LOANS AND ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2021

LOANS AND ALLOWANCE FOR LOAN LOSSES

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans, net of deferred costs and fees, consist of the following as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021		December 31, 2020
Real estate
Commercial	$	2,378,074	$	1,887,505
Construction		150,144		112,290
Multifamily		374,555		433,239
One-to-four family		61,266		71,354
Total real estate loans		2,964,039		2,504,388
Commercial and industrial		611,303		591,500
Consumer		35,067		46,431
Total loans		3,610,409		3,142,319
Deferred fees		(7,121)		(5,266)
Loans, net of deferred fees and unamortized costs		3,603,288		3,137,053
Allowance for loan losses		(38,121)		(35,407)
Balance at the end of the period	$	3,565,167	$	3,101,646

Included in commercial and industrial loans at September 30, 2021 and December 31, 2020 are $2.5 million and $3.8 million, respectively, of Paycheck Protection Program (“PPP”) loans.

The following tables present the activity in the ALLL by segment for the three and nine months ended September 30, 2021 and 2020. The portfolio segments represent the categories that the Company uses to determine its ALLL (in thousands):

	Commercial		Commercial				Multi		One-to-four
Three months ended September 30, 2021	Real Estate		& Industrial		Construction		Family		Family		Consumer		Total
Allowance for loan losses:
Beginning balance	$	20,299	$	10,545	$	1,972	$	2,618	$	169	$	1,774	$	37,377
Provision/(credit) for loan losses		1,169		(440)		129		(331)		(13)		(24)		490
Loans charged-off		—		—		—		—		—		(54)		(54)
Recoveries		—		308		—		—		—		—		308
Total ending allowance balance	$	21,468	$	10,413	$	2,101	$	2,287	$	156	$	1,696	$	38,121

	Commercial		Commercial				Multi		One-to-four
Three months ended September 30, 2020	Real Estate		& Industrial		Construction		Family		Family		Consumer		Total
Allowance for loan losses:
Beginning balance	$	18,690		9,132		741		2,739		242		961		32,505
Provision/(credit) for loan losses		(1,611)		2,104		706		(215)		(61)		214		1,137
Loans charged-off		—		(82)		—		—		—		—		(82)
Recoveries		—		54		—		—		—		—		54
Total ending allowance balance	$	17,079	$	11,208	$	1,447	$	2,524	$	181	$	1,175	$	33,614

	Commercial		Commercial				Multi		One-to-four
Nine months ended September 30, 2021	Real Estate		& Industrial		Construction		Family		Family		Consumer		Total
Allowance for loan losses:
Beginning balance	$	17,243	$	12,123	$	1,593	$	2,661	$	206	$	1,581	$	35,407
Provision/(credit) for loan losses		4,225		(1,163)		508		(374)		(50)		169		3,315
Loans charged-off		—		(855)		—		—		—		(54)		(909)
Recoveries		—		308		—		—		—		—		308
Total ending allowance balance	$	21,468	$	10,413	$	2,101	$	2,287	$	156	$	1,696	$	38,121

	Commercial		Commercial				Multi		One-to-four
Nine months ended September 30, 2020	Real Estate		& Industrial		Construction		Family		Family		Consumer		Total
Allowance for loan losses:
Beginning balance	$	15,317	$	7,070	$	411	$	2,453	$	267	$	754	$	26,272
Provision/(credit) for loan losses		1,762		4,278		1,036		71		(86)		632		7,693
Loans charged-off		—		(254)		—		—		—		(221)		(475)
Recoveries		—		114		—		—		—		10		124
Total ending allowance balance	$	17,079	$	11,208	$	1,447	$	2,524	$	181	$	1,175	$	33,614

Net recoveries for the three months ended September 30, 2021 were $254,000. Net charge-offs for the three months ended September 30, 2020 were $28,000.  Net charge-offs for the nine months ended September 30, 2021 and 2020 were $601,000 and $351,000, respectively.

The following tables present the balance in the ALLL and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2021 and December 31, 2020 (in thousands):

	Commercial		Commercial				Multi		One-to-four
At September 30, 2021	Real Estate		& Industrial		Construction		Family		Family		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	2,814	$	—	$	—	$	33	$	1,430	$	4,277
Collectively evaluated for impairment		21,468		7,599		2,101		2,287		123		266		33,844
Total ending allowance balance	$	21,468	$	10,413	$	2,101	$	2,287	$	156	$	1,696	$	38,121
Loans:
Individually evaluated for impairment	$	10,333	$	3,145	$	—	$	—	$	958	$	2,125	$	16,561
Collectively evaluated for impairment		2,367,741		608,158		150,144		374,555		60,308		32,942		3,593,848
Total ending loan balance	$	2,378,074	$	611,303	$	150,144	$	374,555	$	61,266	$	35,067	$	3,610,409

	Commercial		Commercial				Multi		One-to-four
At December 31, 2020	Real Estate		& Industrial		Construction		Family		Family		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	3,662	$	—	$	—	$	53	$	1,203	$	4,918
Collectively evaluated for impairment		17,243		8,461		1,593		2,661		153		378		30,489
Total ending allowance balance	$	17,243	$	12,123	$	1,593	$	2,661	$	206	$	1,581	$	35,407
Loans:
Individually evaluated for impairment	$	10,345	$	4,192	$	—	$	—	$	999	$	2,197	$	17,733
Collectively evaluated for impairment		1,877,160		587,308		112,290		433,239		70,355		44,234		3,124,586
Total ending loan balance	$	1,887,505	$	591,500	$	112,290	$	433,239	$	71,354	$	46,431	$	3,142,319

The following tables present loans individually evaluated for impairment recognized as of September 30, 2021 and December 31, 2020 (in thousands):

	Unpaid Principal				Allowance for Loan
At September 30, 2021	Balance		Recorded Investment		Losses Allocated
With an allowance recorded:
One-to-four family	$	584	$	454	$	33
Consumer		2,125		2,125		1,430
Commercial & industrial		3,145		3,145		2,814
Total	$	5,854	$	5,724	$	4,277
Without an allowance recorded:
One-to-four family	$	651	$	504	$	—
Commercial real estate		10,333		10,333		—
Commercial & industrial		—		—		—
Total	$	10,984	$	10,837	$	—

	Unpaid Principal				Allowance for Loan
At December 31, 2020	Balance		Recorded Investment		Losses Allocated
With an allowance recorded:
One-to-four family	$	610	$	480	$	53
Consumer		2,197		2,197		1,203
Commercial & industrial		4,192		4,192		3,662
Total	$	6,999	$	6,869	$	4,918
Without an allowance recorded:
One-to-four family	$	666	$	519	$	—
Commercial real estate		10,345		10,345		—
Commercial & industrial		—		—		—
Total	$	11,011	$	10,864	$	—

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 for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Average Recorded		Interest Income
Three months ended September 30, 2021	Investment		Recognized
With an allowance recorded:
One-to-four family	$	458	$	4
Consumer		2,103		26
Commercial & industrial		3,145		—
Total	$	5,706	$	30
Without an allowance recorded:
One-to-four family	$	506	$	7
Commercial real estate		10,335		2
Commercial & industrial		96		—
Total	$	10,937	$	9

	Average Recorded		Interest Income
Three months ended September 30, 2020	Investment		Recognized
With an allowance recorded:
One-to-four family	$	488	$	5
Consumer		2,112		27
Commercial & industrial		5,497		—
Total	$	8,097	$	32
Without an allowance recorded:
One-to-four family	$	524	$	3
Commercial real estate		363		-
Total	$	887	$	3

	Average Recorded		Interest Income
Nine months ended September 30, 2021	Investment		Recognized
With an allowance recorded:
One-to-four family	$	466	$	16
Consumer		2,132		84
Commercial & industrial		3,407		-
Total	$	6,005	$	100
Without an allowance recorded:
One-to-four family	$	511	$	20
Commercial real estate		10,339		207
Commercial & industrial		96		-
Total	$	10,946	$	227

	Average Recorded		Interest Income
Nine months ended September 30, 2020	Investment		Recognized
With an allowance recorded:
One-to-four family	$	494	$	13
Consumer		1,330		58
Commercial & industrial		3,272		—
Total	$	5,096	$	71
Without an allowance recorded:
One-to-four family	$	1,115	$	13
Commercial real estate		364		4
Commercial and industrial		1,188		—
Total	$	2,667	$	17

For a loan to be considered impaired, management determines whether it is probable that the Company 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 “COVID-19 Loan Modifications” 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 September 30, 2021 and December 31, 2020 (in thousands):

At September 30, 2021	Non-accrual		Loans Past Due Over 90 Days Still Accruing
Commercial real estate	$	9,984	$	—
Commercial & industrial		3,145		—
Consumer		1,674		573
Total	$	14,803	$	573

At December 31, 2020	Non-accrual			Loans Past Due Over 90 Days Still Accruing
Commercial & industrial	$	4,192	$	—
Consumer		1,428		769
Total	$	5,620	$	769

Interest income that would have been recorded for the three and nine months ended September 30, 2021 and 2020 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 September 30, 2021 and December 31, 2020 (in thousands):

					90
	30-59		60-89		Days and		Total past		Current
At September 30, 2021	Days		Days		Greater		due		loans		Total
Commercial real estate	$	—	$	—	$	9,984	$	9,984	$	2,368,090	$	2,378,074
Commercial & industrial		92		—		3,145		3,237		608,066		611,303
Construction		—		—		—		—		150,144		150,144
Multifamily		—		—		—		—		374,555		374,555
One-to-four family		—		—		—		—		61,266		61,266
Consumer		43		—		2,247		2,290		32,777		35,067
Total	$	135	$	—	$	15,376	$	15,511	$	3,594,898	$	3,610,409

					90
	30-59		60-89		Days and		Total past		Current
At December 31, 2020	Days		Days		Greater		due		loans		Total
Commercial real estate	$	40	$	9,984	$	—	$	10,024	$	1,877,481	$	1,887,505
Commercial & industrial		4,429		6,400		4,192		15,021		576,479		591,500
Construction		—		—		—		—		112,290		112,290
Multifamily		—		—		—		—		433,239		433,239
One-to-four family		2,908		—		—		2,908		68,446		71,354
Consumer		112		32		2,197		2,341		44,090		46,431
Total	$	7,489	$	16,416	$	6,389	$	30,294	$	3,112,025	$	3,142,319

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.

Included in impaired loans at September 30, 2021 and December 31, 2020 were $1.3 million and $1.4 million, respectively, of loans modified as TDRs. The Company allocated specific reserves amounting to $33,000 and $53,000 for TDRs as of September 30, 2021 and December 31, 2020, respectively. There were no loans modified as a TDR during the three and nine months ended September 30, 2021 or 2020. The Company has not committed to lend additional amounts as of September 30, 2021 to customers with outstanding loans that are classified as TDRs. During the nine months ended September 30, 2021 and September 30, 2020 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 pursuant to the Company’s internal underwriting policy.

The following tables present the recorded investment in TDRs by class of loans as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021		December 31, 2020
Troubled debt restructurings:
Real Estate:
Commercial real estate	$	349	$	361
One-to-four family		958		999
Total troubled debt restructurings	$	1,307	$	1,360

All TDRs at September 30, 2021 and December 31, 2020 were performing in accordance with their restructured terms.

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. Except for one-to-four family loans and consumer loans, the Company analyzes loans individually by classifying the loans as to credit risk at least annually. For one-to-four family loans and consumer loans, the Company evaluates credit quality based on the aging status of the loan, which was previously presented. An analysis is performed on a quarterly basis for loans classified as special mention, substandard or doubtful. The Company uses the following definitions for risk ratings:

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’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 Company 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 as of September 30, 2021 and December 31, 2020 is as follows (in thousands):

			Special
At September 30, 2021	Pass		Mention		Substandard		Doubtful			Total
Commercial real estate	$	2,367,741	$	349	$	9,984	$	—	$	2,378,074
Commercial & industrial		603,963		4,195		—		3,145		611,303
Construction		150,144		—		—		—		150,144
Multifamily		374,555		—		—		—		374,555
Total	$	3,496,403	$	4,544	$	9,984	$	3,145	$	3,514,076

			Special
At December 31, 2020	Pass		Mention		Substandard		Doubtful			Total
Commercial real estate	$	1,877,160	$	361	$	9,984	$	—	$	1,887,505
Commercial & industrial		583,809		3,499		—		4,192		591,500
Construction		112,290		—		—		—		112,290
Multi-family		433,239		—		—		—		433,239
Total	$	3,006,498	$	3,860	$	9,984	$	4,192	$	3,024,534

COVID-19 Loan Modifications

On March 22, 2020, the banking regulators and the FASB issued guidance to financial institutions who were working with borrowers affected by COVID-19 (“COVID-19 Guidance”). The COVID-19 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 state programs that require 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 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.

As of September 30, 2021, the Company had 10 loans amounting to $49.1 million, or 1.4% of total loans, that were modified in accordance with the COVID-19 Guidance and the CARES Act. As of September 30, 2021, principal payment deferrals were $39.2 million, or 1.1% of total loans, while full payment deferrals were $10.0 million, or 0.3% of total loans.