Loans Receivable and Allowance for Loan Losses

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



	September 30, 2016			December 31, 2015
Mortgage loans:
Residential	$	1,213,507		1,254,036
Commercial	1,884,155			1,714,923
Multi-family	1,384,428			1,233,792
Construction	316,803			331,649
Total mortgage loans	4,798,893			4,534,400
Commercial loans	1,553,606			1,433,447
Consumer loans	538,061			566,175
Total gross loans	6,890,560			6,534,022
Purchased credit-impaired ("PCI") loans	1,691			3,435
Premiums on purchased loans	5,330			5,740
Unearned discounts	(39		)	(41	)
Net deferred fees	(6,956		)	(5,482	)
Total loans	$	6,890,586		6,537,674

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



	September 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	$	7,147	7,579	11,317	—	26,043	1,187,464	1,213,507
Commercial	1,574		—	5,679	—	7,253	1,876,902	1,884,155
Multi-family	—		—	1,113	—	1,113	1,383,315	1,384,428
Construction	—		—	2,692	—	2,692	314,111	316,803
Total mortgage loans	8,721		7,579	20,801	—	37,101	4,761,792	4,798,893
Commercial loans	1,754		297	16,436	—	18,487	1,535,119	1,553,606
Consumer loans	2,388		1,000	2,779	—	6,167	531,894	538,061
Total gross loans	$	12,863	8,876	40,016	—	61,755	6,828,805	6,890,560



	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 $40.0 million and $44.4 million at September 30, 2016 and December 31, 2015, respectively. Included in non-accrual loans were $5.4 million and $18.3 million of loans which were less than 90 days past due at September 30, 2016 and December 31, 2015, respectively. There were no loans 90 days or greater past due and still accruing interest at September 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 September 30, 2016, there were 139 impaired loans totaling $44.4 million. Included in this total were 115 TDRs related to 114 borrowers totaling $21.1 million that were performing in accordance with their restructured terms and which continued to accrue interest at September 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):



	September 30, 2016
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	28,694	13,472	2,249	44,415
Collectively evaluated for impairment	4,770,199		1,540,134	535,812	6,846,145
Total gross loans	$	4,798,893	1,553,606	538,061	6,890,560



	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):



	September 30, 2016
	Mortgage loans		Commercial loans	Consumer loans	Total
Individually evaluated for impairment	$	1,963	81	83	2,127
Collectively evaluated for impairment	27,691		28,158	3,112	58,961
Total gross loans	$	29,654	28,239	3,195	61,088



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



	For the three months ended
	September 30, 2016					September 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	—	$	—	$	—	1	$	258	$	256
Total mortgage loans	—	—		—		1	258		256
Consumer loans	—	—		—		—	—		—
Total restructured loans	—	$	—	$	—	1	$	258	$	256



	For the nine months ended
	September 30, 2016					September 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	—	$	—	$	—	6	$	2,192	$	2,184
Construction	—	—		—		1	2,600		2,096
Total mortgage loans	—	—		—		7	4,792		4,280
Commercial loans	—	—		—		4	6,659		6,903
Consumer loans	—	—		—		2	123		115
Total restructured loans	—	$	—	$	—	13	$	11,574	$	11,298

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 nine months ended September 30, 2015 exceeded the carrying amounts of such loans. There were charge-offs recorded on two collateral dependent impaired loans of $312,000 for the three and nine months ended September 30, 2015, which are included in the preceding tables. For the three and nine months ended September 30, 2015, the allowance for loan losses associated with the TDRs presented in the preceding tables totaled $0 and $82,000, respectively and were included in the allowance for loan losses for loans individually evaluated for impairment.

For the three and nine months ended September 30, 2015, the TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 3.00% and 5.26%, respectively, compared to a rate of 3.00% and 5.71% prior to modification, respectively.

There were no payment defaults (90 days or more past due) for loans modified as TDRs within the 12 month periods ending September 30, 2016 and 2015. 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 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 $1.7 million to $1.7 million at September 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 $179,000 and a $682,000 increase in interest income for the three and nine months ended September 30, 2016, respectively, largely due to the acceleration of accretable and non-accretable discounts on these loans. For the three and nine months ended September 30, 2015, $129,000 and $349,000, respectively, of accretable and non-accretable discounts were similarly accelerated and recognized in interest income.

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



	Three months ended September 30,					Nine months ended September 30,
	2016			2015		2016		2015
Beginning balance	$	328		609		676		695
Accretion	(225		)	(220	)	(1,065	)	(683	)
Reclassification from non-accretable discount	209			172		701		549
Ending balance	$	312		561		312		561

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



Three months ended September 30,	Mortgage loans			Commercial loans		Consumer loans		Total Portfolio Segments		Unallocated ⁽¹⁾		Total
2016
Balance at beginning of period	$	31,634		26,299		3,000		60,933		—		60,933
Provision charged to operations	(1,599		)	2,378		221		1,000		—		1,000
Recoveries of loans previously charged-off	2			68		160		230		—		230
Loans charged-off	(383		)	(506	)	(186	)	(1,075	)	—		(1,075	)
Balance at end of period	$	29,654		28,239		3,195		61,088		—		61,088

2015
Balance at beginning of period	$	31,824		22,840		4,570		59,234		390		59,624
Provision charged to operations	569			1,604		(411	)	1,762		(362	)	1,400
Recoveries of loans previously charged-off	3			762		352		1,117		—		1,117
Loans charged-off	(774		)	(130	)	(772	)	(1,676	)	(1	)	(1,677	)
Balance at end of period	$	31,622		25,076		3,739		60,437		27		60,464



Nine months ended September 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	(2,294		)	6,647		(153	)	4,200		—		4,200
Recoveries of loans previously charged-off	575			351		697		1,623		—		1,623
Loans charged-off	(721		)	(4,588	)	(850	)	(6,159	)	—		(6,159	)
Balance at end of period	$	29,654		28,239		3,195		61,088		—		61,088

2015
Balance at beginning of period	$	31,977		24,381		4,881		61,239		495		61,734
Provision charged to operations	1,924			926		718		3,568		(468	)	3,100
Recoveries of loans previously charged-off	139			1,636		819		2,594		—		2,594
Loans charged-off	(2,418		)	(1,867	)	(2,679	)	(6,964	)	—		(6,964	)
Balance at end of period	$	31,622		25,076		3,739		60,437		27		60,464

⁽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):



	September 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	$	11,574	8,580	—	8,905	340	12,144	8,799	—	9,079	451
Commercial	3,051		2,989	—	3,002	31	—	—	—	—	—
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	2,553		2,517	—	2,513	—	2,358	2,351	—	1,170	16
Total	17,178		14,086	—	14,420	371	14,502	11,150	—	10,249	467
Commercial loans	16,238		13,391	—	13,810	4	23,754	21,144	—	21,875	747
Consumer loans	1,510		1,003	—	1,038	44	1,560	1,082	—	1,121	48
Total impaired loans	$	34,926	28,480	—	29,268	419	39,816	33,376	—	33,245	1,262

Loans with an allowance recorded
Mortgage loans:
Residential	$	14,190	13,515	1,800	13,759	378	14,997	14,353	1,901	14,500	505
Commercial	1,094		1,093	163	1,102	41	1,240	1,240	185	1,361	63
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	—		—	—	—	—	—	—	—	—	—
Total	15,284		14,608	1,963	14,861	419	16,237	15,593	2,086	15,861	568
Commercial loans	81		81	81	81	—	612	612	91	807	52
Consumer loans	1,257		1,246	83	1,266	49	1,297	1,286	94	1,312	67
Total impaired loans	$	16,622	15,935	2,127	16,208	468	18,146	17,491	2,271	17,980	687

Total impaired loans
Mortgage loans:
Residential	$	25,764	22,095	1,800	22,664	718	27,141	23,152	1,901	23,579	956
Commercial	4,145		4,082	163	4,104	72	1,240	1,240	185	1,361	63
Multi-family	—		—	—	—	—	—	—	—	—	—
Construction	2,553		2,517	—	2,513	—	2,358	2,351	—	1,170	16
Total	32,462		28,694	1,963	29,281	790	30,739	26,743	2,086	26,110	1,035
Commercial loans	16,319		13,472	81	13,891	4	24,366	21,756	91	22,682	799
Consumer loans	2,767		2,249	83	2,304	93	2,857	2,368	94	2,433	115
Total impaired loans	$	51,548	44,415	2,127	45,476	887	57,962	50,867	2,271	51,225	1,949

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $2.1 million at September 30, 2016 and $2.3 million at December 31, 2015. At September 30, 2016 and December 31, 2015, impaired loans for which there was no related allowance for loan losses totaled $28.5 million and $33.4 million, respectively. The average balance of impaired loans for the nine months ended September 30, 2016 was $45.5 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 September 30, 2016
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	7,579	21,595	—	—	29,174	18,035	1,000	48,209
Substandard	12,549		25,046	1,237	2,517	41,349	34,943	2,728	79,020
Doubtful	—		—	—	—	—	—	—	—
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	20,128		46,641	1,237	2,517	70,523	52,978	3,728	127,229
Pass/Watch	1,193,379		1,837,514	1,383,191	314,286	4,728,370	1,500,628	534,333	6,763,331
Total	$	1,213,507	1,884,155	1,384,428	316,803	4,798,893	1,553,606	538,061	6,890,560


	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