Note 3 - Loans Receivable

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 3 - Loans Receivable

The Company has defined its loan portfolio into three segments that reflect the structure of the lending function, the Company's strategic plan and the manner in which management monitors performance and credit quality. The three loan portfolio segments are: Real Estate Loans, Consumer Loans and Commercial Business Loans. These segments are further disaggregated into classes based on similar attributes and risk characteristics.

Loan amounts are net of unearned loan fees in excess of unamortized costs and premiums of $13.8 million as of  March 31, 2023 and $13.2 million as of  December 31, 2022. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $4.9 million as of  March 31, 2023 and $4.7 million as of  December 31, 2022, and was reported in accrued interest receivable on the consolidated balance sheets.

The amortized cost of loans receivable, net of ACLL, consisted of the following at the dates indicated:

	March 31, 2023		December 31, 2022
	(In thousands)
Real Estate:
One-to-four family	$	354,522	$	343,559
Multi-family		284,863		252,745
Commercial real estate		373,013		388,884
Construction and land		161,662		193,646
Total real estate loans		1,174,060		1,178,834
Consumer:
Home equity		54,116		52,877
Auto and other consumer		251,302		238,913
Total consumer loans		305,418		291,790
Commercial business loans		99,986		76,927
Total loans receivable		1,579,464		1,547,551
Less:
Allowance for credit losses on loans (1)		17,396		16,116
Total loans receivable, net	$	1,562,068	$	1,531,435

(1) Allowance for credit losses on loans in 2023 reported using the CECL method and in 2022 reported using the incurred loss method.

Nonaccrual Loans. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. For those loans placed on non-accrual status due to payment delinquency, return to accrual status will generally not occur until the borrower demonstrates repayment ability over a period of not less than six months.

The following table presents the amortized cost of nonaccrual loans by class of loan at the dates indicated:

	March 31, 2023						December 31, 2022
	Collateral Dependent Loans		Non-Collateral Dependent Loans		Total Nonaccrual Loans		Nonaccrual (1)
	(In thousands)
One-to-four family	$	1,154	$	332	$	1,486	$	954
Commercial real estate		46		—		46		53
Construction and land		—		14		14		15
Home equity		32		274		306		196
Auto and other consumer		—		781		781		575
Total nonaccrual loans	$	1,232	$	1,401	$	2,633	$	1,793
(1) Presentation of December 31, 2022, balances is in accordance with pre-CECL disclosure requirements.

Interest income recognized on a cash basis on nonaccrual loans for the three months ended March 31, 2023, was $9,000.

Prior to the implementation of CECL, the Bank categorized loans as performing or nonperforming based on payment activity. Loans that were more than 90 days past due and nonaccrual loans were considered nonperforming.

The following table represents the credit risk profile based on payment activity by class of loans as of December 31, 2022, in accordance with pre-CECL disclosure requirements:

	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	954	$	342,605	$	343,559
Multi-family		—		252,745		252,745
Commercial real estate		53		388,831		388,884
Construction and land		15		193,631		193,646
Consumer:
Home equity		196		52,681		52,877
Auto and other consumer		575		238,338		238,913
Commercial business		—		76,927		76,927
Total loans	$	1,793	$	1,545,758	$	1,547,551

Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. There were no loans past due 90 days or more and still accruing interest at  March 31, 2023 or  December 31, 2022.

The following table presents the amortized cost of past due loans by segment and class as of March 31, 2023:

	30-59 Days		60-89 Days		90 Days or More		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total Loans
	(In thousands)
Real Estate:
One-to-four family	$	403	$	492	$	620	$	1,515	$	353,007	$	354,522
Multi-family		—		—		—		—		284,863		284,863
Commercial real estate		—		—		—		—		373,013		373,013
Construction and land		18		—		18		36		161,626		161,662
Total real estate loans		421		492		638		1,551		1,172,509		1,174,060
Consumer:
Home equity		63		—		92		155		53,961		54,116
Auto and other consumer		1,127		291		766		2,184		249,118		251,302
Total consumer loans		1,190		291		858		2,339		303,079		305,418
Commercial business loans		—		—		—		—		99,986		99,986
Total loans	$	1,611	$	783	$	1,496	$	3,890	$	1,575,574	$	1,579,464

The following table presents the amortized cost of past due loans by segment and class as of December 31, 2022, in accordance with pre-CECL disclosure requirements:

	30-59 Days		60-89 Days		90 Days or More		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total Loans
	(In thousands)
Real Estate:
One-to-four family	$	1,449	$	155	$	652	$	2,256	$	341,303	$	343,559
Multi-family		—		—		—		—		252,745		252,745
Commercial real estate		—		—		—		—		388,884		388,884
Construction and land		—		18		—		18		193,628		193,646
Total real estate loans		1,449		173		652		2,274		1,176,560		1,178,834
Consumer:
Home equity		153		—		11		164		52,713		52,877
Auto and other consumer		1,390		698		557		2,645		236,268		238,913
Total consumer loans		1,543		698		568		2,809		288,981		291,790
Commercial business loans		—		—		—		—		76,927		76,927
Total loans	$	2,992	$	871	$	1,220	$	5,083	$	1,542,468	$	1,547,551

Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8-point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When the Bank classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk specifically or allow the loss to be addressed in the general allowance. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities but that, unlike specific allowances, have not been specifically allocated to certain problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose the Bank to enough risk to warrant classification as substandard or doubtful but do possess identified weaknesses are designated as either watch or special mention assets; risk ratings 4 and 5 in our risk rating system, respectively. Loans not otherwise classified are considered pass graded loans and are rated 1-3 in our risk rating system.

The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of  March 31, 2023. Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of most recent renewal or extension.

	Term Loans by Year of Origination (1)													Revolving		Total
	2023		2022		2021		2020		2019		Prior			Loans		Loans
	(In thousands)
One-to-four family
Pass	$	1,093	$	71,982	$	112,627	$	76,012	$	14,469	$	74,187		$	—	$	350,370
Watch		—		—		—		951		—		829			—		1,780
Special Mention		—		—		—		330		—		26			—		356
Substandard		—		—		—		304		492		1,220			—		2,016
Total one-to-four family		1,093		71,982		112,627		77,597		14,961		76,262			—		354,522
Gross charge-offs during the period		—		—		—		—		—		—			—		—
Multi-family
Pass		9,145		103,424		82,664		59,124		2,313		6,468			—		263,138
Watch		—		—		15,337		—		6,388		—			—		21,725
Total multi-family		9,145		103,424		98,001		59,124		8,701		6,468			—		284,863
Gross charge-offs during the period		—		—		—		—		—		—			—		—
Commercial Real Estate
Pass		5,428		90,446		108,425		89,639		13,797		31,640			—		339,375
Watch		3,934		—		14,007		3,288		3,627		1,034			—		25,890
Special Mention		—		—		6,627		—		—		—			—		6,627
Substandard		—		46		—		1,075		—		—			—		1,121
Total commercial real estate		9,362		90,492		129,059		94,002		17,424		32,674			—		373,013
Gross charge-offs during the period		—		—		—		—		—		—			—		—
Construction and Land
Pass		9,024		60,673		72,087		1,840		579		2,622			—		146,825
Watch		819		—		—		—		—		18			—		837
Substandard		13,986		—		—		—		—		14			—		14,000
Total construction and land		23,829		60,673		72,087		1,840		579		2,654			—		161,662
Gross charge-offs during the period		—		—		—		—		—		—			—		—
Home Equity
Pass		934		7,932		5,315		3,675		1,718		4,302			29,844		53,720
Watch		—		—		—		—		—		14			3		17
Special Mention		—		—		—		—		—		73			—		73
Substandard		—		—		90		63		—		—			153		306
Total home equity		934		7,932		5,405		3,738		1,718		4,389			30,000		54,116
Gross charge-offs during the period		—		—		—		—		—		11			—		11
Other Consumer
Pass		14,479		86,920		73,549		34,458		18,091		21,028			418		248,943
Watch		—		342		357		272		213		73			—		1,257
Special Mention		—		281		—		9		—		30			—		320
Substandard		—		438		171		6		1		166			—		782
Total other consumer		14,479		87,981		74,077		34,745		18,305		21,297			418		251,302
Gross charge-offs during the period		—		835		—		—		11		85			23		954
Commercial business
Pass		10,681		31,913		12,301		4,149		540		4,283			27,529		91,396
Watch		—		11		399		1,107		—		(3	)		—		1,514
Special Mention		—		—		—		312		—		2,975			3,789		7,076
Total commercial business		10,681		31,924		12,700		5,568		540		7,255			31,318		99,986
Gross charge-offs during the period		—		—		—		—		—		—			—		—
Total loans
Pass		50,784		453,290		466,968		268,897		51,507		144,530			57,791		1,493,767
Watch		4,753		353		30,100		5,618		10,228		1,965			3		53,020
Special Mention		—		281		6,627		651		—		3,104			3,789		14,452
Substandard		13,986		484		261		1,448		493		1,400			153		18,225
Total loans	$	69,523	$	454,408	$	503,956	$	276,614	$	62,228	$	150,999		$	61,736	$	1,579,464
Total gross charge-offs during the period	$	—	$	835	$	—	$	—	$	11	$	96		$	23	$	965

(1) Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of most recent renewal or extension.

The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of December 31, 2022, in accordance with pre-CECL disclosure requirements:

	Pass		Watch		Special Mention		Substandard		Total
	(In thousands)
Real Estate:
One-to-four family	$	339,812	$	2,234	$	27	$	1,486	$	343,559
Multi-family		237,077		15,668		—		—		252,745
Commercial real estate		350,001		25,586		12,161		1,136		388,884
Construction and land		179,116		529		—		14,001		193,646
Total real estate loans		1,106,006		44,017		12,188		16,623		1,178,834
Consumer:
Home equity		52,295		372		14		196		52,877
Auto and other consumer		238,522		222		75		94		238,913
Total consumer loans		290,817		594		89		290		291,790
Commercial business loans		66,276		2,234		8,417		—		76,927
Total loans	$	1,463,099	$	46,845	$	20,694	$	16,913	$	1,547,551

Individually Evaluated Loans. The Company evaluates loans collectively for purposes of determining the ACLL 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 portfolio. These loans are typically identified from a substandard or worse internal risk grade, since the specific attributes and risks associated with such loans tend to become unique as the credit deteriorates. Such loans are typically nonperforming, modified loans made to borrowers experiencing financial difficulty, 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 are evaluated individually for purposes of determining an appropriate lifetime ACLL. 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 costs to sell. The Company may increase or decrease the ACLL for collateral dependent individually evaluated loans based on changes in the estimated expected fair value of the collateral. Changes in the ACLL for all other individually evaluated loans is based substantially on the Company’s evaluation of cash flows expected to be received from such loans.

As of March 31, 2023, $1.2 million of loans were individually evaluated with no ACLL attributed to such loans. At March 31, 2023, all individually evaluated loans were evaluated based on the underlying value of the collateral and none were evaluated using a discounted cash flow approach. All individually evaluated loans were on nonaccrual status at March 31, 2023.

Collateral Dependent Loans. Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes of determining the ACLL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACLL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACLL is recorded.

The following table summarizes collateral dependent loans by segment and collateral type as of March 31, 2023:

	Collateral Type
	Single Family Residence		Warehouse		Total
	(In thousands)
One-to-four family	$	1,154	$	—	$	1,154
Commercial real estate		—		46		46
Home equity		32		—		32
Total collateral dependent loans	$	1,186	$	46	$	1,232

Troubled debt restructuring. Prior to the implementation of CECL on January 1, 2023, a loan was identified as a troubled debt restructuring ("TDR") when a loan to a borrower who was experiencing financial difficulty was modified from its original terms and conditions in such a way that the Bank granted the borrower a concession of some kind. First Fed had granted a variety of concessions to borrowers in the form of loan modifications. The modifications were generally related to the loan's interest rate, term and payment amount or a combination thereof.

The following table is a summary of information pertaining to TDR loans included in impaired loans at the date indicated, in accordance with pre-CECL disclosure requirements:

	December 31, 2022
	(In thousands)
Total TDR loans	$	1,753
Allowance for credit losses on loans related to TDR loans		21
Total nonaccrual TDR loans		29

There were no newly restructured, renewals, or modifications of existing TDR loans that occurred during the three months ended March 31, 2022.

There were no TDR loans that incurred a payment default within 12 months of the restructure date during the three months ended March 31, 2022.

The following table presents TDR loans by class by accrual and nonaccrual status at the date indicated, in accordance with pre-CECL disclosure requirements:

	December 31, 2022
	Accrual		Nonaccrual		Total
	(In thousands)
One-to-four family	$	1,697	$	29	$	1,726
Home equity		27		—		27
Total TDR loans	$	1,724	$	29	$	1,753

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. The Company refers to these loans as modified loans to troubled borrowers ("MLTB"). A MLTB arises from a modification made to a loan in order to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. GAAP requires that certain types of modifications be reported, which consist of the following: (i) principal forgiveness, (ii) interest rate reduction, (iii) other-than-insignificant payment delay, (iv) term extension, or any combination of the foregoing. The ACLL for a MLTB 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 ACLL for a MLTB is determined through individual evaluation.

During the three months ended March 31, 2023, there were no MLTB.