LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES

3 Months Ended

Mar. 31, 2019

LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents the balances in the Company’s non-traditional mortgage (NTM) and traditional loans and leases portfolios as of the dates indicated:



($ in thousands)	NTM Loans			Traditional Loans and Leases			Total Loans and Leases Receivable
March 31, 2019
Commercial:
Commercial and industrial	$	—		$	1,907,102		$	1,907,102
Commercial real estate	—			865,521			865,521
Multifamily	—			2,332,527			2,332,527
SBA	—			74,998			74,998
Construction	—			211,549			211,549
Consumer:
Single family residential mortgage	788,054			1,314,640			2,102,694
Other consumer	2,351			60,458			62,809
Total loans and leases⁽¹⁾	$	790,405		$	6,766,795		$	7,557,200
Percentage to total loans and leases	10.5		%	89.5		%	100.0		%
Allowance for loan and lease losses							(63,885		)
Loans and leases receivable, net							$	7,493,315
December 31, 2018
Commercial:
Commercial and industrial	$	—		$	1,944,142		$	1,944,142
Commercial real estate	—			867,013			867,013
Multifamily	—			2,241,246			2,241,246
SBA	—			68,741			68,741
Construction	—			203,976			203,976
Consumer:
Single family residential mortgage	824,318			1,481,172			2,305,490
Other consumer	2,413			67,852			70,265
Total loans and leases⁽¹⁾	$	826,731		$	6,874,142		$	7,700,873
Percentage to total loans and leases	10.7		%	89.3		%	100.0		%
Allowance for loan and lease losses							(62,192		)
Loans and leases receivable, net							$	7,638,681


(1)	Total loans and leases includes deferred loan origination costs/(fees) and premiums/(discounts), net of $16.8 million and $17.7 million, respectively, at March 31, 2019 and December 31, 2018.

Non-Traditional Mortgage Loans

The Company’s NTM portfolio is comprised of three interest only products: Green Loans, Interest Only loans and a small number of additional loans with the potential for negative amortization. The following table presents the composition of the NTM portfolio as of the dates indicated:



	March 31, 2019						December 31, 2018
($ in thousands)	Count	Amount			Percent		Count	Amount			Percent
Green Loans (HELOC) - first liens	83	$	64,444		8.2	%	88	$	67,729		8.2	%
Interest-only - first liens	477	720,116			91.1	%	519	753,061			91.1	%
Negative amortization	11	3,494			0.4	%	11	3,528			0.4	%
Total NTM - first liens	571	788,054			99.7	%	618	824,318			99.7	%
Green Loans (HELOC) - second liens	8	2,351			0.3	%	10	2,413			0.3	%
Total NTM - second liens	8	2,351			0.3	%	10	2,413			0.3	%
Total NTM loans	579	$	790,405		100.0	%	628	$	826,731		100.0	%
Total loans and leases		$	7,557,200					$	7,700,873
% of total NTM loans to total loans and leases		10.5		%				10.7		%

Green Loans

Green Loans are single family residential first and second mortgage lines of credit with a linked checking account that allows all types of deposits and withdrawals to be performed. These loans are generally interest only for a 15-year term with a balloon payment due at maturity. At March 31, 2019 and December 31, 2018, $292 thousand and $0, respectively, of the Company's Green Loans were non-performing. As a result of their unique payment feature, Green Loans possess higher credit risk due to the potential for negative amortization; however, management believes the risk is mitigated through the Company’s loan terms and underwriting standards, including its policies on LTV ratios and the Company’s contractual ability to curtail loans when the value of the underlying collateral declines. The Company discontinued origination of Green Loans in 2011.

Interest Only Loans

Interest only loans are primarily single family residential first mortgage loans with payment features that allow interest only payments in initial periods before converting to a fully amortizing loan. At March 31, 2019 and December 31, 2018, Interest Only loans totaled $720.1 million and $753.1 million, respectively. At March 31, 2019 and December 31, 2018, none of the Interest Only loans were non-performing.

Loans with the Potential for Negative Amortization

Negative amortization loans totaled $3.5 million and $3.5 million at March 31, 2019 and December 31, 2018, respectively. The Company discontinued origination of negative amortization loans in 2007. At March 31, 2019 and December 31, 2018, none of the loans with the potential for negative amortization were non-performing. These loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization; however, management believes the credit risk associated with these loans is mitigated through the loan terms and underwriting standards, including the Company’s policies on LTV ratios.

Allowance for Loan and Lease Losses

The Company has established credit risk management processes that include regular management review of the loan and lease portfolio to identify problem loans and leases. During the ordinary course of business, management may become aware of borrowers and lessees who may not be able to fulfill the contractual payment requirements of the loan and lease agreements. Such loans and leases are subject to increased monitoring. Consideration is given to placing the loan or lease on non-accrual status, assessing the need for additional ALLL, and partial or full charge off the principal balance. The Company maintains the ALLL at a level that is considered adequate to cover the estimated incurred losses in the loan and lease portfolio.

The Company also maintains a separate reserve for unfunded loan commitments at a level that is considered adequate to cover the estimated incurred loss. The estimated funding of the loan commitments and credit risk factors are determined based on outstanding loans that share similar credit risk exposure are used to determine the adequacy of the reserve. At March 31, 2019 and December 31, 2018, the reserve for unfunded loan commitments was $4.2 million and $4.6 million, respectively, which are included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition.

The credit risk monitoring system is designed to identify impaired and potential problem loans, and to perform periodic evaluation of impairment and the adequacy of the allowance for credit losses in a timely manner. In addition, the Board of Directors of the Bank has adopted a credit policy that includes a credit review and control system that it believes should be effective in ensuring that the Company maintains an adequate allowance for loan and lease losses. The Board of Directors also provides oversight and guidance for management’s allowance evaluation process.

The following table presents a summary of activity in the ALLL for the periods indicated:



	Three Months Ended March 31,
($ in thousands)	2019			2018
Balance at beginning of period	$	62,192		$	49,333
Loans and leases charged off	(1,063		)	(14,639		)
Recoveries of loans and leases previously charged off	244			570
Provision for loan and lease losses	2,512			19,499
Balance at end of period	$	63,885		$	54,763

During the three months ended March 31, 2018, the Company recorded a charge-off of $13.9 million, which reflected the outstanding balance under a $15.0 million line of credit that was originated during the three months ended March 31, 2018. Subsequent to the granting of the line of credit, representations from the borrower in applying for the line of credit were determined by the Bank to be false, and third party bank account statements provided by the borrower to secure the line of credit were found to be fraudulent. The line of credit was granted after the borrower appeared to have satisfied a pre-condition that the line of credit be fully cash collateralized and secured by a bank account at a third party financial institution pledged to the Bank. As part of the Bank’s credit review and portfolio management process, the line of credit and disbursements were reviewed subsequent to closing and compliance with the borrower’s covenants was monitored. As part of this process, on March 9, 2018, the Bank received information that caused it to believe the existence of the pledged bank account had been misrepresented by the borrower and that the account had previously been closed. The Bank filed an action in federal court pursuing the borrower and other parties and is also considering other available sources of collection and other potential means of mitigating the loss; however, no assurance can be given that it will be successful in this regard. Upon extensive review of the underwriting process for this loan, the Bank determined that this loan was the result of an isolated event of external fraud.

The following table presents the activity and balance in the ALLL and the recorded investment, excluding accrued interest, in loans and leases based on the impairment methodology as of or for the three months ended March 31, 2019:



($ in thousands)	Commercial and Industrial			Commercial Real Estate		Multifamily		SBA			Construction			Lease Financing			Single Family Residential Mortgage			Other Consumer			Total
ALLL:
Balance at December 31, 2018	$	18,191		$	6,674	$	17,970	$	1,827		$	3,461		$	—		$	13,128		$	941		$	62,192
Charge-offs	(93		)	—		—		(356		)	—			—			(526		)	(88		)	(1,063		)
Recoveries	33			—		—		41			—			3			150			17			244
Provision (reversal)	762			164		928		1,545			(8		)	(3		)	(610		)	(266		)	2,512
Balance at March 31, 2019	$	18,893		$	6,838	$	18,898	$	3,057		$	3,453		$	—		$	12,142		$	604		$	63,885
Individually evaluated for impairment	$	48		$	—	$	—	$	1,634		$	—		$	—		$	230		$	33		$	1,945
Collectively evaluated for impairment	18,845			6,838		18,898		1,423			3,453			—			11,912			571			61,940
Total ending ALLL balance	$	18,893		$	6,838	$	18,898	$	3,057		$	3,453		$	—		$	12,142		$	604		$	63,885
Loans:
Individually evaluated for impairment	$	4,861		$	573	$	—	$	3,808		$	2,519		$	—		$	20,362		$	841		$	32,964
Collectively evaluated for impairment	1,902,241			864,948		2,332,527		71,190			209,030			—			2,082,332			61,968			7,524,236
Total ending loan balances	$	1,907,102		$	865,521	$	2,332,527	$	74,998		$	211,549		$	—		$	2,102,694		$	62,809		$	7,557,200



($ in thousands)	Commercial and Industrial			Commercial Real Estate		Multifamily		SBA			Construction			Lease Financing			Single Family Residential Mortgage			Other Consumer			Total
ALLL:
Balance at December 31, 2017	$	14,280		$	4,971	$	13,265	$	1,701		$	3,318		$	—		$	10,996		$	802		$	49,333
Charge-offs	(71		)	—		—		(381		)	—			—			(115		)	(14,072		)	(14,639		)
Recoveries	61			—		—		65			—			4			436			4			570
Provision (reversal)	3,301			446		954		192			(98		)	(4		)	652			14,056			19,499
Balance at March 31, 2018	$	17,571		$	5,417	$	14,219	$	1,577		$	3,220		$	—		$	11,969		$	790		$	54,763
Individually evaluated for impairment	$	1,115		$	—	$	—	$	124		$	—		$	—		$	420		$	21		$	1,680
Collectively evaluated for impairment	16,456			5,417		14,219		1,453			3,220			—			11,549			769			53,083
Total ending ALLL balance	$	17,571		$	5,417	$	14,219	$	1,577		$	3,220		$	—		$	11,969		$	790		$	54,763
Loans:
Individually evaluated for impairment	$	5,265		$	—	$	—	$	359		$	—		$	—		$	19,667		$	766		$	26,057
Collectively evaluated for impairment	1,633,294			773,193		1,944,082		78,663			200,766			3			2,181,691			92,758			6,904,450
Total ending loan balances	$	1,638,559		$	773,193	$	1,944,082	$	79,022		$	200,766		$	3		$	2,201,358		$	93,524		$	6,930,507

The following table presents loans and leases individually evaluated for impairment by class of loans and leases as of the dates indicated. The recorded investment, excluding accrued interest, presents customer balances net of any partial charge-offs recognized on the loans and leases and net of any deferred fees and costs and any purchase premium or discount.



	March 31, 2019						December 31, 2018
($ in thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan and Lease Losses		Unpaid Principal Balance		Recorded Investment		Allowance for Loan and Lease Losses
With no related ALLL recorded:
Commercial:
Commercial and industrial	$	4,849	$	4,813	$	—	$	5,491	$	5,455	$	—
Commercial real estate	572		573		—		—		—		—
SBA	1,475		1,409		—		1,668		1,588		—
Construction	2,519		2,519		—		—		—		—
Consumer:
Single family residential mortgage	8,788		8,802		—		12,115		12,161		—
Other consumer	469		469		—		469		469		—
With an ALLL recorded:
Commercial:
Commercial and industrial	48		48		48		—		—		—
SBA	2,499		2,399		1,634		823		788		562
Consumer:
Single family residential mortgage	11,496		11,560		230		5,993		6,032		161
Other consumer	390		372		33		468		452		106
Total	$	33,105	$	32,964	$	1,945	$	27,027	$	26,945	$	829

The following table presents information on impaired loans and leases, disaggregated by class, for the periods indicated:




	Three Months Ended
($ in thousands)	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
March 31, 2019
Commercial:
Commercial and industrial	$	5,048	$	—	$	—
Commercial real estate	577		—		—
SBA	3,845		4		4
Construction	2,519		—		—
Consumer:
Single family residential mortgage	19,323		58		49
Other consumer	844		3		3
Total	$	32,156	$	65	$	56
March 31, 2018
Commercial:
Commercial and industrial	$	5,333	$	3	$	3
SBA	373		—		—
Consumer:
Single family residential mortgage	19,715		57		49
Other consumer	749		3		2
Total	$	26,170	$	63	$	54

Past Due Loans and Leases

The following table presents the aging of the recorded investment in past due loans and leases, excluding accrued interest receivable (which is not considered to be material), by class of loans and leases as of dates indicated:



($ in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 89 Days Past due		Total Past Due		Current		Total
March 31, 2019
NTM loans:
Single family residential mortgage	$	13,162	$	—	$	292	$	13,454	$	774,600	$	788,054
Other consumer	—		—		—		—		2,351		2,351
Total NTM loans	13,162		—		292		13,454		776,951		790,405
Traditional loans and leases:
Commercial:
Commercial and industrial	1,702		1,759		3,386		6,847		1,900,255		1,907,102
Commercial real estate	—		7,286		573		7,859		857,662		865,521
Multifamily	—		—		—		—		2,332,527		2,332,527
SBA	766		1,052		798		2,616		72,382		74,998
Construction	667		—		2,519		3,186		208,363		211,549
Consumer:
Single family residential mortgage	15,687		930		6,683		23,300		1,291,340		1,314,640
Other consumer	1,826		3		372		2,201		58,257		60,458
Total traditional loans and leases	20,648		11,030		14,331		46,009		6,720,786		6,766,795
Total	$	33,810	$	11,030	$	14,623	$	59,463	$	7,497,737	$	7,557,200
December 31, 2018
NTM loans:
Single family residential mortgage	$	7,430	$	617	$	—	$	8,047	$	816,271	$	824,318
Other consumer	—		—		—		—		2,413		2,413
Total NTM loans	7,430		617		—		8,047		818,684		826,731
Traditional loans and leases:
Commercial:
Commercial and industrial	350		1,596		3,340		5,286		1,938,856		1,944,142
Commercial real estate	—		582		—		582		866,431		867,013
Multifamily	356		—		—		356		2,240,890		2,241,246
SBA	551		77		862		1,490		67,251		68,741
Construction	—		939		—		939		203,037		203,976
Consumer:
Single family residential mortgage	7,321		3,160		9,198		19,679		1,461,493		1,481,172
Other consumer	3,132		573		446		4,151		63,701		67,852
Total traditional loans and leases	11,710		6,927		13,846		32,483		6,841,659		6,874,142
Total	$	19,140	$	7,544	$	13,846	$	40,530	$	7,660,343	$	7,700,873

Non-accrual Loans and Leases

The following table presents non-accrual loans and leases as of the dates indicated:



	March 31, 2019						December 31, 2018
($ in thousands)	NTM Loans		Traditional Loans and Leases		Total		NTM Loans		Traditional Loans and Leases		Total
Non-accrual loans and leases
Commercial:
Commercial and industrial	$	—	$	4,859	$	4,859	$	—	$	5,455	$	5,455
Commercial real estate	—		573		573		—		—		—
SBA	—		3,971		3,971		—		2,574		2,574
Construction	—		2,519		2,519		—		—		—
Consumer:
Single family residential mortgage	292		14,978		15,270		—		12,929		12,929
Other consumer	—		547		547		—		627		627
Total non-accrual loans and leases	$	292	$	27,447	$	27,739	$	—	$	21,585	$	21,585

At March 31, 2019 and December 31, 2018, $731 thousand and $470 thousand of loans were past due 90 days or more and still accruing.

Loans in Process of Foreclosure

At March 31, 2019 and December 31, 2018, consumer mortgage loans of $4.0 million and $5.1 million, respectively, were secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

Troubled Debt Restructurings

A modification of a loan constitutes a troubled debt restructuring (TDR) when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of the loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Troubled debt restructured loans and leases consisted of the following as of the dates indicated:



	March 31, 2019						December 31, 2018
($ in thousands)	NTM Loans		Traditional Loans		Total		NTM Loans		Traditional Loans		Total
Commercial:
Commercial and industrial	$	—	$	1,943	$	1,943	$	—	$	2,276	$	2,276
SBA	—		187		187		—		187		187
Consumer:
Single family residential mortgage	2,660		2,433		5,093		2,668		2,596		5,264
Other consumer	294		—		294		294		—		294
Total	$	2,954	$	4,563	$	7,517	$	2,962	$	5,059	$	8,021

The Company did not have any commitments to lend to customers with outstanding loans that were classified as TDRs as of March 31, 2019 or December 31, 2018. Accruing TDRs were $5.6 million and non-accrual TDRs were $1.9 million at March 31, 2019 compared to accruing TDRs of $5.7 million and non-accrual TDRs of $2.3 million at December 31, 2018.

The following table summarizes the pre-modification and post-modification balances of the new TDRs for the periods indicated:



	Three Months Ended
($ in thousands)	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
March 31, 2019
Total	—	$	—	$	—
March 31, 2018
Commercial:
Commercial and industrial	2	$	171	$	163
Total	2	$	171	$	163

The Company considers a TDR to be in payment default once it becomes 30 days or more past due following a modification. During the three months ended March 31, 2019 and 2018, there were no loans and leases that were modified as TDRs during the past 12 months that had subsequent payment defaults during the periods.

The following table summarizes TDRs by modification type for the periods indicated:



	Three Months Ended
	Modification Type
	Change in Principal Payments and Interest Rates			Change in Principal Payments			Total
($ in thousands)	Count	Amount		Count	Amount		Count	Amount
March 31, 2019
Commercial:
Commercial and industrial	—	$	—	—	$	—	—	$	—
Total	—	$	—	—	$	—	—	$	—
March 31, 2018
Commercial:
Commercial and industrial	—	$	—	2	$	163	2	$	163
Total	—	$	—	2	$	163	2	$	163

Credit Quality Indicators

The Company categorizes loans and leases 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. The Company performs historical loss analysis that is combined with a comprehensive loan or lease to value analysis to analyze the associated risks in the current loan and lease portfolio. The Company analyzes loans and leases individually by classifying the loans and leases as to credit risk. This analysis includes all loans and leases delinquent over 60 days and non-homogeneous loans and leases such as commercial and commercial real estate loans and leases. The Company uses the following definitions for risk ratings:

Pass: Loans and leases classified as pass are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weakness as defined under “Special Mention”, “Substandard” or “Doubtful”.

Special Mention: Loans and leases classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or of the Company’s credit position at some future date.

Substandard: Loans and leases classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans and leases classified as doubtful have all the weaknesses inherent in 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 following table presents the risk categories for total loans and leases as of the dates indicated:



($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2019
NTM loans:
Single family residential mortgage	$	772,205	$	13,554	$	2,295	$	—	$	788,054
Other consumer	2,351		—		—		—		2,351
Total NTM loans	774,556		13,554		2,295		—		790,405
Traditional loans and leases:
Commercial:
Commercial and industrial	1,806,891		43,511		56,700		—		1,907,102
Commercial real estate	847,213		13,741		4,567		—		865,521
Multifamily	2,329,615		—		2,912		—		2,332,527
SBA	60,082		4,316		9,798		802		74,998
Construction	201,254		5,105		5,190		—		211,549
Consumer:
Single family residential mortgage	1,289,042		6,554		18,527		517		1,314,640
Other consumer	58,910		980		568		—		60,458
Total traditional loans and leases	6,593,007		74,207		98,262		1,319		6,766,795
Total	$	7,367,563	$	87,761	$	100,557	$	1,319	$	7,557,200

December 31, 2018
NTM loans:
Single family residential mortgage	$	811,056	$	10,966	$	2,296	$	—	$	824,318
Other consumer	2,413		—		—		—		2,413
Total NTM loans	813,469		10,966		2,296		—		826,731
Traditional loans and leases:
Commercial:
Commercial and industrial	1,859,569		41,302		43,271		—		1,944,142
Commercial real estate	851,604		11,376		4,033		—		867,013
Multifamily	2,239,301		—		1,945		—		2,241,246
SBA	53,433		6,114		8,340		854		68,741
Construction	197,851		3,606		2,519		—		203,976
Consumer:
Single family residential mortgage	1,461,721		2,602		16,849		—		1,481,172
Other consumer	66,228		979		645		—		67,852
Total traditional loans and leases	6,729,707		65,979		77,602		854		6,874,142
Total	$	7,543,176	$	76,945	$	79,898	$	854	$	7,700,873

Purchases, Sales, and Transfers

From time to time, the Company purchases and sells loans in the secondary market. Certain loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value and any reductions in value on transfer are reflected as write-downs to allowance for loan losses. The Company had no purchases of loans and leases, excluding loans held-for-sale, for the three months ended March 31, 2019 and 2018. The following table presents loans and leases transferred from (to) loans held-for-sale by portfolio segment for the periods indicated:



	Three Months Ended March 31,
	2019					2018
($ in thousands)	Transfers from Held-For-Sale		Transfers (to) Held-For-Sale			Transfers from Held-For-Sale		Transfers (to) Held-For-Sale
Consumer:
Single family residential mortgage	$	—	$	(243,364	)	$	—	$	(2,184	)
Other consumer	—		—			—		(4,362		)
Total	$	—	$	(243,364	)	$	—	$	(6,546	)

During the quarter, the Company sold $243.4 million in single family residential loans, resulting in a gain of $1.6 million.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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