Note 4. Loans Receivable and Allowance for Loan Losses

Loans receivable at June 30, 2014 and December 31, 2013 are summarized as follows (in thousands):



	June 30, 2014			December 31, 2013
Mortgage loans:
Residential	1,223,145			1,174,043
Commercial	1,669,614			1,400,624
Multi-family	968,242			928,906
Construction	227,433			183,289
Total mortgage loans	4,088,434			3,686,862
Commercial loans	1,201,741			932,199
Consumer loans	617,512			577,602
Total gross loans	5,907,687			5,196,663
Purchased credit-impaired ("PCI") loans	5,187			—
Premiums on purchased loans	4,380			4,202
Unearned discounts	(55		)	(62	)
Net deferred fees	(7,130		)	(5,990	)
	$	5,910,069		5,194,813

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



	June 30, 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	$	10,329	4,572	21,323	36,224	1,186,921	1,223,145	—
Commercial	—		—	19,439	19,439	1,650,175	1,669,614	—
Multi-family	—		—	403	403	967,839	968,242	—
Construction	—		—	—	—	227,433	227,433	—
Total mortgage loans	10,329		4,572	41,165	56,066	4,032,368	4,088,434	—
Commercial loans	385		1	20,914	21,300	1,180,441	1,201,741	—
Consumer loans	2,084		1,478	3,284	6,846	610,666	617,512	—
Total loans	$	12,798	6,051	65,363	84,212	5,823,475	5,907,687	—



	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 $65.4 million and $76.7 million at June 30, 2014 and December 31, 2013, respectively. Included in non-accrual loans were $27.0 million and $33.5 million of loans which were less than 90 days past due at June 30, 2014 and December 31, 2013, respectively. There were no loans ninety days or greater past due and still accruing interest at June 30, 2014, or December 31, 2013.

The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million for which it is probable, based on current information, 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 June 30, 2014, there were 155 impaired loans totaling $93.8 million. Included in this total were 117 TDRs related to 114 borrowers totaling $55.6 million that were performing in accordance with their restructured terms and which continued to accrue interest at June 30, 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.

The following table summarizes loans receivable by portfolio segment and impairment method, excluding PCI loans (in thousands):



	June 30, 2014
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	67,110	24,458	2,271	93,839
Collectively evaluated for impairment	4,021,324		1,177,283	615,241	5,813,848
Total	$	4,088,434	1,201,741	617,512	5,907,687



	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):



	June 30, 2014
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments	Unallocated	Total
Individually evaluated for impairment	$	4,833	3,573	115	8,521	—	8,521
Collectively evaluated for impairment	26,207		23,506	4,266	53,979	1,375	55,354
Total	$	31,040	27,079	4,381	62,500	1,375	63,875



	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 and six months ended June 30, 2014 and 2013 and their balances immediately prior to the modification date and post-modification as of June 30, 2014 and 2013.



	For the three months ended
	June 30, 2014					June 30, 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	$	1,088	$	847	18	$	4,227	$	4,339
Commercial	1	865		870		—	—		—
Total mortgage loans	5	1,953		1,717		18	4,227		4,339
Commercial loans	1	300		300		—	—		—
Consumer loans	—	—		—		2	228		222
Total restructured loans	6	$	2,253	$	2,017	20	$	4,455	$	4,561



	For the six months ended
	June 30, 2014					June 30, 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	8	$	1,963	1,677		33	$	7,029	$	7,203
Commercial	1	865		870		1	329		307
Total mortgage loans	9	2,828		2,547		34	7,358		7,510
Commercial loans	1	300		300		—	—		—
Consumer loans	—	—		—		5	468		461
Total restructured loans	10	$	3,128	$	2,847	39	$	7,826	$	7,971

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 and six months ended June 30, 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 and six months ended June 30, 2014 and 2013. The allowance for loan losses associated with the TDRs presented in the preceding tables totaled $282,000 and $294,000 for the three months ended June 30, 2014 and 2013, respectively, and were included in the allowance for loan losses for loans individually evaluated for impairment. For the six months ended June 30, 2014 and 2013, the allowance for loan losses associated with the TDRs presented in the preceding tables totaled $322,000 and $670,000, respectively, and were included in the allowance for loan losses for loans individually evaluated for impairment.

For the three and six months ended June 30, 2014, the TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 4.81% and 4.65%, respectively, compared to a rate of 5.50% and 5.39% prior to modification, respectively. For the three and six months ended June 30, 2013, the TDRs had weighted average modified interest rate of approximately 4.20% and 4.24%, respectively, compared to a rate of 5.49% and 5.67% prior to modification, respectively.

The following table presents loans modified as TDRs within the previous 12 months from June 30, 2014 and 2013, and for which there was a payment default (90 days or more past due) at the quarter ended June 30, 2014 and 2013.



	June 30, 2014			June 30, 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	2	$	264	1	$	1,445
Total mortgage loans	2	264		1	1,445
Commercial loans	—	$	—
Consumer loans	—	$	—	—	$	—
Total restructured loans	2	$	264	1	$	1,445

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.

PCI loans are loans acquired at a discount primarily due to deteriorated credit quality. As part of the Team Capital acquisition, $5.2 million of the loans purchased at May 30, 2014 were determined to be PCI loans. PCI loans are accounted for at fair value, based upon the present value of expected future cash flows, with no related allowance for loan losses.

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected and the estimated fair value of the PCI loans acquired from Team Capital at May 30, 2014 (in thousands):



	May 30, 2014
Contractually required principal and interest	$	12,505
Contractual cash flows not expected to be collected (non-accretable discount)	(6,475		)
Expected cash flows to be collected at acquisition	6,030
Interest component of expected cash flows (accretable yield)	(810		)
Fair value of acquired loans	$	5,220

The following table summarizes the changes in the accretable yield for PCI loans during the three and six months ended June 30, 2014 (in thousands):



	Three and Six months ended June 30, 2014
Beginning balance	$	—
Acquisition	810
Accretion	(37		)
Reclassification from non-accretable difference	—
Ending balance	$	773

The activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2014 and 2013 was as follows (in thousands):



Three months ended June 30,	Mortgage loans			Commercial loans		Consumer loans		Total Portfolio Segments		Unallocated		Total
2014
Balance at beginning of period	$	31,470		25,161		4,379		61,010		2,410		63,420
Provision charged to operations	646			1,663		226		2,535		(1,035	)	1,500
Recoveries of loans previously charged-off	90			298		729		1,117		—		1,117
Loans charged-off	(1,166		)	(43	)	(953	)	(2,162	)	—		(2,162	)
Balance at end of period	$	31,040		27,079		4,381		62,500		1,375		63,875
2013
Balance at beginning of period	$	36,393		23,501		4,821		64,715		5,319		70,034
Provision charged to operations	(2,789		)	396		660		(1,733	)	2,733		1,000
Recoveries of loans previously charged-off	115			199		263		577		—		577
Loans charged-off	(3,049		)	(286	)	(1,271	)	(4,606	)	—		(4,606	)
Balance at end of period	$	30,670		23,810		4,473		58,953		8,052		67,005



Six months ended June 30,	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	(1,354		)	2,994		369		2,009		(109	)	1,900
Recoveries of loans previously charged-off	157			541		850		1,548		—		1,548
Loans charged-off	(1,907		)	(563	)	(1,767	)	(4,237	)	—		(4,237	)
Balance at end of period	$	31,040		27,079		4,381		62,500		1,375		63,875
2013
Balance at beginning of period	$	37,962		20,315		5,224		63,501		6,847		70,348
Provision charged to operations	(3,611		)	4,248		658		1,295		1,205		2,500
Recoveries of loans previously charged-off	343			313		506		1,162		—		1,162
Loans charged-off	(4,024		)	(1,066	)	(1,915	)	(7,005	)	—		(7,005	)
Balance at end of period	$	30,670		23,810		4,473		58,953		8,052		67,005

The decrease in the unallocated portion of the allowance for loan losses for the three and six months ended June 30, 2014 was primarily attributable to greater certainty regrading collateral valuations and the stabilization of economic conditions. The unallocated portion of the allowance reflects uncertainties related 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.

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



	June 30, 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	$	14,219	10,442	—	11,845	172	13,459	9,999	—	10,322	299
Commercial	5,079		4,847	—	4,851	8	4,917	4,667	—	4,834	3
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	—	—	—	—	—
Total	19,298		15,289	—	16,696	180	18,376	14,666	—	15,156	302
Commercial loans	4,994		3,971	—	4,224	—	8,163	6,674	—	8,252	24
Consumer loans	1,003		848	—	832	21	754	618	—	674	26
Total loans	$	25,295	20,108	—	21,752	201	27,293	21,958	—	24,082	352

Loans with an allowance recorded
Mortgage loans:
Residential	$	15,909	15,299	2,293	15,382	280	17,122	16,473	2,571	16,610	557
Commercial	37,799		36,523	2,540	36,722	476	37,320	36,251	2,309	36,727	976
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	9,810	8,449	2,949	8,659	—
Total	53,708		51,822	4,833	52,104	756	64,252	61,173	7,829	61,996	1,533
Commercial loans	22,057		20,486	3,573	21,173	228	22,779	21,536	2,221	23,204	650
Consumer loans	1,434		1,423	115	1,433	36	1,732	1,703	167	1,726	63
Total loans	$	77,199	73,731	8,521	74,710	1,020	88,763	84,412	10,217	86,926	2,246

Total impaired loans
Mortgage loans:
Residential	$	30,128	25,741	2,293	27,227	452	30,581	26,472	2,571	26,932	856
Commercial	42,878		41,370	2,540	41,573	484	42,237	40,918	2,309	41,561	979
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	9,810	8,449	2,949	8,659	—
Total	73,006		67,111	4,833	68,800	936	82,628	75,839	7,829	77,152	1,835
Commercial loans	27,051		24,457	3,573	25,397	228	30,942	28,210	2,221	31,456	674
Consumer loans	2,437		2,271	115	2,265	57	2,486	2,321	167	2,400	89
Total loans	$	102,494	93,839	8,521	96,462	1,221	116,056	106,370	10,217	111,008	2,598

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $8,521,000 and $10,217,000 at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014 and December 31, 2013, impaired loans for which there was no related allowance for loan losses totaled $20,108,000 and $21,958,000, respectively. The average balance of impaired loans during the six months ended June 30, 2014 was $96,462,000.

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, excluding PCI loans, are as follows (in thousands):



	At June 30, 2014
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	4,572	10,643	328	2,600	18,143	66,372	1,633	86,148
Substandard	21,323		53,797	1,243	—	76,363	43,618	3,437	123,418
Doubtful	—		—	—	—	—	1,144	—	1,144
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	25,895		64,440	1,571	2,600	94,506	111,134	5,070	210,710
Pass/Watch	1,197,250		1,605,174	966,671	224,833	3,993,928	1,090,607	612,442	5,696,977
Total	$	1,223,145	1,669,614	968,242	227,433	4,088,434	1,201,741	617,512	5,907,687

	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	$	1,174,043	1,400,624	928,906	183,289	3,686,862	932,199	577,602	5,196,663