020 and assigned a weighting to each scenario. Based on this analysis, management estimated the potential impact of a stressed environment, such as the one resulting from COVID-19, and the adjustment to the ALLL as of March 31, 2020. In addition to the stress tests, the Bank also established an additional qualitative loss factor solely related to the impact of COVID-19 and included that analysis in its ALLL calculations.

As a result of management’s assessment, the Bank recorded an additional loan loss provision of $3.1 million in the first quarter of 2020. However, this is a period of great uncertainty. The impact of COVID-19 is likely to be felt over the next several quarters. As such, significant adjustments to the ALLL may be required as the full impact of COVID-19 on the Bank’s borrowers becomes known.

The following tables present the activity in the ALLL by segment, including the impact of COVID-19 for the first quarter of 2020, for the three months ended March 31, 2020 and 2019 (in thousands):


	Commercial		Commercial				Multi		One-to-four				COVID-19
Three months ended March 31, 2020	Real Estate		& Industrial		Construction		Family		Family		Consumer		Impact		Total
Allowance for loan losses:
Beginning balance	$	15,317	$	7,070	$	411	$	2,453	$	267	$	754	$	—	$	26,272
Provision/(credit) for loan losses		574		1,098		138		65		(76)		(65)		3,056		4,790
Loans charged-off		—		(13)		—		—		—		(188)		—		(201)
Recoveries		—		58		—		—		—		5		—		63
Total ending allowance balance	$	15,891	$	8,213	$	549	$	2,518	$	191	$	506	$	3,056	$	30,924


	Commercial		Commercial				Multi		One-to-four
Three months ended March 31, 2019	Real Estate		& Industrial		Construction		Family		Family		Consumer		Total
Allowance for loan losses:
Beginning balance	$	9,037	$	6,257	$	625	$	2,047	$	228	$	748	$	18,942
Provision/(credit) for loan losses		1,848		(4,077)		22		64		80		32		(2,031)
Loans charged-off		—		(273)		—		—		—		(74)		(347)
Recoveries		—		4,270		—		—		—		—		4,270
Total ending allowance balance	$	10,885	$	6,177	$	647	$	2,111	$	308	$	706	$	20,834

Net charge-offs were $138,000 for the three months ended March 31, 2020, as compared to net recoveries of $3.9 million for the three months ended March 31, 2019.

Included in the net recoveries during the three months ended March 31, 2019 were $4.2 million in recoveries related to taxi medallion loans charged-off in 2016 and 2017.

The following tables present the balance in the ALLL and the recorded investment in loans by portfolio segment, including the impact of COVID-19 for the first quarter of 2020, based on impairment method as of March 31, 2020 and December 31, 2019 (in thousands):


	Commercial		Commercial				Multi		One-to-four				COVID-19
At March 31, 2020	Real Estate		& Industrial		Construction		Family		Family		Consumer		Impact		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	805	$	—	$	—	$	60	$	116	$	—	$	981
Collectively evaluated for impairment		15,891		7,408		549		2,518		131		390		3,056		29,943
Total ending allowance balance	$	15,891	$	8,213	$	549	$	2,518	$	191	$	506	$	3,056	$	30,924
Loans:
Individually evaluated for impairment	$	363	$	5,801	$	—	$	—	$	1,028	$	369	$	—	$	7,561
Collectively evaluated for impairment		1,729,023		476,386		41,162		379,342		74,582		62,743		—		2,763,238
Total ending loan balance	$	1,729,386	$	482,187	$	41,162	$	379,342	$	75,610	$	63,112	$	—	$	2,770,799


	Commercial		Commercial				Multi		One-to-four
At December 31, 2019	Real Estate		& Industrial		Construction		Family		Family		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	805	$	—	$	—	$	64	$	311	$	1,180
Collectively evaluated for impairment		15,317		6,265		411		2,453		203		443		25,092
Total ending allowance balance	$	15,317	$	7,070	$	411	$	2,453	$	267	$	754	$	26,272
Loans:
Individually evaluated for impairment	$	367	$	1,047	$	—	$	—	$	3,384	$	728	$	5,526
Collectively evaluated for impairment		1,667,869		447,572		30,827		375,611		79,286		71,228		2,672,393
Total ending loan balance	$	1,668,236	$	448,619	$	30,827	$	375,611	$	82,670	$	71,956	$	2,677,919

The following tables present loans individually evaluated for impairment recognized as of March 31, 2020 and December 31, 2019 (in thousands):


	Unpaid Principal				Allowance for Loan
At March 31, 2020	Balance		Recorded Investment		Losses Allocated
With an allowance recorded:
One-to-four family	$	626	$	496	$	60
Consumer		373		369		116
Commercial & industrial		1,047		1,047		805
Total	$	2,046	$	1,912	$	981

Without an allowance recorded:
One-to-four family	$	679	$	532	$	—
Commercial real estate		363		363		—
Commercial & industrial		4,754		4,754		—
Total	$	5,796	$	5,649	$	—


	Unpaid Principal				Allowance for Loan
At December 31, 2019	Balance		Recorded Investment		Losses Allocated
With an allowance recorded:
One-to-four family	$	633	$	503	$	64
Consumer		731		728		311
Commercial & industrial		1,047		1,047		805
Total	$	2,411	$	2,278	$	1,180

Without an allowance recorded:
One-to-four family		3,028	$	2,881	$	—
Commercial real estate		367		367		—
Total	$	3,395	$	3,248	$	—

The recorded investment in loans excludes accrued interest receivable and loan origination fees.

The following tables present the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans as of and for the three months ended March 31, 2020 and 2019 (in thousands):


	Average Recorded		Interest Income
Three months ended March 31, 2020	Investment		Recognized
With an allowance recorded:
One-to-four family	$	500	$	5
Consumer		548		5
Commercial & industrial		1,047		—
Total	$	2,095	$	10

Without an allowance recorded:
One-to-four family	$	1,706	$	7
Commercial real estate		365		4
Commercial & industrial		2,377		—
Total	$	4,448	$	11


	Average Recorded		Interest Income
Three months ended March 31, 2019	Investment		Recognized
With an allowance recorded:
One-to-four family	$	263	$	3
Consumer		97		2
Total	$	360	$	5

Without an allowance recorded:
Commercial real estate	$	381	$	4
One-to-four family		811		11
Total	$	1,192	$	15

For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified non-accrual loans and troubled debt restructurings (“TDRs”). Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based on recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required.

For discussion on modification of loans to borrowers impacted by COVID-19, refer to the “Troubled Debt Restructuring” section herein.

The following tables present the recorded investment in non-accrual loans and loans past due over 90 days and still accruing, by class of loans, as of March 31, 2020 and December 31, 2019 (in thousands):


At March 31, 2020	Non-accrual		Loans Past Due Over 90 Days Still Accruing
Commercial & industrial	$	5,801	$	205
One-to-four family		—		—
Consumer		335		—
Total	$	6,136	$	205


At December 31, 2019		Non-accrual		Loans Past Due Over 90 Days Still Accruing
Commercial & industrial	$	1,047	$	408
One-to-four family		2,345		—
Consumer		693		—
Total	$	4,085	$	408

All TDRs at March 31, 2020 and December 31, 2019 were performing in accordance with their restructured terms.

Interest income that would have been recorded for the three months ended March 31, 2020 and 2019, had non-accrual loans been current according to their original terms, was immaterial.

The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2020 and December 31, 2019 (in thousands):


					Greater
	30-59		60-89		than 90		Total past		Current
At March 31, 2020	Days		Days		days		due		loans		Total
Commercial real estate	$	—	$	—	$	—	$	—	$	1,729,386	$	1,729,386
Commercial & industrial		379		162		6,006		6,547		475,640		482,187
Construction		—		—		—		—		41,162		41,162
Multifamily		—		—		—		—		379,342		379,342
One-to-four family		—		—		—		—		75,610		75,610
Consumer		102		—		335		437		62,675		63,112
Total	$	481	$	162	$	6,341	$	6,984	$	2,763,815	$	2,770,799


					Greater
	30-59		60-89		than 90		Total past		Current
At December 31, 2019	Days		Days		days		due		loans		Total
Commercial real estate	$	—	$	—	$	—	$	—	$	1,668,236	$	1,668,236
Commercial & industrial		346		—		1,455		1,801		446,818		448,619
Construction		—		—		—		—		30,827		30,827
Multifamily		—		—		—		—		375,611		375,611
One-to-four family		—		—		—		—		82,670		82,670
Consumer		636		14		693		1,343		70,613		71,956
Total	$	982	$	14	$	2,148	$	3,144	$	2,674,775	$	2,677,919

Troubled Debt Restructurings:

Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired. On March 22, 2020, the banking regulators and the FASB issued guidance to financial institutions who are working with borrowers affected by COVID-19 (“COVID-19 Guidance”). The guidance indicated that regulatory agencies will not criticize institutions for working with borrowers and will not direct banks to automatically categorize all COVID-19 related loan modifications as TDRs. In addition, the COVID-19 Guidance noted that modification or deferral programs mandated by the federal or a state government related to COVID-19 would not be in the scope of Accounting Standards Codification Subtopic 310-40 – Receivables – Troubled Debt Restructurings by Creditors (“ASC 310-40”), such as a state program that requires all institutions within that state to suspend mortgage payments for a specified period.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” allows banks to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. A bank may elect to account for modifications on certain loans under Section 4013 of the CARES Act or, if a loan modification is not eligible under Section 4013, a bank may use the criteria in the COVID-19 Guidance to determine when a loan modification is not a TDR in accordance with ASC 310-40. For further details on the COVID-19-specific requests for loan modifications and discussion on the impact of COVID-19 on the Bank, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report.

All loans classified as TDRs as of March 31, 2020 were restructured prior to the introduction of the COVID-19 Guidance. Loans that have been modified in accordance with the COVID-19 Guidance and the CARES Act, subsequent to March 31, 2020 and as of April 15, 2020, which is the latest practicable date for which the Bank has information, amounted to $401.7 million.

Included in impaired loans at March 31, 2020 and December 31, 2019 were $1.4 million of loans modified as TDRs. The Bank allocated specific reserves amounting to $60,000 and $80,000 for TDRs as of March 31, 2020 and December 31, 2019, respectively. There were no loans modified as a TDR during the three months ended March 31, 2020 or the year ended December 31, 2019. The Bank has not committed to lend additional amounts as of March 31, 2020 to customers with outstanding loans that are classified as TDRs. During the three months ended March 31, 2020 and March 31, 2019 there were no payment defaults on any loans previously identified as TDRs. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. 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 Bank’s internal underwriting policy.

The following tables present the recorded investment in TDRs by class of loans as of March 31, 2020 and December 31, 2019 (in thousands):


	March 31, 2020		December 31, 2019
Troubled debt restructurings:
Real Estate:
Commercial real estate	$	363	$	367
One-to-four family		1,028		1,039
Consumer		34		35
Total troubled debt restructurings	$	1,425	$	1,441

Credit Quality Indicators:

The Bank 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. The Bank generally analyzes all loans over $500,000, other than one-to-four family and consumer loans, individually by classifying the loans as to credit risk at least annually. For one-to-four family loans and consumer loans, the Bank evaluates credit quality based on the aging status of the loan and by performance status. An analysis is performed on a quarterly basis for loans classified as special mention, substandard, or doubtful. The Bank uses the following definitions for risk ratings:

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.

Loans not meeting the criteria above are considered to be pass-rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):


			Special
At March 31, 2020	Pass		Mention		Substandard		Doubtful			Total
Commercial real estate	$	1,729,023	$	363	$	—	$	—	$	1,729,386
Commercial & industrial		476,181		—		4,959		1,047		482,187
Construction		41,162		—		—		—		41,162
Multifamily		379,342		—		—		—		379,342
Total	$	2,625,708	$	363	$	4,959	$	1,047	$	2,632,077


			Special
At December 31, 2019	Pass		Mention		Substandard		Doubtful			Total
Commercial real estate	$	1,667,869	$	367	$	—	$	—	$	1,668,236
Commercial & industrial		446,612		—		960		1,047		448,619
Construction		30,827		—		—		—		30,827
Multi-family		375,611		—		—		—		375,611
Total	$	2,520,919	$	367	$	960	$	1,047	$	2,523,293