Loans Held for Investment, net

Loans held for investment, net consist of the following:



	December 31,
	2015			2014
	(In thousands)
Residential	$	529,775		$	531,131
Commercial and industrial	25,199			16,514
Commercial real estate:
Land and construction	143,419			106,436
Multi-family	318,313			265,735
Retail/office	161,497			155,095
Other commercial real estate	143,696			156,243
Total commercial real estate	766,925			683,509
Consumer:
Education	91,671			108,384
Other consumer	227,283			233,482
Total consumer loans	318,954			341,866
Total gross loans	1,640,853			1,573,020
Unamortized loan fees, net	(753		)	(1,544		)
Loans held for investment	1,640,100			1,571,476
Allowance for loan losses	(25,147		)	(47,037		)
Loans held for investment, net	$	1,614,953		$	1,524,439

Residential Loans

At December 31, 2015, $529.8 million, or 32.3%, of the total gross loans consisted of residential loans, substantially all of which were 1-to-4 family dwellings. Residential loans consist of both adjustable and fixed-rate loans. The adjustable-rate loans currently in the portfolio were originated with up to 30-year maturities and terms which provide for annual increases or decreases of the rate on the loans, based on a designated index. These rate changes are generally subject to a limit of 2% per adjustment and an aggregate 6% adjustment over the life of the loan. These loans are documented according to standard industry practices. The Company does not originate negative amortization and option payment adjustable rate mortgages.

At December 31, 2015, approximately $305.7 million, or 57.7%, of the held for investment residential gross loans consisted of loans with adjustable interest rates. At December 31, 2015, approximately $224.1 million, or 42.3%, of the held for investment residential gross loans consisted of loans with fixed rates of interest. Although these loans generally provide for repayments of principal over a fixed period of 10 to 30 years, because of prepayments and due-on-sale clauses, such loans generally remain outstanding for a shorter period of time.

Commercial and Industrial Loans

The Company originates loans for commercial and business purposes, including issuing letters of credit. At December 31, 2015, the commercial and industrial gross loans amounted to $25.2 million, or 1.5%, of the total gross loans.

Commercial Real Estate Loans

At December 31, 2015, $766.9 million of gross loans were secured by commercial real estate, which represented 46.7% of the total gross loans. The origination of such loans is generally limited to the Company’s primary market area.

Consumer Loans

The Company offers consumer loans in order to provide a wider range of financial services to its customers. Consumer loans consist of education loans and other consumer loans. At December 31, 2015, $319.0 million, or 19.5%, of the total gross loans consisted of consumer loans.

Approximately $91.7 million, or 5.6%, of the total gross loans at December 31, 2015 consisted of education loans. The origination of student loans was discontinued October 1, 2010 following the March 2010 law ending loan guarantees provided by the U.S. Department of Education. Both the principal amount of an education loan and interest thereon, up to 97% of the balance of the loan, are generally guaranteed by the Great Lakes Higher Education Company. Education loans may be sold to the U.S. Department of Education or to other investors. No education loans were sold during the years ended December 31, 2015 and 2014.

Other consumer loans primarily consist of home equity loans and lines. The primary home equity loan product has an adjustable rate that is linked to the prime interest rate and is secured by a mortgage, either a primary or a junior lien, on the borrower’s residence. In addition, other consumer loans include vehicle loans and other secured and unsecured loans made for a variety of consumer purposes.

Credit is extended to Bank customers through credit cards issued by a third party, ELAN Financial Services ("ELAN"), pursuant to an agency arrangement. A new agreement was signed with ELAN on December 31, 2014, effective January 1, 2015, providing the Company an origination fee for each card sold. The Bank also receives a monthly fee from ELAN resulting from the performance of the originated portfolio, based on 11% of the interest income and 25% of the interchange income. The Bank is no longer exposed to credit risk from the underlying consumer credit. As part of the new agreement, the Bank agreed to sell back to ELAN its participation in outstanding credit card balances totaling $6.6 million with no gain or loss recognized. This transaction settled on February 10, 2015.

Allowances for Loan Losses

The following table presents the allowance for loan losses by component:



	December 31,
	2015		2014
	(In thousands)
General reserve	$	20,840	$	38,596
Specific reserve	4,307		8,441
Total allowance for loan losses	$	25,147	$	47,037

The following table presents activity in the allowance for loan losses by portfolio segment:



	Residential			Commercial and Industrial			Commercial Real Estate			Consumer			Total
	(In thousands)
For the Year Ended:
December 31, 2015
Beginning balance	$	10,684		$	1,436		$	28,716		$	6,201		$	47,037
Provision	(6,025		)	(3,096		)	(18,538		)	(1,837		)	(29,496		)
Charge-offs	(1,112		)	(106		)	(1,696		)	(1,105		)	(4,019		)
Recoveries	1,569			2,122			7,502			432			11,625
Ending balance	$	5,116		$	356		$	15,984		$	3,691		$	25,147
Allowance for loan losses:
Associated with impaired loans	$	1,421		$	118		$	2,218		$	550		$	4,307
Associated with all other loans	3,695			238			13,767			3,140			20,840
Total	$	5,116		$	356		$	15,985		$	3,690		$	25,147
Loans:
Impaired loans individually evaluated	$	11,659		$	184		$	29,692		$	2,367		$	43,902
All other loans	518,116			25,015			737,233			316,587			1,596,951
Total	$	529,775		$	25,199		$	766,925		$	318,954		$	1,640,853
For the Year Ended:
December 31, 2014
Beginning balance	$	13,059		$	6,402		$	42,065		$	3,656		$	65,182
Provision	(599		)	(2,622		)	(6,129		)	4,765			(4,585		)
Charge-offs	(2,212		)	(5,220		)	(16,041		)	(2,599		)	(26,072		)
Recoveries	436			2,876			8,821			379			12,512



Ending balance	$	10,684		$	1,436		$	28,716		$	6,201		$	47,037
Allowance for loan losses:
Associated with impaired loans	$	1,400		$	140		$	6,475		$	426		$	8,441
Associated with all other loans	9,284			1,296			22,241			5,775			38,596
Total	$	10,684		$	1,436		$	28,716		$	6,201		$	47,037
Loans:
Impaired loans individually evaluated	$	14,497		$	113		$	79,160		$	1,515		$	95,285
All other loans	516,634			16,401			604,349			340,351			1,477,735
Total	$	531,131		$	16,514		$	683,509		$	341,866		$	1,573,020
For the Nine Months Ended:
December 31, 2013
Beginning balance	$	14,525		$	7,072		$	54,581		$	3,637		$	79,815
Provision	2,224			(599		)	(2,942		)	1,592			275
Charge-offs	(4,419		)	(864		)	(13,100		)	(1,903		)	(20,286		)
Recoveries	729			793			3,526			330			5,378
Ending balance	$	13,059		$	6,402		$	42,065		$	3,656		$	65,182
Allowance for loan losses:
Associated with impaired loans	$	2,424		$	1,745		$	19,845		$	477		$	24,491
Associated with all other loans	10,635			4,657			22,220			3,179			40,691
Total	$	13,059		$	6,402		$	42,065		$	3,656		$	65,182
Loans:
Impaired loans individually evaluated	$	20,502		$	2,315		$	106,657		$	3,284		$	132,758
All other loans	509,275			19,276			595,698			364,547			1,488,796
Total	$	529,777		$	21,591		$	702,355		$	367,831		$	1,621,554

A substantial portion of loans, 99%, are collateralized by real estate in Wisconsin and adjacent states. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in real estate market conditions in that area.

The following table presents impaired loans segregated by loans with no specific allowance and loans with an allowance by class of loans. The recorded investment amounts represent the gross loan balance less charge-offs. The unpaid principal balance represents the contractual loan balance less any principal payments applied. The interest income recognized column represents all interest income recorded either on a cash or accrual basis after the loan became impaired.



	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Carrying Amount		Year-to-Date Interest Income Recognized
	(In thousands)
December 31, 2015
With no specific allowance recorded:
Residential	$	4,143	$	5,193	$	—	$	5,303	$	171
Commercial and industrial	65		88		—		16		3
Land and construction	798		1,125		—		3,515		36
Multi-family	10,932		11,300		—		15,995		574
Retail/office	2,235		2,593		—		5,775		83
Other commercial real estate	1,479		2,114		—		9,046		115
Education (1)	—		—		—		—		—
Other consumer	1,105		1,218		—		1,181		69
Subtotal	$	20,757	$	23,631	$	—	$	40,831	$	1,051
With an allowance recorded:
Residential	$	7,516	$	7,551	$	1,421	$	6,843	$	285
Commercial and industrial	119		119		118		63		—
Land and construction	4,795		9,062		980		3,917		181
Multi-family	9,027		9,027		1,166		8,421		387
Retail/office	390		390		50		6,073		21
Other commercial real estate	36		48		22		168		—
Education (1)	191		191		191		104		—
Other consumer	1,071		1,073		359		560		64
Subtotal	$	23,145	$	27,461	$	4,307	$	26,149	$	938
Total
Residential	$	11,659	$	12,744	$	1,421	$	12,146	$	456
Commercial and industrial	184		207		118		79		3
Land and construction	5,593		10,187		980		7,432		217
Multi-family	19,959		20,327		1,166		24,416		961
Retail/office	2,625		2,983		50		11,848		104
Other commercial real estate	1,515		2,162		22		9,214		115
Education (1)	191		191		191		104		—
Other consumer	2,176		2,291		359		1,741		133
	$	43,902	$	51,092	$	4,307	$	66,980	$	1,989

(1) Excludes the guaranteed portion of education loans 90+ days past due with balance of $6.2 million and average carrying amounts totaling $6.0 million at December 31, 2015.



	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Carrying Amount		Year-to-Date Interest Income Recognized
	(In thousands)
December 31, 2014
With no specific allowance recorded:
Residential	$	4,992	$	6,406	$	—	$	5,455	$	165
Commercial and industrial	—		268		—		843		26
Land and construction	9,421		19,334		—		12,192		208
Multi-family	17,614		19,863		—		17,979		780
Retail/office	7,840		15,581		—		8,040		354
Other commercial real estate	13,972		15,318		—		14,617		467
Education (1)	205		205		—		101		—
Other consumer	469		845		—		1,003		89
Subtotal	$	54,513	$	77,820	$	—	$	60,230	$	2,089
With an allowance recorded (2):
Residential	$	9,505	$	9,671	$	1,400	$	8,574	$	403
Commercial and industrial	113		236		140		111		1
Land and construction	8,362		12,536		3,657		4,440		180
Multi-family	11,641		11,641		1,308		10,465		485
Retail/office	9,387		9,566		1,391		8,207		356
Other commercial real estate	923		936		119		854		17
Education (1)	—		—		—		—		—
Other consumer	841		841		426		617		48
Subtotal	$	40,772	$	45,427	$	8,441	$	33,268	$	1,490
Total
Residential	$	14,497	$	16,077	$	1,400	$	14,029	$	568
Commercial and industrial	113		504		140		954		27
Land and construction	17,783		31,870		3,657		16,632		388
Multi-family	29,255		31,504		1,308		28,444		1,265
Retail/office	17,227		25,147		1,391		16,247		710
Other commercial real estate	14,895		16,254		119		15,471		484
Education (1)	205		205		—		101		—
Other consumer	1,310		1,686		426		1,620		137
	$	95,285	$	123,247	$	8,441	$	93,498	$	3,579


(1)	Excludes the guaranteed portion of education loans 90+ days past due with balance of $6.6 million and average carrying amounts totaling $7.7 million at December 31, 2014.


(2)	Includes ratio-based allowance for loan losses of $0.5 million associated with loans totaling $1.9 million at December 31, 2014, for which individual reviews have not been completed but an allowance established based on the ratio of allowance for loan losses to gross loans individually reviewed, by class of loan.

The average recorded investment in impaired loans and interest income recognized on impaired loans follows:



	Year Ended December 31, 2015				Year Ended December 31, 2014				Nine Months Ended December 31, 2013
	Average Carrying Amount		Interest Income Recognized		Average Carrying Amount		Interest Income Recognized		Average Carrying Amount		Interest Income Recognized
	(In thousands)
Residential	$	12,146	$	456	$	14,029	$	568	$	18,847	$	344
Commercial and industrial	79		3		954		27		992		316
Land and construction	7,432		217		16,632		388		19,973		142
Multi-family	24,416		961		28,444		1,265		11,456		233
Retail/office	11,848		104		16,247		710		25,988		604
Other commercial real estate	9,214		115		15,471		484		14,821		312
Education	104		—		101		—		343		—
Other consumer	1,741		133		1,620		137		3,031		146
	$	66,980	$	1,989	$	93,498	$	3,579	$	95,451	$	2,097

Although the Company is currently not committed to lend any additional funds on impaired loans in accordance with the original terms of these loans, it is not legally obligated to, and will cautiously disburse additional funds on any loans while in nonaccrual status or if the borrower is in default.

The following table presents the aging of the recorded investment in past due loans by class of loans:



	Days Past Due
	30-59		60-89		90 or More		Current		Total
	(In thousands)
December 31, 2015
Residential	$	663	$	58	$	883	$	528,171	$	529,775
Commercial and industrial	223		177		149		24,650		25,199
Land and construction	910		—		267		142,242		143,419
Multi-family	—		—		—		318,313		318,313
Retail/office	—		398		791		160,308		161,497
Other commercial real estate	—		315		83		143,298		143,696
Education	2,700		2,097		6,375		80,499		91,671
Other consumer	529		84		541		226,129		227,283
	$	5,025	$	3,129	$	9,089	$	1,623,610	$	1,640,853

December 31, 2014
Residential	$	1,186	$	802	$	2,995	$	526,148	$	531,131
Commercial and industrial	205		—		196		16,113		16,514
Land and construction	267		29		1,111		105,029		106,436
Multi-family	—		—		3,518		262,217		265,735
Retail/office	—		—		2,172		152,923		155,095
Other commercial real estate	—		—		3,011		153,232		156,243
Education	3,505		2,140		6,818		95,921		108,384
Other consumer	632		126		517		232,207		233,482
	$	5,795	$	3,097	$	20,338	$	1,543,790	$	1,573,020

Non-accrual loans were $15.3 million and $35.1 million as of December 31, 2015 and 2014, respectively. The Company has experienced a significant reduction in delinquencies since December 31, 2014 primarily due to improving credit conditions and $3.3 million of loans moving to OREO. The Company has $6.2 million of education loans past due 90 days or more at December 31, 2015 that are still accruing interest due to the approximate 97% guarantee provided by governmental agencies. Loans less than 90 days delinquent may be placed on non-accrual status when the probability of collection of principal and interest is deemed to be insufficient to warrant further accrual.

Credit Quality Indicators:

The Company classifies commercial and industrial loans and commercial real estate loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. This analysis is updated on a monthly basis. The following definitions are used for risk ratings:

Pass. Loans classified as pass represent assets that are evaluated and are performing under the stated terms.

Watch. Loans classified as watch possess potential weaknesses that require management attention, but do not yet warrant adverse classification. These loans are treated the same as loans classified as “Pass” for reporting purposes.

Special Mention. Loans classified as special mention exhibit material negative financial trends due to company specific or industry conditions which, if not corrected or mitigated, threaten their capacity to meet current or continuing debt obligations.

Substandard. Loans classified as substandard are inadequately protected by the current net worth, paying capacity of the obligor, or by the collateral pledged. Substandard assets must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

Non-Accrual. Loans classified as non-accrual have the weaknesses of those classified as Substandard, 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 risk category of loans by class of loans, and based on the most recent analysis performed, is as follows:



	Pass (1)			Special Mention			Substandard			Non-Accrual			Total Gross Loans
	(In thousands)
December 31, 2015
Commercial and industrial	$	24,364		$	—		$	674		$	161		$	25,199
Commercial real estate:
Land and construction	137,383			—			579			5,457			143,419
Multi-family	315,366			—			1,749			1,198			318,313
Retail/office	156,737			274			3,121			1,365			161,497
Other	131,647			—			10,903			1,146			143,696
	$	765,497		$	274		$	17,026		$	9,327		$	792,124
Percent of total gross loans	96.6		%	—		%	2.2		%	1.2		%	100.0		%

December 31, 2014
Commercial and industrial	$	14,990		$	—		$	1,491		$	33		$	16,514
Commercial real estate:
Land and construction	85,425			946			2,870			17,195			106,436
Multi-family	261,254			—			915			3,566			265,735
Retail/office	143,260			4,753			3,112			3,970			155,095
Other	145,995			174			6,452			3,622			156,243
	$	650,924		$	5,873		$	14,840		$	28,386		$	700,023
Percent of total gross loans	93.0		%	0.8		%	2.1		%	4.1		%	100.0		%


(1)	Includes TDR accruing loans.

Residential and consumer loans are managed on a pool basis due to their homogeneous nature. Loans that are delinquent 90 days or more are considered non-accrual. The following table presents the residential and consumer gross loans based on accrual status:



	December 31, 2015						December 31, 2014
	Accrual (1)		Non-Accrual		Total Gross Loans		Accrual (1)		Non-Accrual		Total Gross Loans
	(In thousands)
Residential	$	524,780	$	4,995	$	529,775	$	525,258	$	5,873	$	531,131
Consumer
Education (2)	91,480		191		91,671		108,179		205		108,384
Other consumer	226,487		796		227,283		232,831		651		233,482
	$	842,747	$	5,982	$	848,729	$	866,268	$	6,729	$	872,997


(1)	Accrual residential and consumer loans includes substandard rated loans including TDR-accrual.


(2)	Non-accrual education loans represent the portion of these loans 90+ days past due that are not covered by a guarantee provided by government agencies that is limited to approximately 97% of the outstanding balance.

Troubled Debt Restructurings

Modifications of loan terms in a TDR are generally in the form of an extension of payment terms or lowering of the interest rate, although occasionally the Company has reduced the outstanding principal balance.

Loans modified in a troubled debt restructuring that are on non-accrual status at the time of modification will remain on non-accrual status for a period of at least six months, or longer period, sufficient to prove that the borrower demonstrates that they can make the payments under the modified terms. If after this period, the borrower has made payments in accordance with the modified terms, the loan is returned to accrual status but retains its designation as a TDR. Once a TDR loan is returned to accrual, further review of the credit could take place resulting in a further upgrade into the pass category but still remaining as a TDR.

The following table presents information related to loans modified in a troubled debt restructuring by class:



	Number of Modifications (1)	Gross Loans (2) (at beginning of period)		Gross Loans (2) (at period end)
	(Dollars in thousands)
For the Year Ended December 31, 2015
Residential	7	$	549	$	582
Commercial and industrial	1	12		11
Retail/office	1	752		510
Other consumer	24	1,259		1,251
	33	$	2,572	$	2,354



For the Year Ended December 31, 2014
Residential	13	$	1,632	$	1,620
Commercial and industrial	2	64		97
Land and construction	3	427		410
Multi-family	3	1,283		1,183
Other commercial real estate	2	251		256
Other consumer	11	353		305
	34	$	4,010	$	3,871


(1)	Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported in this table.


(2)	Gross loans is inclusive of all partial paydowns and charge-offs since the modification date.

The following tables present gross loans modified in a troubled debt restructuring during the years ended December 31, 2015 and 2014 by class and by type of modification:



	Principal and Interest to Interest Only		Interest Rate Reduction		Interest Rate Reduction To Below Market Rate (1)		Other (2)		Total
	(In thousands)
For the Year Ended December 31, 2015
Residential	$	—	$	380	$	78	$	124	$	582
Commercial and industrial	—		11		—		—		11
Retail/office	—		—		—		510		510
Other consumer	—		454		210		587		1,251
	$	—	$	845	$	288	$	1,221	$	2,354



For the Year Ended December 31, 2014
Residential	$	175	$	788	$	119	$	538	$	1,620
Commercial and industrial	—		—		—		97		97
Land and construction	—		63		—		347		410
Multi-family	—		—		921		262		1,183
Other commercial real estate	—		—		214		42		256
Other consumer	—		252		—		53		305
	$	175	$	1,103	$	1,254	$	1,339	$	3,871


(1)	Includes loans modified at below market rates for borrowers with similar risk profiles and having comparable loan terms and conditions. Market rates are determined by reference to internal new loan pricing grids that specify credit spreads based on loan risk rating and term to maturity.


(2)	Other modifications primarily include providing for the deferral of interest currently due to the new maturity date of the loan.

There were no loans modified in a troubled debt restructuring during the years ended December 31, 2015 and 2014, that subsequently defaulted.

Pledged Loans

At December 31, 2015 and 2014, residential, multi-family, education and other consumer loans with unpaid principal balances of approximately $661.8 million and $726.6 million, respectively were pledged to secure borrowings and for other purposes as permitted or required by law. Certain real-estate related loans are pledged as collateral for FHLB borrowings. See Note 10 -Borrowed Funds.

Related Party Loans

In the ordinary course of business, the Bank has granted loans to principal officers and directors and their affiliates with outstanding balances amounting to $16,000 and $49,000 at December 31, 2015 and 2014, respectively. During the year ended December 31, 2015, there were no principal additions and principal payments totaled $33,000.