LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The following table presents loans receivable as of March 31, 2018 and December 31, 2017.



	March 31, 2018			December 31, 2017
(amounts in thousands)
Commercial:
Multi-family	$	3,645,374		$	3,502,381
Commercial and industrial (including owner occupied commercial real estate)	1,704,791			1,633,818
Commercial real estate non-owner occupied	1,195,904			1,218,719
Construction	81,101			85,393
Total commercial loans	6,627,170			6,440,311
Consumer:
Residential real estate	225,839			234,090
Manufactured housing	87,687			90,227
Other	3,570			3,547
Total consumer loans	317,096			327,864
Total loans receivable	6,944,266			6,768,175
Deferred (fees)/costs and unamortized (discounts)/premiums, net	(700		)	83
Allowance for loan losses	(39,499		)	(38,015		)
Loans receivable, net of allowance for loan losses	$	6,904,067		$	6,730,243

The following tables summarize loans receivable by loan type and performance status as of March 31, 2018 and December 31, 2017:



	March 31, 2018
	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	$	—	$	—	$	—	$	—	$	3,643,539	$	1,835	$	3,645,374
Commercial and industrial	129		—		129		14,220		1,187,571		721		1,202,641
Commercial real estate - owner occupied	—		—		—		1,437		490,277		10,436		502,150
Commercial real estate - non-owner occupied	—		—		—		242		1,190,591		5,071		1,195,904
Construction	—		—		—		—		81,101		—		81,101
Residential real estate	4,490		—		4,490		5,216		210,825		5,308		225,839
Manufactured housing (5)	3,444		2,746		6,190		1,979		77,042		2,476		87,687
Other consumer	75		—		75		97		3,148		250		3,570
Total	$	8,138	$	2,746	$	10,884	$	23,191	$	6,884,094	$	26,097	$	6,944,266
	December 31, 2017
	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	$	4,900	$	—	$	4,900	$	—	$	3,495,600	$	1,881	$	3,502,381
Commercial and industrial	103		—		103		17,392		1,130,831		764		1,149,090
Commercial real estate - owner occupied	202		—		202		1,453		472,501		10,572		484,728
Commercial real estate - non-owner occupied	93		—		93		160		1,213,216		5,250		1,218,719
Construction	—		—		—		—		85,393		—		85,393
Residential real estate	7,628		—		7,628		5,420		215,361		5,681		234,090
Manufactured housing (5)	4,028		2,743		6,771		1,959		78,946		2,551		90,227
Other consumer	116		—		116		31		3,184		216		3,547
Total	$	17,070	$	2,743	$	19,813	$	26,415	$	6,695,032	$	26,915	$	6,768,175


(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 supported by 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 March 31, 2018 and December 31, 2017, the Bank had $0.3 million, respectively, of residential real estate held in other real estate owned. As of March 31, 2018 and December 31, 2017, the Bank had initiated foreclosure proceedings on $1.2 million and $1.6 million, respectively, in loans secured by residential real estate.

Allowance for loan losses

The changes in the allowance for loan losses for the three months ended March 31, 2018 and 2017, and the loans and allowance for loan losses by loan class based on impairment-evaluation method as of March 31, 2018 and December 31, 2017 are presented in the tables below.



Three Months Ended March 31, 2018	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, December 31, 2017	$	12,168	$	10,918		$	3,232		$	7,437		$	979		$	2,929		$	180		$	172		$	38,015
Charge-offs	—		(50		)	(18		)	—			—			(365		)	—			(256		)	(689		)
Recoveries	—		35			—			—			11			7			—			3			56
Provision for loan losses	377		834			311			(204		)	(69		)	608			(4		)	264			2,117
Ending Balance, March 31, 2018	$	12,545	$	11,737		$	3,525		$	7,233		$	921		$	3,179		$	176		$	183		$	39,499

As of March 31, 2018
Loans:
Individually evaluated for impairment	$	—	$	14,288		$	1,483		$	242		$	—		$	8,242		$	10,108		$	97		$	34,460
Collectively evaluated for impairment	3,643,539		1,187,632			490,231			1,190,591			81,101			212,289			75,103			3,223			6,883,709
Loans acquired with credit deterioration	1,835		721			10,436			5,071			—			5,308			2,476			250			26,097
	$	3,645,374	$	1,202,641		$	502,150		$	1,195,904		$	81,101		$	225,839		$	87,687		$	3,570		$	6,944,266
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	986		$	764		$	—		$	—		$	365		$	4		$	—		$	2,119
Collectively evaluated for impairment	12,545		10,300			2,751			4,512			921			2,274			82			125			33,510
Loans acquired with credit deterioration	—		451			10			2,721			—			540			90			58			3,870
	$	12,545	$	11,737		$	3,525		$	7,233		$	921		$	3,179		$	176		$	183		$	39,499



Three Months Ended March 31, 2017	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, December 31, 2016	$	11,602	$	11,050		$	2,183	$	7,894		$	840		$	3,342		$	286		$	118		$	37,315
Charge-offs	—		(198		)	—		(404		)	—			(221		)	—			(20		)	(843		)
Recoveries	—		215			—		—			81			21			—			44			361
Provision for loan losses	681		1,942			211		357			(36		)	(62		)	(2		)	(41		)	3,050
Ending Balance, March 31, 2017	$	12,283	$	13,009		$	2,394	$	7,847		$	885		$	3,080		$	284		$	101		$	39,883
As of December 31, 2017
Loans:
Individually evaluated for impairment	$	—	$	17,461		$	1,448	$	160		$	—		$	9,247		$	10,089		$	30		$	38,435
Collectively evaluated for impairment	3,500,500		1,130,865			472,708		1,213,309			85,393			219,162			77,587			3,301			6,702,825
Loans acquired with credit deterioration	1,881		764			10,572		5,250			—			5,681			2,551			216			26,915
	$	3,502,381	$	1,149,090		$	484,728	$	1,218,719		$	85,393		$	234,090		$	90,227		$	3,547		$	6,768,175
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	650		$	642	$	—		$	—		$	155		$	4		$	—		$	1,451
Collectively evaluated for impairment	12,168		9,804			2,580		4,630			979			2,177			82			117			32,537
Loans acquired with credit deterioration	—		464			10		2,807			—			597			94			55			4,027
	$	12,168	$	10,918		$	3,232	$	7,437		$	979		$	2,929		$	180		$	172		$	38,015

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 March 31, 2018 and December 31, 2017, funds available for reimbursement, if necessary, were $0.6 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.

Impaired 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 impaired loans that were individually evaluated for impairment as of March 31, 2018 and December 31, 2017 and the average recorded investment and interest income recognized for the three months ended March 31, 2018 and 2017. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.



	March 31, 2018						Three Months Ended March 31, 2018
	Recorded Investment Net of Charge offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no recorded allowance:
Commercial and industrial	$	5,830	$	6,029	$	—	$	7,484	$	—
Commercial real estate owner occupied	614		614		—		710		—
Commercial real estate non-owner occupied	242		353		—		201		—
Other consumer	97		97		—		63		—
Residential real estate	3,617		3,788		—		3,623		—
Manufactured housing	9,886		9,886		—		9,876		131
With an allowance recorded:
Commercial and industrial	8,458		8,642		986		8,390		1
Commercial real estate owner occupied	869		869		764		756		1
Residential real estate	4,625		4,662		365		5,122		25
Manufactured housing	222		222		4		223		—
Total	$	34,460	$	35,162	$	2,119	$	36,448	$	158



	December 31, 2017						Three Months Ended March 31, 2017
	Recorded Investment Net of Charge offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no recorded allowance:
Commercial and industrial	$	9,138	$	9,287	$	—	$	4,248	$	50
Commercial real estate owner occupied	806		806		—		1,435		15
Commercial real estate non-owner occupied	160		272		—		1,794		2
Other consumer	30		30		—		57		—
Residential real estate	3,628		3,801		—		4,502		1
Manufactured housing	9,865		9,865		—		9,833		141
With an allowance recorded:
Commercial and industrial	8,323		8,506		650		8,837		81
Commercial real estate - owner occupied	642		642		642		844		1
Commercial real estate non-owner occupied	—		—		—		138		—
Residential real estate	5,619		5,656		155		2,597		39
Manufactured housing	224		224		4		102		3
Total	$	38,435	$	39,089	$	1,451	$	34,387	$	333

Troubled Debt Restructurings

At March 31, 2018 and December 31, 2017, there were $19.0 million and $20.4 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 performance requirement of six months, 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 the 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 table presents total TDRs based on loan type and accrual status at March 31, 2018 and December 31, 2017. Nonaccrual TDRs are included in the reported amount of total non-accrual loans.



	March 31, 2018						December 31, 2017
	Accruing TDRs		Nonaccrual TDRs		Total		Accruing TDRs		Nonaccrual TDRs		Total
(amounts in thousands)
Commercial and industrial	$	68	$	5,519	$	5,587	$	63	$	5,939	$	6,002
Commercial real estate owner occupied	45		—		45		—		—		—
Manufactured housing	8,130		1,787		9,917		8,130		1,766		9,896
Residential real estate	3,026		463		3,489		3,828		703		4,531
Total TDRs	$	11,269	$	7,769	$	19,038	$	12,021	$	8,408	$	20,429

The following table presents loans modified in a troubled debt restructuring by type of concession for the three months ended March 31, 2018 and 2017. There were no modifications that involved forgiveness of debt.



	Three Months Ended March 31, 2018			Three Months Ended March 31, 2017
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Extensions of maturity	—	$	—	1	$	348
Interest-rate reductions	9	322		20	855
Total	9	$	322	21	$	1,203

The following table provides, by loan type, the number of loans modified in troubled debt restructurings, and the related recorded investment, during the three months ended March 31, 2018 and 2017.



	Three Months Ended March 31, 2018			Three Months Ended March 31, 2017
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Commercial and industrial	—	$	—	1	$	348
Manufactured housing	9	322		20	855
Total loans	9	$	322	21	$	1,203

As of March 31, 2018, there were no additional commitments to lend additional funds to debtors whose loans have been modified in TDRs. As of December 31, 2017, except for one commercial and industrial loan with an outstanding commitment of $2.1 million, there were no other commitments to lend additional funds to debtors whose loans have been modified in TDRs.

As of March 31, 2018, one manufactured housing loan totaling $29 thousand that was modified in a TDR within the past twelve months, defaulted on payments. As of March 31, 2017, five manufactured housing loans totaling $0.2 million, that were modified in TDRs within the past twelve months, 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 was no allowance recorded as a result of TDR modifications during the three months ended March 31, 2018. For the three months ended March 31, 2017, there was one allowance recorded resulting from TDR modifications, totaling $1 thousand for one manufactured housing loan.

Purchased Credit Impaired Loans

The changes in accretable yield related to purchased-credit-impaired loans for the three months ended March 31, 2018 and 2017 were as follows:



	Three Months Ended March 31,
	2018			2017
(amounts in thousands)
Accretable yield balance as of December 31,	$	7,825		$	10,202
Accretion to interest income	(338		)	(493		)
Reclassification from nonaccretable difference and disposals, net	176			(333		)
Accretable yield balance as of March 31,	$	7,663		$	9,376

Credit Quality Indicators

Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction 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. Residential real estate loans, manufactured housing and other consumer loans are evaluated based on the payment activity of the loan.

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 loan 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 7 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 rated 8 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 residential real estate, 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 March 31, 2018 and December 31, 2017.



	March 31, 2018
	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	$	3,608,179	$	1,161,401	$	485,423	$	1,178,454	$	81,101	$	—	$	—	$	—	$	6,514,558
Special Mention	29,634		12,751		8,208		16,356		—		—		—		—		66,949
Substandard	7,561		28,489		8,519		1,094		—		—		—		—		45,663
Performing (1)	—		—		—		—		—		216,133		79,518		3,398		299,049
Non-performing (2)	—		—		—		—		—		9,706		8,169		172		18,047
Total	$	3,645,374	$	1,202,641	$	502,150	$	1,195,904	$	81,101	$	225,839	$	87,687	$	3,570	$	6,944,266



	December 31, 2017
	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	$	3,438,554	$	1,118,889	$	471,826	$	1,185,933	$	85,393			$	—	$	—	$	6,300,595
Special Mention	53,873		7,652		5,987		31,767		—		—		—		—		99,279
Substandard	9,954		22,549		6,915		1,019		—				—		—		40,437
Performing (1)	—		—		—		—		—		221,042		81,497		3,400		305,939
Non-performing (2)	—		—		—		—		—		13,048		8,730		147		21,925
Total	$	3,502,381	$	1,149,090	$	484,728	$	1,218,719	$	85,393	$	234,090	$	90,227	$	3,547	$	6,768,175

(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.

Loan Purchases and Sales

Customers did not purchase any loans during first quarter 2018. During first quarter 2018, Customers sold $15.0 million of Small Business Administration (SBA) loans resulting in a gain on sale of $1.4 million. In first quarter 2017, Customers purchased $174.2 million of thirty-year fixed-rate residential mortgage loans from Florida-based Everbank. The purchase price was 98.5% of loans outstanding. In first quarter 2017, Customers sold $94.9 million of multi-family loans for $95.4 million resulting in a gain on sale of $0.5 million and $8.7 million of SBA loans resulting in a gain on sale of $0.8 million.

None of these purchases and sales during the three months ended March 31, 2018 and 2017 materially affected the credit profile of Customers’ related loan portfolio.

Loans Pledged as Collateral

Customers has pledged eligible real estate loans as collateral for potential borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB") in the amount of $5.5 billion at March 31, 2018 and December 31, 2017, respectively.