Loans Receivable and Allowance for Loan Losses

Loans receivable at June 30, 2016 and December 31, 2015 are summarized as follows (in thousands):



	June 30, 2016			December 31, 2015
Mortgage loans:
Residential	$	1,243,496		1,254,036
Commercial	1,796,487			1,714,923
Multi-family	1,381,814			1,233,792
Construction	298,974			331,649
Total mortgage loans	4,720,771			4,534,400
Commercial loans	1,508,616			1,433,447
Consumer loans	550,171			566,175
Total gross loans	6,779,558			6,534,022
Purchased credit-impaired loans	2,418			3,435
Premiums on purchased loans	5,729			5,740
Unearned discounts	(39		)	(41	)
Net deferred fees	(6,700		)	(5,482	)
Total loans	$	6,780,966		6,537,674

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



	June 30, 2016
	30-59 Days		60-89 Days	Non-accrual	Recorded Investment > 90 days accruing	Total Past Due	Current	Total Loans Receivable
Mortgage loans:
Residential	$	9,860	2,854	13,146	—	25,860	1,217,636	1,243,496
Commercial	—		1,166	4,280	—	5,446	1,791,041	1,796,487
Multi-family	—		—	1,889	—	1,889	1,379,925	1,381,814
Construction	—		—	2,517	—	2,517	296,457	298,974
Total mortgage loans	9,860		4,020	21,832	—	35,712	4,685,059	4,720,771
Commercial loans	5		4,564	17,974	—	22,543	1,486,073	1,508,616
Consumer loans	2,014		500	3,202	—	5,716	544,455	550,171
Total gross loans	$	11,879	9,084	43,008	—	63,971	6,715,587	6,779,558



	December 31, 2015
	30-59 Days		60-89 Days	Non-accrual	Recorded Investment > 90 days accruing	Total Past Due	Current	Total Loans Receivable
Mortgage loans:
Residential	$	8,983	5,434	12,031	—	26,448	1,227,588	1,254,036
Commercial	1,732		543	1,263	—	3,538	1,711,385	1,714,923
Multi-family	763		506	742	—	2,011	1,231,781	1,233,792
Construction	—		—	2,351	—	2,351	329,298	331,649
Total mortgage loans	11,478		6,483	16,387	—	34,348	4,500,052	4,534,400
Commercial loans	632		801	23,875	165	25,473	1,407,974	1,433,447
Consumer loans	3,603		1,194	4,109	—	8,906	557,269	566,175
Total gross loans	$	15,713	8,478	44,371	165	68,727	6,465,295	6,534,022

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 $43.0 million and $44.4 million at June 30, 2016 and December 31, 2015, respectively. Included in non-accrual loans were $4.8 million and $18.3 million of loans which were less than 90 days past due at June 30, 2016 and December 31, 2015, respectively. There were no loans 90 days or greater past due and still accruing interest at June 30, 2016. At December 31, 2015, there was one commercial loan for $165,000 which was ninety days or greater past due and still accruing interest. This loan was past due for maturity and well secured at December 31, 2015, and subsequent to the end of the year was renewed by the Company.

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; (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 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, 2016, there were 140 impaired loans totaling $45.3 million. Included in this total were 115 TDRs related to 114 borrowers totaling $21.3 million that were performing in accordance with their restructured terms and which continued to accrue interest at June 30, 2016. At December 31, 2015, there were 148 impaired loans totaling $50.9 million. Included in this total were 122 TDRs to 120 borrowers totaling $26.0 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2015.

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



	June 30, 2016
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	29,236	13,798	2,283	45,317
Collectively evaluated for impairment	4,691,535		1,494,818	547,888	6,734,241
Total gross loans	$	4,720,771	1,508,616	550,171	6,779,558



	December 31, 2015
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	26,743	21,756	2,368	50,867
Collectively evaluated for impairment	4,507,657		1,411,691	563,807	6,483,155
Total gross loans	$	4,534,400	1,433,447	566,175	6,534,022

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



	June 30, 2016
	Mortgage loans		Commercial loans	Consumer loans	Total
Individually evaluated for impairment	$	2,146	81	86	2,313
Collectively evaluated for impairment	29,488		26,218	2,914	58,620
Total gross loans	$	31,634	26,299	3,000	60,933



	December 31, 2015
	Mortgage loans		Commercial loans	Consumer loans	Total
Individually evaluated for impairment	$	2,086	91	94	2,271
Collectively evaluated for impairment	30,008		25,738	3,407	59,153
Total gross loans	$	32,094	25,829	3,501	61,424

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, 2016 and 2015 along with their balances immediately prior to the modification date and post-modification as of June 30, 2016 and 2015. There were no loans modified as TDRs during the three and six months ended June 30, 2016.



	For the three months ended
	June 30, 2016					June 30, 2015
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)
Mortgage loans:
Residential	—	$	—	$	—	3	$	1,612	$	1,615
Total mortgage loans	—	—		—		3	1,612		1,615
Consumer loans	—	—		—		1	79		77
Total restructured loans	—	$	—	$	—	4	$	1,691	$	1,692



	For the six months ended
	June 30, 2016					June 30, 2015
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)
Mortgage loans:
Residential	—	$	—	$	—	5	$	1,935	$	1,934
Construction	—	—		—		1	2,600		910
Total mortgage loans	—	—		—		6	4,535		2,844
Commercial loans	—	—		—		4	6,659		6,903
Consumer loans	—	—		—		2	123		118
Total restructured loans	—	$	—	$	—	12	$	11,317	$	9,865

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, 2015 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 table for the three and six months ended June 30, 2015. For the three and six months ended June 30, 2015, the allowance for loan losses associated with the TDRs presented in the preceding tables totaled $88,000 and $173,000, 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, 2015, the TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 3.53% and 5.41%, respectively, compared to a rate of 5.41% and 5.80% prior to modification, respectively.

The following table presents loans modified as TDRs within the 12 month periods ending June 30, 2016 and 2015, and for which there was a payment default (90 days or more past due) within the respective one year period:



	June 30, 2016			June 30, 2015
Troubled Debt Restructurings Subsequently Defaulted	Number of Loans	Outstanding Recorded Investment		Number of Loans	Outstanding Recorded Investment
	($ in thousands)
Mortgage loans:
Residential	1	$	252	—	$	—
Total mortgage loans	1	252		—	—
Commercial loans	—	—		—	$	—
Total restructured loans	1	$	252	—	$	—

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.

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

PCI loans declined $1.0 million to $2.4 million at June 30, 2016, from $3.4 million at December 31, 2015. The decrease from December 31, 2015, was largely due to the full repayment and greater than projected cash flows on certain PCI loans. This resulted in a $223,000 and a $503,000 increase in interest income for the three and six months ended June 30, 2016, respectively, and a $145,000 and $220,000 increase in interest income for the three and six months ended June 30, 2015, respectively, largely due to the acceleration of accretable and non-accretable discounts on these loans.

The following table summarizes the changes in the accretable yield for PCI loans during the three and six months ended June 30, 2016 and 2015 (in thousands):



	Three months ended June 30,					Six months ended June 30,
	2016			2015		2016		2015
Beginning balance	$	503		681		676		695
Accretion	(419		)	(264	)	(840	)	(462	)
Reclassification from non-accretable discount	244			192		492		376
Ending balance	$	328		609		328		609

The activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2016 and 2015 was as follows (in thousands):



Three months ended June 30,	Mortgage loans			Commercial loans		Consumer loans		Total Portfolio Segments		Unallocated ⁽¹⁾	Total
2016
Balance at beginning of period	$	30,849		28,255		3,087		62,191		—	62,191
Provision charged to operations	497			1,311		(108	)	1,700		—	1,700
Recoveries of loans previously charged-off	401			192		220		813		—	813
Loans charged-off	(113		)	(3,459	)	(199	)	(3,771	)	—	(3,771	)
Balance at end of period	$	31,634		26,299		3,000		60,933		—	60,933

2015
Balance at beginning of period	$	32,886		23,697		4,277		60,860		250	61,110
Provision charged to operations	317			(202	)	845		960		140	1,100
Recoveries of loans previously charged-off	71			660		256		987		—	987
Loans charged-off	(1,450		)	(1,315	)	(808	)	(3,573	)	—	(3,573	)
Balance at end of period	$	31,824		22,840		4,570		59,234		390	59,624



Six months ended June 30,	Mortgage loans			Commercial loans		Consumer loans		Total Portfolio Segments		Unallocated ⁽¹⁾		Total
2016
Balance at beginning of period	$	32,094		25,829		3,501		61,424		—		61,424
Provision charged to operations	(695		)	4,269		(374	)	3,200		—		3,200
Recoveries of loans previously charged-off	573			283		537		1,393		—		1,393
Loans charged-off	(338		)	(4,082	)	(664	)	(5,084	)	—		(5,084	)
Balance at end of period	$	31,634		26,299		3,000		60,933		—		60,933

2015
Balance at beginning of period	$	31,977		24,381		4,881		61,239		495		61,734
Provision charged to operations	1,355			(678	)	1,129		1,806		(106	)	1,700
Recoveries of loans previously charged-off	136			874		467		1,477		1		1,478
Loans charged-off	(1,644		)	(1,737	)	(1,907	)	(5,288	)	—		(5,288	)
Balance at end of period	$	31,824		22,840		4,570		59,234		390		59,624

⁽¹⁾ For the year ended December 31, 2015, the Company enhanced its allowance for loan losses process and allocated the previously unallocated allowance using both qualitative and quantitative factors.

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



	June 30, 2016						December 31, 2015
	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	$	10,781	8,160	—	8,220	215	12,144	8,799	—	9,079	451
Commercial	3,051		2,989	—	3,016	—	—	—	—	—	—
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	2,553		2,517	—	2,511	—	2,358	2,351	—	1,170	16
Total	16,385		13,666	—	13,747	215	14,502	11,150	—	10,249	467
Commercial loans	16,299		13,591	—	13,768	—	23,754	21,144	—	21,875	747
Consumer loans	1,527		1,023	—	1,051	30	1,560	1,082	—	1,121	48
Total impaired loans	$	34,211	28,280	—	28,566	245	39,816	33,376	—	33,245	1,262

Loans with an allowance recorded
Mortgage loans:
Residential	$	15,534	14,471	1,977	14,552	277	14,997	14,353	1,901	14,500	505
Commercial	1,099		1,099	169	1,105	24	1,240	1,240	185	1,361	63
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	—	—	—	—	—
Total	16,633		15,570	2,146	15,657	301	16,237	15,593	2,086	15,861	568
Commercial loans	269		207	81	231	4	612	612	91	807	52
Consumer loans	1,270		1,260	86	1,273	32	1,297	1,286	94	1,312	67
Total impaired loans	$	18,172	17,037	2,313	17,161	337	18,146	17,491	2,271	17,980	687

Total impaired loans
Mortgage loans:
Residential	$	26,315	22,631	1,977	22,772	492	27,141	23,152	1,901	23,579	956
Commercial	4,150		4,088	169	4,121	24	1,240	1,240	185	1,361	63
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	2,553		2,517	—	2,511	—	2,358	2,351	—	1,170	16
Total	33,018		29,236	2,146	29,404	516	30,739	26,743	2,086	26,110	1,035
Commercial loans	16,568		13,798	81	13,999	4	24,366	21,756	91	22,682	799
Consumer loans	2,797		2,283	86	2,324	62	2,857	2,368	94	2,433	115
Total impaired loans	$	52,383	45,317	2,313	45,727	582	57,962	50,867	2,271	51,225	1,949

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $2.3 million at both June 30, 2016 and December 31, 2015. At June 30, 2016 and December 31, 2015, impaired loans for which there was no related allowance for loan losses totaled $28.3 million and $33.4 million, respectively. The average balance of impaired loans for the six months ended June 30, 2016 was $45.7 million.

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 their 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 June 30, 2016
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	2,854	20,261	—	—	23,115	44,161	500	67,776
Substandard	13,146		18,208	1,889	2,517	35,760	35,158	3,151	74,069
Doubtful	—		—	—	—	—	488	—	488
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	16,000		38,469	1,889	2,517	58,875	79,807	3,651	142,333
Pass/Watch	1,227,496		1,758,018	1,379,925	296,457	4,661,896	1,428,809	546,520	6,637,225
Total	$	1,243,496	1,796,487	1,381,814	298,974	4,720,771	1,508,616	550,171	6,779,558

	At December 31, 2015
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	5,434	29,363	1,080	—	35,877	76,464	1,194	113,535
Substandard	12,031		19,451	1,248	2,351	35,081	38,654	4,054	77,789
Doubtful	—		—	—	—	—	8	—	8
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	17,465		48,814	2,328	2,351	70,958	115,126	5,248	191,332
Pass/Watch	1,236,571		1,666,109	1,231,464	329,298	4,463,442	1,318,321	560,927	6,342,690
Total	$	1,254,036	1,714,923	1,233,792	331,649	4,534,400	1,433,447	566,175	6,534,022