Loans Receivable and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2023

Loans Receivable and Allowance for Credit Losses

Note 5. Loans Receivable and Allowance for Credit Losses

Loans receivable at September 30, 2023 and December 31, 2022 are summarized as follows:


	September 30,			December 31,
	2023			2022
	(in thousands)
Mortgage loans:
1-4 Family residential
Investor-Owned	$	347,082		$	343,968
Owner-Occupied		151,866			134,878
Multifamily residential		553,694			494,667
Nonresidential properties		321,472			308,043
Construction and land		411,383			185,018
Total mortgage loans		1,785,497			1,466,574
Nonmortgage loans:
Business loans (1)		18,416			39,965
Consumer loans (2)		10,416			19,129
Total non-mortgage loans		28,832			59,094
Total loans, gross		1,814,329			1,525,668
Net deferred loan origination costs		692			2,051
Allowance for Credit Losses		(27,414	)		(34,592	)
Loans receivable, net	$	1,787,607		$	1,493,127

(1)

As of September 30, 2023 and December 31, 2022, business loans include $1.1 million and $20.0 million, respectively, of SBA Paycheck Protection Program (“PPP”) loans.

(2)

As of September 30, 2023 and December 31, 2022, consumer loans include $9.3 million and $18.2 million, respectively, of microloans originated by Grain through its mobile application that is geared to the underbanked and new generations entering the financial services market and uses non-traditional underwriting methodologies.

The Company’s lending activities are conducted principally in metropolitan New York City. The Company primarily grants loans secured by real estate to individuals and businesses pursuant to an established credit policy applicable to each type of lending activity in which it engages. Although collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrowers’ ability to generate continuing cash flows. The Company also evaluates the collateral and creditworthiness of each customer. The credit policy provides that depending on the borrowers’ creditworthiness and type of collateral, credit may be extended up to predetermined percentages of the market value of the collateral or on an unsecured basis. Real estate is the primary form of collateral. Other important forms of collateral are time deposits and marketable securities.

For disclosures related to the allowance for credit losses and credit quality, the Company does not have any disaggregated classes of loans below the segment level.

Credit-Quality Indicators: Internally assigned risk ratings are used as credit-quality indicators, which are reviewed by management on a quarterly basis.

The objectives of the Company’s risk-rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize credit loss, to identify relevant trends affecting the collectability of the loan portfolio, to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for credit losses.

Below are the definitions of the internally assigned risk ratings:

•

Strong Pass – Loans to a new or existing borrower collateralized at least 90 percent by an unimpaired deposit account at the Company.

•

Good Pass – Loans to a new or existing borrower in a well-established enterprise in excellent financial condition with strong liquidity and a history of consistently high level of earnings, cash flow and debt service capacity.

•

Satisfactory Pass – Loans to a new or existing borrower of average strength with acceptable financial condition, satisfactory record of earnings and sufficient historical and projected cash flow to service the debt.

•

Performance Pass – Existing loans that evidence strong payment history but document less than average strength, financial condition, record of earnings, or projected cash flows with which to service the debt.

•

Special Mention – Loans in this category are currently protected but show one or more potential weaknesses and risks which may inadequately protect collectability or borrower’s ability to meet repayment terms at some future date if the weakness or weaknesses are not monitored or remediated.

•

Substandard – Loans that are inadequately protected by the repayment capacity of the borrower or the current sound net worth of the collateral pledged, if any. Loans in this category have well defined weaknesses and risks that jeopardize the repayment. They are characterized by the distinct possibility that some loss may be sustained if the deficiencies are not remediated.

•

Doubtful – Loans that have all the weaknesses of loans classified as “Substandard” with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable.

Loans within the top four categories above are considered pass rated, as commonly defined. Risk ratings are assigned as necessary to differentiate risk within the portfolio. Risk ratings are reviewed on an ongoing basis and revised to reflect changes in the borrowers’ financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage as well as other considerations.

The following tables present credit risk ratings by loan segment as of September 30, 2023 and December 31, 2022:


	September 30, 2023
	Mortgage Loans								Nonmortgage Loans
							Construction						Total
	1-4 Family		Multifamily		Nonresidential		and Land		Business		Consumer		Loans
	(in thousands)
Risk Rating:
Pass	$	488,062	$	553,694	$	318,829	$	404,726	$	18,207	$	10,416	$	1,793,934
Special mention		3,129		—		2,544		—		—		—		5,673
Substandard		7,757		—		99		6,657		209		—		14,722
Total	$	498,948	$	553,694	$	321,472	$	411,383	$	18,416	$	10,416	$	1,814,329


	December 31, 2022
	Mortgage Loans								Nonmortgage Loans
							Construction						Total
	1-4 Family		Multifamily		Nonresidential		and Land		Business		Consumer		Loans
	(in thousands)
Risk Rating:
Pass	$	462,126	$	492,556	$	307,307	$	173,351	$	39,965	$	19,129	$	1,494,434
Special mention		7,692		1,437		606		—		—		—		9,735
Substandard		9,028		674		130		11,667		—		—		21,499
Total	$	478,846	$	494,667	$	308,043	$	185,018	$	39,965	$	19,129	$	1,525,668

An aging analysis of loans, as of September 30, 2023 and December 31, 2022, is as follows:


	September 30, 2023
			30-59		60-89		90 Days						90 Days
			Days		Days		or More				Nonaccrual		or More
	Current		Past Due		Past Due		Past Due		Total		Loans		Accruing
	(in thousands)
Mortgage loans:
1-4 Family residential
Investor-Owned	$	346,686	$	—	$	—	$	396	$	347,082	$	396	$	—
Owner-Occupied		149,732		—		—		2,134		151,866		2,134		—
Multifamily residential		553,694		—		—		—		553,694		—		—
Nonresidential properties		320,936		—		536		—		321,472		—		—
Construction and land		404,726		—		—		6,657		411,383		6,657		—
Nonmortgage loans:
Business		18,159		48		—		209		18,416		209		—
Consumer		9,969		86		361		—		10,416		—		—
Total	$	1,803,902	$	134	$	897	$	9,396	$	1,814,329	$	9,396	$	—


	December 31, 2022
			30-59		60-89		90 Days						90 Days
			Days		Days		or More				Nonaccrual		or More
	Current		Past Due		Past Due		Past Due		Total		Loans		Accruing
	(in thousands)
Mortgage loans:
1-4 Family residential
Investor-Owned	$	340,495	$	1,530	$	78	$	1,865	$	343,968	$	3,061	$	—
Owner-Occupied		131,510		2,553		—		815		134,878		2,987		—
Multifamily residential		490,024		4,643		—		—		494,667		—		—
Nonresidential properties		303,190		4,246		607		—		308,043		93		—
Construction and land		173,351		—		4,100		7,567		185,018		7,567		—
Nonmortgage loans:
Business		27,657		1,466		7,869		2,973		39,965		—		2,973
Consumer		16,743		1,267		1,119		—		19,129		—		—
Total	$	1,482,970	$	15,705	$	13,773	$	13,220	$	1,525,668	$	13,708	$	2,973

The following schedules detail the composition of the allowance for credit losses on loans and the related recorded investment in loans as of and for the three and nine months ended September 30, 2023 and 2022, and as of and for the year ended December 31, 2022:



	For the Nine Months Ended September 30, 2023
	Mortgage Loans															Nonmortgage Loans					Total
	1-4 Family Investor Owned			1-4 Family Owner Occupied			Multifamily			Nonresidential			Construction and Land			Business		Consumer			For the Period
	(in thousands)
Allowance for Credit Losses:
Balance, beginning of period	$	3,863		$	1,723		$	8,021		$	2,724		$	2,683		$	120	$	15,458		$	34,592
Provision (benefit) charged to expense		33			257			653			(20	)		2,276			193		(2,029	)		1,363
Impact of CECL adoption		766			146			(3,962	)		578			(911	)		236		57			(3,090	)
Charge-offs		—			—			—			—			—			—		(6,092	)		(6,092	)
Recoveries		—			—			—			—			—			3		638			641
Balance, end of period	$	4,662		$	2,126		$	4,712		$	3,282		$	4,048		$	552	$	8,032		$	27,414
Ending balance: individually evaluated for impairment	$	—		$	71		$	—		$	—		$	—		$	204	$	—		$	275
Ending balance: collectively evaluated for impairment		4,662			2,055			4,712			3,282			4,048			348		8,032			27,139
Total	$	4,662		$	2,126		$	4,712		$	3,282		$	4,048		$	552	$	8,032		$	27,414
Loans:
Ending balance: individually evaluated for impairment	$	396		$	2,134		$	—		$	—		$	6,657		$	209	$	—		$	9,396
Ending balance: collectively evaluated for impairment		346,686			149,732			553,694			321,472			404,726			18,207		10,416			1,804,933
Total	$	347,082		$	151,866		$	553,694		$	321,472		$	411,383		$	18,416	$	10,416		$	1,814,329

	For the Three Months Ended September 30, 2023
	Mortgage Loans															Nonmortgage Loans					Total
	1-4 Family Investor Owned			1-4 Family Owner Occupied			Multifamily			Nonresidential			Construction and Land			Business		Consumer			For the Period
	(in thousands)
Allowance for loan losses:
Balance, beginning of period	$	4,776		$	2,152		$	4,738		$	3,238		$	3,189		$	450	$	9,630		$	28,173
Provision (benefit) charged to expense		(114	)		(26	)		(26	)		44			859			102		(89	)		750
Losses charged-off		—			—			—			—			—			—		(1,592	)		(1,592	)
Recoveries		—			—			—			—			—			3		80			83
Balance, end of period	$	4,662		$	2,126		$	4,712		$	3,282		$	4,048		$	552	$	8,032		$	27,414


	For the Nine Months Ended September 30, 2022
	Mortgage Loans											Nonmortgage Loans						Total
	1-4 Family Investor Owned		1-4 Family Owner Occupied		Multifamily		Nonresidential			Construction and Land		Business			Consumer			For the Period
	(in thousands)
Allowance for loan losses:
Balance, beginning of period	$	3,540	$	1,178	$	5,684	$	2,165		$	2,024	$	306		$	1,455		$	16,352
Provision (benefit) charged to expense		25		214		1,064		296			802		(235	)		9,239			11,405
Charge-offs		—		—		—		—			—		—			(3,000	)		(3,000	)
Recoveries		156		39		—		—			—		94			62			351
Balance, end of period	$	3,721	$	1,431	$	6,748	$	2,461		$	2,826	$	165		$	7,756		$	25,108
Ending balance: individually evaluated for impairment	$	69	$	99	$	—	$	37		$	—	$	—		$	—		$	205
Ending balance: collectively evaluated for impairment		3,652		1,332		6,748		2,424			2,826		165			7,756			24,903
Total	$	3,721	$	1,431	$	6,748	$	2,461		$	2,826	$	165		$	7,756		$	25,108
Loans:
Ending balance: individually evaluated for impairment	$	8,352	$	4,440	$	—	$	1,587		$	10,660	$	359		$	—		$	25,398
Ending balance: collectively evaluated for impairment		328,315		108,309		421,917		281,055			186,777		41,039			22,563			1,389,975

Total	$	336,667	$	112,749	$	421,917	$	282,642		$	197,437	$	41,398		$	22,563		$	1,415,373

	For the Three Months Ended September 30, 2022
	Mortgage Loans											Nonmortgage Loans						Total
	1-4 Family Investor Owned		1-4 Family Owner Occupied		Multifamily		Nonresidential			Construction and Land		Business			Consumer			Total
	(in thousands)
Allowance for loan losses:
Balance, beginning of period	$	3,607	$	1,233	$	6,374	$	2,493		$	2,262	$	103		$	1,463		$	17,535
Provision (benefit) charged to expense		114		159		374		(32	)		564		61			8,090			9,330
Losses charged-off		—		—		—		—			—		—			(1,799	)		(1,799	)
Recoveries		—		39		—		—			—		1			2			42
Balance, end of period	$	3,721	$	1,431	$	6,748	$	2,461		$	2,826	$	165		$	7,756		$	25,108


	For the Year Ended December 31, 2022
	Mortgage Loans										Nonmortgage Loans						Total
	1-4 Family Investor Owned		1-4 Family Owner Occupied		Multifamily		Nonresidential		Construction and Land		Business			Consumer			For the Period
	(in thousands)
Allowance for loan losses:
Balance, beginning of year	$	3,540	$	1,178	$	5,684	$	2,165	$	2,024	$	306		$	1,455		$	16,352
Provision (benefit) charged to expense		167		506		2,337		559		659		(280	)		20,098			24,046
Charge-offs		—		—		—		—		—		—			(6,660	)		(6,660	)
Recoveries		156		39		—		—		—		94			565			854
Balance, end of year	$	3,863	$	1,723	$	8,021	$	2,724	$	2,683	$	120		$	15,458		$	34,592
Ending balance: individually evaluated for impairment	$	63	$	96	$	—	$	37	$	—	$	—		$	—		$	196
Ending balance: collectively evaluated for impairment		3,800		1,627		8,021		2,687		2,683		120			15,458			34,396
Total	$	3,863	$	1,723	$	8,021	$	2,724	$	2,683	$	120		$	15,458		$	34,592
Loans:
Ending balance: individually evaluated for impairment	$	5,269	$	4,315	$	—	$	801	$	7,567	$	—		$	—		$	17,952
Ending balance: collectively evaluated for impairment		338,699		130,563		494,667		307,242		177,451		39,965			19,129			1,507,716
Total	$	343,968	$	134,878	$	494,667	$	308,043	$	185,018	$	39,965		$	19,129		$	1,525,668

Loans are considered impaired when current information and events indicate all amounts due may not be collectable according to the contractual terms of the related loan agreements. Impaired loans are identified by applying normal loan review procedures in accordance with the allowance for credit losses methodology. Management periodically assesses loans to determine whether impairment exists. Any loan that is, or will potentially be, no longer performing in accordance with the terms of the original loan contract is evaluated to determine impairment.

The following information relates to impaired loans as of and for the nine months ended September 30, 2023 and 2022 and as of and for the year ended December 31, 2022:


	Unpaid Contractual		Recorded Investment		Recorded Investment		Total				Average		Interest Income
	Principal		With No		With		Recorded		Related		Recorded		Recognized
As of and For the Nine Months Ended September 30, 2023	Balance		Allowance		Allowance		Investment		Allowance		Investment		on a Cash Basis
	(in thousands)
Mortgage loans:
1-4 Family residential	$	2,517	$	2,081	$	449	$	2,530	$	71	$	6,478	$	40
Multifamily residential		—		—		—		—		—		958		—
Nonresidential properties		—		—		—		—		—		531		—
Construction and land		6,650		6,657		—		6,657		—		8,438		—
Nonmortgage loans:
Business		209		—		209		209		204		83		—
Consumer		—				—		—		—		—		—
Total	$	9,376	$	8,738	$	658	$	9,396	$	275	$	16,488	$	40

	Unpaid Contractual		Recorded Investment		Recorded Investment		Total				Average		Interest Income
	Principal		With No		With		Recorded		Related		Recorded		Recognized
As of and For the Nine Months Ended September 30, 2022	Balance		Allowance		Allowance		Investment		Allowance		Investment		on a Cash Basis
	(in thousands)
Mortgage loans:
1-4 Family residential	$	13,100	$	11,015	$	1,777	$	12,792	$	168	$	11,440	$	164
Multifamily residential		—		—		—		—		—		789		—
Nonresidential properties		1,630		1,239		348		1,587		37		2,268		38
Construction and land		10,660		10,660		—		10,660		—		5,147		16
Nonmortgage loans:
Business		359		359		—		359		—		93		—
Consumer		—		—		—		—		—		24		—
Total	$	25,749	$	23,273	$	2,125	$	25,398	$	205	$	19,761	$	218


	Unpaid Contractual		Recorded Investment		Recorded Investment		Total				Average		Interest Income
	Principal		With No		With		Recorded		Related		Recorded		Recognized
As of and for the Year Ended December 31, 2022	Balance		Allowance		Allowance		Investment		Allowance		Investment		on a Cash Basis
	(in thousands)
Mortgage loans:
1-4 Family residential	$	9,986	$	7,827	$	1,757	$	9,584	$	159	$	11,072	$	307
Multifamily residential		—		—		—		—		—		630		—
Nonresidential properties		843		457		344		801		37		1,930		30
Construction and land		7,567		7,567		—		7,567		—		6,408		—
Nonmortgage loans:
Business		—		—		—		—		—		3		—
Consumer		—		—		—		—		—		—		—
Total	$	18,396	$	15,851	$	2,101	$	17,952	$	196	$	20,043	$	337

The Company adopted Accounting Standards Update (“ASU”) 2022-02 on January 1, 2023. Since adoption, the Company has not modified any loans with borrowers experiencing financial difficulty. These modifications may include a reduction in interest rate, an extension in term, principal forgiveness and/or other than insignificant payment delay. At September 30, 2023, there were no loans with modifications to borrowers experiencing financial difficulty.

Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company classified certain loans as troubled debt restructuring (“TDR”) loans when credit terms to a borrower in financial difficulty were modified, in accordance with ASC 310-40. With the adoption of ASU

2022-02 as of January 1, 2023, the Company has ceased to recognize or measure for new TDRs but those existing at December 31, 2022 will remain until settled.

During the year ended December 31, 2022, there were no loans restructured as a troubled debt restructuring.

At September 30, 2023 and December 31, 2022, there were 21and 23 troubled debt restructured loans totaling $5.9 million and $6.6 million of which $5.2 million and $4.2 million are on accrual status, respectively. There were no commitments to lend additional funds to borrowers whose loans have been modified in a troubled debt restructuring. The financial impact from the concessions made represents specific impairment reserves on these loans, which aggregated to $0.2 million December 31, 2022.

Write-off and write-down of Microloans

In 2020, the Company entered into a business arrangement with the FinTech startup company Grain. Grain’s product is a mobile application geared to the underbanked, minorities and new generations entering the financial services market. In employing this mobile application, the Bank uses non-traditional underwriting methodologies to provide revolving credit to borrowers who otherwise may gravitate to using alternative non-bank lenders. Under the terms of its agreement with Grain, the Bank is the lender for Grain-originated microloans with credit lines currently up to $1,500 and, where applicable, the depository for related security deposits. Grain originates and services these microloans and is responsible for maintaining compliance with the Bank's origination and servicing standards, as well as applicable regulatory and legal requirements. If a microloan is found to be fraudulent, becomes 90 days delinquent upon 90 days of origination or defaults due to a failure of Grain to properly service the microloan, the Bank’s applicable standards for origination or servicing are deemed to have not been complied with and the microloan is put back to Grain, who then becomes responsible for the microloan and any related losses. The microloans put back to Grain are accounted for as an “other asset,” specifically referred to herein as the “Grain Receivable.” At December 31, 2022, the Bank had 27,886 Grain microloans outstanding, net of put backs, with an aggregate balance totaling $18.2 million and which were performing, in management's opinion, comparably to similar portfolios, offset by a $15.4 million allowance for loan losses, resulting in $2.8 million in Grain microloans, net of allowance for loan losses.

Grain has been victimized by cyber fraud using synthetic and other forms of fraudulent identifications, a phenomenon that has become prevalent with Fintechs. Grain remains a pre-profit startup highly dependent on earnings from its relationship with the Bank, a new relationship with another financial institution, and further capital raises which may not materialize.

The Company continues to closely monitor its portfolio of consumer loans originated by Grain as well as Grain’s refinement of solutions for detecting and preventing cyber fraud in the application for microloans. The Company has requested, and Grain has agreed, that no new microloans be originated until further notice and that further extensions of credit to an existing microloan borrower only be made upon confirmation that such borrower is not fraudulent. Further, like other start-up companies, there is a higher level of risk that Grain may not be able to execute its business plan and may fail. In the event Grain were to cease operations, and although it has considered contingency plans, the Bank may have greater difficulty in servicing and collecting the microloan portfolio. In such a case, the level the Bank has provided for in its allowance for credit losses for its microloan portfolio may be inadequate and it may need to increase its provision for credit losses, which could materially decrease the Company’s net income. As a consequence of such events, the Bank may determine it appropriate to terminate its relationship with Grain.

At September 30, 2023, the Bank had 16,687 Grain microloans outstanding, net of put backs, with an aggregate balance totaling $9.3 million and which were performing, in management’s opinion, comparably to similar portfolios, offset by an $8.1 million allowance for credit losses, resulting in $1.2 million in Grain microloans. Since the beginning of the Bank’s agreement with Grain and through September 30, 2023, 45,322 microloans amounting to $24.3 million have been deemed to be fraudulent and put back to Grain. The Company has written-down a total of $15.6 million, net of recoveries, of the Grain Receivable and received $6.8 million in cash from Grain and through the application of security deposits connected to fraudulent loan accounts. The Bank also opted to use the $1.8 million grant it received from the U.S. Treasury Department’s Rapid Response ‎Program to defray the Grain Receivable. The application of those amounts resulted in no net receivable. Additionally, the Company wrote-off its equity investment in Grain of $1.0 million during the year ended December 31, 2022. As of September 30, 2023, the Company’s total exposure to Grain was $1.2 million of the remaining microloans, net of allowance for credit losses, excluding $2.4 million of unused commitments available to Grain borrowers and $1.6 million of security deposits by Grain borrowers. The $1.3 million of recoveries for the nine months ended September 30, 2023 and the $18.5 million write-off for the nine months ended September 30, 2022 related to Grain is included in non-interest expense in the accompanying Consolidated Statements of Operations. Of the $1.3 million of recoveries for the nine months ended September 30, 2023, $0.7 million were payments received from Grain on the Grain Receivable and the remainder were payments from Grain borrowers.


Grain Technology, Inc. ("Grain") Total Exposure as of September 30, 2023
(in thousands)
Receivable from Grain
Microloans originated - put back to Grain (inception-to-September 30, 2023)	$	24,255
Write-downs, net of recoveries (inception-to-date as of September 30, 2023)		(15,610	)
Cash receipts from Grain (inception-to-September 30, 2023)		(6,819	)
Grant/reserve (inception-to-September 30, 2023)		(1,826	)
Net receivable as of September 30, 2023	$	—
Microloan receivables from Grain borrowers
Grain originated loans receivable as of September 30, 2023	$	9,318
Allowance for credit losses as of September 30, 2023 (1)		(8,163	)
Microloans, net of allowance for credit losses as of September 30, 2023	$	1,155
Investments
Investment in Grain	$	1,000
Investment in Grain write-off		(1,000	)
Investment in Grain as of September 30, 2023	$	—
Total exposure to Grain as of September 30, 2023	$	1,155

(1) Includes $0.3 million for allowance for unused commitments on the $2.4 million of unused commitments available to Grain borrowers reported in other liabilities in the accompanying Consolidated Statements of Financial Conditions. Excludes $1.6 million of security deposits by Grain originated borrowers reported in deposits in the accompanying Consolidated Statements of Financial Conditions.

Off-Balance Sheet Credit Losses

Also included within the scope of the CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and construction loans.

The Company estimates expected credit losses over the contractual period in which the company is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet exposures is adjusted as a provision for credit loss expense. The Company uses similar assumptions and risk factors that are developed for collectively evaluated financing receivables. This estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments to be funded over its estimated life.

At September 30, 2023, the allowance for off-balance sheet credit losses was $3.2 million, which is included in the "Other liabilities" on the Consolidated Statements of Financial Condition. During the nine months ended September 30, 2023, the Company had $1.9 million in credit loss provision for off-balance-sheet items, which are included in "Provision for contingencies" on the Consolidated Statements of Income.

The following table presents the activity in the allowance for off-balance-sheet credit losses:


	September 30,		December 31,
	2023		2022
Balance at beginning of period	$	354	$	229
Impact on CECL adoption		948		—
Provision		1,893		125
Allowance for credit losses	$	3,195	$	354