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Note 4 - Loans and Allowance for Credit Losses on Loans
 9 Months Ended
Sep. 30, 2020
Notes to Financial Statements  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

(4)

Loans and Allowance for Credit Losses on Loans

 

Composition of loans by class as reported under ASC 326 follows:

 

(in thousands)

 

September 30, 2020

  

December 31, 2019

 
         

Commercial real estate - non-owner occupied

 $828,328  $746,283 

Commercial real estate - owner occupied

  492,825   474,329 

Total commercial real estate

  1,321,153   1,220,612 
         

Commercial and industrial - term

  494,394   457,298 

Commercial and industrial - term - PPP

  642,056   — 

Commercial and industrial - lines of credit

  237,456   381,502 

Total commercial and industrial

  1,373,906   838,800 
         

Residential real estate - owner occupied

  211,984   217,606 

Residential real estate - non-owner occupied

  143,149   134,995 

Total residential real estate

  355,133   352,601 
         

Construction and land development

  257,875   255,816 

Home equity lines of credit

  97,150   103,854 

Consumer

  44,161   47,467 

Leases

  13,981   16,003 

Credits cards - commercial

  9,122   9,863 

Total loans (1)

 $3,472,481  $2,845,016 

 

(1) Total loans are presented inclusive of premiums, discounts, and net of loan origination fees and costs.

 

For historical comparative purposes, the composition of loans by class pre-ASC 326 adoption follows:

 

(in thousands)

 

December 31, 2019

 
     

Commercial and industrial

 $870,511 

Construction and development, excluding undeveloped land

  213,822 

Undeveloped land

  46,360 
     

Real estate mortgage:

    

Commercial investment

  736,618 

Owner occupied commercial

  473,783 

1-4 family residential

  334,358 

Home equity - first lien

  48,620 

Home equity - junior lien

  73,477 

Subtotal: Real estate mortgage

  1,666,856 

Consumer

  47,467 

Total loans (1)

 $2,845,016 

 

(1) Total loans are presented inclusive of premiums, discounts, and net of loan origination fees and costs.

 

Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $12 million and $7 million at September 30, 2020 and December 31, 2019, respectively, and was included in the consolidated balance sheets.

 

Loans with carrying amounts of $1.9 billion and $1.6 billion at September 30, 2020 and December 31, 2019, respectively, were pledged to secure FHLB borrowing capacity, the increase stemming from pledging a portion of the PPP portfolio this year.

 

Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers, totaled $44 million and $43 million as of September 30, 2020 and December 31, 2019, respectively.

 

The following table summarizes loans acquired in Bancorp’s May 1, 2019 acquisition, as recasted:

 

  

May 1, 2019

 
  

Contractual

  

Non-accretable

  

Accretable

  

Acquisition-day

 

(in thousands)

 

Receivable

  

Yield

  

Yield

  

Fair Value

 
                 

Commercial and industrial

 $8,249  $—  $(23) $8,226 

Construction and land development

  18,738   —   86   18,824 

Real estate mortgage:

                

Commercial real estate

  84,219   —   (456)  83,763 

Residential real estate

  50,556   —   322   50,878 

Home equity lines of credit

  875   —   8   883 

Subtotal: Real estate mortgage

  135,650   —   (126)  135,524 
                 

Consumer

  1,528   —   (73)  1,455 
                 

Total loans acquired under ASC 310-20

  164,165   —   (136)  164,029 
                 

Commercial and industrial

  —   —   —   — 

Construction and land development

  —   —   —   — 

Real estate mortgage:

                

Commercial real estate

  1,351   (1,351)  —   — 

Residential real estate

  228   (228)  —   — 

Home equity lines of credit

  —   —   —   — 

Subtotal: Real estate mortgage

  1,579   (1,579)  —   — 
                 

Consumer

  —   —   —   — 
                 

Total purchased credit impaired loans acquired under ASC 310-30

  1,579   (1,579)  —   — 
                 

Total loans

 $165,744  $(1,579) $(136) $164,029 

 

 

The Bank acquired PCI loans related to its 2019 and 2013 acquisitions. At acquisition date, these loans were accounted for under ASC 310-30. On January 1, 2020, Bancorp adopted ASC 326 using the prospective transition approach for loans purchased with credit deterioration that were previously classified as PCI and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI loans met the criteria of PCD loans as of the adoption date. On January 1, 2020, non-accretable yield marks of $1.6 million related to formerly classified PCI loans were reclassed between the amortized cost basis of loans and corresponding ACL. The majority of these marks were subsequently charged off in the third quarter of 2020.

 

Bancorp’s estimate of the ACL on loans reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications. The activity in the ACL related to loans follows (2020 is presented in accordance with ASC 326 and 2019 in accordance with ASC 310):

 

(in thousands)

Three Months Ended September 30, 2020

 

Beginning

Balance

  

Impact of

Adopting

ASC 326

  

Initial ACL on

Loans Purchased

with Credit

Deterioration

  

Provision for

Credit Losses

  

Charge-offs

  

Recoveries

  

Ending

Balance

 
                             

Commercial real estate - non-owner occupied

 $18,839  $-  $-  $(558) $(143) $2  $18,140 

Commercial real estate - owner occupied

  6,706   -   -   1,674   (1,351)  -   7,029 

Total commercial real estate

  25,545   -   -   1,116   (1,494)  2   25,169 
                             

Commercial and industrial - term

  7,339   -   -   1,605   (1)  1   8,944 

Commercial and industrial - lines of credit

  3,242   -   -   179   -   -   3,421 

Total commercial and industrial

  10,581   -   -   1,784   (1)  1   12,365 
                             

Residential real estate - owner occupied

  2,848   -   -   464   (61)  13   3,264 

Residential real estate - non-owner occupied

  1,594   -   -   418   (2)  -   2,010 

Total residential real estate

  4,442   -   -   882   (63)  13   5,274 
                             

Construction and land development

  5,608   -   -   420   -   -   6,028 

Home equity lines of credit

  832   -   -   106   -   -   938 

Consumer

  362   -   -   57   (140)  57   336 

Leases

  223   -   -   34   -   -   257 

Credit cards - commercial

  115   -   -   19   -   -   134 

Total net loan (charge-offs) recoveries

 $47,708  $-  $-  $4,418  $(1,698) $73  $50,501 

 

(in thousands)

Nine Months Ended September 30, 2020

 

Beginning

Balance

  

Impact of

Adopting

ASC 326

  

Initial ACL on

Loans Purchased

with Credit

Deterioration

  

Provision for

Credit Losses

  

Charge-offs

  

Recoveries

  

Ending

Balance

 
                             

Commercial real estate - non-owner occupied

 $5,235  $2,946  $152  $9,945  $(143) $5  $18,140 

Commercial real estate - owner occupied

  3,327   1,542   1,350   2,161   (1,351)  -   7,029 

Total commercial real estate

  8,562   4,488   1,502   12,106   (1,494)  5   25,169 
                             

Commercial and industrial - term

  6,782   365   -   1,790   (1)  8   8,944 

Commercial and industrial - lines of credit

  5,657   (1,528)  -   (708)  -   -   3,421 

Total commercial and industrial

  12,439   (1,163)  -   1,082   (1)  8   12,365 
                             

Residential real estate - owner occupied

  1,527   1,087   99   615   (79)  15   3,264 

Residential real estate - non-owner occupied

  947   429   -   636   (2)  -   2,010 

Total residential real estate

  2,474   1,516   99   1,251   (81)  15   5,274 
                             

Construction and land development

  2,105   3,056   -   867   -   -   6,028 

Home equity lines of credit

  728   114   -   96   -   -   938 

Consumer

  100   264   34   54   (394)  278   336 

Leases

  237   (4)  -   24   -   -   257 

Credit cards - commercial

  146   (50)  -   38   -   -   134 

Total net loan (charge-offs) recoveries

 $26,791  $8,221  $1,635  $15,518  $(1,970) $306  $50,501 

 

(in thousands)

Three Months Ended September 30, 2019

 

Beginning

Balance

  

Provision for

Credit Losses

  

Charge-offs

  

Recoveries

  

Ending

Balance

 
                     

Real estate mortgage

 $12,030  $269  $-  $46  $12,345 

Commercial and industrial

  11,858   32   (91)  154   11,953 

Construction and development

  1,810   (108)  -   -   1,702 

Undeveloped land

  601   195   -   -   796 

Consumer

  117   12   (139)  91   81 
  $26,416  $400  $(230) $291  $26,877 

 

 

(in thousands)

Nine Months Ended September 30, 2019

 

Beginning

Balance

  

Provision for

Credit Losses

  

Charge-offs

  

Recoveries

  

Ending

Balance

 
                     

Real estate mortgage

 $10,681  $1,579  $(13) $98  $12,345 

Commercial and industrial

  11,965   (178)  (94)  260   11,953 

Construction and development

  1,760   (261)  -   203   1,702 

Undeveloped land

  752   44   -   -   796 

Consumer

  376   (184)  (383)  272   81 
  $25,534  $1,000  $(490) $833  $26,877 

 

 

Upon adoption of ASC 326 on January 1, 2020, Bancorp recorded an increase of $8.2 million to the ACL on loans and a corresponding decrease to retained earnings, net of the DTA impact. In addition, non-accretable yield marks of $1.6 million related to formerly classified PCI loans were reclassed between the amortized cost basis of loans and corresponding ACL. The majority of these marks were subsequently charged off in the third quarter of 2020. The adjustment upon adoption of ASC 326 raised the ACL on loans balance to $37 million on January 1, 2020. In addition to CECL adoption, Bancorp’s national unemployment forecast adjustments within the CECL model have had a significant impact on the ACL in 2020, along with changes in the loan mix and the addition of a large specific reserve during the second quarter of 2020.

 

Subsequent to January 1, 2020, based on the economic crisis caused by COVID-19 and measures taken to protect public health such as stay-at-home orders and mandatory closures of businesses, economic activity halted significantly and job losses surged. As such, national unemployment has fluctuated widely as follows:

 

  

Sep 20

  

Aug 20

  

Jul 20

  

Jun 20

  

May 20

  

Apr 20

  

Mar 20

  

Feb 20

  

Jan 20

  

Dec 19

 

National Unemployment Rate

  7.90%  8.40%  10.20%  11.10%  13.30%  14.70%  4.40%  3.50%  3.60%  3.50%

 

As of March 31, 2020, based on the evolving pandemic, Bancorp elected to forecast for only one quarter of national unemployment (versus the four quarters used as of January 1, 2020) and modified its forecast to reflect a significant increase in unemployment (utilizing the highest unemployment rate in Bancorp’s observed history) reverting back to Bancorp’s long-term average in the third quarter of 2020, with the loss driver remaining significantly worse compared to recent trends. The impact of the increased national unemployment forecast was muted by an adjustment in qualitative factors attributed to the massive federal stimulus programs enacted at the end of the first quarter in response to the pandemic. The forecasted increase in national unemployment coupled with the qualitative factor adjustments resulted in approximately $4.2 million of the total $5.5 million provision expense recorded for the three months ended March 31, 2020.

 

During the second quarter, for the first time during 2020, the FRB released a forecasted Seasonally Adjusted National Civilian Unemployment Rate for the years ended December 31, 2020, 2021 and 2022. Based on this and the continuation of the economic crisis, as of June 30, 2020, Bancorp elected to forecast for four quarters of national unemployment utilizing actual June unemployment then stepping down to the FRB median forecast before reverting back to Bancorp’s long-term average in the fourth quarter of 2020. Similar to the first quarter of 2020, the impact of the increased unemployment forecast was muted by an adjustment in qualitative factors attributed to the massive federal stimulus programs that have been enacted. The forecasted increase in unemployment coupled with the qualitative factor adjustments resulted in approximately $4.6 million of the total $5.5 million provision expense recorded for the three months ended June 30, 2020.

 

During the third quarter, the FRB released its forecasted Seasonally Adjusted National Civilian Unemployment Rate for the 12 months ended December 31, 2020, 2021, 2022 and 2023 as follows:

 

  

2020

  

2021

  

2022

  

2023

 
                 

Upper end of range

  8.0%  8.0%  7.5%  6.0%

Median

  7.6%  5.5%  4.6%  4.0%

Lower end of range

  6.5%  4.0%  3.5%  3.5%

 

As of September 30, 2020, Bancorp elected to forecast for one quarter of national unemployment utilizing the FRB’s 2020 median unemployment forecast released in September then stepping down to the FRB’s 2021 median unemployment forecast over the next three quarters before reverting back to Bancorp’s long-term average. In addition, Bancorp predominantly reversed the qualitative factor adjustment established in the first and second quarters of 2020 attributed to the massive federal stimulus. The forecasted changes in unemployment, coupled with the qualitative factor adjustments resulted in approximately $4.4 million, of the total third quarter provision expense for the three months ended September.

 

The pandemic has had a material impact on Bancorp’s ACL on loans calculation for 2020. While Bancorp has not yet experienced any credit quality issues resulting in charge-offs related to the pandemic, the ACL calculation for loans and resulting provision were significantly impacted by changes in forecasted economic conditions. Should the forecast for economic conditions worsen, Bancorp could experience further increases in its required ACL and record additional provision expense. While the execution of payment deferrals under the CARES ACT has assisted the ratio of past due loans to total loans, it is possible that asset quality could worsen at future measurement periods if the effects of the pandemic are prolonged.

 

In connection with the adoption of ASC 326, Bancorp analyzed its unused lines of credit and recorded credit loss expense for off-balance sheet credit exposures (non-interest expense) totaling $375,000 and $1.5 million during the first and second quarters of 2020. The second quarter increase directly correlates to the increased availability due to C&I line of credit pay downs. Further declines in line of credit utilization resulted in an additional $550,000 of such expense in the third quarter. At September 30, 2020, approximately $6 million was accrued within other liabilities related to off-balance sheet credit exposures.

 

During the second quarter of 2020, a large CRE relationship was placed on non-accrual status and received a $2 million specific reserve allocation within the ACL on loans. The borrower did not receive PPP funds, the loan was current at the time of non-accrual classification and each subsequent quarter end, and no payments related to the loan have been deferred. 

 

The following table presents the amortized cost basis and ACL allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses:

 

(in thousands)

September 30, 2020

 

Real Estate

  

Accounts

Receivable /

Equipment

  

Other

  

Total

  

ACL

Allocation

 
                     

Commercial real estate - non-owner occupied

 $10,218  $-  $-  $10,218  $1,991 

Commercial real estate - owner occupied

  1,493   -   -   1,493   - 

Total commercial real estate

  11,711   -   -   11,711   1,991 
                     

Commercial and industrial - term

  18   9   -   27   18 

Commercial and industrial - lines of credit

  -   88   -   88   - 

Total commercial and industrial

  18   97   -   115   18 
                     

Residential real estate - owner occupied

  443   -   -   443   - 

Residential real estate - non-owner occupied

  102   -   -   102   - 

Total residential real estate

  545   -   -   545   - 
                     

Construction and land development

  -   -   -   -   - 

Home equity lines of credit

  -   -   -   -   - 

Consumer

  -   -   5   5   - 

Leases

  -   -   -   -   - 

Credit cards - commercial

  -   -   -   -   - 

Total collateral dependent loans

 $12,274  $97  $5  $12,376  $2,009 

 

There have been no significant changes to the types of collateral securing Bancorp’s collateral dependent loans.

 

The following table presents loans individually and collectively evaluated for impairment and the respective ACL allocation as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASC 326:

 

  

Loans

  

ACL

 

(in thousands)

December 31, 2019

 

 

Loans individually evaluated for impairment

  

Loans collectively evaluated for impairment

  

Loans acquired

with deteriorated

credit quality

  

Total loans

  

Loans individually evaluated for impairment

  

Loans collectively evaluated for impairment

  

Loans acquired

with deteriorated

credit quality

  

Total ACL

 
                                 

Commercial and industrial

 $8,223  $862,288  $—  $870,511  $1,150  $11,672  $—  $12,822 

Construction and development, excluding undeveloped land

  —   213,822   —   213,822   —   1,319   —   1,319 

Undeveloped land

  —   46,360   —   46,360   —   786   —   786 

Real estate mortgage

  3,307   1,663,549   —   1,666,856   13   11,751   —   11,764 

Consumer

  —   47,467   —   47,467   —   100   —   100 
                                 

Total

 $11,530  $2,833,486  $—  $2,845,016  $1,163  $25,628  $—  $26,791 

 

The following table presents information pertaining to impaired loans as of December 31, 2019 and the three and nine month periods ended September 30, 2019, as determined in accordance with ASC 310:

 

  

As of

  

Three months ended

  

Nine months ended

 
  

December 31, 2019

  

September 30, 2019

  

September 30, 2019

 
                             
      

Unpaid

      

Average

  

Interest

  

Average

  

Interest

 
  

Recorded

  

principal

  

Related

  

recorded

  

income

  

recorded

  

income

 

(in thousands)

 

investment

  

balance

  

ACL

  

investment

  

recognized

  

investment

  

recognized

 
                             

Impaired loans with no related ACL

                            

Commercial and industrial

 $174  $174  $—  $136  $—  $164  $— 

Construction and development, excluding undeveloped land

  —   —   —   —   —   80   — 

Undeveloped land

  —   —   —   —   —   119   — 
                             

Real estate mortgage

                            

Commercial investment

  741   741   —   524   —   376   — 

Owner occupied commercial

  2,278   2,736   —   1,427   —   1,226   — 

1-4 family residential

  124   124   —   426   —   614   — 

Home equity - junior lien

  151   151   —   359   —   329   — 

Subtotal: Real estate mortgage

  3,294   3,752   —   2,736   —   2,545   — 
                             

Subtotal

 $3,468  $3,926  $—  $2,872  $—  $2,908  $— 
                             

Impaired loans with an ACL

                            

Commercial and industrial

 $8,049  $8,049  $1,150  $28  $—  $27  $— 

Real estate mortgage

                            

1-4 family residential

  13   13   13   14   —   14   — 

Subtotal: Real estate mortgage

  13   13   13   14   —   14   — 
                             

Subtotal

 $8,062  $8,062  $1,163  $42  $—  $41  $- 
                             

Total impaired loans:

                            

Commercial and industrial

 $8,223  $8,223  $1,150  $164  $—  $191  $- 

Construction and development, excluding undeveloped land

  —   —   —   —   —   80   — 

Undeveloped land

  —   —   —   —   —   119   — 
                             

Real estate mortgage

                            

Commercial investment

  741   741   —   524   —   376   — 

Owner occupied commercial

  2,278   2,736   —   1,427   —   1,226   — 

1-4 family residential

  137   137   13   440   —   628   — 

Home equity - junior lien

  151   151   —   359   —   329   — 

Subtotal: Real estate mortgage

  3,307   3,765   13   2,750   —   2,559   — 
                             

Total

 $11,530  $11,988  $1,163  $2,914  $—  $2,949  $- 

 

 

 

Differences between recorded investment amounts and unpaid principal balance amounts less related ACL are due to partial charge-offs which have occurred over the lives of certain loans.

 

The following tables present the aging of contractually past due loans by portfolio class (2020 is presented in accordance with ASC 326 and 2019 in accordance with ASC 310):

 

 

 

(in thousands)

     

30-59 days

  

60-89 days

  

90 or more

  

Total

  

Total

 

September 30, 2020

 

Current

  

Past Due

  

Past Due

  

Days Past Due

  

Past Due

  

Loans

 
                         

Commercial real estate - non-owner occupied

 $826,448  $275  $240  $1,365  $1,880  $828,328 

Commercial real estate - owner occupied

  491,628   —   168   1,029   1,197   492,825 

Total commercial real estate

  1,318,076   275   408   2,394   3,077   1,321,153 
                         

Commercial and industrial - term

  494,286   95   4   9   108   494,394 

Commercial and industrial - term - PPP

  642,056   —   —   —   —   642,056 

Commercial and industrial - lines of credit

  236,582   381   5   488   874   237,456 

Total commercial and industrial

  1,372,924   476   9   497   982   1,373,906 
                         

Residential real estate - owner occupied

  210,518   1,062   17   387   1,466   211,984 

Residential real estate - non-owner occupied

  142,672   375   30   72   477   143,149 

Total residential real estate

  353,190   1,437   47   459   1,943   355,133 
                         

Construction and land development

  257,875   —   —   —   —   257,875 

Home equity lines of credit

  97,150   —   —   —   —   97,150 

Consumer

  44,150   6   3   2   11   44,161 

Leases

  13,981   —   —   —   —   13,981 

Credit cards - commercial

  9,122   —   —   —   —   9,122 

Total

 $3,466,468  $2,194  $467  $3,352  $6,013  $3,472,481 

 

              

90 or more

         
              

Days Past Due

         

(in thousands)

     

30-59 days

  

60-89 days

  

(includes all

  

Total

  

Total

 

December 31, 2019

 

Current

  

Past Due

  

Past Due

  

non-accrual)

  

Past Due

  

Loans

 
                         

Commercial and industrial

 $861,860  $253  $194  $8,204  $8,651  $870,511 

Construction and development, excluding undeveloped land

  213,766   6   50   —   56   213,822 

Undeveloped land

  46,360   —   —   —   —   46,360 
                         

Real estate mortgage:

                        

Commercial investment

  735,387   94   —   1,137   1,231   736,618 

Owner occupied commercial

  470,951   467   86   2,279   2,832   473,783 

1-4 family residential

  332,718   1,368   33   239   1,640   334,358 

Home equity - first lien

  48,441   179   —   —   179   48,620 

Home equity - junior lien

  72,995   196   100   186   482   73,477 

Subtotal: Real estate mortgage

  1,660,492   2,304   219   3,841   6,364   1,666,856 
                         

Consumer

  47,379   84   4   —   88   47,467 
                         

Total

 $2,829,857  $2,647  $467  $12,045  $15,159  $2,845,016 

 

The following table presents the amortized cost basis of non-performing loans and the amortized cost basis of loans on non-accrual status for which there was no related ACL losses of September 30, 2020:

 

(In thousands) Non-accrual Loans   Total   Troubled Debt   Past Due 90-Days-

or-More and Still

 

September 30, 2020

 

with no Recorded ACL

  

Non-accrual

  

Restructurings

  

 

Accruing Interest

 
                 

Commercial real estate - non-owner occupied

 $127  $10,219  $—  $753 

Commercial real estate - owner occupied

  1,493   1,493   —   — 

Total commercial real estate

  1,620   11,712   —   753 
                 

Commercial and industrial - term

  9   9   18   — 

Commercial and industrial - lines of credit

  88   88   —   399 

Total commercial and industrial

  97   97   18   399 
                 

Residential real estate - owner occupied

  442   442   —   — 

Residential real estate - non-owner occupied

  102   102   —   — 

Total residential real estate

  544   544   —   — 
                 

Construction and land development

  —   —   —   — 

Home equity lines of credit

  —   —   —   — 

Consumer

  5   5   —   — 

Leases

  —   —   —   — 

Credit cards - commercial

  —   —   —   — 

Total

 $2,266  $12,358  $18  $1,152 

 

 

 

For the three and nine month periods ended September 30, 2020 and 2019, the amount of accrued interest income previously recorded as revenue and subsequently reversed due to the change in accrual status was immaterial.

 

For the three and nine month periods ended September 30, 2020 and 2019, no interest income was recognized on loans on non-accrual status.

 

The following table presents the recorded investment in non-performing loans by portfolio class as of December 31, 2019:

 

December 31, 2019 (in thousands)

 

Non-accrual

  

Past Due 90-Days-or-

More and Still

Accruing Interest

 
         

Commercial and industrial

 $8,202  $— 

Construction and development, excluding undeveloped land

  —   — 

Undeveloped land

  —   — 
         

Real estate mortgage:

        

Commercial investment

  740   396 

Owner occupied commercial

  2,278   — 

1-4 family residential

  123   104 

Home equity - first lien

  —   — 

Home equity - junior lien

  151   35 

Subtotal: Real estate mortgage

  3,292   535 

Consumer

  —   — 
         

Total

 $11,494  $535 

 

Loan Risk Ratings

 

Consistent with regulatory guidance, Bancorp categorizes loans into credit risk rating categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans include all risk-rated loans other than those classified as OAEM, substandard, and doubtful, which are defined below:

 

OAEM – Loans classified as OAEM have potential weaknesses requiring management's heightened attention. These potential weaknesses may result in deterioration of repayment prospects for the loan or of Bancorp's credit position at some future date.

 

Substandard – Loans classified as substandard are inadequately protected by the paying capacity of the obligor or of collateral pledged, if any. Loans so classified have well-defined weaknesses that jeopardize ultimate repayment of the debt. Default is a distinct possibility if the deficiencies are not corrected.

 

Substandard non-performing – Loans classified as substandard non-performing have all the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as TDRs. Loans are placed on non-accrual status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more.

 

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. As of September 30, 2020, the risk rating of loans based on year of origination is as follows:

 

  

Term Loans Amortized Cost Basis by Origination Year

             
                          

Revolving

  

Revolving

     
                          

loans

  

loans

     

(in thousands)

                         

amortized

  

converted

     

September 30, 2020

 

2020

  

2019

  

2018

  

2017

  

2016

  

Prior

  

cost basis

  

to term

  

Total

 
                                     

Commercial real estate - non-owner occupied:

                                    

Risk rating

                                    

Pass

 $226,752  $138,493  $120,350  $116,490  $83,431  $70,706  $14,170  $11,730  $782,122 

OAEM

  649   18,344   -   -   7,835   50   -   -   26,878 

Substandard

  4,183   1,976   -   -   1,528   991   430   -   9,108 

Substandard non-performing

  9,608   -   -   612   -   -   -   -   10,220 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Commercial real estate non-owner occupied

 $241,192  $158,813  $120,350  $117,102  $92,794  $71,747  $14,600  $11,730  $828,328 
                                     

Commercial real estate - owner occupied:

                                    

Risk rating

                                    

Pass

 $149,101  $98,084  $87,903  $50,901  $41,869  $37,568  $7,610  $2,197  $475,233 

OAEM

  75   5,362   957   813   246   -   -   -   7,453 

Substandard

  1,408   5,514   1,349   260   122   -   -   -   8,653 

Substandard non-performing

  114   -   16   -   -   1,022   -   334   1,486 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Commercial real estate owner occupied

 $150,698  $108,960  $90,225  $51,974  $42,237  $38,590  $7,610  $2,531  $492,825 
                                     

Commercial and industrial - term:

                                    

Risk rating

                                    

Pass

 $798,680  $106,779  $97,116  $46,000  $39,479  $24,234  $-  $7,204  $1,119,492 

OAEM

  3,108   2,603   8,373   144   101   13   -   -   14,342 

Substandard

  271   2,075   -   -   177   74   -   -   2,597 

Substandard non-performing

  -   -   -   -   12   7   -   -   19 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Commercial and industrial - term

 $802,059  $111,457  $105,489  $46,144  $39,769  $24,328  $-  $7,204  $1,136,450 
                                     

Commercial and industrial - lines of credit

                                    

Risk rating

                                    

Pass

 $19,342  $19,792  $2,820  $2,870  $346  $130  $186,484  $-  $231,784 

OAEM

  -   -   -   -   -   -   1,347   -   1,347 

Substandard

  -   -   -   -   -   -   4,237   -   4,237 

Substandard non-performing

  -   -   -   -   -   -   88   -   88 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Commercial and industrial - lines of credit

 $19,342  $19,792  $2,820  $2,870  $346  $130  $192,156  $-  $237,456 

 

 

(continued)

 

(continued)

  

Term Loans Amortized Cost Basis by Origination Year

             
                          

Revolving

  

Revolving

     
                          

loans

  

loans

     

(in thousands)

                         

amortized

  

converted

     

September 30, 2020

 

2020

  

2019

  

2018

  

2017

  

2016

  

Prior

  

cost basis

  

to term

  

Total

 
                                     

Residential real estate - owner occupied

                                    

Risk rating

                                    

Pass

 $51,043  $39,569  $27,408  $20,939  $30,413  $41,483  $-  $593  $211,448 

OAEM

  -   -   -   -   -   -   -   -   - 

Substandard

  14   -   -   116   -   -   -   -   130 

Substandard non-performing

  49   58   -   101   39   60   -   99   406 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Residential real estate - owner occupied

 $51,106  $39,627  $27,408  $21,156  $30,452  $41,543  $-  $692  $211,984 
                                     

Residential real estate - non-owner occupied

                                    

Risk rating

                                    

Pass

 $58,495  $24,194  $26,822  $11,995  $11,205  $8,132  $-  $370  $141,213 

OAEM

  140   1,600   -   -   -   90   -   -   1,830 

Substandard

  -   -   -   -   -   -   -   -   - 

Substandard non-performing

  -   -   30   -   -   76   -   -   106 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Residential real estate - non-owner occupied

 $58,635  $25,794  $26,852  $11,995  $11,205  $8,298  $-  $370  $143,149 
                                     

Construction and land development

                                    

Risk rating

                                    

Pass

 $98,655  $91,552  $38,746  $16,678  $1,213  $2,719  $6,174  $1,883  $257,620 

OAEM

  -   -   -   -   -   -   249   -   249 

Substandard

  -   -   -   -   1   -   -   -   1 

Substandard non-performing

  -   -   -   -   -   5   -   -   5 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Construction and land development

 $98,655  $91,552  $38,746  $16,678  $1,214  $2,724  $6,423  $1,883  $257,875 
                                     

Home equity lines of credit

                                    

Risk rating

                                    

Pass

 $-  $-  $-  $-  $-  $-  $97,150  $-  $97,150 

OAEM

  -   -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   -   - 

Substandard non-performing

  -   -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Home equity lines of credit

 $-  $-  $-  $-  $-  $-  $97,150  $-  $97,150 
                                     

Consumer

                                    

Risk rating

                                    

Pass *

 $7,690  $3,416  $2,111  $288  $448  $1,434  $28,629  $139  $44,155 

OAEM

  -   -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   -   - 

Substandard non-performing

  -   -   -   -   2   1   3   -   6 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Consumer

 $7,690  $3,416  $2,111  $288  $450  $1,435  $28,632  $139  $44,161 

 

 

* - Revolving loans include $506,000 in overdrawn demand deposit balances.

 

 

(continued)

 

(continued)

  

Term Loans Amortized Cost Basis by Origination Year

             
                          

Revolving

  

Revolving

     
                          

loans

  

loans

     

(in thousands)

                         

amortized

  

converted

     

September 30, 2020

 

2020

  

2019

  

2018

  

2017

  

2016

  

Prior

  

cost basis

  

to term

  

Total

 
                                     

Leases

                                    

Risk rating

                                    

Pass

 $2,749  $2,083  $2,304  $1,550  $2,861  $2,308  $-  $-  $13,855 

OAEM

  -   -   31   -   87   -   -   -   118 

Substandard

  -   -   8   -   -   -   -   -   8 

Substandard non-performing

  -   -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Consumer

 $2,749  $2,083  $2,343  $1,550  $2,948  $2,308  $-  $-  $13,981 
                                     

Credit cards - commercial

                                    

Risk rating

                                    

Pass

 $-  $-  $-  $-  $-  $-  $9,122  $-  $9,122 

OAEM

  -   -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   -   - 

Substandard non-performing

  -   -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Consumer

 $-  $-  $-  $-  $-  $-  $9,122  $-  $9,122 
                                     

Total loans

                                    

Risk rating

                                    

Pass

 $1,412,507  $523,962  $405,580  $267,711  $211,265  $188,714  $349,339  $24,116  $3,383,194 

OAEM

  3,972   27,909   9,361   957   8,269   153   1,596   -   52,217 

Substandard

  5,876   9,565   1,357   376   1,828   1,065   4,667   -   24,734 

Substandard non-performing

  9,771   58   46   713   53   1,171   91   433   12,336 

Doubtful

  -   -   -   -   -   -   -   -   - 

Total Loans

 $1,432,126  $561,494  $416,344  $269,757  $221,415  $191,103  $355,693  $24,549  $3,472,481 

 

 

Bancorp considers the performance of the loan portfolio and its impact on the ACL. For certain loan classes, such as credit cards, credit quality is evaluated based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in commercial credit cards based on payment activity:

 

  

September 30,

 

(in thousands)

 

2020

 
     

Credit cards - commercial

    

Performing

 $9,122 

Non-performing

  — 

Total credit cards - commercial

 $9,122 

 

In accordance with Section 4013 of the CARES Act and in response to requests from borrowers who experienced business or personal cash flow interruptions related to the pandemic, Bancorp extended payment deferrals for those affected borrowers. Depending on the demonstrated need of the customer, Bancorp deferred either the full loan payment or the principal-only portion of respective loan payments for 90 or 180 days for some borrowers directly impacted by the pandemic. Pursuant to the CARES Act, these loan deferrals were not classified as TDRs and not included in past due and/or non-performing loan statistics.

 

Internally assigned risk ratings of loans by loan portfolio class classification category as of December 31, 2019 follows:

 

 

(in thousands)

             

Substandard

      

Total

 

December 31, 2019

 

Pass

  

OAEM

  

Substandard

  

Non-performing

  

Doubtful

  

Loans

 
                         

Commercial and industrial

 $840,105  $704  $21,500  $8,202  $—  $870,511 

Construction and development, excluding undeveloped land

  213,822   —   —   —   —   213,822 

Undeveloped land

  46,360   —   —   —   —   46,360 
                         

Real estate mortgage:

                        

Commercial investment

  722,747   6,459   6,275   1,137   —   736,618 

Owner occupied commercial

  460,981   1,375   9,050   2,377   —   473,783 

1-4 family residential

  332,294   1,701   122   241   —   334,358 

Home equity - first lien

  48,620   —   —   —   —   48,620 

Home equity - junior lien

  73,273   —   17   187   —   73,477 

Subtotal: Real estate mortgage

  1,637,915   9,535   15,464   3,942   —   1,666,856 
                         

Consumer

  47,429   —   38   —   —   47,467 
                         

Total

 $2,785,631  $10,239  $37,002  $12,144  $—  $2,845,016 

 

 

 

Troubled Debt Restructurings

 

Detail of outstanding TDRs included in total non-performing loans follows:

 

  

September 30, 2020

  

December 31, 2019

 
      

Specific

  

Additional

      

Specific

  

Additional

 
      

reserve

  

commitment

      

reserve

  

commitment

 

(in thousands)

 

Balance

  

allocation

  

to lend

  

Balance

  

allocation

  

to lend

 
                         

Commercial and industrial - term

 $18  $18  $—  $21  $21  $— 

Residential real estate

  —   —   —   13   13   — 

Consumer

  —   —   —   —   —   — 
                         

Total TDRs

 $18  $18  $—  $34  $34  $— 

 

 

During the three and nine month periods ended September 30, 2020 and 2019, there were no loans modified as TDRs and there were no payment defaults of existing TDRs within 12 months following the modification. Default is determined at 90 or more days past due, charge-off, or foreclosure.

 

At September 30, 2020 and December 31, 2019, Bancorp had $40,000 and $239,000, respectively, in residential real estate loans for which formal foreclosure proceedings were in process.

 

Purchased Credit Impaired Loans (Prior to the Adoption of ASC 326)

 

Management utilized the following criteria in determining which loans were classified as PCI loans for its 2019 acquisition:

 

●

Loans classified by management as substandard, doubtful or loss

 

●

Loans classified as non-accrual when acquired

 

●

Loans past due 90 days or more when acquired

 

●

Loans for which management assigned a non-accretable mark

 

The Bank acquired $1.6 million in PCI loans in connection with its 2019 acquisition. Under ASC 310-30, the non-accretable amount attributed to these loans equaled the contractually required principal at acquisition date and as of September 30, 2020.

 

The following table presents a roll forward of the accretable amount of PCI loans acquired in its 2013 acquisition:

 

  

Three months ended

  

Nine months ended

 

(in thousands)

 

September 30, 2019

  

September 30, 2019

 
         

Balance, beginning of period

 $(57) $(68)

Transfers between non-accretable and accretable

  —   — 

Net accretion into interest income on loans, including loan fees

  57   68 

Balance, end of period

 $-  $-