| Loans | Note 5: Loans
The following table sets forth the composition of the loan
portfolio at June 30, 2016 and December 31, 2015:
June 30, 2016 December 31, 2015
Amount Percent of Non-Covered Amount Percent of Non-Covered
(dollars in thousands)
Non-Covered Loans Held for Investment:
Mortgage Loans:
Multi-family $ 26,750,593 72.73 % $ 25,971,629 72.67 %
Commercial real estate 7,793,610 21.19 7,857,204 21.98
Acquisition, development, and construction 361,523 0.98 311,676 0.87
One-to-four family 246,183 0.67 116,841 0.33
Total mortgage loans held for investment $ 35,151,909 95.57 $ 34,257,350 95.85
Other Loans:
Commercial and industrial 1,174,180 3.19 1,085,529 3.04
Lease financing, net of unearned income of $47,492 and $43,553,
respectively 425,047 1.16 365,027 1.02
Total commercial and industrial loans (1) 1,599,227 4.35 1,450,556 4.06
Purchased credit-impaired loans 5,983 0.02 8,344 0.02
Other 21,282 0.06 24,239 0.07
Total other loans held for investment 1,626,492 4.43 1,483,139 4.15
Total non-covered loans held for investment $ 36,778,401 100.00 % $ 35,740,489 100.00 %
Net deferred loan origination costs 22,129 22,715
Allowance for losses on non-covered loans (153,059 ) (147,124 )
Non-covered loans held for investment, net $ 36,647,471 $ 35,616,080
Covered loans 1,890,883 2,060,089
Allowance for losses on covered loans (26,649 ) (31,395 )
Covered loans, net $ 1,864,234 $ 2,028,694
Loans held for sale 609,894 367,221
Total loans, net $ 39,121,599 $ 38,011,995
(1) Includes specialty finance loans of
$1.0 billion and $880.7 million and other C&I loans of $592.4
million and $569.9 million, respectively, at June 30, 2016 and
December 31, 2015.
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 income-producing properties such as office
buildings, retail centers, mixed-use buildings, and multi-tenanted
light industrial properties that are 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 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; 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.
The repayment of multi-family and CRE loans generally depends on
the income produced by the underlying properties which, in turn,
depends on their successful operation and management. To mitigate
the potential for credit losses, the Company underwrites its loans
in accordance with credit standards it considers to be prudent,
looking first at the consistency of the cash flows being produced
by the underlying property. In addition, multi-family buildings and
CRE properties are inspected as a prerequisite to approval, and
independent appraisers, whose appraisals are carefully reviewed by
the Company’s in-house appraisers, perform appraisals on the
collateral properties. In many cases, a second independent
appraisal review is performed. To further manage its credit risk,
the Company’s lending policies limit the amount of credit
granted to any one borrower and typically require conservative debt
service coverage ratios and loan-to-value ratios. Nonetheless, 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. Accordingly, 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 Company seeks to minimize the credit risk on ADC
loans 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, 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. 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 June 30,
2016 and December 31, 2015, respectively, were loans of $93.7
million and $105.6 million to executive officers, directors, and
their related interests and parties. There were no loans to
principal shareholders at either of those dates.
Non-covered purchased credit-impaired (“PCI”) loans,
which had a carrying value of $6.0 million and an unpaid principal
balance of $7.5 million at June 30, 2016, 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.
Loans Held for Sale
The Community Bank’s mortgage banking division originates,
aggregates, and services 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 has used its mortgage banking platform
to originate jumbo loans which it typically has sold 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.
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 June 30, 2016:
(in thousands) Loans 30-89 Days Past Due Non- Accrual Loans (1) Loans 90 Days or More Delinquent and Still Accruing Interest Total Past Due Current Total Loans
Multi-family $ 2,253 $ 13,771 $
— $ 16,024 $ 26,734,569 $ 26,750,593
Commercial real estate
— 11,811
— 11,811 7,781,799 7,793,610
One-to-four family 574 9,952
— 10,526 235,657 246,183
Acquisition, development, and construction
—
—
—
— 361,523 361,523
Commercial and industrial (2) 1,883 1,677
— 3,560 1,595,667 1,599,227
Other 122 8,692
— 8,814 12,468 21,282
Total $ 4,832 $ 45,903 $
— $ 50,735 $ 36,721,683 $ 36,772,418
(1) Excludes $991,000 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, 2015:
(in thousands) Loans 30-89 Days Non- Accrual (1) Loans 90 Days or More Delinquent and Still Accruing Total Past Due Current Total Loans
Multi-family $ 4,818 $ 13,904 $
— $ 18,722 $ 25,952,907 $ 25,971,629
Commercial real estate 178 14,920
— 15,098 7,842,106 7,857,204
One-to-four family 1,117 12,259
— 13,376 103,465 116,841
Acquisition, development, and construction
— 27
— 27 311,649 311,676
Commercial and industrial (2)
— 4,473
— 4,473 1,446,083 1,450,556
Other 492 1,242
— 1,734 22,505 24,239
Total $ 6,605 $ 46,825 $
— $ 53,430 $ 35,678,715 $ 35,732,145
(1) Excludes $969,000 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 summarizes the Company’s portfolio of
non-covered loans held for investment (excluding non-covered PCI
loans) by credit quality indicator at June 30, 2016:
Mortgage Loans Other Loans
(in thousands) Multi-Family Commercial One-to-Four Acquisition, Total Commercial (1) Other Total Other
Credit Quality Indicator:
Pass $ 26,512,672 $ 7,750,219 $ 236,231 $ 360,763 $ 34,859,885 $ 1,527,439 $ 19,943 $ 1,547,382
Special mention 211,459 32,297
— 760 244,516 61,049
— 61,049
Substandard 26,462 11,094 9,952
— 47,508 10,739 1,339 12,078
Doubtful
—
—
—
—
—
—
—
—
Total $ 26,750,593 $ 7,793,610 $ 246,183 $ 361,523 $ 35,151,909 $ 1,599,227 $ 21,282 $ 1,620,509
(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, 2015:
Mortgage Loans Other Loans
(in thousands) Multi- Family Commercial One-to- Four Acquisition, Total Commercial (1) Other Total Other
Credit Quality Indicator:
Pass $ 25,936,423 $ 7,839,127 $ 104,582 $ 309,039 $ 34,189,171 $ 1,433,778 $ 22,996 $ 1,456,774
Special mention 6,305 3,883
—
— 10,188 11,771
— 11,771
Substandard 28,901 14,194 12,259 2,637 57,991 5,007 1,243 6,250
Doubtful
—
—
—
—
—
—
—
—
Total $ 25,971,629 $ 7,857,204 $ 116,841 $ 311,676 $ 34,257,350 $ 1,450,556 $ 24,239 $ 1,474,795
(1) Includes lease financing receivables,
all of which were classified as “pass.”
The preceding classifications are the most current ones 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 June 30, 2016, loans on which concessions
were made with respect to rate reductions and/or extension of
maturity dates amounted to $15.6 million; loans on which
forbearance agreements were reached amounted to $2.9 million.
The following table presents information regarding the
Company’s TDRs as of June 30, 2016 and December 31,
2015:
June 30, 2016 December 31, 2015
(in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total
Loan Category:
Multi-family $ 1,999 $ 9,100 $ 11,099 $ 2,017 $ 635 $ 2,652
Commercial real estate
— 2,529 2,529 115 6,255 6,370
One-to-four family
— 1,605 1,605
— 987 987
Acquisition, development, and construction
—
—
—
— 27 27
Commercial and industrial 1,269 1,799 3,068 627 1,279 1,906
Other
— 206 206
— 213 213
Total $ 3,268 $ 15,239 $ 18,507 $ 2,759 $ 9,396 $ 12,155
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 six
months ended June 30, 2016 and the twelve months ended
December 31, 2015 are summarized as follows:
For the Six Months Ended June 30,
2016
Weighted Average Interest Rate Charge-
(dollars in thousands) Number Pre-Modification Post- off Capitalized
Loan Category:
Multi-family 1 4.63 % 4.00 % $
— $
—
One-to-four family 3 3.62 3.07
— 6
Commercial and industrial 2 3.30 3.20 47
—
Total 6 $ 47 $ 6
For the Twelve Months Ended
December 31, 2015
Weighted Average Interest Rate Charge-
(dollars in thousands) Number Pre-Modification Post- off Capitalized
Loan Category:
One-to-four family 4 4.02 % 2.72 % $
— $ 6
Commercial and industrial 2 3.40 3.52 33
—
Other 2 4.58 2.00
— 2
Total 8 $ 33 $ 8
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 were in bankruptcy or were 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
June 30, 2016:
(dollars in thousands) Amount Percent of
Loan Category:
One-to-four family $ 1,775,616 93.9 %
Other loans 115,267 6.1
Total covered loans $ 1,890,883 100.0 %
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 June 30, 2016 and December 31, 2015, the unpaid
principal balance of covered loans was $2.3 billion and $2.5
billion, respectively. The carrying value of such loans was $1.9
billion and $2.1 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 six months ended June 30, 2016, changes in the
accretable yield for covered loans were as follows:
(in thousands) Accretable Yield
Balance at beginning of period $ 803,145
Reclassification from non-accretable difference 8,348
Accretion (66,193 )
Balance at end of period $ 745,300
In the preceding table, the line item “Reclassification from
non-accretable difference” includes changes in cash flows
that the Company does not expect 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 more than offset by an 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 its
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
June 30, 2016 and December 31, 2015:
(in thousands) June 30, 2016 December 31, 2015
Covered Loans 90 Days or More Past Due:
One-to-four family $ 126,615 $ 130,626
Other loans 6,524 6,556
Total covered loans 90 days or more past due $ 133,139 $ 137,182
The following table presents information regarding the
Company’s covered loans that were 30 to 89 days past due at
June 30, 2016 and December 31, 2015:
(in thousands) June 30, December 31,
Covered Loans 30-89 Days Past Due:
One-to-four family $ 26,658 $ 30,455
Other loans 1,063 2,369
Total covered loans 30-89 days past due $ 27,721 $ 32,824
At June 30, 2016, the Company had $27.7 million of covered
loans that were 30 to 89 days past due, and covered loans of $133.1
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 $1.7 billion at June 30, 2016
and was considered current at that date.
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 and six months
ended June 30, 2016, the Company recorded recoveries of losses
on covered loans of $1.8 million and $4.7 million, respectively.
The 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 $1.5 million and $3.8 million respectively, that was
recorded in “Non-interest income.”
The Company recorded a provision for losses on covered loans of
$2.2 million and $3.1 million, respectively, in the three and six
months ended June 30, 2015. The provision was largely due to
credit deterioration in the acquired portfolios of one-to-four
family and home equity loans, and was partly offset by FDIC
indemnification income of $1.8 million and $2.5 million,
respectively, that was recorded in “Non-interest
income” in the corresponding period. |
