Loans Receivable and Allowance for Loan Losses

Loans receivable at September 30, 2017 and December 31, 2016 are summarized as follows (in thousands):



	September 30, 2017			December 31, 2016
Mortgage loans:
Residential	$	1,157,311		1,211,672
Commercial	2,022,576			1,978,569
Multi-family	1,334,984			1,402,054
Construction	324,692			264,814
Total mortgage loans	4,839,563			4,857,109
Commercial loans	1,708,842			1,630,444
Consumer loans	481,262			516,755
Total gross loans	7,029,667			7,004,308
Purchased credit-impaired ("PCI") loans	991			1,272
Premiums on purchased loans	4,229			4,968
Unearned discounts	(36		)	(39	)
Net deferred fees	(6,799		)	(7,023	)
Total loans	$	7,028,052		7,003,486

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



	September 30, 2017
	30-59 Days		60-89 Days	Non-accrual	Recorded Investment > 90 days accruing	Total Past Due	Current	Total Loans Receivable
Mortgage loans:
Residential	$	5,973	3,525	8,820	—	18,318	1,138,993	1,157,311
Commercial	608		292	8,070	—	8,970	2,013,606	2,022,576
Multi-family	—		—	—	—	—	1,334,984	1,334,984
Construction	—		—	—	—	—	324,692	324,692
Total mortgage loans	6,581		3,817	16,890	—	27,288	4,812,275	4,839,563
Commercial loans	1,870		244	17,523	—	19,637	1,689,205	1,708,842
Consumer loans	2,307		1,080	2,035	—	5,422	475,840	481,262
Total gross loans	$	10,758	5,141	36,448	—	52,347	6,977,320	7,029,667



	December 31, 2016
	30-59 Days		60-89 Days	Non-accrual	Recorded Investment > 90 days accruing	Total Past Due	Current	Total Loans Receivable
Mortgage loans:
Residential	$	5,891	6,563	12,021	—	24,475	1,187,197	1,211,672
Commercial	—		80	7,493	—	7,573	1,970,996	1,978,569
Multi-family	—		—	553	—	553	1,401,501	1,402,054
Construction	—		—	2,517	—	2,517	262,297	264,814
Total mortgage loans	5,891		6,643	22,584	—	35,118	4,821,991	4,857,109
Commercial loans	1,656		357	16,787	—	18,800	1,611,644	1,630,444
Consumer loans	2,561		1,199	3,030	—	6,790	509,965	516,755
Total gross loans	$	10,108	8,199	42,401	—	60,708	6,943,600	7,004,308

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The principal amounts of these non-accrual loans were $36.4 million and $42.4 million at September 30, 2017 and December 31, 2016, respectively. Included in non-accrual loans were $9.1 million and $7.3 million of loans which were less than 90 days past due at September 30, 2017 and December 31, 2016, respectively. There were no loans 90 days or greater past due and still accruing interest at September 30, 2017 or December 31, 2016.

The Company defines an impaired loan as a non-homogeneous loan greater than $1.0 million for which it is probable, based on current information, all amounts due under the contractual terms of the loan agreement will not be collected. Impaired loans also include all loans modified as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when a loan modification resulting in a concession is made in an effort to mitigate potential loss arising from a borrower’s financial difficulty. Smaller balance homogeneous loans, including residential mortgages and other consumer loans, are evaluated collectively for impairment and are excluded from the definition of impaired loans, unless modified as TDRs. The Company separately calculates the reserve for loan losses on impaired loans. The Company may recognize impairment of a loan based upon: (1) the present value of expected cash flows discounted at the effective interest rate; (2) if a loan is collateral dependent, the fair value of collateral; or (3) the fair value of the loan. Additionally, if impaired loans have risk characteristics in common, those loans may be aggregated and historical statistics may be used as a means of measuring those impaired loans.

The Company uses third-party appraisals to determine the fair value of the underlying collateral in its analysis of collateral dependent impaired loans. A third-party appraisal is generally ordered as soon as a loan is designated as a collateral dependent impaired loan and is updated annually or more frequently, if required.

A specific allocation of the allowance for loan losses is established for each collateral dependent impaired loan with a carrying balance greater than the collateral’s fair value, less estimated costs to sell. Charge-offs are generally taken for the amount of the specific allocation when operations associated with the respective property cease and it is determined that collection of amounts due will be derived primarily from the disposition of the collateral. At each quarter end, if a loan is designated as a collateral dependent impaired loan and the third-party appraisal has not yet been received, an evaluation of all available collateral is made using the best information available at the time, including rent rolls, borrower financial statements and tax returns, prior appraisals, management’s knowledge of the market and collateral, and internally prepared collateral valuations based upon market assumptions regarding vacancy and capitalization rates, each as and where applicable. Once the appraisal is received and reviewed, the specific reserves are adjusted to reflect the appraised value. The Company believes there have been no significant time lapses in the recognition of changes in collateral values as a result of this process.

At September 30, 2017, there were 145 impaired loans totaling $50.2 million. Included in this total were 126 TDRs related to 122 borrowers totaling $31.7 million that were performing in accordance with their restructured terms and which continued to accrue interest at September 30, 2017. At December 31, 2016, there were 141 impaired loans totaling $52.0 million. Included in this total were 114 TDRs to 110 borrowers totaling $29.9 million that were performing in accordance with their restructured terms and which continued to accrue interest at December 31, 2016.

The following table summarizes loans receivable by portfolio segment and impairment method, excluding PCI loans (in thousands):



	September 30, 2017
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	28,578	19,393	2,210	50,181
Collectively evaluated for impairment	4,810,985		1,689,449	479,052	6,979,486
Total gross loans	$	4,839,563	1,708,842	481,262	7,029,667



	December 31, 2016
	Mortgage loans		Commercial loans	Consumer loans	Total Portfolio Segments
Individually evaluated for impairment	$	29,551	20,255	2,213	52,019
Collectively evaluated for impairment	4,827,558		1,610,189	514,542	6,952,289
Total gross loans	$	4,857,109	1,630,444	516,755	7,004,308

The allowance for loan losses is summarized by portfolio segment and impairment classification as follows (in thousands):



	September 30, 2017
	Mortgage loans		Commercial loans	Consumer loans	Total
Individually evaluated for impairment	$	1,773	1,028	71	2,872
Collectively evaluated for impairment	24,724		30,423	2,257	57,404
Total gross loans	$	26,497	31,451	2,328	60,276



	December 31, 2016
	Mortgage loans		Commercial loans	Consumer loans	Total
Individually evaluated for impairment	$	1,986	268	80	2,334
Collectively evaluated for impairment	27,640		28,875	3,034	59,549
Total gross loans	$	29,626	29,143	3,114	61,883

Loan modifications to borrowers experiencing financial difficulties that are considered TDRs primarily involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. These modifications generally do not result in the forgiveness of principal or accrued interest. In addition, the Company attempts to obtain additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

The following tables present the number of loans modified as TDRs during the three and nine months ended September 30, 2017 and 2016, along with their balances immediately prior to the modification date and post-modification as of September 30, 2017 and 2016. There were no loans modified as TDRs during the three and nine months ended September 30, 2016.



	For the three months ended
	September 30, 2017					September 30, 2016
Troubled Debt Restructurings	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	($ in thousands)
Mortgage loans:
Residential	2	$	632	$	470	—	$	—	$	—
Total mortgage loans	2	632		470		—	—		—
Total restructured loans	2	$	632	$	470	—	$	—	$	—



	For the nine months ended
	September 30, 2017					September 30, 2016
Troubled Debt Restructurings	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	($ in thousands)
Mortgage loans:
Residential	7	$	3,436	$	3,202	—	$	—	$	—
Total mortgage loans	7	3,436		3,202		—	—		—
Commercial loans	1	1,300		1,210		—	—		—
Consumer loans	1	70		68		—	—		—
Total restructured loans	9	$	4,806	$	4,480	—	$	—	$	—

All TDRs are impaired loans, which are individually evaluated for impairment, as previously discussed. During the three and nine months ended September 30, 2017, $3.2 million and $4.4 million of charge-offs were recorded on collateral dependent impaired loans. There were no charge-offs recorded on collateral dependent impaired loans for the same periods last year. For the three and nine months ended September 30, 2017, the allowance for loan losses associated with the TDRs presented in the preceding tables totaled $0 and $120,000, respectively, and were included in the allowance for loan losses for loans individually evaluated for impairment.

For the three and nine months ended September 30, 2017, the TDRs presented in the preceding tables had a weighted average modified interest rate of approximately 4.36% and 4.02%, respectively, compared to a weighted average rate of 4.33% and 3.93% prior to modification, respectively.

There were no payment defaults (90 days or more past due) for loans modified as TDRs within the 12 month periods ending September 30, 2017 and 2016. TDRs that subsequently default are considered collateral dependent impaired loans and are evaluated for impairment based on the estimated fair value of the underlying collateral less expected selling costs.

PCI loans are loans acquired at a discount primarily due to deteriorated credit quality. As part of the May 30, 2014 acquisition of Team Capital, $5.2 million of the loans acquired were determined to be PCI loans. At the date of acquisition, PCI loans were accounted for at fair value, based upon the then present value of expected future cash flows, with no related allowance for loan losses. PCI loans totaled $1.0 million at September 30, 2017 and $1.3 million at December 31, 2016.

The following table summarizes the changes in the accretable yield for PCI loans during the three and nine months ended September 30, 2017 and 2016 (in thousands):



	Three months ended September 30,					Nine months ended September 30,
	2017			2016		2017		2016
Beginning balance	$	158		328		200		676
Accretion	(154		)	(225	)	(299	)	(1,065	)
Reclassification from non-accretable discount	99			209		202		701
Ending balance	$	103		312		103		312

The activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):



Three months ended September 30,	Mortgage loans			Commercial loans		Consumer loans		Total Portfolio Segments		Unallocated	Total
2017
Balance at beginning of period	$	28,826		31,085		2,951		62,862		—	62,862
Provision charged (credited) to operations	(2,301		)	3,446		(645	)	500		—	500
Recoveries of loans previously charged-off	4			140		291		435		—	435
Loans charged-off	(32		)	(3,220	)	(269	)	(3,521	)	—	(3,521	)
Balance at end of period	$	26,497		31,451		2,328		60,276		—	60,276

2016
Balance at beginning of period	$	31,634		26,299		3,000		60,933		—	60,933
Provision charged (credited) to operations	(1,599		)	2,378		221		1,000		—	1,000
Recoveries of loans previously charged-off	2			68		160		230		—	230
Loans charged-off	(383		)	(506	)	(186	)	(1,075	)	—	(1,075	)
Balance at end of period	$	29,654		28,239		3,195		61,088		—	61,088



Nine months ended September 30,	Mortgage loans			Commercial loans		Consumer loans		Total Portfolio Segments		Unallocated	Total
2017
Balance at beginning of period	$	29,626		29,143		3,114		61,883		—	61,883
Provision charged (credited) to operations	(2,724		)	6,840		(416	)	3,700		—	3,700
Recoveries of loans previously charged-off	65			671		692		1,428		—	1,428
Loans charged-off	(470		)	(5,203	)	(1,062	)	(6,735	)	—	(6,735	)
Balance at end of period	$	26,497		31,451		2,328		60,276		—	60,276

2016
Balance at beginning of period	$	32,094		25,829		3,501		61,424		—	61,424
Provision charged (credited) to operations	(2,294		)	6,647		(153	)	4,200		—	4,200
Recoveries of loans previously charged-off	575			351		697		1,623		—	1,623
Loans charged-off	(721		)	(4,588	)	(850	)	(6,159	)	—	(6,159	)
Balance at end of period	$	29,654		28,239		3,195		61,088		—	61,088

The following table presents loans individually evaluated for impairment by class and loan category, excluding PCI loans (in thousands):



	September 30, 2017						December 31, 2016
	Unpaid Principal Balance		Recorded Investment	Related Allowance	Average Recorded Investment	Interest Income Recognized	Unpaid Principal Balance	Recorded Investment	Related Allowance	Average Recorded Investment	Interest Income Recognized
Loans with no related allowance
Mortgage loans:
Residential	$	13,035	10,277	—	10,391	340	10,691	7,881	—	8,027	484
Commercial	4,600		4,472	—	4,496	—	1,556	1,556	—	1,586	40
Construction	—		—	—	—	—	2,553	2,517	—	2,514	—
Total	17,635		14,749	—	14,887	340	14,800	11,954	—	12,127	524
Commercial loans	17,505		13,884	—	13,954	280	21,830	18,874	—	13,818	259
Consumer loans	1,606		1,067	—	1,186	51	1,493	981	—	1,026	59
Total impaired loans	$	36,746	29,700	—	30,027	671	38,123	31,809	—	26,971	842

Loans with an allowance recorded
Mortgage loans:
Residential	$	13,803	12,759	1,633	12,873	374	14,169	13,520	1,716	13,705	519
Commercial	1,071		1,070	140	1,083	40	4,138	4,077	270	4,111	55
Construction	—		—	—	—	—	—	—	—	—	—
Total	14,874		13,829	1,773	13,956	414	18,307	17,597	1,986	17,816	574
Commercial loans	6,158		5,509	1,028	6,045	52	1,381	1,381	268	5,956	4
Consumer loans	1,154		1,143	71	1,170	47	1,242	1,232	80	1,259	66
Total impaired loans	$	22,186	20,481	2,872	21,171	513	20,930	20,210	2,334	25,031	644

Total impaired loans
Mortgage loans:
Residential	$	26,838	23,036	1,633	23,264	714	24,860	21,401	1,716	21,732	1,003
Commercial	5,671		5,542	140	5,579	40	5,694	5,633	270	5,697	95
Construction	—		—	—	—	—	2,553	2,517	—	2,514	—
Total	32,509		28,578	1,773	28,843	754	33,107	29,551	1,986	29,943	1,098
Commercial loans	23,663		19,393	1,028	19,999	332	23,211	20,255	268	19,774	263
Consumer loans	2,760		2,210	71	2,356	98	2,735	2,213	80	2,285	125
Total impaired loans	$	58,932	50,181	2,872	51,198	1,184	59,053	52,019	2,334	52,002	1,486

Specific allocations of the allowance for loan losses attributable to impaired loans totaled $2.9 million at September 30, 2017 and $2.3 million at December 31, 2016. At September 30, 2017 and December 31, 2016, impaired loans for which there was no related allowance for loan losses totaled $29.7 million and $31.8 million, respectively. The average balance of impaired loans for the nine months ended September 30, 2017 was $51.2 million.

The Company utilizes an internal nine-point risk rating system to summarize its loan portfolio into categories with similar risk characteristics. Loans deemed to be “acceptable quality” are rated 1 through 4, with a rating of 1 established for loans with minimal risk. Loans that are deemed to be of “questionable quality” are rated 5 (watch) or 6 (special mention). Loans with adverse classifications (substandard, doubtful or loss) are rated 7, 8 or 9, respectively. Commercial mortgage, commercial, multi-family and construction loans are rated individually, and each lending officer is responsible for risk rating loans in their portfolio. These risk ratings are then reviewed by the department manager and/or the Chief Lending Officer and by the Credit Department. The risk ratings are also confirmed through periodic loan review examinations, which are currently performed by an independent third-party. Reports by the independent third-party are presented directly to the Audit Committee of the Board of Directors.

Loans receivable by credit quality risk rating indicator, excluding PCI loans, are as follows (in thousands):



	At September 30, 2017
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	3,525	19,437	16	—	22,978	26,156	1,080	50,214
Substandard	8,820		25,633	—	—	34,453	30,361	2,034	66,848
Doubtful	—		—	—	—	—	771	—	771
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	12,345		45,070	16	—	57,431	57,288	3,114	117,833
Pass/Watch	1,144,966		1,977,506	1,334,968	324,692	4,782,132	1,651,554	478,148	6,911,834
Total	$	1,157,311	2,022,576	1,334,984	324,692	4,839,563	1,708,842	481,262	7,029,667


	At December 31, 2016
	Residential		Commercial mortgage	Multi- family	Construction	Total mortgages	Commercial	Consumer	Total loans
Special mention	$	6,563	25,329	563	—	32,455	14,840	1,242	48,537
Substandard	12,021		23,011	553	2,517	38,102	47,255	2,940	88,297
Doubtful	—		—	—	—	—	—	—	—
Loss	—		—	—	—	—	—	—	—
Total classified and criticized	18,584		48,340	1,116	2,517	70,557	62,095	4,182	136,834
Pass/Watch	1,193,088		1,930,229	1,400,938	262,297	4,786,552	1,568,349	512,573	6,867,474
Total	$	1,211,672	1,978,569	1,402,054	264,814	4,857,109	1,630,444	516,755	7,004,308