LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The following table presents loans receivable as of June 30, 2016 and December 31, 2015:



	June 30, 2016			December 31, 2015
(amounts in thousands)
Commercial:
Multi-family	$	3,308,556		$	2,909,439
Commercial and industrial (including owner occupied commercial real estate)	1,192,674			1,111,400
Commercial real estate non-owner occupied	1,139,711			956,255
Construction	99,615			87,240
Total commercial loans	5,740,556			5,064,334
Consumer:
Residential real estate	262,567			271,613
Manufactured housing	107,874			113,490
Other	3,277			3,708
Total consumer loans	373,718			388,811
Total loans receivable	6,114,274			5,453,145
Deferred costs and unamortized premiums, net	302			334
Allowance for loan losses	(38,097		)	(35,647		)
Loans receivable, net of allowance for loan losses	$	6,076,479		$	5,417,832

The following tables summarize loans receivable by loan type and performance status as of June 30, 2016 and December 31, 2015:



	June 30, 2016
	30-89 Days Past Due (1)		90 Days Or More Past Due(1)		Total Past Due (1)		Non- Accrual		Current (2)		Purchased- Credit- Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Multi-family	$	—	$	—	$	—	$	—	$	3,304,995	$	3,561	$	3,308,556
Commercial and industrial	—		—		—		5,294		837,642		932		843,868
Commercial real estate - owner occupied	—		—		—		2,677		333,609		12,520		348,806
Commercial real estate - non-owner occupied	52		—		52		2,299		1,126,583		10,777		1,139,711
Construction	—		—		—		—		99,381		234		99,615
Residential real estate	570		—		570		2,494		251,672		7,831		262,567
Manufactured housing (5)	3,461		2,297		5,758		1,818		97,062		3,236		107,874
Other consumer	—		—		—		45		3,006		226		3,277
Total	$	4,083	$	2,297	$	6,380	$	14,627	$	6,053,950	$	39,317	$	6,114,274
	December 31, 2015
	30-89 Days Past Due (1)		90 Days Or More Past Due(1)		Total Past Due (1)		Non- Accrual		Current (2)		Purchased- Credit- Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Multi-family	$	—	$	—	$	—	$	—	$	2,905,789	$	3,650	$	2,909,439
Commercial and industrial	39		—		39		1,973		799,595		1,552		803,159
Commercial real estate - owner occupied	268		—		268		2,700		292,312		12,961		308,241
Commercial real estate - non-owner occupied	1,997		—		1,997		1,307		940,895		12,056		956,255
Construction	—		—		—		—		87,006		234		87,240
Residential real estate	2,986		—		2,986		2,202		257,984		8,441		271,613
Manufactured housing (5)	3,752		2,805		6,557		2,449		101,132		3,352		113,490
Other consumer	107		—		107		140		3,227		234		3,708
Total	$	9,149	$	2,805	$	11,954	$	10,771	$	5,387,940	$	42,480	$	5,453,145


(1)	Includes past due loans that are accruing interest because collection is considered probable.


(2)	Loans where next payment due is less than 30 days from the report date.

(3)

Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because of the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans.


(4)	Amounts exclude deferred costs and fees, unamortized premiums and discounts, and the allowance for loan losses.


(5)	Manufactured housing loans purchased in 2010 are subject to cash reserves held at the Bank that are used to fund past-due payments when the loan becomes 90 days or more delinquent. Subsequent purchases are subject to varying provisions in the event of borrowers’ delinquencies.

As of June 30, 2016 and December 31, 2015, the Bank had $1.0 million and $1.2 million, respectively, of residential real estate held in other real estate owned. As of June 30, 2016 and December 31, 2015, the Bank had initiated foreclosure proceedings on $1.0 million and $0.6 million, respectively, on loans secured by residential real estate.

Allowance for loan losses

During second quarter 2015, the Bank refined its methodology for estimating the general allowance for loan losses. Previously, the general allowance for the portion of the loan portfolio originated after December 31, 2009 ("Post 2009 loan portfolio") was based generally on qualitative factors due to insufficient historical loss data on the portfolio. During second quarter 2015, the Bank began using objectively verifiable industry and peer loss data to estimate probable incurred losses as of the balance sheet date for the Post 2009 loan portfolio until sufficient internal loss history is available. The same methodology was also adopted for the portion of the loan portfolio originated on or before December 31, 2009 ("Legacy loan portfolio") that had no loss history over the past two years.

The changes in the allowance for loan losses for the three and six months ended June 30, 2016 and 2015 and the loans and allowance for loan losses by loan class based on impairment evaluation method as of June 30, 2016 and December 31, 2015 are as follows. The amounts presented for the provision for loan losses below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans.



Three Months Ended June 30, 2016	Multi-family		Commercial and Industrial			Commercial Real Estate Owner Occupied		Commercial Real Estate Non-Owner Occupied			Construction			Residential Real Estate			Manufactured Housing			Other Consumer			Total
(amounts in thousands)
Ending Balance, March 31, 2016	$	12,135	$	9,959		$	1,410	$	8,548		$	1,264		$	3,676		$	468		$	145		$	37,605
Charge-offs	—		(537		)	—		—			—			(413		)	—			(190		)	(1,140		)
Recoveries	—		55			—		—			24			1			—			—			80
Provision for loan losses	233		893			172		(65		)	(79		)	271			(28		)	155			1,552
Ending Balance, June 30, 2016	$	12,368	$	10,370		$	1,582	$	8,483		$	1,209		$	3,535		$	440		$	110		$	38,097
Six Months Ended June 30, 2016
Ending Balance, December 31, 2015	$	12,016	$	8,864		$	1,348	$	8,420		$	1,074		$	3,298		$	494		$	133		$	35,647
Charge-offs	—		(537		)	—		—			—			(413		)	—			(232		)	(1,182		)
Recoveries	—		111			—		8			457			1			—			—			577
Provision for loan losses	352		1,932			234		55			(322		)	649			(54		)	209			3,055
Ending Balance, June 30, 2016	$	12,368	$	10,370		$	1,582	$	8,483		$	1,209		$	3,535		$	440		$	110		$	38,097
As of June 30, 2016
Loans:
Individually evaluated for impairment	$	386	$	28,564		$	9,840	$	5,962		$	—		$	4,270		$	8,850		$	44		$	57,916
Collectively evaluated for impairment	3,304,609		814,372			326,446		1,122,972			99,381			250,466			95,788			3,007			6,017,041
Loans acquired with credit deterioration	3,561		932			12,520		10,777			234			7,831			3,236			226			39,317
	$	3,308,556	$	843,868		$	348,806	$	1,139,711		$	99,615		$	262,567		$	107,874		$	3,277		$	6,114,274
Allowance for loan losses:
Individually evaluated for impairment	$	202	$	3,183		$	—	$	177		$	—		$	104		$	—		$	—		$	3,666
Collectively evaluated for impairment	12,166		6,968			1,582		4,535			1,209			2,491			96			53			29,100
Loans acquired with credit deterioration	—		219			—		3,771			—			940			344			57			5,331
	$	12,368	$	10,370		$	1,582	$	8,483		$	1,209		$	3,535		$	440		$	110		$	38,097



Three Months Ended June 30, 2015	Multi-family		Commercial and Industrial			Commercial Real Estate Owner Occupied			Commercial Real Estate Non-Owner Occupied			Construction			Residential Real Estate			Manufactured Housing			Other Consumer			Total
(amounts in thousands)
Ending Balance, March 31, 2015	$	8,196	$	6,747		$	4,583		$	9,738		$	852		$	2,995		$	346		$	109		$	33,566
Charge-offs	—		(1,213		)	(270		)	—			(295		)	(26		)	—			—			(1,804		)
Recoveries	—		58			1			—			172			572			—			2			805
Provision for loan losses	538		8,470			(663		)	(3,428		)	115			(86		)	(30		)	8			4,924
Ending Balance, June 30, 2015	$	8,734	$	14,062		$	3,651		$	6,310		$	844		$	3,455		$	316		$	119		$	37,491
Six Months Ended June 30, 2015
Ending Balance, December 31, 2014	$	8,493	$	4,784		$	4,336		$	9,198		$	1,047		$	2,698		$	262		$	114		$	30,932
Charge-offs	—		(1,234		)	(343		)	(245		)	(1,064		)	(26		)	—			(36		)	(2,948		)
Recoveries	—		103			1			—			187			572			—			85			948
Provision for loan losses	241		10,409			(343		)	(2,643		)	674			211			54			(44		)	8,559
Ending Balance, June 30, 2015	$	8,734	$	14,062		$	3,651		$	6,310		$	844		$	3,455		$	316		$	119		$	37,491
As of December 31, 2015
Loans:
Individually evaluated for impairment	$	661	$	17,621		$	8,329		$	4,831		$	—		$	4,726		$	8,300		$	140		$	44,608
Collectively evaluated for impairment	2,905,128		783,986			286,951			939,368			87,006			258,446			101,838			3,334			5,366,057
Loans acquired with credit deterioration	3,650		1,552			12,961			12,056			234			8,441			3,352			234			42,480
	$	2,909,439	$	803,159		$	308,241		$	956,255		$	87,240		$	271,613		$	113,490		$	3,708		$	5,453,145
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	1,990		$	1		$	148		$	—		$	84		$	—		$	50		$	2,273
Collectively evaluated for impairment	12,016		6,650			1,347			3,858			1,074			2,141			98			28			27,212
Loans acquired with credit deterioration	—		224			—			4,414			—			1,073			396			55			6,162
	$	12,016	$	8,864		$	1,348		$	8,420		$	1,074		$	3,298		$	494		$	133		$	35,647

Certain manufactured housing loans were purchased in August 2010. A portion of the purchase price may be used to reimburse the Bank under the specified terms in the purchase agreement for defaults of the underlying borrower and other specified items. At June 30, 2016 and December 31, 2015, funds available for reimbursement, if necessary, were $1.2 million and $1.2 million, respectively. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb the probable incurred losses within the manufactured housing portfolio.

Loans Individually Evaluated for Impairment

The following tables present the recorded investment (net of charge-offs), unpaid principal balance, and related allowance by loan type for loans that are individually evaluated for impairment as of June 30, 2016 and December 31, 2015 and the average recorded investment and interest income recognized for the three and six months ended June 30, 2016 and 2015. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.



	June 30, 2016						Three Months Ended June 30, 2016				Six Months Ended June 30, 2016
	Recorded Investment Net of Charge offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no related allowance recorded:
Multi-family	$	—	$	—	$	—	$	—	$	—	$	220	$	—
Commercial and industrial	20,833		22,911		—		19,892		286		17,280		473
Commercial real estate owner occupied	9,840		9,840		—		9,882		108		9,360		202
Commercial real estate non-owner occupied	5,427		5,426		—		4,755		—		4,595		15
Other consumer	44		44		—		45		—		46		—
Residential real estate	3,871		3,871		—		4,013		20		4,119		44
Manufactured housing	8,850		8,850		—		8,874		172		8,683		281
With an allowance recorded:
Multi-family	386		386		202		390		5		260		10
Commercial and industrial	7,731		7,731		3,183		8,034		41		7,211		112
Commercial real estate owner occupied	—		—		—		6		—		8		—
Commercial real estate non-owner occupied	535		535		177		538		2		544		4
Other consumer	—		—		—		27		—		48		—
Residential real estate	399		399		104		544		—		494		—
Total	$	57,916	$	59,993	$	3,666	$	57,000	$	634	$	52,868	$	1,141



	December 31, 2015						Three Months Ended June 30, 2015				Six Months Ended June 30, 2015
	Recorded Investment Net of Charge offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no related allowance recorded:
Multi-family	$	661	$	661	$	—	$	—	$	—	$	—	$	—
Commercial and industrial	12,056		13,028		—		7,122		439		9,356		604
Commercial real estate owner occupied	8,317		8,317		—		5,175		122		6,177		185
Commercial real estate non-owner occupied	4,276		4,276		—		6,805		246		8,135		374
Construction	—		—		—		1,497		—		1,773		—
Other consumer	48		48		—		35		—		30		—
Residential real estate	4,331		4,331		—		3,924		21		3,841		42
Manufactured housing	8,300		8,300		—		4,747		186		4,027		209
With an allowance recorded:
Commercial and industrial	5,565		5,914		1,990		10,686		96		7,735		101
Commercial real estate - owner occupied	12		12		1		18		—		20		—
Commercial real estate non-owner occupied	555		555		148		1,072		7		1,177		7
Other consumer	92		92		50		73		—		87		—
Residential real estate	395		395		84		454		—		424		—
Total	$	44,608	$	45,929	$	2,273	$	41,608	$	1,117	$	42,782	$	1,522

Troubled Debt Restructurings

At June 30, 2016 and December 31, 2015, there were $14.1 million and $11.4 million, respectively, in loans reported as troubled debt restructurings (“TDRs”). TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum six-month performance requirement; however, it will remain classified as impaired. Generally, the Bank requires sustained performance for nine months before returning a TDR to accrual status.

Modification of purchased-credit-impaired loans that are accounted for within loan pools in accordance with the accounting standards for purchased-credit-impaired loans do not result in the removal of these loans from the pool even if modifications would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not considered TDRs.

The following is an analysis of loans modified in a troubled debt restructuring by type of concession for the three and six months ended June 30, 2016 and 2015. There were no modifications that involved forgiveness of debt.



	Three Months Ended June 30, 2016			Three Months Ended June 30, 2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Interest-rate reductions	16	$	535	109	$	5,012
Total	16	$	535	109	$	5,012



	Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Extensions of maturity	3	$	1,995	—	$	—
Interest-rate reductions	39	1,399		112	5,417
Total	42	$	3,394	112	$	5,417

The following table provides, by loan type, the number of loans modified in troubled debt restructurings, and the related recorded investment, during the three and six months ended June 30, 2016 and 2015.



	Three Months Ended June 30, 2016			Three Months Ended June 30, 2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Commercial and industrial	—	$	—	2	$	608
Commercial real estate non-owner occupied	—	—		—	—
Manufactured housing	14	319		106	4,193
Residential real estate	2	216		1	211
Total loans	16	$	535	109	$	5,012



	Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Commercial and industrial	1	$	76	2	$	608
Commercial real estate non-owner occupied	1	1,844		—	—
Manufactured housing	37	1,183		108	4,400
Residential real estate	3	291		2	409
Total loans	42	$	3,394	112	$	5,417

As of June 30, 2016 and December 31, 2015, there were no commitments to lend additional funds to debtors whose terms have been modified in TDRs.

As of June 30, 2016, two manufactured housing loans totaling $0.1 million that were modified in TDRs within the past twelve months, defaulted on payments. As of June 30, 2015, there were no loans modified in TDRs within the past twelve months that defaulted on payments.

Loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. There were no specific allowances as a result of TDR modifications during the three and six months ended June 30, 2016. There were two specific allowances resulting from TDR modifications during the three and six months ended June 30, 2015, including $70 thousand for one commercial and industrial loan and $20 thousand for one residential real estate loan.

Purchased Credit Impaired Loans

The changes in accretable yield related to purchased-credit-impaired loans for the three and six months ended June 30, 2016 and 2015 were as follows:



	Three Months Ended June 30,
	2016			2015
(amounts in thousands)
Accretable yield balance as of March 31,	$	12,622		$	15,424
Accretion to interest income	(499		)	(578		)
Reclassification from nonaccretable difference and disposals, net	(958		)	(544		)
Accretable yield balance as of June 30,	$	11,165		$	14,302

	Six Months Ended June 30,
	2016			2015
(amounts in thousands)
Accretable yield balance as of December 31,	$	12,947		$	17,606
Accretion to interest income	(969		)	(1,239		)
Reclassification from nonaccretable difference and disposals, net	(813		)	(2,065		)
Accretable yield balance as of June 30,	$	11,165		$	14,302

Allowance for Loan Losses and the FDIC Loss Sharing Receivable and Clawback Liability

Losses incurred on covered loans were eligible for partial reimbursement by the FDIC. Subsequent to the purchase date, the expected cash flows on the covered loans were subject to evaluation. Decreases in the present value of expected cash flows on the covered loans were recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time, the FDIC indemnification asset was increased reflecting an estimated future collection from the FDIC, which was recorded as a reduction to the provision for loan losses. If the expected cash flows on the covered loans increased such that a previously recorded impairment could be reversed, the Bank recorded a reduction in the allowance for loan losses (with a related credit to the provision for loan losses) accompanied by a reduction in the FDIC receivable balance (with a related charge to the provision for loan losses). Increases in expected cash flows on covered loans and decreases in expected cash flows from the FDIC loss sharing receivable, when there are no previously recorded impairments, were considered together and recognized over the remaining life of the loans as interest income. Decreases in the valuations of other real estate owned covered by the loss sharing agreements were recorded net of the estimated FDIC receivable as an increase to other real estate owned expense (a component of non-interest expense).

On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered assets through September 30, 2015, adjusted for cash payments to and receipts from the FDIC as part of the December 31, 2015 and March 31, 2016 certifications. Consequently, loans and other real estate owned previously reported as covered assets pursuant to the loss sharing agreements are not presented as covered assets as of June 30, 2016. As of June 30, 2016, the negotiated settlement amount of $1.4 million was recorded in "Accrued interest payable and other liabilities" on the consolidated balance sheet.

The following table presents changes in the allowance for loan losses and the FDIC loss sharing receivable, including the effects of the estimated clawback liability and the termination agreement, for the three and six months ended June 30, 2016 and 2015.



	Allowance for Loan Losses
	Three Months Ended June 30,
(amounts in thousands)	2016			2015
Ending balance as of March 31,	$	37,605		$	33,566
Provision for loan losses (1)	1,552			4,924
Charge-offs	(1,140		)	(1,804		)
Recoveries	80			805
Ending balance as of June 30,	$	38,097		$	37,491



	FDIC Loss Sharing Receivable/ Clawback Liability
	Three Months Ended June 30,
(amounts in thousands)	2016			2015
Ending balance as of March 31,	$	(2,544	)	$	3,427
Increased (decreased) estimated cash flows (2)	766			(4,411		)
Other activity, net (a)	49			334
Cash payments to (receipts from) the FDIC	348			(805		)
Ending balance as of June 30,	$	(1,381	)	$	(1,455	)

(1) Provision for loan losses	$	1,552		$	4,924
(2) Effect attributable to FDIC loss share arrangements	(766		)	4,411
Net amount reported as provision for loan losses	$	786		$	9,335

(a) Includes external costs, such as legal fees, real estate taxes, and appraisal expenses, which qualify for reimbursement under loss sharing arrangements.



	Allowance for Loan Losses
	Six months ended June 30,
(amounts in thousands)	2016			2015
Ending balance as of December 31,	$	35,647		$	30,932
Provision for loan losses (1)	3,055			8,559
Charge-offs	(1,182		)	(2,948		)
Recoveries	577			948
Ending balance as of June 30,	$	38,097		$	37,491



	FDIC Loss Sharing Receivable/ Clawback Liability
	Six months ended June 30,
(amounts in thousands)	2016			2015
Ending balance as of December 31,	$	(2,083	)	$	2,320
Increased (decreased) estimated cash flows (2)	289			(3,740		)
Other activity, net (a)	(255		)	468
Cash payments to (receipts from) the FDIC	668			(503		)
Ending balance as of June 30,	$	(1,381	)	$	(1,455	)

(1) Provision for loan losses	$	3,055		$	8,559
(2) Effect attributable to FDIC loss share arrangements	(289		)	3,740
Net amount reported as provision for loan losses	$	2,766		$	12,299

(a) Includes external costs, such as legal fees, real estate taxes, and appraisal expenses, which qualified for reimbursement under the loss sharing arrangements.

Credit Quality Indicators

Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, construction, and residential real estate loans are rated based on an internally assigned risk rating system which is assigned at the time of loan origination and reviewed on a periodic, or on an “as needed,” basis. Manufactured housing and other consumer loans are evaluated based on the payment activity of the loan and individual loans are not assigned an internal risk rating unless delinquent.

To facilitate the monitoring of credit quality within the multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, construction and residential real estate classes, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective portfolio class, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 6), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to manage those loans.

The risk rating grades are defined as follows:

“1” – Pass/Excellent

Loans rated 1 represent a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has access to alternative financial markets.

“2” – Pass/Superior

Loans rated 2 are those for which the borrower has a strong financial condition, balance sheet, operations, cash flow, debt capacity and coverage with ratios better than industry norms. The borrowers of these loans exhibit a limited leverage position, are virtually immune to local economies, and are in stable growing industries. The management team is well respected and the company has ready access to public markets.

“3” – Pass/Strong

Loans rated 3 are those loans for which the borrowers have above average financial condition and flexibility; more than satisfactory debt service coverage; balance sheet and operating ratios are consistent with or better than industry peers; operate in industries with little risk; move in diversified markets; and are experienced and competent in their industry. These borrowers’ access to capital markets is limited mostly to private sources, often secured, but the borrower typically has access to a wide range of refinancing alternatives.

“4” – Pass/Good

Loans rated 4 have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher grade borrower. These loans carry a normal level of risk, with very low loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans.

“5” – Satisfactory

Loans rated 5 are extended to borrowers who are determined to be a reasonable credit risk and demonstrate the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. The borrower’s historical financial information may indicate erratic performance, but current trends are positive and the quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher grade loans. If adverse circumstances arise, the impact on the borrower may be significant.

“6” – Satisfactory/Bankable with Care

Loans rated 6 are those for which the borrower has higher than normal credit risk; however, cash flow and asset values are generally intact. These borrowers may exhibit declining financial characteristics, with increasing leverage and decreasing liquidity and may have limited resources and access to financial alternatives. Signs of weakness in these borrowers may include delinquent taxes, trade slowness and eroding profit margins.

“7” – Special Mention

Loans rated Special Mention are credit facilities that may have potential developing weaknesses and deserve extra attention from the account manager and other management personnel. In the event potential weaknesses are not corrected or mitigated, deterioration in the ability of the borrower to repay the debt in the future may occur. This grade is not assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where significant actual, not potential, weaknesses or problems are clearly evident are graded in the category below.

“8” – Substandard

Loans are classified Substandard when the loans are inadequately protected by the current sound worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the company will sustain some loss if the weaknesses are not corrected.

“9” – Doubtful

The Bank assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

“10” – Loss

The Bank assigns a loss rating to loans considered uncollectible and of such little value that their continuance as an active asset is not warranted. Amounts classified as loss are immediately charged off.

Risk ratings are not established for certain consumer loans, including home equity, manufactured housing, and installment loans, mainly because these portfolios consist of a larger number of homogeneous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based upon aggregate payment history through the monitoring of delinquency levels and trends and are classified as performing and non-performing.

The following tables present the credit ratings of loans receivable as of June 30, 2016 and December 31, 2015.



	June 30, 2016
	Multi-family		Commercial and Industrial		Commercial Real Estate Owner Occupied		Commercial Real Estate Non-Owner Occupied		Construction		Residential Real Estate		Manufactured Housing		Other Consumer		Total
(amounts in thousands)
Pass/Satisfactory	$	3,306,759	$	815,210	$	336,283	$	1,133,554	$	99,615	$	259,894	$	—	$	—	$	5,951,315
Special Mention	386		21,588		7,944		3,700		—		—		—		—		33,618
Substandard	1,411		7,070		4,579		2,457		—		2,673		—		—		18,190
Performing (1)	—		—		—		—		—		—		100,298		3,232		103,530
Non-performing (2)	—		—		—		—		—		—		7,576		45		7,621
Total	$	3,308,556	$	843,868	$	348,806	$	1,139,711	$	99,615	$	262,567	$	107,874	$	3,277	$	6,114,274



	December 31, 2015
	Multi-family		Commercial and Industrial		Commercial Real Estate Owner Occupied		Commercial Real Estate Non-Owner Occupied		Construction		Residential Real Estate		Manufactured Housing		Other Consumer		Total
(amounts in thousands)
Pass/Satisfactory	$	2,907,362	$	784,892	$	295,762	$	950,886	$	87,240	$	268,210	$	—	$	—	$	5,294,352
Special Mention	661		14,052		7,840		1,671		—		282		—		—		24,506
Substandard	1,416		4,215		4,639		3,698		—		3,121		—		—		17,089
Performing (1)	—		—		—		—		—		—		104,484		3,461		107,945
Non-performing (2)	—		—		—		—		—		—		9,006		247		9,253
Total	$	2,909,439	$	803,159	$	308,241	$	956,255	$	87,240	$	271,613	$	113,490	$	3,708	$	5,453,145


(1)	Includes consumer and other installment loans not subject to risk ratings.


(2)	Includes loans that are past due and still accruing interest and loans on nonaccrual status.