LOANS AND LEASES

3 Months Ended

Mar. 31, 2019

3. LOANS AND LEASES

Loans outstanding, excluding those held for sale, by general ledger classification, as of March 31, 2019 and December 31, 2018, consisted of the following:

			% of					% of
	March 31,		Totals			December 31,		Total
(Dollars in thousands)	2019		Loans			2018		Loans
Residential mortgage	$	569,304		14.61	%	$	571,570		14.55	%
Multifamily mortgage		1,104,406		28.34			1,135,805		28.92
Commercial mortgage		705,221		18.09			702,165		17.88
Commercial loans (including equipment financing)		1,406,215		36.08			1,397,057		35.57
Home equity lines of credit		57,639		1.48			62,191		1.58
Consumer loans, including fixed rate home equity loans		54,276		1.39			58,678		1.49
Other loans		355		0.01			465		0.01
Total loans	$	3,897,416		100.00	%	$	3,927,931		100.00	%

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on federal Call Report codes. The following portfolio classes have been identified as of March 31, 2019 and December 31, 2018:

			% of					% of
	March 31,		Totals			December 31,		Total
(Dollars in thousands)	2019		Loans			2018		Loans
Primary residential mortgage	$	598,299		15.37	%	$	600,891		15.31	%
Home equity lines of credit		57,636		1.48			62,191		1.58
Junior lien loan on residence		7,429		0.19			7,418		0.19
Multifamily property		1,104,406		28.36			1,135,805		28.94
Owner-occupied commercial real estate		251,948		6.47			261,193		6.65
Investment commercial real estate		1,005,724		25.83			1,001,918		25.53
Commercial and industrial		633,590		16.27			616,838		15.72
Lease financing		175,517		4.51			172,643		4.40
Farmland/agricultural production		145		—			149		0.01
Commercial construction loans		86		—			86		0.01
Consumer and other loans		59,138		1.52			65,180		1.66
Total loans	$	3,893,918		100.00	%	$	3,924,312		100.00	%
Net deferred costs		3,498					3,619
Total loans including net deferred costs	$	3,897,416				$	3,927,931

The following tables present the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance for loan and lease losses (ALLL) as of March 31, 2019 and December 31, 2018:

	March 31, 2019
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		To Loans		Collectively		To Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	For		Evaluated for		For		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential mortgage	$	9,131	$	258	$	589,168	$	3,219	$	598,299	$	3,477
Home equity lines of credit		214		—		57,422		152		57,636		152
Junior lien loan on residence		33		—		7,396		15		7,429		15
Multifamily property		—		—		1,104,406		5,768		1,104,406		5,768
Owner-occupied commercial real estate		1,514		—		250,434		2,534		251,948		2,534
Investment commercial real estate		18,293		—		987,431		14,410		1,005,724		14,410
Commercial and industrial		—		—		633,590		10,185		633,590		10,185
Lease financing		—		—		175,517		1,803		175,517		1,803
Farmland/agricultural production		—		—		145		2		145		2
Commercial construction loans		—		—		86		1		86		1
Consumer and other loans		—		—		59,138		306		59,138		306
Total ALLL	$	29,185	$	258	$	3,864,733	$	38,395	$	3,893,918	$	38,653

	December 31, 2018
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		To Loans		Collectively		To Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	For		Evaluated for		For		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential mortgage	$	9,518	$	262	$	591,373	$	3,244	$	600,891	$	3,506
Home equity lines of credit		255		—		61,936		164		62,191		164
Junior lien loan on residence		36		—		7,382		15		7,418		15
Multifamily property		1,262		—		1,134,543		5,959		1,135,805		5,959
Owner-occupied commercial real estate		1,574		—		259,619		2,614		261,193		2,614
Investment commercial real estate		18,655		—		983,263		14,248		1,001,918		14,248
Commercial and industrial		—		—		616,838		9,839		616,838		9,839
Lease financing		—		—		172,643		1,772		172,643		1,772
Farmland/agricultural production		—		—		149		2		149		2
Commercial construction loans		—		—		86		1		86		1
Consumer and other loans		—		—		65,180		384		65,180		384
Total ALLL	$	31,300	$	262	$	3,893,012	$	38,242	$	3,924,312	$	38,504

Impaired loans include nonaccrual loans of $24.9 million at March 31, 2019 and $25.7 million at December 31, 2018. Impaired loans also include performing TDR loans of $4.3 million at both March 31, 2019 and December 31, 2018. At March 31, 2019, the allowance allocated to TDR loans totaled $258 thousand, of which $159 thousand was allocated to nonaccrual loans. At December 31, 2018, the allowance allocated to TDR loans totaled $262 thousand of which $161 thousand was allocated to nonaccrual loans. All accruing TDR loans were paying in accordance with restructured terms as of March 31, 2019. The Company has not committed to lend additional amounts as of March 31, 2019 to customers with outstanding loans that are classified as TDR loans.

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2019 and December 31, 2018 (The average impaired loans on the following tables represent year to date impaired loans.):

	March 31, 2019
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	9,314	$	8,126	$	—	$	8,304
Owner-occupied commercial real estate		2,714		1,514		—		1,535
Investment commercial real estate		20,041		18,293		—		18,434
Home equity lines of credit		216		214		—		214
Junior lien loan on residence		100		33		—		34
Total loans with no related allowance	$	32,385	$	28,180	$	—	$	28,521
With related allowance recorded:
Primary residential mortgage	$	1,005	$	1,005	$	258	$	1,052
Total loans with related allowance	$	1,005	$	1,005	$	258	$	1,052
Total loans individually evaluated for Impairment	$	33,390	$	29,185	$	258	$	29,573

	December 31, 2018
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	9,789	$	8,502	$	—	$	8,042
Owner-occupied commercial real estate		2,741		1,574		—		2,025
Investment commercial real estate		20,179		18,655		—		13,999
Home equity lines of credit		257		255		—		123
Junior lien loan on residence		102		36		—		45
Multifamily property		1,262		1,262		—		105
Total loans with no related allowance	$	34,330	$	30,284	$	—	$	24,339
With related allowance recorded:
Primary residential mortgage	$	1,016	$	1,016	$	262	$	1,144
Total loans with related allowance	$	1,016	$	1,016	$	262	$	1,144
Total loans individually evaluated for impairment	$	35,346	$	31,300	$	262	$	25,483

Interest income recognized on impaired loans for the quarters ended March 31, 2019 and 2018 was not material. The Company did not recognize any income on nonaccruing impaired loans for the three months ended March 31, 2019 and 2018.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2019 and December 31, 2018:

	March 31, 2019
			Loans Past Due
			Over 90 Days
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	4,857	$	—
Home equity lines of credit		195		—
Junior lien loan on residence		33		—
Owner-occupied commercial real estate		1,514		—
Investment commercial real estate		18,293		—
Total	$	24,892	$	—

	December 31, 2018
			Loans Past Due
			Over 90 Days
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	5,215	$	—
Home equity lines of credit		235		—
Junior lien loan on residence		36		—
Owner-occupied commercial real estate		1,574		—
Investment commercial real estate		18,655		—
Total	$	25,715	$	—

The following tables present the aging of the recorded investment in past due loans as of March 31, 2019 and December 31, 2018 by class of loans, excluding nonaccrual loans:

	March 31, 2019
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	656	$	205	$	—	$	861
Multifamily property		1,191		—		—		1,191
Owner-occupied commercial real estate		354		—		—		354
Commercial construction loans		86		—		—		86
Total	$	2,287	$	205	$	—	$	2,492

	December 31, 2018
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	606	$	491	$	—	$	1,097
Consumer and other loans		2		—		—		2
Total	$	608	$	491	$	—	$	1,099

Credit Quality Indicators:

The Company places all commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.

In addition, the Bank has engaged an independent loan review firm to validate risk ratings and to ensure compliance with our policies and procedures. This review of the following types of loans is performed quarterly:

•

A majority of relationships or new lending to existing relationships greater than $1,000,000;

•

All criticized and classified rated borrowers with relationship exposure of more than $500,000;

•

A random sample of borrowers with relationships less than $1,000,000;

•

All leveraged loans;

•

At least two borrowing relationships managed by each commercial banker;

•

Any new Regulation “O” loan commitments over $1,000,000;

•

Any other credits requested by Bank senior management or a member of the Board of Directors and any borrower for which the reviewer determines a review is warranted based upon knowledge of the portfolio, local events, industry stresses, etc.

The Company uses the following regulatory definitions for criticized and classified risk ratings:

Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans 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 institution will sustain some loss if the deficiencies are not corrected.

Doubtful: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

Loans that are considered to be impaired are individually evaluated for potential loss and allowance adequacy. Loans not deemed impaired are collectively evaluated for potential loss and allowance adequacy.

As of March 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	588,077	$	1,033	$	9,189	$	—
Home equity lines of credit		57,422		—		214		—
Junior lien loan on residence		7,396		—		33		—
Multifamily property		1,102,458		1,599		349		—
Owner-occupied commercial real estate		245,404		1,257		5,287		—
Investment commercial real estate		956,874		20,603		28,247		—
Commercial and industrial		617,523		8,311		7,756		—
Lease financing		175,517		—		—		—
Farmland/agricultural production		145		—		—		—
Commercial construction loans		—		86		—		—
Consumer and other loans		58,907		—		231		—
Total	$	3,809,723	$	32,889	$	51,306	$	—

As of December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	590,372	$	943	$	9,576	$	—
Home equity lines of credit		61,936		—		255		—
Junior lien loan on residence		7,382		—		36		—
Multifamily property		1,130,926		3,263		1,616		—
Owner-occupied commercial real estate		255,417		249		5,527		—
Investment commercial real estate		948,300		20,756		32,862		—
Commercial and industrial		608,262		417		8,159		—
Lease financing		172,643		—		—		—
Farmland/agricultural production		149		—		—		—
Commercial construction loans		—		86		—		—
Consumer and other loans		64,946		—		234		—
Total	$	3,840,333	$	25,714	$	58,265	$	—

At March 31, 2019, $29.1 million of substandard loans were also considered impaired, compared to December 31, 2018, when $31.2 million of substandard loans were also impaired.

The activity in the allowance for loan and lease losses for the three months ended March 31, 2019 is summarized below:

	January 1,										March 31,
	2019										2019
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	3,506	$	—		$	42	$	(71	)	$	3,477
Home equity lines of credit		164		—			2		(14	)		152
Junior lien loan on residence		15		—			11		(11	)		15
Multifamily property		5,959		—			—		(191	)		5,768
Owner-occupied commercial real estate		2,614		—			—		(80	)		2,534
Investment commercial real estate		14,248		—			—		162			14,410
Commercial and industrial		9,839		—			4		342			10,185
Lease financing		1,772		—			—		31			1,803
Farmland/agricultural production		2		—			—		—			2
Commercial construction loans		1		—			—		—			1
Consumer and other loans		384		(11	)		1		(68	)		306
Total ALLL	$	38,504	$	(11	)	$	60	$	100		$	38,653

The activity in the allowance for loan and lease losses for the three months ended March 31, 2018 is summarized below:

	January 1,										March 31,
	2018										2018
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	4,085	$	(77	)	$	—	$	395		$	4,403
Home equity lines of credit		221		—			2		(31	)		192
Junior lien loan on residence		12		—			9		(5	)		16
Multifamily property		10,007		—			—		(867	)		9,140
Owner-occupied commercial real estate		2,385		—			66		(87	)		2,364
Investment commercial real estate		11,933		—			—		434			12,367
Commercial and industrial		6,563		—			16		1,174			7,753
Lease financing		884		—			—		152			1,036
Farmland/agricultural production		—		—			—		2			2
Commercial construction loans		1		—			—		—			1
Consumer and other loans		349		(11	)		1		83			422
Total ALLL	$	36,440	$	(88	)	$	94	$	1,250		$	37,696

Troubled Debt Restructurings:

The Company has allocated $258 thousand and $262 thousand of specific reserves on TDRs to customers whose loan terms have been modified in TDRs as of March 31, 2019 and December 31, 2018, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.

The terms of certain loans were modified as TDRs when one or a combination of the following occurred: a reduction of the stated interest rate of the loan; the maturity date was extended; or some other modification or extension occurred which would not be readily available in the market.

There were no loans modified as TDRs during the three-month periods ended March 31, 2019 and March 31, 2018.

The identification of the TDRs did not have a significant impact on the allowance for loan and lease losses.

The following table presents loans by class modified as TDRs that failed to comply with the modified terms in the twelve months following modification and resulted in a payment default as March 31, 2019:

	Number of		Recorded
(Dollars in thousands)	Contracts		Investment
Investment commercial real estate		1	$	14,841
Total		1	$	14,841

	Number of		Recorded
(Dollars in thousands)	Contracts		Investment
Primary residential mortgage		1	$	336
Total		1	$	336

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. The modification of the terms of such loans may include one or more of the following: (1) a reduction of the stated interest rate of the loan to a rate that is lower than the current market rate for new debt with similar risk; (2) an extension of an interest only period for a predetermined period of time; (3) an extension of the maturity date; or (4) an extension of the amortization period over which future payments will be computed. At the time a loan is restructured, the Bank performs a full re-underwriting analysis, which includes, at a minimum, obtaining current financial statements and tax returns, copies of all leases, and an updated independent appraisal of the property. A loan will continue to accrue interest if it can be reasonably determined that the borrower should be able to perform under the modified terms, that the loan has not been chronically delinquent (both to debt service and real estate taxes) or in nonaccrual status since its inception, and that there have been no charge-offs on the loan. Restructured loans with previous charge-offs would not accrue interest at the time of the TDR. At a minimum, six consecutive months of contractual payments would need to be made on a restructured loan before returning it to accrual status. Once a loan is classified as a TDR, the loan is reported as a TDR until the loan is paid in full, sold or charged-off. In rare circumstances, a loan may be removed from TDR status if it meets the requirements of ASC 310-40-50-2.

- 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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