LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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



	December 31,
	2018			2017
(amounts in thousands)
Loans receivable, mortgage warehouse, at fair value	$	1,405,420		$	1,793,408
Loans receivable:
Commercial:
Multi-family	3,285,297			3,502,381
Commercial and industrial (including owner occupied commercial real estate)	1,951,277			1,633,818
Commercial real estate non-owner occupied	1,125,106			1,218,719
Construction	56,491			85,393
Total commercial loans receivable	6,418,171			6,440,311
Consumer:
Residential real estate	566,561			234,090
Manufactured housing	79,731			90,227
Other	74,035			3,547
Total consumer loans receivable	720,327			327,864
Loans receivable	7,138,498			6,768,175
Deferred (fees) costs and unamortized (discounts) premiums, net	(424		)	83
Allowance for loan losses	(39,972		)	(38,015		)
Total loans receivable, net of allowance for loan losses	$	8,503,522		$	8,523,651

Customers' total loans receivable portfolio includes loans receivable which are reported at fair value based on an election made to account for these loans at fair value and loans receivable which are predominately reported at their outstanding unpaid principal balance, net of charge-offs and deferred costs and fees and unamortized premiums and discounts and are evaluated for impairment.

Loans receivable, mortgage warehouse, at fair value:

Mortgage warehouse loans consist of commercial loans to mortgage companies. These mortgage warehouse lending transactions are subject to master repurchase agreements. As a result of the contractual provisions, for accounting purposes control of the underlying mortgage loan has not transferred and the rewards and risks of the mortgage loans are not assumed by Customers. The mortgage warehouse loans receivable are designated as loans held for investment and reported at fair value based on an election made to account for the loans at fair value. Pursuant to the agreements, Customers funds the pipelines for these mortgage lenders by sending payments directly to the closing agents for funded mortgage loans and receives proceeds directly from third party investors when the underlying mortgage loans are sold into the secondary market. The fair value of the mortgage warehouse loans is estimated as the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The interest rates on these loans are variable, and the lending transactions are short-term, with an average life of 23 days from purchase to sale. The primary goal of these lending transactions is to provide liquidity to mortgage companies.

At December 31, 2018 and 2017, all of Customers' commercial mortgage warehouse loans were current in terms of payment. As these loans are reported at their fair value, they do not have an allowance for loan loss and are therefore excluded from allowance for loan losses related disclosures.

Loans receivable:

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



	December 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	$	—	$	—	$	—	$	1,155	$	3,282,452	$	1,690	$	3,285,297
Commercial and industrial	1,914		—		1,914		17,764		1,353,586		536		1,373,800
Commercial real estate owner occupied	193		—		193		1,037		567,809		8,438		577,477
Commercial real estate non-owner occupied	1,190		—		1,190		129		1,119,443		4,344		1,125,106
Construction	—		—		—		—		56,491		—		56,491
Residential real estate	5,940		—		5,940		5,605		550,679		4,337		566,561
Manufactured housing ⁽⁵⁾	3,926		2,188		6,114		1,693		69,916		2,008		79,731
Other consumer	200		—		200		111		73,503		221		74,035
Total	$	13,363	$	2,188	$	15,551	$	27,494	$	7,073,879	$	21,574	$	7,138,498



	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. Due to 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 December 31, 2018 and 2017, the Bank had $0.2 million and $0.3 million, respectively, of residential real estate held in OREO. As of December 31, 2018 and 2017, the Bank had initiated foreclosure proceedings on $2.1 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 years ended December 31, 2018 and 2017, and the loans and allowance for loan losses by loan type based on impairment-evaluation method are presented in the tables below.



Twelve months ended December 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	—			(1,722		)	(747		)	—			—			(466		)	—			(1,822		)	(4,757		)
Recoveries	—			403			326			5			241			76			—			21			1,072
Provision for loan losses	(706		)	2,546			509			(1,349		)	(596		)	1,115			(35		)	4,158			5,642
Ending Balance, December 31, 2018	$	11,462		$	12,145		$	3,320		$	6,093		$	624		$	3,654		$	145		$	2,529		$	39,972

As of December 31, 2018
Loans:
Individually evaluated for impairment	$	1,155		$	17,828		$	1,069		$	129		$	—		$	8,631		$	10,195		$	111		$	39,118
Collectively evaluated for impairment	3,282,452			1,355,436			567,970			1,120,633			56,491			553,593			67,528			73,703			7,077,806
Loans acquired with credit deterioration	1,690			536			8,438			4,344			—			4,337			2,008			221			21,574
Total loans receivable	$	3,285,297		$	1,373,800		$	577,477		$	1,125,106		$	56,491		$	566,561		$	79,731		$	74,035		$	7,138,498
Allowance for loan losses:
Individually evaluated for impairment	$	539		$	261		$	1		$	—		$	—		$	41		$	3		$	—		$	845
Collectively evaluated for impairment	10,923			11,516			3,319			4,161			624			3,227			89			2,390			36,249
Loans acquired with credit deterioration	—			368			—			1,932			—			386			53			139			2,878
Allowance for loan losses	$	11,462		$	12,145		$	3,320		$	6,093		$	624		$	3,654		$	145		$	2,529		$	39,972



Twelve months ended 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)
Ending Balance, December 31, 2016	$	11,602	$	11,050		$	2,183		$	7,894		$	840		$	3,342		$	286		$	118		$	37,315
Charge-offs	—		(4,157		)	(731		)	(486		)	—			(415		)	—			(1,338		)	(7,127		)
Recoveries	—		676			9			—			164			72			—			138			1,059
Provision for loan losses	566		3,349			1,771			29			(25		)	(70		)	(106		)	1,254			6,768
Ending Balance, December 31, 2017	$	12,168	$	10,918		$	3,232		$	7,437		$	979		$	2,929		$	180		$	172		$	38,015

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
Total loans receivable	$	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
Allowance for loan losses	$	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 December 31, 2018 and 2017, funds available for reimbursement, if necessary, were $0.5 million and $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 December 31, 2018 and 2017, and the average recorded investment and interest income recognized for the years ended December 31, 2018, 2017 and 2016. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.



	December 31, 2018						Twelve Months Ended, December 31, 2018
	Recorded Investment Net of Charge Offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no related allowance recorded:
Multi-family	$	—	$	—	$	—	$	537	$	8
Commercial and industrial	13,660		15,263		—		8,831		673
Commercial real estate owner occupied	1,037		1,766		—		776		19
Commercial real estate non-owner occupied	129		241		—		645		48
Residential real estate	4,842		5,128		—		4,129		151
Manufactured housing	10,027		10,027		—		10,015		561
Other consumer	111		111		—		89		1
With an allowance recorded:
Multi-family	1,155		1,155		539		231		37
Commercial and industrial	4,168		4,351		261		6,504		25
Commercial real estate owner occupied	32		32		1		443		3
Residential real estate	3,789		3,789		41		4,566		131
Manufactured housing	168		168		3		214		14
Total	$	39,118	$	42,031	$	845	$	36,980	$	1,671



	December 31, 2017						Twelve Months Ended, December 31, 2017				Twelve Months Ended, December 31, 2016
	Recorded Investment Net of Charge Offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no related allowance recorded:
Multi-family	$	—	$	—	$	—	$	—	$	—	$	964	$	53
Commercial and industrial	9,138		9,287		—		8,865		214		15,424		804
Commercial real estate owner occupied	806		806		—		1,439		70		7,963		426
Commercial real estate non-owner occupied	160		272		—		898		2		5,265		155
Residential real estate	3,628		3,801		—		4,617		24		4,567		120
Manufactured housing	9,865		9,865		—		10,003		558		8,961		465
Other consumer	30		30		—		51		—		47		—
With an allowance recorded:
Multi-family	—		—		—		—		—		232		—
Commercial and industrial	8,323		8,506		650		5,984		230		7,028		436
Commercial real estate owner occupied	642		642		642		882		—		173		—
Commercial real estate non-owner occupied	—		—		—		—		—		380		—
Residential real estate	5,619		5,656		155		3,307		187		395		—
Manufactured housing	224		224		4		131		8		—		—
Other consumer	—		—		—		—		—		29		—
Total	$	38,435	$	39,089	$	1,451	$	36,177	$	1,293	$	51,428	$	2,459

Troubled Debt Restructurings

At December 31, 2018, 2017 and 2016, there were $19.2 million, $20.4 million and $16.4 million, respectively, in loans reported as 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. Modifications of PCI loans that are accounted for within loan pools in accordance with the accounting standards for PCI 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 December 31, 2018, 2017, and 2016. Nonaccrual TDRs are included in the reported amount of total non-accrual loans.



	December 31,
	2018						2017						2016
	Accruing TDRs		Nonaccrual TDRs		Total		Accruing TDRs		Nonaccrual TDRs		Total		Accruing TDRs		Nonaccrual TDRs		Total
(amounts in thousands)
Commercial and industrial	$	64	$	5,273	$	5,337	$	63	$	5,939	$	6,002	$	73	$	146	$	219
Commercial real estate owner occupied	32		—		32		—		—		—		12		—		12
Commercial real estate non-owner occupied	—		—		—		—		—		—		—		1,945		1,945
Residential real estate	3,026		667		3,693		3,828		703		4,531		4,012		707		4,719
Manufactured housing	8,502		1,620		10,122		8,130		1,766		9,896		7,429		2,072		9,501
Other consumer	—		12		12		—		—		—		—		—		—
Total TDRs	$	11,624	$	7,572	$	19,196	$	12,021	$	8,408	$	20,429	$	11,526	$	4,870	$	16,396

The following table presents loans modified in a TDR by type of concession for the years ended December 31, 2018, 2017 and 2016. There were no modifications that involved forgiveness of debt for the years ended December 31, 2018, 2017 and 2016.



	For the Years Ended December 31,
	2018			2017			2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Extensions of maturity	2	$	60	5	$	6,497	3	$	1,995
Interest-rate reductions	39	1,615		35	1,574		61	4,621
Total	41	$	1,675	40	$	8,071	64	$	6,616

The following table provides, by loan type, the number of loans modified in TDRs and the related recorded investment for the years ended December 31, 2018, 2017 and 2016.



	For the Years Ended December 31,
	2018			2017			2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Commercial and industrial	—	$	—	4	$	6,437	1	$	76
Commercial real estate non-owner occupied	—	—		—	—		1	1,844
Residential real estate	2	352		—	—		4	2,410
Manufactured housing	38	1,310		36	1,634		58	2,286
Other consumer	1	13		—	—		—	—
Total loans	41	$	1,675	40	$	8,071	64	$	6,616

As of December 31, 2018 and 2017, except for one commercial and industrial loan with an outstanding commitment of $1.5 million and $2.1 million, respectively, there were no other commitments to lend additional funds to debtors whose loans have been modified in TDRs. There were no commitments to lend additional funds to debtors whose terms were modified in TDRs at December 31, 2016.

As of December 31, 2018, four manufactured housing loans totaling $0.1 million that were modified in TDRs within the past twelve months that defaulted on payments. As of December 31, 2017, five manufactured housing loans totaling $0.2 million that were modified in TDRs within the past twelve months that defaulted on payments. As of December 31, 2016, eight manufactured housing loans totaling $0.2 million, one commercial real estate non-owner occupied loan of $1.8 million and one residential real estate loan of $0.1 million that were modified in TDRs within the past twelve months defaulted on payments.

Loans modified in TDRs 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. For the year ended December 31, 2018, there were no allowances recorded as a result of TDR modifications. For the year ended December 31, 2017, there was one allowance resulting from TDR modifications totaling $1 thousand for one manufactured housing loan. There were no allowances recorded as a result of TDR modifications during 2016.

Purchased-Credit-Impaired Loans

The changes in accretable yield related to PCI loans for the years ended December 31, 2018, 2017 and 2016, were as follows:



	For the Years Ended December 31,
	2018			2017			2016
(amounts in thousands)
Accretable yield balance, beginning of period	$	7,825		$	10,202		$	12,947
Accretion to interest income	(1,455		)	(1,673		)	(3,760		)
Reclassification from nonaccretable difference and disposals, net	(192		)	(704		)	1,015
Accretable yield balance, end of period	$	6,178		$	7,825		$	10,202

Allowance for Loan Losses and the FDIC Loss Sharing Receivable and Clawback Liability

In 2010, Customers acquired certain loans pursuant to FDIC-assisted transactions in which losses from resolution of the nonperforming loans were eligible for partial reimbursement by the FDIC. Subsequent to the purchase date, the expected cash flows on the covered loans were subject to evaluation. Decreases in the present value of expected cash flows on the covered loans were recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time, the FDIC loss sharing receivable balance was increased reflecting an estimated future collection from the FDIC, which was recorded as a reduction to the provision for loan losses. If the expected cash flows on the covered loans increased such that a previously recorded impairment could be reversed, Customers recorded a reduction in the allowance for loan losses (with a related credit to the provision for loan losses) accompanied by a reduction in the FDIC loss sharing receivable balance (with a related charge to the provision for loan losses). Increases in expected cash flows on covered loans and decreases in expected cash flows from the FDIC loss sharing receivable, when there were no previously recorded impairments, were considered together and recognized over the remaining life of the loans as interest income. Decreases in the valuations of OREO covered by the loss sharing agreements were recorded net of the estimated FDIC receivable as an increase to OREO expense (a component of non-interest expense).

As part of the FDIC loss sharing agreements, Customers also assumed a potential liability to be paid within 45 days subsequent to the maturity or termination of the loss sharing agreements that was contingent upon actual losses incurred over the life of the agreements relative to the expected losses and the consideration paid upon acquisition of the failed institutions. Due to cash receipts on the covered assets in excess of the original expectations of the FDIC, Customers anticipated that it would be required to pay an amount to the FDIC at the end of the loss sharing agreements.

Customers presented the FDIC Loss Sharing Receivable, net of the Clawback liability on the consolidated balance sheets. In the event the Clawback liability exceeded the FDIC Loss Sharing Receivable balance, the net liability amount was presented in "Accrued interest payable and other liabilities" on the consolidated balance sheets.

On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered assets through September 30, 2015, adjusted for cash payments to and cash receipts from the FDIC as part of the December 31, 2015 and March 31, 2016 certifications. Consequently, loans and OREO previously reported as covered assets pursuant to the loss sharing agreements were no longer presented as covered assets as of June 30, 2016.

The following table presents changes in the allowance for loans losses and the FDIC loss sharing receivable, including the effect of the estimated Clawback liability for the years ended December 31, 2018, 2017 and 2016.



	Allowance for Loan Losses For the Years Ended December 31,
	2018			2017			2016
(amounts in thousands)
Ending balance as of December 31,	$	38,015		$	37,315		$	35,647
Provision for loan losses (1)	5,642			6,768			3,330
Charge-offs	(4,757		)	(7,127		)	(4,405		)
Recoveries	1,072			1,059			2,743
Ending balance as of December 31,	$	39,972		$	38,015		$	37,315



	FDIC Loss Sharing Receivable For the Years Ended December 31,
	2018		2017		2016
(amounts in thousands)
Ending balance as of December 31,	$	—	$	—	$	(2,083	)
Increased estimated cash flows (2)	—		—		289
Other activity, net ^(a)	—		—		(255		)
Cash payments to the FDIC	—		—		2,049
Ending balance as of December 31,	$	—	$	—	$	—

(1) Provision for loan losses	$	5,642	$	6,768	$	3,330
(2) Effect attributable to FDIC loss sharing agreements	—		—		(289		)
Net amount reported as provision for loan losses	$	5,642	$	6,768	$	3,041


(a)	Includes external costs, such as legal fees, real estate taxes and appraisal expenses, that qualified for reimbursement under the loss sharing agreements.

Credit Quality Indicators

The allowance for loan losses represents management's estimate of probable losses in Customers' loans receivable portfolio, excluding commercial mortgage warehouse loans carried under the fair value option. 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, and construction loan portfolios, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective loan portfolios, 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 considered 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 December 31, 2018 and 2017.



	December 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 ⁽³⁾
(amounts in thousands)
Pass/Satisfactory	$	3,201,822	$	1,306,466	$	562,639	$	1,054,493	$	56,491	$	—	$	—	$	—	$	6,181,911
Special Mention	55,696		30,551		9,730		30,203		—		—		—		—		126,180
Substandard	27,779		36,783		5,108		40,410		—		—		—		—		110,080
Performing ⁽¹⁾	—		—		—		—		—		555,016		71,924		73,724		700,664
Non-performing ⁽²⁾	—		—		—		—		—		11,545		7,807		311		19,663
Total	$	3,285,297	$	1,373,800	$	577,477	$	1,125,106	$	56,491	$	566,561	$	79,731	$	74,035	$	7,138,498



	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 ⁽³⁾
(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 residential real estate, manufactured housing, and other consumer loans not subject to risk ratings.


(2)	Includes residential real estate, manufactured housing, and other consumer loans that are past due and still accruing interest or on nonaccrual status.


(3)	Excludes commercial mortgage warehouse loans carried under the fair value option.

Loan Purchases and Sales

Purchases and sales of loans were as follows for the years ended December 31, 2018, 2017 and 2016:



	For the Years Ended December 31,
	2018			2017			2016
(amounts in thousands)
Purchases ⁽¹⁾
Residential real estate	$	368,402		$	264,090		$	—
Other consumer	30,066			—			—
Total	$	398,468		$	264,090		$	—
Sales ⁽²⁾
Multi-family	$	(54,638	)	$	(226,831	)	$	—
Commercial and industrial ⁽³⁾	(32,263		)	(19,974		)	(23,731		)
Commercial real estate owner occupied ⁽³⁾	(20,218		)	(19,813		)	(15,342		)
Residential real estate	—			(191,574		)	—
Other consumer	—			—			—
Total	$	(107,119	)	$	(458,192	)	$	(39,073	)


(1)	The purchase price was 99.9% and 99.4% of loans outstanding for the years ended December 31, 2018 and 2017, respectively. There were no loan purchases during the year ended December 31, 2016.


(2)	Loan sales resulted in a net gain of $3.3 million, $4.2 million and $3.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.


(3)	Primarily sales of SBA loans.

None of the purchases and sales during the years ended December 31, 2018, 2017 and 2016 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 FHLB and FRB in the amount of $5.4 billion and $5.5 billion at December 31, 2018 and 2017, respectively.