Note 5: Loans

The following table sets forth the composition of the loan portfolio at September 30, 2016 and December 31, 2015:


	September 30, 2016						December 31, 2015
	Amount			Percent of Non-Covered Loans Held for Investment			Amount			Percent of Non-Covered Loans Held for Investment
(dollars in thousands)
Non-Covered Loans Held for Investment:
Mortgage Loans:
Multi-family	$	27,066,459			72.49	%	$	25,971,629			72.67	%
Commercial real estate		7,764,241			20.80			7,857,204			21.98
Acquisition, development, and construction		372,199			1.00			311,676			0.87
One-to-four family		331,617			0.89			116,841			0.33

Total mortgage loans held for investment	$	35,534,516			95.18		$	34,257,350			95.85

Other Loans:
Commercial and industrial		1,301,814			3.48			1,085,529			3.04
Lease financing, net of unearned income of $52,788 and $43,553, respectively		473,481			1.27			365,027			1.02

Total commercial and industrial loans ⁽¹⁾		1,775,295			4.75			1,450,556			4.06
Purchased credit-impaired loans		5,939			0.02			8,344			0.02
Other		19,791			0.05			24,239			0.07

Total other loans held for investment		1,801,025			4.82			1,483,139			4.15

Total non-covered loans held for investment	$	37,335,541			100.00	%	$	35,740,489			100.00	%

Net deferred loan origination costs		25,199						22,715
Allowance for losses on non-covered loans		(154,705	)					(147,124	)

Non-covered loans held for investment, net	$	37,206,035					$	35,616,080

Covered loans		1,789,164						2,060,089
Allowance for losses on covered loans		(25,360	)					(31,395	)

Covered loans, net	$	1,763,804					$	2,028,694
Loans held for sale		701,398						367,221

Total loans, net	$	39,671,237					$	38,011,995

(1)	Includes specialty finance loans of $1.1 billion and $880.7 million, and other C&I loans of $630.7 million and $569.9 million, respectively, at September 30, 2016 and December 31, 2015.

Non-Covered Loans

Non-Covered Loans Held for Investment

The majority of the loans the Company originates for investment are multi-family loans, most of which are collateralized by non-luxury apartment buildings in New York City that are rent-regulated and feature below-market rents. In addition, the Company originates commercial real estate (“CRE”) loans, most of which are collateralized by income-producing properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties that are located in New York City and on Long Island.

The Company also originates acquisition, development, and construction (“ADC”) loans, and commercial and industrial (“C&I”) loans, for investment. ADC loans are primarily originated for multi-family and residential tract projects in New York City and on Long Island. C&I loans consist of asset-based loans, equipment loans and leases, and dealer floor-plan loans (together, “specialty finance loans and leases”) that generally are made to large corporate obligors, many of which are publicly traded, carry investment grade or near-investment grade ratings, and participate in stable industries nationwide; and “other” C&I loans that primarily are made to small and mid-size businesses in Metro New York. “Other” C&I loans are typically made for working capital, business expansion, and the purchase of machinery and equipment.

The repayment of multi-family and CRE loans generally depends on the income produced by the underlying properties which, in turn, depends on their successful operation and management. To mitigate the potential for credit losses, the Company underwrites its loans in accordance with credit standards it considers to be prudent, looking first at the consistency of the cash flows being produced by the underlying property. In addition, multi-family buildings and CRE properties are inspected as a prerequisite to approval, and independent appraisers, whose appraisals are carefully reviewed by the Company’s in-house appraisers, perform appraisals on the collateral properties. In many cases, a second independent appraisal review is performed. To further manage its credit risk, the Company’s lending policies limit the amount of credit granted to any one borrower and typically require conservative debt service coverage ratios and loan-to-value ratios. Nonetheless, the ability of the Company’s borrowers to repay these loans may be impacted by adverse conditions in the local real estate market and the local economy. Accordingly, there can be no assurance that its underwriting policies will protect the Company from credit-related losses or delinquencies.

ADC loans typically involve a higher degree of credit risk than loans secured by improved or owner-occupied real estate. Accordingly, borrowers are required to provide a guarantee of repayment and completion, and loan proceeds are disbursed as construction progresses, as certified by in-house or third-party engineers. The Company seeks to minimize the credit risk on ADC loans by maintaining conservative lending policies and rigorous underwriting standards. However, if the estimate of value proves to be inaccurate, the cost of completion is greater than expected, or the length of time to complete and/or sell or lease the collateral property is greater than anticipated, the property could have a value upon completion that is insufficient to assure full repayment of the loan. This could have a material adverse effect on the quality of the ADC loan portfolio, and could result in losses or delinquencies.

To minimize the risk involved in specialty finance lending and leasing, the Company participates in syndicated loans that are brought to it, and equipment loans and leases that are assigned to it, by a select group of nationally recognized sources who have had long-term relationships with its experienced lending officers. Each of these credits is secured with a perfected first security interest or outright ownership in the underlying collateral, and structured as senior debt or as a non-cancelable lease. To further minimize the risk involved in specialty finance lending and leasing, each transaction is re-underwritten. In addition, outside counsel is retained to conduct a further review of the underlying documentation.

To minimize the risks involved in other C&I lending, the Company underwrites such loans on the basis of the cash flows produced by the business; requires that such loans be collateralized by various business assets, including inventory, equipment, and accounts receivable, among others; and requires personal guarantees. However, the capacity of a borrower to repay such a C&I loan is substantially dependent on the degree to which the business is successful. In addition, the collateral underlying such loans may depreciate over time, may not be conducive to appraisal, or may fluctuate in value, based upon the results of operations of the business.

Included in non-covered loans held for investment at September 30, 2016 and December 31, 2015, respectively, were loans of $92.3 million and $105.6 million to officers, directors, and their related interests and parties. There were no loans to principal shareholders at either of those dates.

Non-covered purchased credit-impaired (“PCI”) loans, which had a carrying value of $5.9 million and an unpaid principal balance of $7.3 million at September 30, 2016, are loans that had been covered under an FDIC loss sharing agreement that expired in March 2015 and that now are included in non-covered loans. Such loans continue to be accounted for under Accounting Standards Codification (“ASC”) 310-30 and are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the lives of the loans. Under ASC 310-30, purchasers are permitted to aggregate acquired loans into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

Loans Held for Sale

The Community Bank’s mortgage banking division originates, aggregates, and services one-to-four family loans. Community banks, credit unions, mortgage companies, and mortgage brokers use its proprietary web-accessible mortgage banking platform to originate and close one-to-four family loans throughout the U.S. These loans are generally sold to GSEs, servicing retained. To a much lesser extent, the Community Bank uses its mortgage banking platform to originate jumbo loans that are typically sold to other financial institutions. Such loans have not represented, nor are they expected to represent, a material portion of the held-for-sale loans originated by the Community Bank.

In addition, the Community Bank services mortgage loans for various third parties, primarily including GSEs.

Asset Quality

The following table presents information regarding the quality of the Company’s non-covered loans held for investment (excluding non-covered PCI loans) at September 30, 2016:


(in thousands)	Loans 30-89 Days Past Due⁽¹⁾		Non- Accrual Loans ⁽¹⁾		Loans 90 Days or More Delinquent and Still Accruing Interest		Total Past Due Loans		Current Loans		Total Loans Receivable
Multi-family	$	2,948	$	10,769	$	—	$	13,717	$	27,052,742	$	27,066,459
Commercial real estate		—		10,628		—		10,628		7,753,613		7,764,241
One-to-four family		1,495		9,790		—		11,285		320,332		331,617
Acquisition, development, and construction		6,200		—		—		6,200		365,999		372,199
Commercial and industrial ⁽²⁾		15,694		10,847		—		26,541		1,748,754		1,775,295
Other		235		1,367		—		1,602		18,189		19,791

Total	$	26,572	$	43,401	$	—	$	69,973	$	37,259,629	$	37,329,602

(1)	Excludes $4,000 and $950,000 of non-covered PCI loans that were 30-89 days past due and 90 days or more past due, respectively.

(2)	Includes lease financing receivables, all of which were current.

The following table presents information regarding the quality of the Company’s non-covered loans held for investment at December 31, 2015:


(in thousands)	Loans 30-89 Days Past Due		Non- Accrual Loans ⁽¹⁾		Loans 90 Days or More Delinquent and Still Accruing Interest		Total Past Due Loans		Current Loans		Total Loans Receivable
Multi-family	$	4,818	$	13,904	$	—	$	18,722	$	25,952,907	$	25,971,629
Commercial real estate		178		14,920		—		15,098		7,842,106		7,857,204
One-to-four family		1,117		12,259		—		13,376		103,465		116,841
Acquisition, development, and construction		—		27		—		27		311,649		311,676
Commercial and industrial ⁽²⁾		—		4,473		—		4,473		1,446,083		1,450,556
Other		492		1,242		—		1,734		22,505		24,239

Total	$	6,605	$	46,825	$	—	$	53,430	$	35,678,715	$	35,732,145

(1)	Excludes $969,000 of non-covered PCI loans that were 90 days or more past due.

(2)	Includes lease financing receivables, all of which were current.

The following table summarizes the Company’s portfolio of non-covered loans held for investment (excluding non-covered PCI loans) by credit quality indicator at September 30, 2016:


	Mortgage Loans										Other Loans
(in thousands)	Multi- Family		Commercial Real Estate		One-to-Four Family		Acquisition, Development, and Construction		Total Mortgage Loans		Commercial and Industrial⁽¹⁾		Other		Total Other Loans
Credit Quality Indicator:
Pass	$	26,768,006	$	7,739,061	$	321,827	$	348,789	$	35,177,683	$	1,681,841	$	18,423	$	1,700,264
Special mention		271,366		14,452		—		17,210		303,028		32,156		—		32,156
Substandard		27,087		10,728		9,790		6,200		53,805		61,298		1,368		62,666
Doubtful		—		—		—		—		—		—		—		—

Total	$	27,066,459	$	7,764,241	$	331,617	$	372,199	$	35,534,516	$	1,775,295	$	19,791	$	1,795,086

(1)	Includes lease financing receivables, all of which were classified as “pass.”

The following table summarizes the Company’s portfolio of non-covered loans held for investment by credit quality indicator at December 31, 2015:


	Mortgage Loans										Other Loans
(in thousands)	Multi- Family		Commercial Real Estate		One-to- Four Family		Acquisition, Development, and Construction		Total Mortgage Loans		Commercial and Industrial⁽¹⁾		Other		Total Other Loans
Credit Quality Indicator:
Pass	$	25,936,423	$	7,839,127	$	104,582	$	309,039	$	34,189,171	$	1,433,778	$	22,996	$	1,456,774
Special mention		6,305		3,883		—		—		10,188		11,771		—		11,771
Substandard		28,901		14,194		12,259		2,637		57,991		5,007		1,243		6,250
Doubtful		—		—		—		—		—		—		—		—

Total	$	25,971,629	$	7,857,204	$	116,841	$	311,676	$	34,257,350	$	1,450,556	$	24,239	$	1,474,795

(1)	Includes lease financing receivables, all of which were classified as “pass.”

The preceding classifications are the most current ones available and generally have been updated within the last twelve months. In addition, they follow regulatory guidelines and can generally be described as follows: pass loans are of satisfactory quality; special mention loans have a potential weakness or risk that may result in the deterioration of future repayment; substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged (these loans have a well-defined weakness and there is a distinct possibility that the Company will sustain some loss); and doubtful loans, based on existing circumstances, have weaknesses that make collection or liquidation in full highly questionable and improbable. In addition, one-to-four family loans are classified based on the duration of the delinquency.

Troubled Debt Restructurings

The Company is required to account for certain held-for-investment loan modifications and restructurings as troubled debt restructurings (“TDRs”). In general, a modification or restructuring of a loan constitutes a TDR if the Company grants a concession to a borrower experiencing financial difficulty. A loan modified as a TDR generally is placed on non-accrual status until the Company determines that future collection of principal and interest is reasonably assured, which requires, among other things, that the borrower demonstrate performance according to the restructured terms for a period of at least six consecutive months.

In an effort to proactively manage delinquent loans, the Company has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, and forbearance agreements. As of September 30, 2016, loans on which concessions were made with respect to rate reductions and/or extension of maturity dates amounted to $16.6 million; loans on which forbearance agreements were reached amounted to $2.8 million.

The following table presents information regarding the Company’s TDRs as of September 30, 2016 and December 31, 2015:


	September 30, 2016						December 31, 2015
(in thousands)	Accruing		Non-Accrual		Total		Accruing		Non-Accrual		Total
Loan Category:
Multi-family	$	1,990	$	8,877	$	10,867	$	2,017	$	635	$	2,652
Commercial real estate		—		2,495		2,495		115		6,255		6,370
One-to-four family		—		1,571		1,571		—		987		987
Acquisition, development, and construction		—		—		—		—		27		27
Commercial and industrial		1,884		2,358		4,242		627		1,279		1,906
Other		—		204		204		—		213		213

Total	$	3,874	$	15,505	$	19,379	$	2,759	$	9,396	$	12,155

The eligibility of a borrower for work-out concessions of any nature depends upon the facts and circumstances of each transaction, which may change from period to period, and involves judgment by Company personnel regarding the likelihood that the concession will result in the maximum recovery for the Company.

The financial effects of the Company’s TDRs for the nine months ended September 30, 2016 and September 30, 2015 are summarized as follows:


	For the Nine Months Ended September 30, 2016
(dollars in thousands)	Weighted Average Interest Rate
(dollars in thousands)	Number of Loans		Pre- Modification			Post- Modification			Charge- off Amount		Capitalized Interest
Loan Category:
Multi-family		1		4.63	%		4.00	%	$	—	$	—
One-to-four family		3		3.62			3.07			—		6
Commercial and industrial		4		3.26			3.21			89		—

Total		8							$	89	$	6


	For the Nine Months Ended September 30, 2015
		Weighted Average Interest Rate
(dollars in thousands)		Number of Loans		Pre- Modification			Post- Modification			Charge- off Amount		Capitalized Interest
Loan Category:
Commercial real estate		3		7.49	%		7.49	%		—	$	—
One-to-four family		3		2.97			2.41			—		3
Multi-family		1		5.63			—			—		—
Other		2		4.58			2.00			—		2

Total		9								—	$	5

The Company does not consider a payment to be in default when the loan is in forbearance, or otherwise granted a delay of payment, when the agreement to forebear or allow a delay of payment is part of a modification. Subsequent to the modification, the loan is not considered to be in default until payment is contractually past due in accordance with the modified terms. However, the Company does consider a loan with multiple modifications or forbearance periods to be in default, and would also consider a loan to be in default if it were in bankruptcy or were partially charged off subsequent to modification.

Covered Loans

The following table presents the carrying value of covered loans acquired in the AmTrust and Desert Hills acquisitions as of September 30, 2016:


(dollars in thousands)	Amount		Percent of Covered Loans
Loan Category:
One-to-four family	$	1,688,148		94.4	%
Other loans		101,016		5.6

Total covered loans	$	1,789,164		100.0	%

The Company refers to certain loans acquired in the AmTrust and Desert Hills transactions as “covered loans” because the Company is being reimbursed for a substantial portion of losses on these loans under the terms of the FDIC loss sharing agreements. Covered loans are accounted for under ASC 310-30 and are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the lives of the loans. Under ASC 310-30, purchasers are permitted to aggregate acquired loans into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

At September 30, 2016 and December 31, 2015, the unpaid principal balance of covered loans was $2.2 billion and $2.5 billion, respectively. The carrying value of such loans was $1.8 billion and $2.1 billion, respectively, at the corresponding dates.

At the respective acquisition dates, the Company estimated the fair values of the AmTrust and Desert Hills loan portfolios, which represented the expected cash flows from the portfolios, discounted at market-based rates. In estimating such fair values, the Company: (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”); and (b) estimated the expected amount and timing of undiscounted principal and interest payments (the “undiscounted expected cash flows”). The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) is accreted into interest income over the lives of the loans. The amount by which the undiscounted contractual cash flows exceed the undiscounted expected cash flows is referred to as the “non-accretable difference.” The non-accretable difference represents an estimate of the credit risk in the loan portfolios at the respective acquisition dates.

The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment assumptions, and changes in expected principal and interest payments over the estimated lives of the loans. Changes in interest rate indices for variable rate loans increase or decrease the amount of interest income expected to be collected, depending on the direction of interest rates. Prepayments affect the estimated lives of covered loans and could change the amount of interest income and principal expected to be collected. Changes in expected principal and interest payments over the estimated lives of covered loans are driven by the credit outlook and by actions that may be taken with borrowers.

On a quarterly basis, the Company evaluates the estimates of the cash flows it expects to collect. Expected future cash flows from interest payments are based on variable rates at the time of the quarterly evaluation. Estimates of expected cash flows that are impacted by changes in interest rate indices for variable rate loans and prepayment assumptions are treated as prospective yield adjustments and included in interest income.

In the nine months ended September 30, 2016, changes in the accretable yield for covered loans were as follows:


(in thousands)	Accretable Yield
Balance at beginning of period	$	803,145
Reclassification to non-accretable difference		(26,350	)
Accretion		(99,028	)

Balance at end of period	$	677,767

In the preceding table, the line item “Reclassification to non-accretable difference” includes changes in cash flows that the Company does not expect to collect due to changes in prepayment assumptions, changes in interest rates on variable rate loans, and changes in loss assumptions. As of the Company’s most recent quarterly evaluation, prepayment assumptions increased, which resulted in a decrease in future expected interest cash flows and, consequently, a decrease in the accretable yield. The effect of this decrease was partially offset by an improvement in the underlying credit assumptions coupled with coupon rates on variable rate loans resetting slightly higher, which resulted in an increase in future expected interest cash flows and, consequently, an increase in the accretable yield.

Reflecting the foreclosure of certain loans acquired in the AmTrust and Desert Hills acquisitions, the Company owns certain other real estate owned (“OREO”) that is covered under its loss sharing agreements with the FDIC (“covered OREO”). Covered OREO was initially recorded at its estimated fair value on the respective dates of acquisition, based on independent appraisals, less the estimated selling costs. Any subsequent write-downs due to declines in fair value have been charged to non-interest expense, and have been partially offset by loss reimbursements under the FDIC loss sharing agreements. Any recoveries of previous write-downs have been credited to non-interest expense and partially offset by the portion of the recovery that was due to the FDIC.

The FDIC loss share receivable represents the present value of the estimated losses to be reimbursed by the FDIC. The estimated losses were based on the same cash flow estimates used in determining the fair value of the covered loans. The FDIC loss share receivable is reduced as losses on covered loans are recognized and as loss sharing payments are received from the FDIC. Realized losses in excess of acquisition-date estimates result in an increase in the FDIC loss share receivable. Conversely, if realized losses are lower than the acquisition-date estimates, the FDIC loss share receivable is reduced by amortization to interest income.

The following table presents information regarding the Company’s covered loans that were 90 days or more past due at September 30, 2016 and December 31, 2015:


(in thousands)	September 30, 2016		December 31, 2015
Covered Loans 90 Days or More Past Due:
One-to-four family	$	126,612	$	130,626
Other loans		6,465		6,556

Total covered loans 90 days or more past due	$	133,077	$	137,182

The following table presents information regarding the Company’s covered loans that were 30 to 89 days past due at September 30, 2016 and December 31, 2015:


(in thousands)	September 30, 2016		December 31, 2015
Covered Loans 30-89 Days Past Due:
One-to-four family	$	24,973	$	30,455
Other loans		1,458		2,369

Total covered loans 30-89 days past due	$	26,431	$	32,824

At September 30, 2016, the Company had $26.4 million of covered loans that were 30 to 89 days past due, and covered loans of $133.1 million that were 90 days or more past due but considered to be performing due to the application of the yield accretion method under ASC 310-30. The remainder of the Company’s covered loan portfolio totaled $1.6 billion at September 30, 2016 and was considered current at that date.

Loans that may have been classified as non-performing loans by AmTrust or Desert Hills were no longer classified as non-performing by the Company because, at the respective dates of acquisition, the Company believed that it would fully collect the new carrying value of these loans. The new carrying value represents the contractual balance, reduced by the portion that is expected to be uncollectible (i.e., the non-accretable difference) and by an accretable yield (discount) that is recognized as interest income. It is important to note that management’s judgment is required in reclassifying loans subject to ASC 310-30 as performing loans, and such judgment is dependent on having a reasonable expectation about the timing and amount of the cash flows to be collected, even if the loan is contractually past due.

The primary credit quality indicator for covered loans is the expectation of underlying cash flows. In the three months ended September 30, 2016 and 2015, the Company recorded recoveries of losses on covered loans of $1.3 million and $8.5 million, respectively. The respective recoveries were largely due to an increase in expected cash flows in the acquired portfolios of one-to-four family and home equity loans, and were partly offset by FDIC indemnification expense of $1.0 million and $6.8 million, respectively, that was recorded in “Non-interest income” in the respective periods.

Similarly, the Company recovered losses on covered loans of $6.0 million during the nine months ended September 30, 2016, which was largely offset by FDIC indemnification expense of $4.8 million. During the nine months ended September 30, 2015, the Company recovered $5.4 million of losses on covered loans, which was largely offset by FDIC indemnification expense of $4.3 million. The FDIC indemnification expense recorded in the nine months ended September 30, 2016 and 2015 was recorded in “Non-interest income” in the corresponding periods.