LOANS

6 Months Ended

Jun. 30, 2020

LOANS

LOANS

4. LOANS

A summary of the balances of loans follows:

	June 30,		December 31,
	2020		2019
	(in thousands)
Residential real estate:
One- to four-family	$	977,336	$	935,794
Second mortgages and equity lines of credit		152,709		155,716
Residential real estate construction		20,655		14,055
		1,150,700		1,105,565
Commercial:
Commercial real estate		1,318,051		1,169,923
Commercial construction		194,549		153,907
Commercial and industrial		456,192		306,282
Total commercial loans		1,968,792		1,630,112
Consumer loans:
Auto		345,212		424,592
Personal		9,318		11,289
Total consumer loans		354,530		435,881
Total loans		3,474,022		3,171,558
Allowance for loan losses		(36,107)		(24,060)
Loans, net	$	3,437,915	$	3,147,498

The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying unaudited interim Consolidated Balance Sheets. The Company and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At June 30, 2020 and December 31, 2019, the Company was servicing loans for participants aggregating $220.4 million and $195.2 million, respectively.

Acquired Loans

The loans purchased from Coastway Bancorp, Inc. included $5.4 million in purchased credit impaired loans (“PCI”). The PCI loans were primarily residential real estate loans. The following table provides certain information pertaining to PCI loans:

	June 30,			December 31,
	2020		2019
	(in thousands)
Outstanding balance	$	4,394	$	4,609
Carrying amount	$	4,169	$	4,378

The following table summarizes activity in the accretable yield for PCI loans:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(in thousands)
Balance at beginning of period	$	147	$	184	$	149	$	185
Additions		—		—		—		—
Accretion		(2)		(1)		(4)		(2)
Reclassification from nonaccretable difference		—		(14)		—		(14)
Balance at end of period	$	145	$	169	$	145	$	169

The following is the activity in the allowance for loan losses for the three and six months ended June 30, 2020 and 2019:

	Residential		Commercial		Commercial		Commercial
	Real Estate		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total
	(in thousands)
Balance at March 31, 2019	$	3,120	$	10,351	$	2,670	$	2,819	$	1,109	$	1,213	$	21,282
Provision (credit) for loan losses		(115)		749		257		442		71		346		1,750
Charge-offs		(116)		—		—		(750)		(178)		—		(1,044)
Recoveries		211		—		—		1		61		—		273
Balance at June 30, 2019	$	3,100	$	11,100	$	2,927	$	2,512	$	1,063	$	1,559	$	22,261
Balance at March 31, 2020	$	3,177	$	14,642	$	2,522	$	2,740	$	1,484	$	1,824	$	26,389
Provision (credit) for loan losses		2,598		3,747		693		1,102		808		1,056		10,004
Charge-offs		(52)		—		—		(280)		(126)		—		(458)
Recoveries		134		—		—		—		38		—		172
Balance at June 30, 2020	$	5,857	$	18,389	$	3,215	$	3,562	$	2,204	$	2,880	$	36,107

	Residential		Commercial		Commercial		Commercial
	Real Estate		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total
	(in thousands)
Balance at December 31, 2018	$	3,239	$	10,059	$	2,707	$	2,286	$	1,154	$	1,210	$	20,655
Provision (credit) for loan losses		(227)		1,036		220		1,001		228		349		2,607
Charge-offs		(136)		—		—		(790)		(444)		—		(1,370)
Recoveries		224		5		—		15		125		—		369
Balance at June 30, 2019	$	3,100	$	11,100	$	2,927	$	2,512	$	1,063	$	1,559	$	22,261
Balance at December 31, 2019	$	3,178	$	12,875	$	2,526	$	2,977	$	1,010	$	1,494	$	24,060
Provision (credit) for loan losses		2,549		6,687		689		943		1,499		1,386		13,753
Charge-offs		(52)		(1,174)		—		(577)		(379)		—		(2,182)
Recoveries		182		1		—		219		74		—		476
Balance at June 30, 2020	$	5,857	$	18,389	$	3,215	$	3,562	$	2,204	$	2,880	$	36,107

Allocation of the allowance to loan segments at June 30, 2020 and December 31, 2019 follows:

	Residential		Commercial		Commercial		Commercial
	Real Estate		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total
	(in thousands)
June 30, 2020:
Loans:
Impaired loans	$	25,022	$	3,631	$	10,971	$	10,578	$	—			$	50,202
Non-impaired loans		1,125,678		1,314,420		183,578		445,614		354,530				3,423,820
Total loans	$	1,150,700	$	1,318,051	$	194,549	$	456,192	$	354,530			$	3,474,022
Allowance for loan losses:
Impaired loans	$	1,066	$	—	$	—	$	457	$	—	$	—	$	1,523
Non-impaired loans		4,791		18,389		3,215		3,105		2,204		2,880		34,584
Total allowance for loan losses	$	5,857	$	18,389	$	3,215	$	3,562	$	2,204	$	2,880	$	36,107
December 31, 2019:
Loans:
Impaired loans	$	27,275	$	530	$	11,244	$	5,831	$	—			$	44,880
Non-impaired loans		1,078,290		1,169,393		142,663		300,451		435,881				3,126,678
Total loans	$	1,105,565	$	1,169,923	$	153,907	$	306,282	$	435,881			$	3,171,558
Allowance for loan losses:
Impaired loans	$	985	$	—	$	—	$	176	$	—	$	—	$	1,161
Non-impaired loans		2,193		12,875		2,526		2,801		1,010		1,494		22,899
Total allowance for loan losses	$	3,178	$	12,875	$	2,526	$	2,977	$	1,010	$	1,494	$	24,060

The following is a summary of past due and non-accrual loans at June 30, 2020 and December 31, 2019:

					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans on
	Past Due		Past Due		Past Due		Past Due		Non-accrual
	(in thousands)
June 30, 2020
Residential real estate:
One- to four-family	$	1,279	$	3,276	$	5,396	$	9,951	$	10,595
Second mortgages and equity lines of credit		183		319		556		1,058		1,095
Commercial real estate		—		2,667		3,631		6,298		3,631
Commercial construction		—		—		10,939		10,939		10,939
Commercial and industrial		1,278		799		1,879		3,956		10,572
Consumer:
Auto		1,175		671		942		2,788		1,179
Personal		5		42		13		60		53
Total	$	3,920	$	7,774	$	23,356	$	35,050	$	38,064
December 31, 2019
Residential real estate:
One- to four-family	$	9,364	$	5,622	$	5,668	$	20,654	$	10,610
Second mortgages and equity lines of credit		418		77		760		1,255		1,561
Commercial real estate		261		4,730		191		5,182		530
Commercial construction		—		—		1,960		1,960		11,244
Commercial and industrial		2,000		722		3,133		5,855		5,831
Consumer:
Auto		3,180		456		457		4,093		529
Personal		69		16		13		98		16
Total	$	15,292	$	11,623	$	12,182	$	39,097	$	30,321

At June 30, 2020 and December 31, 2019, there were no loans past due 90 days or more and still accruing.

The following information pertains to impaired loans:

	June 30, 2020						December 31, 2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(in thousands)
Impaired loans without a specific reserve:
Residential real estate	$	10,725	$	11,706	$	—	$	11,610	$	12,140	$	—
Commercial real estate		3,631		4,770		—		530		530		—
Commercial construction		10,971		11,244		—		11,244		11,244		—
Commercial and industrial		4,809		6,678		—		5,505		6,901		—
Total		30,136		34,398		—		28,889		30,815		—
Impaired loans with a specific reserve:
Residential real estate		14,297		14,634		1,066		15,665		16,218		985
Commercial and industrial		5,769		5,769		457		326		326		176
Total		20,066		20,403		1,523		15,991		16,544		1,161
Total impaired loans	$	50,202	$	54,801	$	1,523	$	44,880	$	47,359	$	1,161

	Three Months Ended June 30,
	2020						2019
					Interest						Interest
	Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(in thousands)
Residential real estate	$	25,241	$	253	$	196	$	30,868	$	408	$	314
Commercial real estate		3,668		1		1		92		—		—
Commercial construction		10,971		—		—		—		—		—
Commercial and industrial		7,765		—		—		6,466		10		10
Total	$	47,645	$	254	$	197	$	37,426	$	418	$	324

	Six Months Ended June 30,
	2020						2019
					Interest						Interest
	Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(in thousands)
Residential real estate	$	25,919	$	575	$	518	$	30,818	$	948	$	759
Commercial real estate		2,622		1		1		895		—		—
Commercial construction		11,062		—		—		—		—		—
Commercial and industrial		7,120		7		7		5,586		23		23
Total	$	46,723	$	583	$	526	$	37,299	$	971	$	782

Interest income recognized and interest income recognized on a cash basis in the tables above represent interest income for the three and six months ended June 30, 2020 and 2019, not for the time period designated as impaired. No additional funds are committed to be advanced in connection with impaired loans.

There were no material TDR loan modifications for the three months ended June 30, 2020 and 2019.  

The recorded investment in TDRs was $17.3 million and $20.0 million at June 30, 2020 and December 31, 2019, respectively. Commercial TDRs totaled $2.7 million and $3.0 million at June 30, 2020 and December 31, 2019, respectively. The remainder of the TDRs outstanding at the end of these periods were residential loans. Non-accrual TDRs totaled $4.3 million and $5.0 million at June 30, 2020 and December 31, 2019, respectively. Of these loans, $2.7 million and $3.0 million were non-accrual commercial TDRs.

All TDR loans are considered impaired and management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each loan. TDR loans which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In either case, any reserve required is recorded as part of the allowance for loan losses.

During the three and six months ended June 30, 2020 and 2019, there were no payment defaults on TDRs.  

Credit Quality Information

The Company uses a ten grade internal loan rating system for commercial real estate, commercial construction and commercial loans, as follows:

Loans rated 1 – 6 are considered “pass” rated loans with low to average risk.

Loans rated 7 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.  

Loans rated 8 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 9 are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 10 are considered “uncollectible” (loss), and of such little value that their continuance as loans is not warranted.  

Loans not rated consist primarily of certain smaller balance commercial real estate and commercial loans that are managed by exception.  

On an annual basis, or more often if needed, the Company formally reviews on a risk adjusted basis, the ratings on all commercial real estate, construction and commercial loans. Semi-annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.  

On a monthly basis, the Company reviews the residential construction, residential real estate and consumer installment portfolios for credit quality primarily through the use of delinquency reports.

The following table presents the Company’s loans by risk rating at June 30, 2020 and December 31, 2019:

	June 30, 2020						December 31, 2019
	Commercial		Commercial		Commercial		Commercial		Commercial		Commercial
	Real Estate		Construction		and Industrial		Real Estate		Construction		and Industrial
	(in thousands)
Loans rated 1 - 6	$	1,313,255	$	168,974	$	444,708	$	1,163,342	$	127,962	$	294,507
Loans rated 7		258		14,636		1,073		4,539		14,701		6,117
Loans rated 8		524		10,939		8,397		530		11,244		3,223
Loans rated 9		3,107		—		2,014		—		—		2,435
Loans rated 10		—		—		—		—		—		—
Loans not rated		907		—		—		1,512		—		—
	$	1,318,051	$	194,549	$	456,192	$	1,169,923	$	153,907	$	306,282