Loans Receivable and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2021

Receivables [Abstract]

Loans Receivable and Allowance for Credit Losses

Loans Receivable and Allowance for Credit Losses

On January 1, 2020, the Company adopted CECL, which replaced 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, 2021 and December 31, 2020 are summarized as follows (in thousands):

	March 31, 2021		December 31, 2020
Mortgage loans:
Residential	$	1,277,376	1,294,702
Commercial	3,594,012		3,458,666
Multi-family	1,458,193		1,484,515
Construction	615,706		541,939
Total mortgage loans	6,945,287		6,779,822
Commercial loans	2,510,708		2,567,470
Consumer loans	363,648		492,566
Total gross loans	9,819,643		9,839,858
Premiums on purchased loans	1,378		1,566
Unearned discounts	(7)		(12)
Net deferred fees	(17,478)		(18,522)
Total loans	$	9,803,536	9,822,890

At March 31, 2021, $101.7 million of loans purchased from SB One that were previously classified as consumer loans were classified as commercial mortgage loans, following further analysis of the underwriting documents and operational intent of the borrower. These loans are comprised of term loans and lines of credit secured by 1-4 family residential properties that are held by borrowers to generate rental income.

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

	March 31, 2021
	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	$	6,862	6,161	7,797	—	20,820	1,256,556	1,277,376	7,797
Commercial	2,183		520	33,742	—	36,445	3,557,567	3,594,012	33,742
Multi-family	1,327		—	101	—	1,428	1,456,765	1,458,193	101
Construction	1,123		1,656	1,392	—	4,171	611,535	615,706	1,392
Total mortgage loans	11,495		8,337	43,032	—	62,864	6,882,423	6,945,287	43,032
Commercial loans	393		235	36,042	—	36,670	2,474,038	2,510,708	21,298
Consumer loans	1,356		277	3,010	—	4,643	359,005	363,648	3,009
Total gross loans	$	13,244	8,849	82,084	—	104,177	9,715,466	9,819,643	67,339

	December 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	$	15,789	8,852	9,315	—	33,956	1,260,746	1,294,702	9,315
Commercial	761		113	31,982	—	32,856	3,425,810	3,458,666	20,482
Multi-family	206		585	—	—	791	1,483,724	1,484,515	—
Construction	—		—	1,392	—	1,392	540,547	541,939	1,392
Total mortgage loans	16,756		9,550	42,689	—	68,995	6,710,827	6,779,822	31,189
Commercial loans	1,658		1,179	42,118	—	44,955	2,522,515	2,567,470	15,541
Consumer loans	4,348		4,519	2,283	—	11,150	481,416	492,566	2,283
Total gross loans	$	22,762	15,248	87,090	—	125,100	9,714,758	9,839,858	49,013

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 $82.1 million and $87.1 million at March 31, 2021 and December 31, 2020, respectively. Included in non-accrual loans were $27.1 million and $35.3 million of loans which were less than 90 days past due at March 31, 2021 and December 31, 2020, respectively. There were no loans 90 days or greater past due and still accruing interest at March 31, 2021 or December 31, 2020.

Management has elected to measure an allowance for credit losses for accrued interest receivables specifically related to any loan that has been deferred as a result of COVID-19. Generally, 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 collateral-dependent 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. 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 fair value of the collateral less any selling costs. 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 selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less estimated selling costs. 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 and evaluated for charge offs. The Company believes there have been no significant time lapses resulting from this process.

At March 31, 2021, there were 167 impaired loans totaling $79.5 million. Included in this total were 115 TDRs related to 112 borrowers totaling $22.7 million that were performing in accordance with their restructured terms and which continued to accrue interest at March 31, 2021. At December 31, 2020, there were 169 impaired loans totaling $86.0 million, of which 135 loans totaling $39.6 million were TDRs. Included in this total were 112 TDRs to 110 borrowers totaling $23.1 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2020.

At March 31, 2021 and December 31, 2020, the Company had $30.1 million and $26.3 million of collateral-dependent impaired loans, respectively. The collateral-dependent impaired loans at March 31, 2021 consisted of $28.3 million in commercial loans, $1.6 million in residential real estate loans, and $216,000 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, 2021 and 2020 was as follows (in thousands):

March 31, 2021	Mortgage loans		Commercial loans	Consumer loans	Total
Balance at beginning of period	$	68,307	27,084	6,075	101,466
Provision benefit to operations	(13,467)		(467)	(1,066)	(15,000)
Recoveries of loans previously charged-off	276		528	303	1,107
Loans charged-off	(918)		(843)	(221)	(1,982)
Balance at end of period	$	54,198	26,302	5,091	85,591
March 31, 2020	Mortgage loans		Commercial loans	Consumer loans	Total
Balance at beginning of period	$	25,511	28,263	1,751	55,525
Provision charge (benefit) to operations	7,710		7,619	(629)	14,700
Retained earnings (due to initial CECL adoption)	14,188		(9,974)	3,706	7,920
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

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, 2021, the Company recorded a negative provision for credit losses on loans of $15.0 million. The decrease in the provision for credit losses for the year ended March 31, 2021 was the result of an improved current economic forecast and the resultant favorable impact on expected credit losses, compared with a provision for credit losses for the prior year, which was based upon a weak economic forecast and uncertain outlook attributable to the COVID-19. The largest decrease in the provision for credit losses on loans for the year ended March 31, 2021 was in the commercial real estate portfolio.

The following table illustrates the impact the January 1, 2020 adoption of CECL had on the allowance for credits losses for the loan portfolio (in thousands):

	January 1, 2020
	As reported under CECL		Prior to CECL	Impact of CECL adoption
Loans
Residential	$	8,950	3,414	5,536
Commercial	17,118		12,831	4,287
Multi-family	9,519		3,374	6,145
Construction	4,152		5,892	(1,740)
Total mortgage loans	39,739		25,511	14,228
Commercial loans	18,254		28,263	(10,009)
Consumer loans	5,452		1,751	3,701
Allowance for credit losses on loans	$	63,445	55,525	7,920

The following tables summarize loans receivable by portfolio segment and impairment method (in thousands):

	March 31, 2021
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	49,783	28,359	1,405	79,547
Collectively evaluated for impairment	6,895,504		2,482,349	362,243	9,740,096
Total gross loans	$	6,945,287	2,510,708	363,648	9,819,643

	December 31, 2020
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	48,783	35,832	1,431	86,046
Collectively evaluated for impairment	6,731,039		2,531,638	491,135	9,753,812
Total gross loans	$	6,779,822	2,567,470	492,566	9,839,858

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

	March 31, 2021
	Mortgage loans		Commercial loans	Consumer loans	Total
Individually evaluated for impairment	$	927	3,832	43	4,802
Collectively evaluated for impairment	53,271		22,470	5,048	80,789
Total gross loans	$	54,198	26,302	5,091	85,591

	December 31, 2020
	Mortgage loans		Commercial loans	Consumer loans	Total
Individually evaluated for impairment	$	4,220	4,715	39	8,974
Collectively evaluated for impairment	64,087		22,369	6,036	92,492
Total gross loans	$	68,307	27,084	6,075	101,466

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, 2021 and 2020, along with their balances immediately prior to the modification date and post-modification as of March 31, 2021 and 2020 (in thousands):

	For the three months ended
	March 31, 2021					March 31, 2020
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)
Commercial loans	3	$	1,361	$	1,359	2	$	746	$	731
Total restructured loans	3	$	1,361	$	1,359	2	$	746	$	731

For loans modified as TDRs in the preceding table, there were no allowance for credit losses required at March 31, 2021.

There were no payment defaults (90 days or more past due) at the quarter ended March 31, 2021 and 2020 for loans modified as TDRs within the previous 12 month periods ending March 31, 2021 and March 31, 2020. For TDRs that subsequently default, the Company determines the amount of the allowance for the respective loans in accordance with the accounting policy for the allowance for credit losses on loans individually evaluated for impairment.

All TDRs are impaired loans, which are individually evaluated for impairment. During the three months ended March 31, 2021, $1.5 million of charge-offs were recorded on TDRs. (See subsequent discussion related to COVID-19 loan modifications.)

As allowed by CECL, the Company elected to maintain pools of loans accounted for under ASC 310-30. At December 31, 2020, 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. Loans considered to be PCI prior to January 1, 2020 were converted to PCD loans on that date. Any additional loans acquired by the Company after January 1, 2020, that experience more-than-insignificant deterioration in credit quality after origination, have been classified as PCD loans.

The table below is a summary of the PCD loans accounted for in accordance with ASC 310-26 that were acquired in the SB One acquisition at the July 31, 2020 closing date (in thousands):

Gross amortized cost basis at July 31, 2020	$	315,784
Interest component of expected cash flows (accretable difference)	(7,988)
Fair value of PCD loans	307,796
Allowance for credit losses on PCD loans	(13,586)
Net PCD loans	$	294,210

At March 31, 2021, the balance of PCD loans totaled $283.9 million with a related allowance for credit losses of $10.8 million. The balance of PCD loans at December 31, 2020 was $296.6 million with a related allowance for credit losses of $13.1 million.

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

	March 31, 2021						December 31, 2020
	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	$	12,267	9,794	—	10,083	118	13,981	11,380	—	11,587	511
Commercial	34,125		30,656	—	31,555	17	17,414	17,414	—	16,026	60
Total	46,392		40,450	—	41,638	135	31,395	28,794	—	27,613	571
Commercial loans	11,630		8,963	—	9,082	—	15,895	14,009	—	12,791	46
Consumer loans	1,360		857	—	2,319	13	1,382	880	—	7	50
Total impaired loans	$	59,382	50,270	—	53,039	148	48,672	43,683	—	40,411	667
Loans with an allowance recorded
Mortgage loans:
Residential	$	8,938	8,438	904	8,461	77	7,950	7,506	806	7,604	307
Commercial	895		895	23	925	13	14,993	12,483	3,414	123	570
Total	9,833		9,333	927	9,386	90	22,943	19,989	4,220	7,727	877
Commercial loans	22,622		19,396	3,832	23,451	123	24,947	21,823	4,715	18,620	311
Consumer loans	563		548	43	550	10	565	551	39	5	20
Total impaired loans	$	33,018	29,277	4,802	33,387	223	48,455	42,363	8,974	26,352	1,208
Total impaired loans
Mortgage loans:
Residential	$	21,205	18,232	904	18,544	195	21,931	18,886	806	19,191	818
Commercial	35,020		31,551	23	32,480	30	32,407	29,897	3,414	16,149	630
Total	56,225		49,783	927	51,024	225	54,338	48,783	4,220	35,340	1,448
Commercial loans	34,252		28,359	3,832	32,533	123	40,842	35,832	4,715	31,411	357
Consumer loans	1,923		1,405	43	2,869	23	1,947	1,431	39	12	70
Total impaired loans	$	92,400	79,547	4,802	86,426	371	97,127	86,046	8,974	66,763	1,875

Specific allocations of the allowance for credit losses attributable to impaired loans totaled $4.8 million at March 31, 2021 and $9.0 million at December 31, 2020. At March 31, 2021 and December 31, 2020, impaired loans for which there was no related allowance for credit losses totaled $50.3 million and $43.7 million, respectively. The average balance of impaired loans for the three months ended March 31, 2021 and December 31, 2020 was $86.4 million and $66.8 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 COVID-19 and its adverse economic impact on both our commercial and retail borrowers, the Company implemented a modification program to defer principal or principal and interest payments for 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.

Loans that have been or are expected to be granted COVID-19 related deferrals or modifications have decreased from a peak level of $1.31 billion, or 16.8% of loans, to $132.0 million, or 1.3% of loans as of April 20, 2021. This $132.0 million of loans includes $300,000 in a first 90-day deferral period, $46.6 million in a second 90-day deferral period, and $85.1 million in a third deferral period. Of the $123.5 million in commercial loans in deferral, $119.0 million or 96.4% are under principal only deferral and are paying interest. Included in the $132.0 million of loans, $40.9 million are secured by hotels, $33.1 million are secured by multi-family properties (the majority of which is student housing related), $8.6 million are secured by retail properties, $6.5 million are secured by restaurants, and $8.5 million are secured by residential mortgages, with the balance comprised of diverse commercial loans. In accordance with the CARES Act, the Company has elected to not apply troubled debt restructuring classification to any COVID-19 related loan modifications that were performed after March 1, 2020 to borrowers who were current as of December 31, 2019. Accordingly, these modifications are not classified as TDRs.

In addition, the Company participated in the Paycheck Protection Program (“PPP”) through the United States Department of the Treasury and Small Business Administration ("SBA"). As of March 31, 2021, the Company secured a total of 1,318 PPP loans for its customers totaling $664.5 million, which includes both the initial round and the second round of PPP. Additionally, as of March 31, 2021, 670 PPP loans totaling $182.6 million were forgiven. The balance at March 31, 2021 for PPP loans was $481.9 million. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan was made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the commercial loan portfolio.

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

	At March 31, 2021
Total portfolio	Residential		Commercial mortgage		Multi-family		Construction		Total mortgages		Commercial		Consumer		Total Loans (1)
Special mention	$	5,847	129,051		35,885		25,409		196,192		115,619		529		312,340
Substandard	23,416		109,689		1,552		5,736		140,393		124,581		3,836		268,810
Doubtful	—		—		—		—		—		20		—		20
Loss	—		—		—		—		—		—		—		—
Total criticized and classified	29,263		238,740		37,437		31,145		336,585		240,220		4,365		581,170
Pass/Watch	1,248,113		3,355,272		1,420,756		584,561		6,608,702		2,270,488		359,283		9,238,473
Total	$	1,277,376	3,594,012		1,458,193		615,706		6,945,287		2,510,708		363,648		9,819,643
2021
Special mention	$	—	—		—		—		—		23		—		23
Substandard	—		—		—		—		—		391		—		391
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total criticized and classified	—		—		—		—		—		414		—		414
Pass/Watch	82,831		78,552		31,141		14,913		207,437		252,045		8,947		468,429
Total gross loans	$	82,831	78,552		31,141		14,913		207,437		252,459		8,947		468,843
2020
Special mention	$	—	$	—	$	—	$	1,986	$	1,986	$	345	$	—	$	2,331
Substandard	163		—		—		—		163		1,824		—		1,987
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—

Total criticized and classified	163		—	—	1,986	2,149	2,169	—	4,318
Pass/Watch	262,032		670,040	296,124	123,927	1,352,123	595,559	39,107	1,986,789
Total gross loans	$	262,195	670,040	296,124	125,913	1,354,272	597,728	39,107	1,991,107
2019
Special mention	$	661	30,310	679	16,189	47,839	8,819	—	56,658
Substandard	3,773		2,426	—	—	6,199	9,856	361	16,416
Doubtful	—		—	—	—	—	—	—	—
Loss	—		—	—	—	—	—	—	—
Total criticized and classified	4,434		32,736	679	16,189	54,038	18,675	361	73,074
Pass/Watch	139,951		632,084	177,648	259,223	1,208,906	246,072	46,155	1,501,133
Total gross loans	$	144,385	664,820	178,327	275,412	1,262,944	264,747	46,516	1,574,207
2018
Special mention	$	2,425	39,825	20,125	—	62,375	3,578	—	65,953
Substandard	744		5,383	—	5,121	11,248	6,568	120	17,936
Doubtful	—		—	—	—	—	—	—	—
Loss	—		—	—	—	—	—	—	—
Total criticized and classified	3,169		45,208	20,125	5,121	73,623	10,146	120	83,889
Pass/Watch	81,320		385,080	183,343	145,307	795,050	228,963	44,128	1,068,141
Total gross loans	$	84,489	430,288	203,468	150,428	868,673	239,109	44,248	1,152,030
2017 and prior
Special mention	$	2,761	58,916	15,081	7,234	83,992	102,854	529	187,375
Substandard	18,736		101,880	1,552	615	122,783	105,942	3,355	232,080
Doubtful	—		—	—	—	—	20	—	20
Loss	—		—	—	—	—	—	—	—
Total criticized and classified	21,497		160,796	16,633	7,849	206,775	208,816	3,884	419,475
Pass/Watch	681,979		1,589,516	732,500	41,191	3,045,186	947,849	220,946	4,213,981
Total gross loans	$	703,476	1,750,312	749,133	49,040	3,251,961	1,156,665	224,830	4,633,456
	At December 31, 2020
	Residential		Commercial mortgage	Multi-family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	2,882	124,631	29,781	24,376	181,670	157,080	1,867	340,617
Substandard	26,651		98,313	1,568	4,924	131,456	127,092	6,746	265,294
Doubtful	—		—	—	—	—	52	—	52
Loss	—		—	—	—	—	—	—	—
Total criticized and classified	29,533		222,944	31,349	29,300	313,126	284,224	8,613	605,963
Pass/Watch	1,265,169		3,235,722	1,453,166	512,639	6,466,696	2,283,246	483,953	9,233,895
Total	$	1,294,702	3,458,666	1,484,515	541,939	6,779,822	2,567,470	492,566	9,839,858

(1) Contained within criticized and classified loans at March 31, 2021 are loans that were granted payment deferrals related to COVID-19 totaling $132.0 million.