| Loans | Note 5: Loans
The following table sets forth the composition of the loan
portfolio at the dates indicated:
June 30, 2017 December 31, 2016
Amount Percent of Non-Covered Amount Percent of Non-Covered
(dollars in thousands)
Non-Covered Loans Held for Investment:
Mortgage Loans:
Multi-family $ 26,859,208 72.15 % $ 26,945,052 72.13 %
Commercial real estate 7,540,633 20.26 7,724,362 20.68
One-to-four family 412,945 1.11 381,081 1.02
Acquisition, development, and construction 373,041 1.00 381,194 1.02
Total mortgage loans held for investment $ 35,185,827 94.52 $ 35,431,689 94.85
Other Loans:
Commercial and industrial 1,485,487 3.99 1,341,216 3.59
Lease financing, net of unearned income of $56,205 and $60,278,
respectively 544,995 1.47 559,229 1.50
Total commercial and industrial loans (1) 2,030,482 5.46 1,900,445 5.09
Purchased credit-impaired loans 5,406 0.01 5,762 0.01
Other 4,129 0.01 18,305 0.05
Total other loans held for investment 2,040,017 5.48 1,924,512 5.15
Total non-covered loans held for investment $ 37,225,844 100.00 % $ 37,356,201 100.00 %
Net deferred loan origination costs 25,195 26,521
Allowance for losses on non-covered loans (154,683 ) (158,290 )
Non-covered loans held for investment, net $ 37,096,356 $ 37,224,432
Covered loans
— 1,698,133
Allowance for losses on covered loans
— (23,701 )
Covered loans, net $
— $ 1,674,432
Loans held for sale 1,803,724 409,152
Total loans, net $ 38,900,080 $ 39,308,016
(1) Includes specialty finance loans of
$1.5 billion at June 30, 2017 and $1.3 billion at
December 31, 2016, and other commercial and industrial loans
of $566.4 million and $632.9 million, respectively, at
June 30, 2017 and December 31, 2016.
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 with rent-regulated units and
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.
To a lesser extent, the Company also originates one-to-four family
loans, acquisition, development, and construction
(“ADC”) loans, and commercial and industrial
(“C&I”) loans, for investment. One-to-four family
loans held for investment are originated through the
Company’s mortgage banking operation and primarily consist of
jumbo prime adjustable rate mortgages made to borrowers with a
solid credit history. 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. In addition, the Company utilizes the same stringent
appraisal process for ADC loans as it does for its multi-family and
CRE loans.
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 typically
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,
2017 and December 31, 2016, respectively, were loans of
$58.2 million and $91.8 million to 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 $5.4 million and an unpaid principal
balance of $6.2 million at June 30, 2017, are loans that
had been covered under an FDIC Loss Share 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 were initially measured
at fair value, which included 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 operation originates,
aggregates, sells, 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 nationwide. 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 that are typically 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 currently services mortgage loans for various third parties,
primarily including GSEs.
On June 27, 2017, the Company entered into an agreement to
sell its mortgage banking business, which was acquired as part of
its 2009 FDIC-assisted acquisition of AmTrust Bank
(“AmTrust”) and is reported under the Company’s
Residential Mortgage Banking segment, to Freedom Mortgage
Corporation (“Freedom”). Freedom will acquire both the
Company’s origination and servicing platforms, as well as our
mortgage servicing rights asset of approximately $220.6 million and
loans of approximately $266.9 million. Additionally, the Company
has received approval from the FDIC to sell the assets covered
under our Loss Share Agreements (the “LSA”) and we have
entered into an agreement to sell the majority of our one-to-four
family residential mortgage-related assets of approximately $1.5
billion, including those covered under the LSA, to an affiliate of
Cerberus Capital Management, L.P. (“Cerberus”).
The transactions are expected to close during the third quarter of
2017, subject to certain closing conditions.
The decision to sell the mortgage banking business and to sell the
assets covered under our LSA was the result of an evaluation with
the Board of Directors and our outside advisors. Selling to a
large, national, full-service mortgage banking company that would
keep certain employees and maintain operations in the region were
important considerations during the evaluation process. These
actions are consistent with the Company’s strategic
objectives. Such sales allow the Company to focus on its core
business model, including growth through acquisitions, generate
liquidity which will be redeployed into higher-earning assets,
enhance returns through improved efficiencies, and reposition our
balance sheet.
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, 2017:
(in thousands) Loans 30-89 Days (1) Non-Accrual (1) Loans 90 Days or Total Past Due Current Total Loans
Multi-family $ 4,201 $ 9,820 $
— $ 14,021 $ 26,845,187 $ 26,859,208
Commercial real estate 1,586 4,497
— 6,083 7,534,550 7,540,633
One-to-four family 297 10,724
— 11,021 401,924 412,945
Acquisition, development, and construction
— 6,200
— 6,200 366,841 373,041
Commercial and industrial (2) (3) 6,036 49,484
— 55,520 1,974,962 2,030,482
Other 15 1,263
— 1,278 2,851 4,129
Total $ 12,135 $ 81,988 $
— $ 94,123 $ 37,126,315 $ 37,220,438
(1) Excludes $595 thousand of
non-covered PCI loans that were 90 days or more past due.
(2) Includes lease financing receivables,
all of which were current.
(3) Includes $6.0 million and
$34.3 million of taxi medallion loans or taxi
medallion-related loans that were 30 to 89 days past due and 90
days or more past due, respectively.
The following table presents information regarding the quality of
the Company’s non-covered loans held for investment
(excluding non-covered PCI loans) at December 31, 2016:
(in thousands) Loans 30-89 Days (1) Non-Accrual (1) Loans 90 Days or Total Past Due Current Total Loans
Multi-family $ 28 $ 13,558 $
— $ 13,586 $ 26,931,466 $ 26,945,052
Commercial real estate
— 9,297
— 9,297 7,715,065 7,724,362
One-to-four family 2,844 9,679
— 12,523 368,558 381,081
Acquisition, development, and construction
— 6,200
— 6,200 374,994 381,194
Commercial and industrial (2) (3) 7,263 16,422
— 23,685 1,876,760 1,900,445
Other 248 1,313
— 1,561 16,744 18,305
Total $ 10,383 $ 56,469 $
— $ 66,852 $ 37,283,587 $ 37,350,439
(1) Excludes $6 thousand and
$869 thousand of non-covered PCI loans that were 30 to 89 days
past due and 90 days or more past due, respectively.
(2) Includes lease financing receivables,
all of which were current.
(3) Includes $6.8 million and
$15.2 million of taxi medallion loans that were 30 to 89 days
past due and 90 days or more past due, respectively.
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, 2017:
Mortgage Loans Other Loans
(in thousands) Multi-Family Commercial One-to-Four Family Acquisition, Total Commercial (1) Other Total Other
Credit Quality Indicator:
Pass $ 26,664,141 $ 7,525,701 $ 410,772 $ 324,789 $ 34,925,403 $ 1,910,975 $ 4,121 $ 1,915,096
Special mention 100,089 8,515
— 42,052 150,656 38,503
— 38,503
Substandard 94,978 6,417 2,173 6,200 109,768 81,004 8 81,012
Doubtful
—
—
—
—
—
—
—
—
Total $ 26,859,208 $ 7,540,633 $ 412,945 $ 373,041 $ 35,185,827 $ 2,030,482 $ 4,129 $ 2,034,611
(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 (excluding non-covered PCI
loans) by credit quality indicator at December 31, 2016:
Mortgage Loans Other Loans
(in thousands) Multi-Family Commercial One-to-Four Family Acquisition, Total Commercial (1) Other Total Other
Credit Quality Indicator:
Pass $ 26,754,622 $ 7,701,773 $ 371,179 $ 341,784 $ 35,169,358 $ 1,771,975 $ 16,992 $ 1,788,967
Special mention 164,325 12,604
— 33,210 210,139 54,979
— 54,979
Substandard 26,105 9,985 9,902 6,200 52,192 73,491 1,313 74,804
Doubtful
—
—
—
—
—
—
—
—
Total $ 26,945,052 $ 7,724,362 $ 381,081 $ 381,194 $ 35,431,689 $ 1,900,445 $ 18,305 $ 1,918,750
(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 potential weaknesses that deserve
management’s close attention; 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 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, 2017, loans on which concessions
were made with respect to rate reductions and/or extension of
maturity dates amounted to $37.4 million; loans on which
forbearance agreements were reached amounted to
$2.6 million.
The following table presents information regarding the
Company’s TDRs as of the dates indicated:
June 30, 2017 December 31, 2016
(in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total
Loan Category:
Multi-family $ 1,962 $ 8,061 $ 10,023 $ 1,981 $ 8,755 $ 10,736
Commercial real estate
— 891 891
— 1,861 1,861
One-to-four family 219 3,021 3,240 222 1,749 1,971
Commercial and industrial 177 25,512 25,689 1,263 3,887 5,150
Other
— 201 201
— 202 202
Total $ 2,358 $ 37,686 $ 40,044 $ 3,466 $ 16,454 $ 19,920
The eligibility of a borrower for work-out concessions of any
nature depends upon the facts and circumstances of each loan, 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 three
months ended June 30, 2017 and 2016 are summarized as
follows:
For the Three Months Ended
June 30, 2017
Weighted Average
(dollars in thousands) Number Pre-Modification Post-Modification Pre-Modification Post- Charge-off Capitalized
Loan Category:
One-to-four family 3 $ 544 $ 657 5.90 % 2.00 % $
— $ 7
Commercial and industrial 13 22,752 18,722 3.49 3.45 825
—
Total 16 $ 23,296 $ 19,379 $ 825 $ 7
For the Three Months Ended
June 30, 2016
Weighted Average
(dollars in thousands) Number Pre-Modification Post-Modification Pre-Modification Post- Charge-off Capitalized
Loan Category:
One-to-four family 1 $ 1 $ 108 4.13 % 2.00 % $
— $ 2
Commercial and industrial 1 651 650 3.30 3.30
—
—
Total 2 $ 652 $ 758 $
— $ 2
The financial effects of the Company’s TDRs for the six
months ended June 30, 2017 and 2016 are summarized as
follows:
For the Six Months Ended June 30,
2017
Weighted Average
(dollars in thousands) Number Pre-Modification Post-Modification Pre-Modification Post- Charge-off Capitalized
Loan Category:
One-to-four family 4 $ 809 $ 994 5.93 % 2.21 % $
— $ 12
Commercial and industrial 30 30,714 23,151 3.45 3.45 4,104
—
Total 34 $ 31,523 $ 24,145 $ 4,104 $ 12
For the Six Months Ended June 30,
2016
Weighted Average
(dollars in thousands) Number Pre-Modification Post-Modification Pre-Modification Post- Charge-off Capitalized
Loan Category:
Multi-family 1 $ 9,340 $ 8,503 4.63 % 4.00 % $
— $
—
One-to-four family 3 477 636 3.62 3.07
— 6
Commercial and industrial 2 $ 1,397 $ 1,300 3.30 3.20 47
—
Total 6 $ 11,214 $ 10,439 $ 47 $ 6
At June 30, 2017, one non-covered one-to-four family loan, in
the amount of $255,000, that had been modified as a TDR during the
twelve months ended at that date was 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 the borrower were in
bankruptcy or if the loan were partially charged off subsequent to
modification.
Covered Loans
The following table presents the carrying value of held-for-sale
covered loans which were acquired in the acquisitions of AmTrust
and Desert Hills Bank (“Desert Hills”) as of
June 30, 2017:
(dollars in thousands) Amount Percent of Covered
Loan Category:
One-to-four family $ 1,433,324 96.8 %
Other loans 47,409 3.2
Total covered loans held for sale $ 1,480,733 100.0 %
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 LSA. 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, 2017 and December 31, 2016, the unpaid
principal balance of covered loans was $1.8 billion and
$2.1 billion, respectively. The carrying value of such loans
was $1.5 billion and $1.7 billion 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, 2017, changes in the
accretable yield for covered loans were as follows:
(in thousands) Accretable Yield
Balance at beginning of period $ 647,470
Reclassification to non-accretable difference (11,381 )
Accretion (62,625 )
Balance at end of period $ 573,464
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 with an improvement in the
underlying credit assumptions and the resetting of rates on
variable rate loans at a slightly higher level, 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 its LSA
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 non-interest
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.
At June 30, 2017 and December 31, 2016, respectively, the
Company held residential mortgage loans of $71.6 million and
$78.6 million that were in the process of foreclosure. The
vast majority of such loans were covered loans.
The following table presents information regarding the
Company’s covered loans (which, as of June 30, 2017 are
classified as held for sale) that were 90 days or more past due at
the dates indicated:
(in thousands) June 30, 2017 December 31, 2016
Covered Loans 90 Days or More Past Due:
One-to-four $ 120,815 $ 124,820
Other loans 8,278 6,645
Total covered loans 90 days or more past due $ 129,093 $ 131,465
The following table presents information regarding the
Company’s covered loans (which, as of June 30, 2017 are
classified as held for sale) that were 30 to 89 days past due at
the dates indicated:
(in thousands) June 30, 2017 December 31, 2016
Covered Loans 30-89
One-to-four $ 17,718 $ 21,112
Other loans 5,134 1,536
Total covered loans 30-89 $ 22,852 $ 22,648
At June 30, 2017, the Company had $22.9 million of
covered loans that were 30 to 89 days past due, and covered loans
of $129.1 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.
Loans that may have been classified as non-performing non-performing non-accretable 310-30
The primary credit quality indicator for covered loans is the
expectation of underlying cash flows. In the three and six months
ended June 30, 2017, the Company recorded recoveries of losses
on covered loans of $17.9 million and $23.7 million,
respectively. The recoveries were largely due to an increase in
expected cash flows in the acquired portfolios of one-to-four “Non-interest
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 “Non-interest |
