Loans Receivable and Allowance for Credit Losses on Loans

3 Months Ended

Mar. 31, 2020

Receivables [Abstract]

Loans Receivable and Allowance for Credit Losses on Loans

Loans Receivable and Allowance for Credit Losses on Loans

On January 1, 2020, the Company adopted CECL, which replaces the incurred loss methodology with an expected loss methodology. The adoption of the new standard resulted in the Company recording a $7.9 million increase to the allowance for credit losses on loans with a corresponding cumulative effect adjustment to decrease retained earnings by $5.9 million, net of income taxes. (See Adoption of CECL table below for additional detail.)

Loans receivable at March 31, 2020 and December 31, 2019 are summarized as follows (in thousands):

	March 31, 2020		December 31, 2019
Mortgage loans:
Residential	$	1,106,670	1,077,689
Commercial	2,555,091		2,578,393
Multi-family	1,222,313		1,225,551
Construction	408,944		429,812
Total mortgage loans	5,293,018		5,311,445
Commercial loans:
Commercial owner occupied	935,669		853,269
Commercial non-owner occupied	719,780		732,277
Other commercial loans	48,220		49,213
Total commercial loans	1,703,669		1,634,759
Consumer loans	379,597		391,360
Total gross loans	7,376,284		7,337,564
Purchased credit-deteriorated ("PCD") loans	737		746
Premiums on purchased loans	2,300		2,474
Unearned discounts	(26)		(26)
Net deferred fees	(7,251)		(7,873)
Total loans	$	7,372,044	7,332,885

The following tables summarize the aging of loans receivable by portfolio segment and class of loans, excluding PCD loans (in thousands):

	March 31, 2020
	30-59 Days		60-89 Days	Non-accrual	Recorded Investment > 90 days accruing	Total Past Due	Current	Total Loans Receivable	Non-accrual loans with no related allowance
Mortgage loans:
Residential	$	6,240	4,075	6,145	—	16,460	1,090,210	1,106,670	1,522
Commercial	424		—	5,264	—	5,688	2,549,403	2,555,091	—
Multi-family	—		—	—	—	—	1,222,313	1,222,313	—
Construction	—		—	—	—	—	408,944	408,944	—
Total mortgage loans	6,664		4,075	11,409	—	22,148	5,270,870	5,293,018	1,522
Commercial loans	13,793		1	23,086	—	36,880	1,666,789	1,703,669	1,344
Consumer loans	1,707		661	844	—	3,212	376,385	379,597	664
Total gross loans	$	22,164	4,737	35,339	—	62,240	7,314,044	7,376,284	3,530

	December 31, 2019
	30-59 Days		60-89 Days	Non-accrual	Recorded Investment > 90 days accruing	Total Past Due	Current	Total Loans Receivable	Non-accrual loans with no related allowance
Mortgage loans:
Residential	$	5,905	2,579	8,543	—	17,027	1,060,662	1,077,689	2,989
Commercial	—		—	5,270	—	5,270	2,573,123	2,578,393	—
Multi-family	—		—	—	—	—	1,225,551	1,225,551	—
Construction	—		—	—	—	—	429,812	429,812	—
Total mortgage loans	5,905		2,579	13,813	—	22,297	5,289,148	5,311,445	2,989
Commercial loans	2,383		95	25,160	—	27,638	1,607,121	1,634,759	3,238
Consumer loans	1,276		337	1,221	—	2,834	388,526	391,360	569
Total gross loans	$	9,564	3,011	40,194	—	52,769	7,284,795	7,337,564	6,796

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The principal amounts of these non-accrual loans were $35.3 million and $40.2 million at March 31, 2020 and December 31, 2019, respectively. Included in non-accrual loans were $16.0 million and $13.1 million of loans which were less than 90 days past due at March 31, 2020 and December 31, 2019, respectively. There were no loans 90 days or greater past due and still accruing interest at March 31, 2020 or December 31, 2019.

Management has elected not to measure an allowance for credit losses for accrued interest receivables related to its loan portfolio as its policy is to write-off uncollectible accrued interest receivable balances in a timely manner. Accrued interest is written off by reversing interest income during the quarter the loan is moved from an accrual to a non-accrual status.

The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million, for which, based on current information, the Bank does not expect to collect all amounts due under the contractual terms of the loan agreement. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analysis of collateral-dependent loans. A third-party appraisal is generally ordered as soon as a loan is designated as a collateral-dependent loan and updated annually, or more frequently if required.

A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the collateral’s fair value less cost to sell. A specific allocation of the allowance for credit losses is established for each collateral-dependent loan with a carrying balance greater than the collateral’s fair value, less estimated costs to sell. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. At each fiscal quarter end, if a loan is designated as collateral-dependent and the third-party appraisal has not yet been received, an evaluation of all available collateral is made using the best information available at the time, including rent rolls, borrower financial statements and tax returns, prior appraisals, management’s knowledge of the market and collateral, and internally prepared collateral valuations based upon market assumptions regarding vacancy and capitalization rates, each as and where applicable. Once the appraisal is received and reviewed, the specific reserves are adjusted to reflect the appraised value. The Company believes there have been no significant time lapses as a result of this process.

At March 31, 2020, there were 158 impaired loans totaling $65.7 million. Included in this total were 129 TDRs related to 125 borrowers totaling $39.1 million that were performing in accordance with their restructured terms and which continued to accrue interest at March 31, 2020. At December 31, 2019, there were 158 impaired loans totaling $70.6 million, of which 147 loans totaling $48.3 million were TDRs. Included in this total were 133 TDRs related to 128 borrowers totaling $42.7 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2019.

At March 31, 2020 and December 31, 2019, the Company had $15.9 million and $20.4 million of collateral-dependent impaired loans, respectively. The collateral-dependent impaired loans at March 31, 2020 consisted of $12.8 million in commercial loans, $3.0 million in residential real estate loans, and $174,000 in consumer loans. The collateral for these impaired loans was primarily real estate.

The activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2020 and 2019 was as follows (in thousands):

Three months ended March 31,	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
2020
Balance at beginning of period	$	25,511	28,263	1,751	55,525
Retained earnings (due to initial CECL adoption)	14,188		(9,974)	3,706	7,920
Provision charged (credited) to operations	7,710		7,619	(629)	14,700
Recoveries of loans previously charged-off	93		313	123	529
Loans charged-off	(2)		(3,380)	(149)	(3,531)
Balance at end of period	$	47,500	22,841	4,802	75,143
2019
Balance at beginning of period	$	27,678	25,693	2,191	55,562
Provision (credited) charged to operations	(982)		1,282	(100)	200
Recoveries of loans previously charged-off	230		52	130	412
Loans charged-off	—		(676)	(145)	(821)
Balance at end of period	$	26,926	26,351	2,076	55,353

As a result of the January 1, 2020 adoption of CECL, the Company recorded a $7.9 million increase to the allowance for credit losses on loans. For the three months ended March 31, 2020, the Company recorded a $14.7 million provision for credit losses on loans. The increase in provision for credit losses for the quarter resulted primarily from the impact of reserve build related to the COVID-19 pandemic, with the largest increase in the commercial loans and commercial real estate portfolios.

The following table illustrates the impact of the January 1, 2020 adoption of CECL on the loan portfolio:

	January 1, 2020
	As reported under CECL		Prior to CECL	Impact of CECL adoption
Loans
Residential	$	8,950	3,411	5,539
Commercial	17,118		12,885	4,233
Multi-family	9,519		3,370	6,149
Construction	4,152		5,885	(1,733)
Total mortgage loans	39,739		25,551	14,188
Commercial loans	18,254		28,228	(9,974)
Consumer loans	5,452		1,746	3,706
Allowance for credit losses on loans	$	63,445	55,525	7,920

The following tables summarize loans receivable by portfolio segment and impairment method at March 31, 2020 and December 31, 2019 (in thousands):

	March 31, 2020
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	39,592	24,026	2,114	65,732
Collectively evaluated for impairment	5,253,426		1,679,643	377,483	7,310,552
Total gross loans	$	5,293,018	1,703,669	379,597	7,376,284

	December 31, 2019
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	39,910	28,357	2,374	70,641
Collectively evaluated for impairment	5,271,535		1,606,402	388,986	7,266,923
Total gross loans	$	5,311,445	1,634,759	391,360	7,337,564

The allowance for credit losses is summarized by portfolio segment and impairment classification as follows (in thousands):

	March 31, 2020
	Mortgage loans		Commercial loans	Consumer loans	Total
Individually evaluated for impairment	$	1,590	4,073	36	5,699
Collectively evaluated for impairment	45,910		18,768	4,766	69,444
Total gross loans	$	47,500	22,841	4,802	75,143

	December 31, 2019
	Mortgage loans		Commercial loans	Consumer loans	Total
Individually evaluated for impairment	$	1,580	3,462	25	5,067
Collectively evaluated for impairment	23,931		24,801	1,726	50,458
Total gross loans	$	25,511	28,263	1,751	55,525

Loan modifications to borrowers experiencing financial difficulties that are considered TDRs primarily involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. These modifications generally do not result in the forgiveness of principal or accrued interest. In addition, management attempts to obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

The following tables present the number of loans modified as TDRs during the three months ended March 31, 2020 and 2019, along with their balances immediately prior to the modification date and post-modification as of March 31, 2020 and 2019 (dollars in thousands):

	For the three months ended
	March 31, 2020					March 31, 2019
Troubled Debt Restructurings	Number of Loans	Pre-Modification Outstanding Recorded  Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded  Investment		Post-Modification Outstanding Recorded  Investment
	($ in thousands)
Mortgage loans:
Commercial	—	$	—	—		1	$	14,010	14,010
Total mortgage loans	—	—		—		1	14,010		14,010
Commercial loans	2	746		731		4	2,013		2,013
Total restructured loans	2	$	746	$	731	5	$	16,023	$	16,023

All TDRs are impaired loans, which are individually evaluated for impairment. During the three months ended March 31, 2020 $2.7 million of charge-offs were recorded on collateral-dependent impaired loans. For the three months ended March 31, 2020,

the allowance for loan losses associated with the TDRs presented in the preceding tables totaled $448,000 and was included in the allowance for loan losses for loans individually evaluated for impairment.

The TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 6.99% compared to a weighted average rate of 7.19% prior to modification, for the three months ended March 31, 2020.

The following table presents loans modified as TDRs within the previous 12 months from March 31, 2020 and 2019, and for which there was a payment default (90 days or more past due) at the quarter ended March 31, 2020 and 2019.

	March 31, 2020			March 31, 2019
Troubled Debt Restructurings Subsequently Defaulted	Number of Loans	Outstanding Recorded Investment		Number of Loans	Outstanding Recorded  Investment
	($ in thousands)
Commercial loans	—	$	—	3	$	540
Total restructured loans	—	$	—	3	$	540

There were no loans which had a payment default (90 days or more past due) for loans modified as TDRs within the 12 month period ending March 31, 2020. There were three payment defaults (90 days or more past due) to one borrower for loans modified as TDRs within the 12 month period ending March 31, 2019. For TDR’s that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for credit losses on loans individually evaluated for impairment.

As allowed by CECL, the Company elected to maintain pools of loans accounted for under ASC 310-30. At December 31, 2019, purchased credit impaired (“PCI”) loans totaled $746,000. In accordance with the CECL standard, management did not reassess whether modifications of individually acquired financial assets accounted for in pools were TDRs as of the date of adoption. All loans considered to be PCI prior to January 1, 2020 were converted to purchased credit deteriorated ("PCD") loans on that date. PCD loans totaled $737,000 at March 31, 2020. Subsequent to January 1, 2020, should the Company acquire loans that experience more-than-insignificant deterioration in credit quality since origination, these loans will be classified as PCD.

The following table presents loans individually evaluated for impairment by class and loan category, excluding PCD loans (in thousands):

	March 31, 2020						December 31, 2019
	Unpaid Principal Balance		Recorded Investment	Related Allowance	Average Recorded Investment	Interest Income Recognized	Unpaid Principal Balance	Recorded Investment	Related Allowance	Average Recorded Investment	Interest Income Recognized
Loans with no related allowance
Mortgage loans:
Residential	$	12,644	10,187	—	10,257	118	13,478	10,739	—	10,910	533
Commercial	14,295		14,180	—	14,183	128	—	—	—	—	—
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	—	—	—	—	—
Total	26,939		24,367	—	24,440	246	13,478	10,739	—	10,910	533
Commercial loans	3,943		2,135	—	3,417	18	3,927	3,696	—	4,015	17
Consumer loans	1,661		1,128	—	1,139	17	2,086	1,517	—	1,491	86
Total impaired loans	$	32,543	27,630	—	28,996	281	19,491	15,952	—	16,416	636
Loans with an allowance recorded
Mortgage loans:
Residential	$	10,777	10,273	876	10,308	112	10,860	10,326	829	10,454	428
Commercial	4,828		4,828	694	4,832	14	18,845	18,845	751	18,862	569
Multi-family	182		124	20	124	—	—	—	—	—	—
Construction	—		—	—	—	—	—	—	—	—	—
Total	15,787		15,225	1,590	15,264	126	29,705	29,171	1,580	29,316	997
Commercial loans	24,763		21,891	4,073	24,152	104	27,762	24,661	3,462	27,527	444
Consumer loans	997		986	36	8,560	11	868	857	25	878	46
Total impaired loans	$	41,547	38,102	5,699	47,976	241	58,335	54,689	5,067	57,721	1,487
Total impaired loans
Mortgage loans:
Residential	$	23,421	20,460	876	20,565	230	24,338	21,065	829	21,364	961
Commercial	19,123		19,008	694	19,015	142	18,845	18,845	751	18,862	569
Multi-family	182		124	20	124	—	—	—	—	—	—
Total	42,726		39,592	1,590	39,704	372	43,183	39,910	1,580	40,226	1,530
Commercial loans	28,706		24,026	4,073	27,569	122	31,689	28,357	3,462	31,542	461
Consumer loans	2,658		2,114	36	9,699	28	2,954	2,374	25	2,369	132
Total impaired loans	$	74,090	65,732	5,699	76,972	522	77,826	70,641	5,067	74,137	2,123

Specific allocations of the allowance for credit losses attributable to impaired loans totaled $5.7 million at March 31, 2020 and $5.1 million at December 31, 2019. At March 31, 2020 and December 31, 2019, impaired loans for which there was no related allowance for credit losses totaled $27.6 million and $16.0 million, respectively. The average balance of impaired loans for the three months ended March 31, 2020 and December 31, 2019 was $77.0 million and $74.1 million, respectively.

Management utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar risk characteristics. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with

minimal risk. Loans that are deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial, multi-family and construction loans are rated individually, and each lending officer is responsible for risk rating loans in their portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and by the Credit Department. The risk ratings are also confirmed through periodic loan review examinations which are currently performed by an independent third-party. Reports by the independent third-party are presented directly to the Audit Committee of the Board of Directors.

In response to the COVID-19 pandemic and its adverse economic impact on both our commercial and retail borrowers, we implemented a short-term modification program to defer principal or principal and interest payments for up to 90 days to borrowers directly impacted by the pandemic and who were not more than 30 days past due as of December 31, 2019 all in accordance with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. As of April 28, 2020, deferred payment relief had been provided to 638 borrowers representing total principal loan balances of $889.0 million.

In addition, the Company participated in the Paycheck Protection Program (“PPP”) through the United States Department of the Treasury and Small Business Administration. As of April 28, 2020 the Company secured 820 PPP loans for its customers totaling $377.5 million.

The following table summarizes the Company's gross loans held for investment by year of origination and internally assigned credit grades:

	Total Portfolio as of March 31, 2020
	Residential		Commercial mortgage	Multi-family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	4,075	19,848	—	—	23,923	114,858	661	139,442
Substandard	9,050		12,722	124	6,181	28,077	51,689	1,032	80,798
Doubtful	—		—	—	—	—	732	—	732
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	13,125		32,570	124	6,181	52,000	167,279	1,693	220,972
Pass/Watch	1,093,545		2,522,521	1,222,189	402,763	5,241,018	1,536,390	377,904	7,155,312
Total gross loans	$	1,106,670	2,555,091	1,222,313	408,944	5,293,018	1,703,669	379,597	7,376,284
2020
Special mention	$	—	—	—	—	—	—	—	—
Substandard	—		—	—	—	—	—	—	—
Doubtful	—		—		—	—	—	—	—
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	—		—	—	—	—	—	—	—
Pass/Watch	67,775		99,722	34,785	2,005	204,287	59,721	8,587	272,595
Total gross loans	$	67,775	99,722	34,785	2,005	204,287	59,721	8,587	272,595
2019
Special mention	$	—	—	—	—	—	1,231	—	1,231
Substandard	—		—	—	—	—	228	—	228
Doubtful	—		—		—	—	—	—	—
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	—		—	—	—	—	1,459	—	1,459
Pass/Watch	155,718		505,804	141,727	143,297	946,546	231,465	55,899	1,233,910
Total gross loans	$	155,718	505,804	141,727	143,297	946,546	232,924	55,899	1,235,369
2018
Special mention	$	—	—	—	—	—	4,656	—	4,656
Substandard	—		—	—	—	—	757	—	757

Doubtful	—		—		—	—	—	—	—
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	—		—	—	—	—	5,413	—	5,413
Pass/Watch	96,683		357,530	115,282	188,523	758,018	195,828	48,203	1,002,049
Total gross loans	$	96,683	357,530	115,282	188,523	758,018	201,241	48,203	1,007,462
2017
Special mention	$	—	220	—	—	220	3,204	—	3,424
Substandard	568		995	—	—	1,563	8,264	—	9,827
Doubtful	—		—		—	—	—	—	—
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	568		1,215	—	—	1,783	11,468	—	13,251
Pass/Watch	92,471		399,107	136,620	68,938	697,136	207,256	38,057	942,449
Total gross loans	$	93,039	400,322	136,620	68,938	698,919	218,724	38,057	955,700
2016 and prior
Special mention	$	4,075	19,628	—	—	23,703	105,767	661	130,131
Substandard	8,482		11,727	124	6,181	26,514	42,440	1,032	69,986
Doubtful	—		—		—	—	732	—	732
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	12,557		31,355	124	6,181	50,217	148,939	1,693	200,849
Pass/Watch	680,898		1,160,358	793,775	—	2,635,031	842,120	227,158	3,704,309
Total gross loans	$	693,455	1,191,713	793,899	6,181	2,685,248	991,059	228,851	3,905,158
	Total Portfolio as of December 31, 2019
	Residential		Commercial mortgage	Multi-family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	2,402	46,758	—	—	49,160	79,248	286	128,694
Substandard	10,204		13,458	—	6,181	29,843	57,015	1,668	88,526
Doubtful	—		—	—	—	—	836	—	836
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	12,606		60,216	—	6,181	79,003	137,099	1,954	218,056
Pass/Watch	1,065,083		2,518,177	1,225,551	423,631	5,232,442	1,497,660	389,406	7,119,508
Total gross loans	$	1,077,689	2,578,393	1,225,551	429,812	5,311,445	1,634,759	391,360	7,337,564