| Loans | Note 5. Loans
The following table sets forth the composition of the loan
portfolio at September 30, 2015 and December 31,
2014:
September 30, 2015 December 31, 2014
(dollars in thousands)
Amount Percent of Non-Covered
Amount Percent of Non-Covered
Non-Covered Loans Held for Investment:
Mortgage Loans:
Multi-family $ 24,635,567 72.19% $ 23,831,846 72.21%
Commercial real estate 7,642,994
22.40 7,634,320
23.13
Acquisition, development, and construction 294,768 0.86 258,116 0.78
One-to-four family 102,317 0.30 138,915 0.42
Total mortgage loans held for investment $ 32,675,646
95.75 31,863,197
96.54
Other Loans:
Commercial and industrial 1,130,707 3.31 900,551 2.73
Lease financing, net of unearned income of $31,708 and $18,913 279,507 0.82 208,670 0.63
Total commercial and industrial loans 1,410,214 4.13 1,109,221 3.36
Purchased credit-impaired loans (1) 12,976 0.04
--
--
Other 26,069 0.08 31,943 0.10
Total other loans held for investment 1,449,259 4.25 1,141,164 3.46
Total non-covered loans held for investment $ 34,124,905 100.00% $ 33,004,361 100.00%
Net deferred loan origination costs 21,660 20,595
Allowance for losses on non-covered loans (146,045) (139,857)
Non-covered loans held for investment, net $ 34,000,520 $ 32,885,099
Covered loans 2,149,055 2,428,622
Allowance for losses on covered loans (37,632) (45,481)
Covered loans, net $ 2,111,423 $ 2,383,141
Loans held for sale 380,613 379,399
Total loans, net $ 36,492,556 $ 35,647,639
(1) Includes $941,000 of multi-family
loans; $9.9 million of commercial real estate loans; $1.0 million
of acquisition, development, and construction loans; $965,000 of
commercial and industrial loans; and $163,000 of other loans that
were included in “Covered loans” at December 31,
2014.
Non-Covered Loans
Non-Covered Loans Held for Investment
The majority of the loans the Company originates for investment are
multi-family loans, most of which are collateralized by non-luxury
apartment buildings in New York City that are rent-regulated and
feature below-market rents. In addition, the Company originates
commercial real estate (“CRE”) loans, most of which are
collateralized by properties located in New York City and on Long
Island.
The Company also originates acquisition, development, and
construction (“ADC”) loans, and commercial and
industrial (“C&I”) loans, for investment. ADC loans
are primarily originated for multi-family and residential tract
projects in New York City and on Long Island. C&I loans consist
of asset-based loans, equipment loans and leases, and dealer
floor-plan loans (together, “specialty finance loans and
leases”) that are made to nationally recognized borrowers
throughout the U.S.; and “other” C&I loans that
primarily are made to small and mid-size businesses in Metro New
York. “Other” C&I loans are typically made for
working capital, business expansion, and the purchase of machinery
and equipment.
Payments on multi-family and CRE loans generally depend on the
income produced by the underlying properties which, in turn,
depends on their successful operation and management. Accordingly,
the ability of the Company’s borrowers to repay these loans
may be impacted by adverse conditions in the local real estate
market and the local economy. While the Company generally requires
that such loans be qualified on the basis of the collateral
property’s current cash flows, appraised value, and debt
service coverage ratio, among other factors, there can be no
assurance that its underwriting policies will protect the Company
from credit-related losses or delinquencies.
ADC loans typically involve a higher degree of credit risk than
loans secured by improved or owner-occupied real estate.
Accordingly, borrowers are required to provide a guarantee of
repayment and completion, and loan proceeds are disbursed as
construction progresses, as certified by in-house or third-party
engineers. The risk of loss on an ADC loan is largely dependent
upon the accuracy of the initial appraisal of the property’s
value upon completion of construction or development; the
developer’s experience; the estimated cost of construction,
including interest; and the estimated time to complete and/or sell
or lease such property. The Company seeks to minimize these risks
by maintaining conservative lending policies and rigorous
underwriting standards. However, if the estimate of value proves to
be inaccurate, the cost of completion is greater than expected, or
the length of time to complete and/or sell or lease the collateral
property is greater than anticipated (based, for example, on a
downturn in the local economy or real estate market), the property
could have a value upon completion that is insufficient to assure
full repayment of the loan. This could have a material adverse
effect on the quality of the ADC loan portfolio, and could result
in losses or delinquencies.
To minimize the risk involved in specialty finance lending and
leasing, the Company participates in syndicated loans that are
brought to it, and equipment loans and leases that are assigned to
it, by a select group of nationally recognized sources who have had
long-term relationships with its experienced lending officers.
Specialty finance loans and leases generally are made to large
corporate obligors, many of which are publicly traded, carry
investment grade or near-investment grade ratings, and participate
in stable industries nationwide. Furthermore, each of these credits
is secured with a perfected first security interest or outright
ownership in the underlying collateral, and structured as senior
debt or as a non-cancelable lease. To further minimize the risk
involved in specialty finance lending and leasing, each transaction
is re-underwritten. In addition, outside counsel is retained to
conduct a further review of the underlying documentation.
To minimize the risks involved in other C&I lending, the
Company underwrites such loans on the basis of the cash flows
produced by the business; requires that such loans be
collateralized by various business assets, including inventory,
equipment, and accounts receivable, among others; and requires
personal guarantees. However, the capacity of a borrower to repay
such a C&I loan is substantially dependent on the degree to
which the business is successful. In addition, the collateral
underlying such loans may depreciate over time, may not be
conducive to appraisal, or may fluctuate in value, based upon the
results of operations of the business.
Included in non-covered loans held for investment at
September 30, 2015 and December 31, 2014 were loans to
non-officer directors of $126.6 million and $129.5 million,
respectively.
Non-covered purchased credit-impaired (“PCI”) loans,
which had a carrying value of $13.0 million and an unpaid principal
balance of $14.8 million at September 30, 2015, are loans that
had been covered under an FDIC loss sharing agreement that expired
in March 2015 and that now are included in non-covered loans. Such
loans continue to be accounted for under Accounting Standards
Codification (“ASC”) 310-30 and are initially measured
at fair value, which includes estimated future credit losses
expected to be incurred over the lives of the loans. Under ASC
310-30, purchasers are permitted to aggregate acquired loans into
one or more pools, provided that the loans have common risk
characteristics. A pool is then accounted for as a single asset
with a single composite interest rate and an aggregate expectation
of cash flows.
Non-Covered Loans Held for Sale
The mortgage banking operation of the Community Bank was
established in January 2010 to originate, aggregate, and service
one-to-four family loans. Community banks, credit unions, mortgage
companies, and mortgage brokers use its proprietary web-accessible
mortgage banking platform to originate and close one-to-four family
loans throughout the U.S. These loans are generally sold to GSEs,
servicing retained. To a much lesser extent, the Community Bank
uses its mortgage banking platform to originate jumbo loans which
it typically sells to other financial institutions. Such loans have
not represented, nor are they expected to represent, a material
portion of the held-for-sale loans originated by the Community
Bank. In addition, the Community Bank services mortgage loans for
various third parties, primarily including GSEs. The unpaid
principal balance of loans serviced for others was $23.9 billion
and $22.4 billion at September 30, 2015 and December 31,
2014, respectively.
Asset Quality
The following table presents information regarding the quality of
the Company’s non-covered loans held for investment
(excluding non-covered PCI loans) at September 30, 2015:
(in
thousands) Loans 30-89 Days Non- (1) Loans 90 Days or More Total
Current Total Loans
Multi-family $ 1,670 $ 15,524 $ -- $ 17,194 $ 24,618,373 $ 24,635,567
Commercial real estate 4,544 20,034 -- 24,578 7,618,416 7,642,994
One-to-four family 860 11,445 -- 12,305 90,012 102,317
Acquisition, development, and construction -- 525 -- 525 294,243 294,768
Commercial and industrial (2) -- 6,221 -- 6,221 1,403,993 1,410,214
Other 513 1,493 -- 2,006 24,063 26,069
Total $ 7,587 $ 55,242 $ -- $ 62,829 $ 34,049,100 $ 34,111,929
(1) Excludes $1.1 million of non-covered
PCI loans that were 90 days or more past due.
(2) Includes lease financing receivables,
all of which were current.
The following table presents information regarding the quality of
the Company’s non-covered loans held for investment at
December 31, 2014:
(in
thousands) Loans 30-89 Days Non- Accrual Loans Total
Current Total Loans
Multi-family $ 464 $ 31,089 $ -- $ 31,553 $ 23,800,293 $ 23,831,846
Commercial real estate 1,464 24,824 -- 26,288 7,608,032 7,634,320
One-to-four family 3,086 11,032 -- 14,118 124,797 138,915
Acquisition, development, and construction -- 654 -- 654 257,462 258,116
Commercial and industrial (1) 530 8,382 -- 8,912 1,100,309 1,109,221
Other 648 969 -- 1,617 30,326 31,943
Total $ 6,192 $ 76,950 $ -- $ 83,142 $ 32,921,219 $ 33,004,361
(1) Includes lease financing receivables,
all of which were current.
The following table summarizes the Company’s portfolio of
non-covered loans held for investment, excluding non-covered PCI
loans, by credit quality indicator at September 30, 2015:
(in thousands) Multi-Family
Commercial One-to-Four Acquisition, Total Commercial (1) Other Total
Credit Quality Indicator:
Pass $ 24,597,041 $ 7,618,479 $ 90,872 $ 293,492 $ 32,599,884 $ 1,390,799 $ 24,576 $ 1,415,375
Special mention 6,322 3,327 -- -- 9,649 14,050 -- 14,050
Substandard 32,204 21,188 11,445 1,276 66,113 5,365 1,493 6,858
Doubtful -- -- -- -- -- -- -- --
Total $ 24,635,567 $ 7,642,994 $ 102,317 $ 294,768 $ 32,675,646 $ 1,410,214 $ 26,069 $ 1,436,283
(1) Includes lease financing receivables,
all of which were classified as “pass.”
The following table summarizes the Company’s portfolio of
non-covered loans held for investment by credit quality indicator
at December 31, 2014:
(in thousands) Multi-Family
Commercial One-to-Four Acquisition, Total Commercial (1) Other Total
Credit Quality Indicator:
Pass $ 23,777,569 $ 7,591,223 $ 127,883 $ 256,868 $ 31,753,543 $ 1,083,173 $ 30,974 $ 1,114,147
Special mention 6,798 9,123 -- -- 15,921 17,032 -- 17,032
Substandard 47,479 33,974 11,032 1,248 93,733 9,016 969 9,985
Doubtful -- -- -- -- -- -- -- --
Total $ 23,831,846 $ 7,634,320 $ 138,915 $ 258,116 $ 31,863,197 $ 1,109,221 $ 31,943 $ 1,141,164
(1) Includes lease financing receivables,
all of which were classified as “pass.”
The preceding classifications are the most current available and
generally have been updated within the last twelve months. In
addition, they follow regulatory guidelines and can generally be
described as follows: pass loans are of satisfactory quality;
special mention loans have a potential weakness or risk that may
result in the deterioration of future repayment; substandard loans
are inadequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged (these loans
have a well-defined weakness and there is a distinct possibility
that the Company will sustain some loss); and doubtful loans, based
on existing circumstances, have weaknesses that make collection or
liquidation in full highly questionable and improbable. In
addition, one-to-four family loans are classified based on the
duration of the delinquency.
Troubled Debt Restructurings
The Company is required to account for certain held-for-investment
loan modifications and restructurings as troubled debt
restructurings (“TDRs”). In general, a modification or
restructuring of a loan constitutes a TDR if the Company grants a
concession to a borrower experiencing financial difficulty. A loan
modified as a TDR generally is placed on non-accrual status until
the Company determines that future collection of principal and
interest is reasonably assured, which requires, among other things,
that the borrower demonstrate performance according to the
restructured terms for a period of at least six consecutive
months.
In an effort to proactively manage delinquent loans, the Company
has selectively extended to certain borrowers concessions such as
rate reductions, extension of maturity dates, and forbearance
agreements. As of September 30, 2015, loans on which
concessions were made with respect to rate reductions and/or
extension of maturity dates amounted to $21.2 million; loans on
which forbearance agreements were reached amounted to $5.3
million.
The following table presents information regarding the
Company’s TDRs as of September 30, 2015 and
December 31, 2014:
September 30, 2015 December 31, 2014
(in
thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total
Loan Category:
Multi-family $ 2,025 $ 3,261 $ 5,286 $ 7,697 $ 17,879 $ 25,576
Commercial real estate 6,053 12,372 18,425 8,139 9,939 18,078
One-to-four family -- 885 885 -- 260 260
Acquisition, development, and construction -- 525 525 -- 654 654
Commercial and industrial -- 1,163 1,163 -- 1,195 1,195
Other -- 218 218 -- -- --
Total $ 8,078 $ 18,424 $ 26,502 $ 15,836 $ 29,927 $ 45,763
The eligibility of a borrower for work-out concessions of any
nature depends upon the facts and circumstances of each
transaction, which may change from period to period, and involves
judgment by Company personnel regarding the likelihood that the
concession will result in the maximum recovery for the Company.
The financial effects of the Company’s TDRs for the nine
months ended September 30, 2015 are summarized as follows:
For the Nine Months Ended
September 30, 2015
(dollars in
thousands) Weighted Average Interest
Number Pre- Post- Charge-off Capitalized
Loan Category:
Commercial real estate 3 7.49 % 7.49 % -- --
One-to-four family 3 2.97 2.41 -- 3
Multi-family 1 5.63 -- -- --
Other 2 4.58 2.00 -- 2
Total 9 -- 5
In the nine months ended September 30, 2014, the Company
classified one multi-family loan in the amount of $316,000, one CRE
loan in the amount of $2.1 million, one ADC loan in the amount of
$935,000, and one C&I loan in the amount of $499,000 as
non-accrual TDRs. While other concessions were granted to the
borrowers, the interest rates on the loans were maintained. As a
result, these TDRs did not have a financial impact on the
Company’s results of operations during the current nine-month
period.
At September 30, 2015 and 2014, none of the loans that had
been modified as TDRs during the twelve months ended at those dates
were in payment default. A loan is considered to be in payment
default once it is 30 days contractually past due under the
modified terms.
The Company does not consider a payment to be in default when the
loan is in forbearance, or otherwise granted a delay of payment,
when the agreement to forebear or allow a delay of payment is part
of a modification. Subsequent to the modification, the loan is not
considered to be in default until payment is contractually past due
in accordance with the modified terms. However, the Company does
consider a loan with multiple modifications or forbearance periods
to be in default, and would also consider a loan to be in default
if it was in bankruptcy or was partially charged off subsequent to
modification.
Covered Loans
The following table presents the carrying value of covered loans
acquired in the AmTrust and Desert Hills acquisitions as of
September 30, 2015:
(dollars in
thousands) Amount Percent of
Loan Category:
One-to-four family $ 1,993,640 92.8%
All other loans 155,415 7.2
Total covered loans $ 2,149,055 100.0%
The Company refers to certain loans acquired in the AmTrust and
Desert Hills transactions as “covered loans” because
the Company is being reimbursed for a substantial portion of losses
on these loans under the terms of the FDIC loss sharing agreements.
Covered loans are accounted for under ASC 310-30 and are initially
measured at fair value, which includes estimated future credit
losses expected to be incurred over the lives of the loans. Under
ASC 310-30, purchasers are permitted to aggregate acquired loans
into one or more pools, provided that the loans have common risk
characteristics. A pool is then accounted for as a single asset
with a single composite interest rate and an aggregate expectation
of cash flows.
At September 30, 2015 and December 31, 2014, the unpaid
principal balance of covered loans was $2.6 billion and $2.9
billion, respectively. The carrying value of such loans was $2.1
billion and $2.4 billion, respectively, at the corresponding
dates.
At the respective acquisition dates, the Company estimated the fair
values of the AmTrust and Desert Hills loan portfolios, which
represented the expected cash flows from the portfolios, discounted
at market-based rates. In estimating such fair values, the Company:
(a) calculated the contractual amount and timing of
undiscounted principal and interest payments (the
“undiscounted contractual cash flows”); and
(b) estimated the expected amount and timing of undiscounted
principal and interest payments (the “undiscounted expected
cash flows”). The amount by which the undiscounted expected
cash flows exceed the estimated fair value (the “accretable
yield”) is accreted into interest income over the lives of
the loans. The amount by which the undiscounted contractual cash
flows exceed the undiscounted expected cash flows is referred to as
the “non-accretable difference.” The non-accretable
difference represents an estimate of the credit risk in the loan
portfolios at the respective acquisition dates.
The accretable yield is affected by changes in interest rate
indices for variable rate loans, changes in prepayment assumptions,
and changes in expected principal and interest payments over the
estimated lives of the loans. Changes in interest rate indices for
variable rate loans increase or decrease the amount of interest
income expected to be collected, depending on the direction of
interest rates. Prepayments affect the estimated lives of covered
loans and could change the amount of interest income and principal
expected to be collected. Changes in expected principal and
interest payments over the estimated lives of covered loans are
driven by the credit outlook and by actions that may be taken with
borrowers.
On a quarterly basis, the Company evaluates the estimates of the
cash flows it expects to collect. Expected future cash flows from
interest payments are based on variable rates at the time of the
quarterly evaluation. Estimates of expected cash flows that are
impacted by changes in interest rate indices for variable rate
loans and prepayment assumptions are treated as prospective yield
adjustments and included in interest income.
In the nine months ended September 30, 2015, changes in the
accretable yield for covered loans were as follows:
(in
thousands) Accretable Yield
Balance at beginning of period $ 1,037,023
Reclassification to non-accretable difference (75,479)
Accretion (103,148)
Balance at end of period $ 858,396
In the preceding table, the line item “Reclassification to
non-accretable difference” includes changes in cash flows
that the Company expects to collect due to changes in prepayment
assumptions, changes in interest rates on variable rate loans, and
changes in loss assumptions. As of the Company’s most recent
quarterly evaluation, prepayment assumptions increased, which
resulted in a decrease in future expected interest cash flows and,
consequently, a decrease in the accretable yield. The effect of
this decrease was partially offset by a slight improvement in the
underlying credit assumptions coupled with coupon rates on variable
rate loans resetting slightly higher, which resulted in an increase
in future expected interest cash flows and, consequently, an
increase in the accretable yield.
Reflecting the foreclosure of certain loans acquired in the AmTrust
and Desert Hills acquisitions, the Company owns certain other real
estate owned (“OREO”) that is covered under the
Company’s loss sharing agreements with the FDIC
(“covered OREO”). Covered OREO was initially recorded
at its estimated fair value on the respective dates of acquisition,
based on independent appraisals, less the estimated selling costs.
Any subsequent write-downs due to declines in fair value have been
charged to non-interest expense, and have been partially offset by
loss reimbursements under the FDIC loss sharing agreements. Any
recoveries of previous write-downs have been credited to
non-interest expense and partially offset by the portion of the
recovery that was due to the FDIC.
The FDIC loss share receivable represents the present value of the
estimated losses to be reimbursed by the FDIC. The estimated losses
were based on the same cash flow estimates used in determining the
fair value of the covered loans. The FDIC loss share receivable is
reduced as losses on covered loans are recognized and as loss
sharing payments are received from the FDIC. Realized losses in
excess of acquisition-date estimates result in an increase in the
FDIC loss share receivable. Conversely, if realized losses are
lower than the acquisition-date estimates, the FDIC loss share
receivable is reduced by amortization to interest income.
The following table presents information regarding the
Company’s covered loans that were 90 days or more past due at
September 30, 2015 and December 31, 2014:
(in
thousands)
September 30, 2015
December 31, 2014
Covered Loans 90 Days or More Past Due:
One-to-four family $ 135,297 $ 148,967
Other loans 6,879 8,922
Total covered loans 90 days or more past due $ 142,176 $ 157,889
The following table presents information regarding the
Company’s covered loans that were 30 to 89 days past due at
September 30, 2015 and December 31, 2014:
(in
thousands)
September 30, 2015
December 31, 2014
Covered Loans 30-89 Days Past Due:
One-to-four family $ 35,403 $ 37,680
Other loans 2,879 4,016
Total covered loans 30-89 days past due $ 38,282 $ 41,696
At September 30, 2015, the Company had $38.3 million of
covered loans that were 30 to 89 days past due, and covered loans
of $142.2 million that were 90 days or more past due but considered
to be performing due to the application of the yield accretion
method under ASC 310-30. The remaining portion of the
Company’s covered loan portfolio totaled $2.0 billion at
September 30, 2015 and was considered current at that date.
Per ASC 310-30, the Company aggregates credit-impaired loans
acquired in the same fiscal quarter into one or more pools,
provided that the loans have common risk characteristics. A pool is
then accounted for as a single asset with a single composite
interest rate and an aggregate expectation of cash flows.
Loans that may have been classified as non-performing loans by
AmTrust or Desert Hills were no longer classified as non-performing
by the Company because, at the respective dates of acquisition, the
Company believed that it would fully collect the new carrying value
of these loans. The new carrying value represents the contractual
balance, reduced by the portion that is expected to be
uncollectible (i.e., the non-accretable difference) and by an
accretable yield (discount) that is recognized as interest income.
It is important to note that management’s judgment is
required in reclassifying loans subject to ASC 310-30 as performing
loans, and such judgment is dependent on having a reasonable
expectation about the timing and amount of the cash flows to be
collected, even if the loan is contractually past due.
The primary credit quality indicator for covered loans is the
expectation of underlying cash flows. In the three months ended
September 30, 2015 and 2014, the Company recorded recoveries
of losses on covered loans of $8.5 million and $3.9 million,
respectively. The respective recoveries were largely due to an
increase in expected cash flows in the acquired portfolios of
one-to-four family and home equity loans, and were partly offset by
FDIC indemnification expense of $6.8 million and $3.2 million,
respectively, that was recorded in “Non-interest
income” in the respective periods.
Similarly, the Company recovered losses on covered loans of $5.4
million during the nine months ended September 30, 2015, which
was largely offset by FDIC indemnification expense of $4.3 million.
During the nine months ended September 30, 2014, the Company
recovered $18.4 million of losses on covered loans, which was
largely offset by FDIC indemnification expense of $14.7 million.
The FDIC indemnification expense recorded in the nine months ended
September 30, 2015 and 2014 were recorded in
“Non-interest income” in the corresponding periods. |
