Note 3. Loans Receivable and Allowance for Loan Losses

Loans receivable at March 31, 2014 and December 31, 2013 are summarized as follows (in thousands):



	March 31, 2014			December 31, 2013
Mortgage loans:
Residential	1,165,196			1,174,043
Commercial	1,404,466			1,400,624
Multi-family	939,018			928,906
Construction	212,419			183,289
Total mortgage loans	3,721,099			3,686,862
Commercial loans	966,444			932,199
Consumer loans	572,136			577,602
Total gross loans	5,259,679			5,196,663
Premiums on purchased loans	4,187			4,202
Unearned discounts	(57		)	(62	)
Net deferred fees	(6,035		)	(5,990	)
	$	5,257,774		5,194,813

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



	March 31, 2014
	30-59 Days		60-89 Days	Non-accrual	Total Past Due and Non-accrual	Current	Total Loans Receivable	Recorded Investment > 90 days accruing
Mortgage loans:
Residential	$	7,742	5,429	21,985	35,156	1,130,040	1,165,196	—
Commercial	1,403		—	18,918	20,321	1,384,145	1,404,466	—
Multi-family	—		—	403	403	938,615	939,018	—
Construction	—		—	—	—	212,419	212,419	—
Total mortgage loans	9,145		5,429	41,306	55,880	3,665,219	3,721,099	—
Commercial loans	4,322		42	19,350	23,714	942,730	966,444	—
Consumer loans	2,756		1,808	3,400	7,964	564,172	572,136	—
Total loans	$	16,223	7,279	64,056	87,558	5,172,121	5,259,679	—



	December 31, 2013
	30-59 Days		60-89 Days	Non-accrual	Total Past Due and Non-accrual	Current	Total Loans Receivable	Recorded Investment > 90 days accruing
Mortgage loans:
Residential	$	10,639	5,062	23,011	38,712	1,135,331	1,174,043	—
Commercial	687		318	18,662	19,667	1,380,957	1,400,624	—
Multi-family	—		—	403	403	928,503	928,906	—
Construction	—		—	8,448	8,448	174,841	183,289	—
Total mortgage loans	11,326		5,380	50,524	67,230	3,619,632	3,686,862	—
Commercial loans	305		77	22,228	22,610	909,589	932,199	—
Consumer loans	2,474		2,194	3,928	8,596	569,006	577,602	—
Total loans	$	14,105	7,651	76,680	98,436	5,098,227	5,196,663	—

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 $64.1 million and $76.7 million at March 31, 2014 and December 31, 2013, respectively. Included in non-accrual loans were $25.8 million and $33.5 million of loans which were less than 90 days past due at March 31, 2014 and December 31, 2013, respectively. There were no loans ninety days or greater past due and still accruing interest at March 31, 2014, or December 31, 2013.

The Company defines an impaired loan as a non-homogenous loan greater than $1.0 million for which it is probable, based on current information, that all amounts due under the contractual terms of the loan agreement will not be collected. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when a loan modification resulting in a concession is made in an effort to mitigate potential loss arising from a borrower’s financial difficulty. Smaller balance homogeneous loans, including residential mortgages and other consumer loans, are evaluated collectively for impairment and are excluded from the definition of impaired loans, unless modified as TDRs. The Company separately calculates the reserve for loan losses on impaired loans. The Company may recognize impairment of a loan based upon: (1) the present value of expected cash flows discounted at the effective interest rate; or (2) if a loan is collateral dependent, the fair value of collateral; or (3) the fair value of the loan. Additionally, if impaired loans have risk characteristics in common, those loans may be aggregated and historical statistics may be used as a means of measuring those impaired loans.

The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analyses of collateral dependent impaired loans. A third party appraisal is generally ordered as soon as a loan is designated as a collateral dependent impaired loan and is updated annually or more frequently, if required.

A specific allocation of the allowance for loan losses is established for each collateral dependent impaired loan with a carrying balance greater than the collateral’s fair value, less estimated costs to sell. Charge-offs are generally taken for the amount of the specific allocation when operations associated with the respective property cease and it is determined that collection of amounts due will be derived primarily from the disposition of the collateral. At each fiscal quarter end, if a loan is designated as a collateral dependent impaired loan 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, 2014, there were 152 impaired loans totaling $94.6 million. Included in this total were 118 TDRs related to 114 borrowers totaling $57.8 million that were performing in accordance with their restructured terms and which continued to accrue interest at March 31, 2014. At December 31, 2013, there were 152 impaired loans totaling $106.4 million. Included in this total were 115 TDRs to 110 borrowers totaling $58.2 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2013.

Loans receivable summarized by portfolio segment and impairment method are as follows (in thousands):



	March 31, 2014
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	67,374	24,958	2,294	94,626
Collectively evaluated for impairment	3,653,725		941,486	569,842	5,165,053
Total	$	3,721,099	966,444	572,136	5,259,679



	December 31, 2013
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	75,839	28,210	2,321	106,370
Collectively evaluated for impairment	3,611,023		903,989	575,281	5,090,293
Total	$	3,686,862	932,199	577,602	5,196,663

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



	March 31, 2014
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments	Unallocated	Total
Individually evaluated for impairment	$	4,763	2,248	119	7,130	—	7,130
Collectively evaluated for impairment	26,707		22,913	4,260	53,880	2,410	56,290
Total	$	31,470	25,161	4,379	61,010	2,410	63,420



	December 31, 2013
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments	Unallocated	Total
Individually evaluated for impairment	$	7,829	2,221	167	10,217	—	10,217
Collectively evaluated for impairment	26,315		21,886	4,762	52,963	1,484	54,447
	$	34,144	24,107	4,929	63,180	1,484	64,664

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, the Company 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, 2014 and 2013 and their balances immediately prior to the modification date and post-modification as of March 31, 2014 and 2013.



	For the three months ended
	March 31, 2014					March 31, 2013
Troubled Debt Restructuring	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:
Residential	4	$	875	$	835	15	$	2,802	$	2,882
Commercial	—	—		—		1	329		308
Total mortgage loans	4	875		835		16	3,131		3,190
Commercial loans	1	116		28		—	—		—
Consumer loans	—	—		—		3	240		244
Total restructured loans	5	$	991	$	863	19	$	3,371	$	3,434

All TDRs are impaired loans, which are individually evaluated for impairment, as previously discussed. Estimated collateral values of collateral dependent impaired loans modified during the three months ended March 31, 2014 and 2013 exceeded the carrying amounts of such loans. As a result, there were no charge-offs recorded on collateral dependent impaired loans presented in the preceding tables for the three months ended March 31, 2014 and 2013. The allowance for loan losses associated with the TDRs presented in the preceding tables totaled $41,000 and $380,000 for the three months ended March 31, 2014 and 2013, respectively, and were included in the allowance for loan losses for loans individually evaluated for impairment.

For the three months ended March 31, 2014, the TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 4.31%, respectively, compared to a rate of 5.23% prior to modification, respectively. For the three months ended March 31, 2013, the TDRs had weighted average modified interest rate of approximately 4.30%, respectively, compared to a rate of 5.90% prior to modification, respectively.

The following table presents loans modified as TDRs within the previous 12 months from March 31, 2014 and 2013, and for which there was a payment default (90 days or more past due) at the quarter ended March 31, 2014 and 2013.



	March 31, 2014			March 31, 2013
Troubled Debt Restructurings Subsequently Defaulted	Number of Loans	Outstanding Recorded Investment		Number of Loans	Outstanding Recorded Investment
		($ in thousands)			($ in thousands)
Mortgage loans:
Residential	1	$	90	1	$	1,785
Total mortgage loans	1	90		1	1,785
Commercial loans	3	$	1,647	—	$	—
Total restructured loans	4	$	1,737	1	$	1,785

TDRs that subsequently default are considered collateral dependent impaired loans and are evaluated for impairment based on the estimated fair value of the underlying collateral less expected selling costs.

The activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2014 and 2013 was as follows (in thousands):



Three months ended March 31,	Mortgage loans			Commercial loans		Consumer loans		Total Portfolio Segments		Unallocated		Total
2014
Balance at beginning of period	$	34,144		24,107		4,929		63,180		1,484		64,664
Provision charged to operations	(2,000		)	1,330		144		(526	)	926		400
Recoveries of loans previously charged off	67			243		121		431		—		431
Loans charged off	(741		)	(519	)	(815	)	(2,075	)	—		(2,075	)
Balance at end of period	$	31,470		25,161		4,379		61,010		2,410		63,420
2013
Balance at beginning of period	$	37,962		20,315		5,224		63,501		6,847		70,348
Provision charged to operations	(823		)	3,853		(2	)	3,028		(1,528	)	1,500
Recoveries of loans previously charged off	229			113		243		585		—		585
Loans charged off	(975		)	(780	)	(644	)	(2,399	)	—		(2,399	)
Balance at end of period	$	36,393		23,501		4,821		64,715		5,319		70,034

The increase in the unallocated portion of the allowance for loan losses for the three months ended March 31, 2014 was primarily attributable to certain impaired loans where the appropriate allowance has been established using discounted cash flow analyses, but where Management has given consideration to the potential collateral shortfall.

Impaired loans receivable by class are summarized as follows (in thousands):



	March 31, 2014						December 31, 2013
	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	$	14,607	10,791	—	10,874	84	13,459	9,999	—	10,322	299
Commercial	5,081		4,847	—	4,856	—	4,917	4,667	—	4,834	3
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	—	—	—	—	—
Total	19,688		15,638	—	15,730	84	18,376	14,666	—	15,156	302
Commercial loans	4,991		3,981	—	4,015	—	8,163	6,674	—	8,252	24
Consumer loans	1,015		861	—	869	229	754	618	—	674	26
Total loans	25,694		20,480	—	20,614	313	27,293	21,958	—	24,082	352
Loans with an allowance recorded
Mortgage loans:
Residential	$	16,467	15,874	2,285	15,912	148	17,122	16,473	2,571	16,610	557
Commercial	37,068		35,862	2,478	35,982	235	37,320	36,251	2,309	36,727	976
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	9,810	8,449	2,949	8,659	—
Total	53,535		51,736	4,763	51,894	383	64,252	61,173	7,829	61,996	1,533
Commercial loans	22,417		20,977	2,248	21,380	114	22,779	21,536	2,221	23,204	650
Consumer loans	1,443		1,433	119	1,439	17	1,732	1,703	167	1,726	63
Total loans	$	77,395	74,146	7,130	74,713	514	88,763	84,412	10,217	86,926	2,246
Total
Mortgage loans:
Residential	$	31,074	26,665	2,285	26,786	232	30,581	26,472	2,571	26,932	856
Commercial	42,149		40,709	2,478	40,838	235	42,237	40,918	2,309	41,561	979
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	9,810	8,449	2,949	8,659	—
Total	73,223		67,374	4,763	67,624	467	82,628	75,839	7,829	77,152	1,835
Commercial loans	27,408		24,958	2,248	25,395	114	30,942	28,210	2,221	31,456	674
Consumer loans	2,458		2,294	119	2,308	246	2,486	2,321	167	2,400	89
Total loans	$	103,089	94,626	7,130	95,327	827	116,056	106,370	10,217	111,008	2,598

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $7,130,000 and $10,217,000 at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and December 31, 2013, impaired loans for which there was no related allowance for loan losses totaled $20,480,000 and $21,958,000, respectively. The average balance of impaired loans during the three months ended March 31, 2014 was $95,327,000.

The Company utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar characteristics. Loans deemed to be “acceptable quality” (pass) are rated 1through 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 Credit Administration. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third party. Reports concerning periodic loan review examinations by the independent third party are presented directly to both the Audit and Risk Committees of the Board of Directors.

Loans receivable by credit quality risk rating indicator are as follows (in thousands):



	At March 31, 2014
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	5,429	13,602	329	—	19,360	31,191	1,807	52,358
Substandard	21,985		52,037	403	—	74,425	45,895	3,554	123,874
Doubtful	—		—	—	—	—	649	—	649
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	27,414		65,639	732	—	93,785	77,735	5,361	176,881
Pass/Watch	1,137,782		1,338,827	938,286	212,419	3,627,314	888,709	566,775	5,082,798
Total outstanding loans	$	1,165,196	1,404,466	939,018	212,419	3,721,099	966,444	572,136	5,259,679

	At December 31, 2013
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	5,062	15,301	—	—	20,363	28,551	2,037	50,951
Substandard	23,011		54,592	403	8,449	86,455	46,687	4,220	137,362
Doubtful	—		—	—	—	—	649	—	649
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	28,073		69,893	403	8,449	106,818	75,887	6,257	188,962
Pass/Watch	1,145,970		1,330,731	928,503	174,840	3,580,044	856,312	571,345	5,007,701
Total outstanding loans	$	1,174,043	1,400,624	928,906	183,289	3,686,862	932,199	577,602	5,196,663