Loans Receivable and Allowance for Loan Losses

Loans receivable at March 31, 2015 and December 31, 2014 are summarized as follows (in thousands):



	March 31, 2015			December 31, 2014
Mortgage loans:
Residential	$	1,245,711		1,251,445
Commercial	1,688,083			1,694,359
Multi-family	1,070,294			1,041,582
Construction	274,001			221,102
Total mortgage loans	4,278,089			4,208,488
Commercial loans	1,242,565			1,262,422
Consumer loans	601,190			611,467
Total gross loans	6,121,844			6,082,377
Purchased credit-impaired ("PCI") loans	4,285			4,510
Premiums on purchased loans	5,386			5,307
Unearned discounts	(47		)	(53	)
Net deferred fees	(6,769		)	(6,636	)
Total loans	$	6,124,699		6,085,505

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



	March 31, 2015
	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	$	8,871	5,832	16,913	31,616	1,214,095	1,245,711	—
Commercial	1,485		292	18,203	19,980	1,668,103	1,688,083	—
Multi-family	526		—	322	848	1,069,446	1,070,294	—
Construction	—		—	—	—	274,001	274,001	—
Total mortgage loans	10,882		6,124	35,438	52,444	4,225,645	4,278,089	—
Commercial loans	3,352		18	12,035	15,405	1,227,160	1,242,565	—
Consumer loans	3,599		1,020	3,415	8,034	593,156	601,190	—
Total gross loans	$	17,833	7,162	50,888	75,883	6,045,961	6,121,844	—



	December 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	$	10,121	4,331	17,222	31,674	1,219,771	1,251,445	—
Commercial	146		30	20,026	20,202	1,674,157	1,694,359	—
Multi-family	—		—	321	321	1,041,261	1,041,582	—
Construction	—		—	—	—	221,102	221,102	—
Total mortgage loans	10,267		4,361	37,569	52,197	4,156,291	4,208,488	—
Commercial loans	1,000		371	12,342	13,713	1,248,709	1,262,422	—
Consumer loans	2,398		2,509	3,944	8,851	602,616	611,467	—
Total gross loans	$	13,665	7,241	53,855	74,761	6,007,616	6,082,377	—

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 $50.9 million and $53.9 million at March 31, 2015 and December 31, 2014, respectively. Included in non-accrual loans were $7.3 million and $8.4 million of loans which were less than 90 days past due at March 31, 2015 and December 31, 2014, respectively. There were no loans 90 days or greater past due and still accruing interest at March 31, 2015, or December 31, 2014.

The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million for which it is probable that, based on current information, that the Bank will not collect all amounts due under the contractual terms of the loan agreement. 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 market price 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 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 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, 2015, there were 153 impaired loans totaling $90.8 million. Included in this total were 131 TDRs related to 123 borrowers totaling $61.7 million that were performing in accordance with their restructured terms and which continued to accrue interest at March 31, 2015. At December 31, 2014, there were 147 impaired loans totaling $85.4 million. Included in this total were 123 TDRs to 120 borrowers totaling $54.8 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2014.

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



	March 31, 2015
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	65,563	22,849	2,396	90,808
Collectively evaluated for impairment	4,212,526		1,219,716	598,794	6,031,036
Total	$	4,278,089	1,242,565	601,190	6,121,844



	December 31, 2014
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	66,548	16,463	2,384	85,395
Collectively evaluated for impairment	4,141,940		1,245,959	609,083	5,996,982
Total	$	4,208,488	1,262,422	611,467	6,082,377

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



	March 31, 2015
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments	Unallocated	Total
Individually evaluated for impairment	$	4,896	1,648	109	6,653	—	6,653
Collectively evaluated for impairment	27,990		22,049	4,168	54,207	250	54,457
Total	$	32,886	23,697	4,277	60,860	250	61,110



	December 31, 2014
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments	Unallocated	Total
Individually evaluated for impairment	$	4,696	2,318	113	7,127	—	7,127
Collectively evaluated for impairment	27,281		22,063	4,768	54,112	495	54,607
	$	31,977	24,381	4,881	61,239	495	61,734

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, 2015 and 2014 along with their balances immediately prior to the modification date and post-modification as of March 31, 2015 and 2014:



	For the three months ended
	March 31, 2015					March 31, 2014
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	2	$	322	$	321	4	$	875	$	835
Construction	1	2,600		347		—	—		—
Total mortgage loans	3	2,922		668		4	875		835
Commercial loans	4	6,659		6,898		1	116		28
Consumer loans	1	44		42		—	—		—
Total restructured loans	8	$	9,625	$	7,608	5	$	991	$	863

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, 2015 and 2014 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, 2015 and 2014. The allowance for loan losses associated with the TDRs presented in the preceding tables totaled $31,000 and $41,000 for the three months ended March 31, 2015 and 2014, respectively, and were included in the allowance for loan losses for loans individually evaluated for impairment.

For the three months ended March 31, 2015, the TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 5.90%, compared to a rate of 5.83% prior to modification. For the three months ended March 31, 2014, the TDRs had a weighted average modified interest rate of approximately 4.31%, compared to a rate of 5.23% prior to modification.

The following table presents loans modified as TDRs within the previous 12 months from March 31, 2015 and 2014, and for which there was a payment default (90 days or more past due) at the quarter ended March 31, 2015 and 2014.



	March 31, 2015				March 31, 2014
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
Total mortgage loans	—		—		1	90
Commercial loans	—		—		3	$	1,647
Total restructured loans	$	—	$	—	4	$	1,737

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 PCI loans	$	5,220

PCI loans declined $225,000 to $4.3 million at March 31, 2015, from $4.5 million at December 31, 2014, largely due to the full repayment and greater than projected cash flows on certain PCI loans. This resulted in a $76,000 increase in interest income for the three months ended March 31, 2015, due to the acceleration of accretable and non-accretable discount on these loans.

The following table summarizes the changes in the accretable yield for PCI loans during the three months ended March 31, 2015 (in thousands):



	Three months ended March 31, 2015
Beginning balance	$	695
Acquisition	—
Accretion	(198		)
Reclassification from non-accretable discount	184
Ending balance	$	681

The activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 and 2014 was as follows (in thousands):



Three months ended March 31,	Mortgage loans			Commercial loans		Consumer loans		Total Portfolio Segments		Unallocated		Total
2015
Balance at beginning of period	$	31,977		24,381		4,881		61,239		495		61,734
Provision charged to operations	1,038			(477	)	284		845		(245	)	600
Recoveries of loans previously charged-off	65			215		211		491		—		491
Loans charged-off	(194		)	(422	)	(1,099	)	(1,715	)	—		(1,715	)
Balance at end of period	$	32,886		23,697		4,277		60,860		250		61,110

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

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



	March 31, 2015						December 31, 2014
	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	$	15,230	10,895	—	11,048	107	14,942	10,629	—	11,138	357
Commercial	2,613		2,574	—	2,574	—	4,971	4,708	—	4,713	—
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	—	—	—	—	—
Total	17,843		13,469	—	13,622	107	19,913	15,337	—	15,851	357
Commercial loans	8,925		8,387	—	8,501	60	2,718	2,179	—	1,823	4
Consumer loans	1,302		854	—	862	8	1,250	830	—	870	28
Total loans	$	28,070	22,710	—	22,985	175	23,881	18,346	—	18,544	389

Loans with an allowance recorded
Mortgage loans:
Residential	$	15,444	14,824	2,382	14,864	386	15,523	14,906	2,367	15,106	555
Commercial	38,382		36,923	2,504	37,021	239	37,555	36,306	2,329	36,674	914
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	347		347	10	347	14	—	—	—	—	—
Total	54,173		52,094	4,896	52,232	639	53,078	51,212	4,696	51,780	1,469
Commercial loans	16,257		14,462	1,648	14,673	75	15,990	14,283	2,318	15,967	390
Consumer loans	1,552		1,542	109	1,548	19	1,565	1,554	113	1,578	80
Total loans	$	71,982	68,098	6,653	68,453	733	70,633	67,049	7,127	69,325	1,939

Total impaired loans
Mortgage loans:
Residential	$	30,674	25,719	2,382	25,912	493	30,465	25,535	2,367	26,244	912
Commercial	40,995		39,497	2,504	39,595	239	42,526	41,014	2,329	41,387	914
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	347		347	10	347	14	—	—	—	—	—
Total	72,016		65,563	4,896	65,854	746	72,991	66,549	4,696	67,631	1,826
Commercial loans	25,182		22,849	1,648	23,174	135	18,708	16,462	2,318	17,790	394
Consumer loans	2,854		2,396	109	2,410	27	2,815	2,384	113	2,448	108
Total loans	$	100,052	90,808	6,653	91,438	908	94,514	85,395	7,127	87,869	2,328

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $6,653,000 and $7,127,000 at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 and December 31, 2014, impaired loans for which there was no related allowance for loan losses totaled $22,710,000 and $18,346,000, respectively. The average balance of impaired loans during the three months ended March 31, 2015 and December 31, 2014 was $91,438,000 and $87,869,000, respectively.

The Company 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 his or her portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and by the Credit Administration 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.

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



	At March 31, 2015
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	5,832	43,749	1,105	—	50,686	57,403	1,020	109,109
Substandard	16,913		30,773	847	347	48,880	32,410	3,165	84,455
Doubtful	—		1,061	—	—	1,061	28	—	1,089
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	22,745		75,583	1,952	347	100,627	89,841	4,185	194,653
Pass/Watch	1,222,966		1,612,500	1,068,342	273,654	4,177,462	1,152,724	597,005	5,927,191
Total	$	1,245,711	1,688,083	1,070,294	274,001	4,278,089	1,242,565	601,190	6,121,844

	At December 31, 2014
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	4,331	18,414	851	—	23,596	45,599	2,509	71,704
Substandard	17,222		53,454	322	2,600	73,598	32,828	3,938	110,364
Doubtful	—		1,063	—	—	1,063	29	—	1,092
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	21,553		72,931	1,173	2,600	98,257	78,456	6,447	183,160
Pass/Watch	1,229,892		1,621,428	1,040,409	218,502	4,110,231	1,183,966	605,020	5,899,217
Total	$	1,251,445	1,694,359	1,041,582	221,102	4,208,488	1,262,422	611,467	6,082,377