Loans And The Allowance For Loan Losses

9 Months Ended

Sep. 30, 2020

Loans And The Allowance For Loan Losses [Abstract]

Loans And The Allowance For Loan Losses

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Loan Portfolio Composition

The following table presents selected information on the composition of the Company’s loan portfolio as of the dates indicated:

	September 30, 2020		December 31, 2019
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	364,598	$	158,572
Commercial and multi-family		702,624		645,036
Construction-Residential		6,761		1,067
Construction-Commercial		102,011		97,848
Home equities		84,863		69,351
Total real estate loans		1,260,857		971,874
Commercial and industrial loans		448,092		251,197
Consumer and other loans		412		1,926
Unaccreted yield adjustments*		(6,285)		1,534
Total gross loans		1,703,076		1,226,531
Allowance for loan losses		(20,601)		(15,175)
Loans, net	$	1,682,475	$	1,211,356

* Includes net premiums and discounts on acquired loans and net deferred fees and costs on loans originated, including $5.8 million of PPP fees at September 30, 2020.

The CARES Act established a loan program administered through the U.S. Small Business Administration (SBA), referred to as the paycheck protection program (“PPP”). PPP loans are 100% guaranteed by the SBA and are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. Through September 30, 2020, the Company had originated 1,931 PPP loans totaling $203 million, included in commercial and industrial loans. PPP loans did not impact the Company’s allowance for loan loss as a result of the SBA guarantees. Fees collected from the SBA for these loans in the nine month period ended September 30, 2020 totaled $7.4 million. These fees are deferred and amortized into interest income over the contractual period of the loan. Upon SBA forgiveness or sale of a PPP loan, unamortized fees are then recognized into interest income. As of September 30, 2020, no PPP loans had received SBA forgiveness.

In connection with the FSB acquisition, the Company acquired $271 million in total loans, primarily residential real estate. At September 30, 2020, the outstanding principal balance and carrying amount of acquired credit-impaired loans totaled $0.9 million and $0.8 million, respectively. The Company is not recording interest on the acquired credit-impaired loans due to the uncertainty of the cash flows relating to such loans. There were no valuation allowances for specifically identified impairment attributable to acquired credit-impaired loans at September 30, 2020. The Company did not have any acquired credit-impaired loans as of December 31, 2019.

‎

Also in connection with the FSB acquisition, the Company acquired a loan serving portfolio of $107 million in principal balances in which residential real estate loans were sold to FHLMC and the servicing rights are retained by the Company. No loans were sold to FHLMC by the Company during the three and nine month periods ending September 30, 2020 and 2019.

The Company also sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. In the three and nine month periods ended September 30, 2020, the Company sold mortgages to FNMA totaling $7.2 million and $15.0 million, respectively. In the three and nine month periods ended September 30, 2019, the Company sold mortgages to FNMA totaling $3.0 million and $7.6 million, respectively.

At September 30, 2020 and December 31, 2019, the Company had loan servicing portfolio principal balances of $185 million and $76 million, respectively, upon which it earned servicing fees. The fair value of the mortgage servicing rights for that portfolio was $1.0 million and $0.6 million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020 there were no residential mortgages held for sale. At December 31, 2019 there were $0.7 million in residential mortgages held for sale.

These financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. Disclosures related to the basis for accounting for loans, the method for recognizing interest income on loans, the policy for placing loans on nonaccrual status and the subsequent recording of payments and resuming accrual of interest, the policy for determining past due status, a description of the Company’s accounting policies and methodology used to estimate the allowance for loan losses, the policy for charging-off loans, the accounting policies for impaired loans, and more descriptive information on the Company’s credit risk ratings are all contained in the Notes to the Audited Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The accounting policy for loans acquired in a business combination is included in Note 1 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. There have been no significant changes to the Company’s significant accounting policies as disclosed in Note 1 to the 10-K, as supplemented in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

Credit Quality Indicators

The Company monitors the credit risk in its loan portfolio by reviewing certain credit quality indicators (“CQI”). The primary CQI for the commercial mortgage and commercial and industrial portfolios is the individual loan’s credit risk rating. The following list provides a description of the credit risk ratings that are used internally by the Bank when assessing the adequacy of its allowance for loan losses:

Acceptable or better

Watch

Special Mention

Substandard

Doubtful

Loss

“Special mention” and “substandard” loans are weaker credits with a higher risk of loss and are categorized as “criticized” assets.

The Company’s consumer loans, including residential mortgages and home equities, are not individually risk rated or reviewed in the Company’s loan review process. Unlike commercial customers, consumer loan customers are not required to provide the Company with updated financial information. Consumer loans also carry smaller balances. Given the lack of updated information after the initial underwriting of the loan and small size of individual loans, the Company uses delinquency status as the primary credit quality indicator for consumer loans. However, once a consumer loan is identified as impaired, it is individually evaluated for impairment.

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The Company continues to evaluate its loan portfolio in response to the economic impact of the COVID-19 pandemic on its clients. The increase in the watch category during the nine months ended September 30, 2020 was a result of the Company reclassifying all commercial loans that received a deferral into the watch or criticized categories. The Company will reassess the watch classification after the deferral’s termination dates and evidence of continuation of payments as contracted. During the third quarter of 2020, the Company identified a well-defined weakness in the hotel industry and classified the loans to clients within that industry as substandard. As of September 30, 2020, the Company’s hotel loan portfolio was $81 million, or approximately 6.5%, of total commercial loans. As a result, total criticized assets increased to $133 million at September 30, 2020 compared with $51 million at the end of the 2019.

The following tables provide data, at the class level, of credit quality indicators of certain loans for the dates specified:

September 30, 2020
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
Acceptable or better	$	52,162	$	314,997	$	367,159	$	339,810
Watch		21,322		303,965		325,287		87,414
Special Mention		2,088		13,985		16,073		5,855
Substandard		26,439		69,677		96,116		15,013
Doubtful/Loss		-		-		-		-
Total	$	102,011	$	702,624	$	804,635	$	448,092
December 31, 2019
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
Acceptable or better	$	73,646	$	451,297	$	524,943	$	165,255
Watch		13,380		171,277		184,657		68,665
Special Mention		8,359		15,725		24,084		7,631
Substandard		2,463		6,737		9,200		9,646
Doubtful/Loss		-		-		-		-
Total	$	97,848	$	645,036	$	742,884	$	251,197

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Past Due Loans

The following tables provide an analysis of the age of the recorded investment in loans that are past due as of the dates indicated:

September 30, 2020
(in thousands)
		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance
Commercial and industrial	$	440,340	$	575	$	227	$	-	$	6,950	$	448,092
Residential real estate:
Residential		360,418		58		1,266		-		2,856		364,598
Construction		6,038		-		723		-		-		6,761
Commercial real estate:
Commercial		687,280		-		6,053		594		8,697		702,624
Construction		100,555		-		150		-		1,306		102,011
Home equities		82,864		929		11		-		1,059		84,863
Consumer and other		398		3		7		4		-		412
Total Loans	$	1,677,893	$	1,565	$	8,437	$	598	$	20,868	$	1,709,361

Note: Loan balances do not include $(6.3) million of unaccreted yield adjustments as of September 30, 2020.

December 31, 2019
(in thousands)
		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance
Commercial and industrial	$	245,658	$	705	$	-	$	-	$	4,834	$	251,197
Residential real estate:
Residential		153,630		2,616		888		-		1,438		158,572
Construction		865		-		202		-		-		1,067
Commercial real estate:
Commercial		630,016		3,482		5,879		-		5,659		645,036
Construction		92,667		2,886		720		-		1,575		97,848
Home equities		67,868		354		239		-		890		69,351
Consumer and other		1,907		15		4		-		-		1,926
Total Loans	$	1,192,611	$	10,058	$	7,932	$	-	$	14,396	$	1,224,997

Note: Loan balances do not include $1.5 million of unamortized yield adjustments as of December 31, 2019.

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Allowance for loan losses

The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended September 30, 2020 and 2019.

September 30, 2020
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan			(in thousands)
losses:
Beginning balance	$	5,260	$	11,625	$	233	$	1,147		489	$	18,754
Charge-offs		(124)		(5)		(14)		-		-		(143)
Recoveries		105		-		4		-		-		109
Provision (Credit)		(23)		1,843		(187)		218		30		1,881
Ending balance	$	5,218	$	13,463	$	36	$	1,365	$	519	$	20,601

September 30, 2019
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan			(in thousands)
losses:
Beginning balance	$	5,272	$	8,637	$	130	$	883	$	326	$	15,248
Charge-offs		(91)		(55)		(40)		-		-		(186)
Recoveries		747		-		4		-		-		751
Provision (Credit)		(732)		358		45		(87)		(15)		(431)
Ending balance	$	5,196	$	8,940	$	139	$	796	$	311	$	15,382

* Includes construction loans

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The following tables present the activity in the allowance for loan losses according to portfolio segment for the nine month periods ended September 30, 2020 and 2019:

Nine months ended September 30, 2020
				(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,547	$	9,005	$	155	$	1,071	$	397	$	15,175
Charge-offs		(143)		(5)		(44)		(29)		(4)		(225)
Recoveries		141		11		22		-		-		174
Provision (Credit)		673		4,452		(97)		323		126		5,477
Ending balance	$	5,218	$	13,463	$	36	$	1,365	$	519	$	20,601

* Includes construction loans

Note: Loan balances do not include $(6.3) million of unaccreted yield adjustments as of September 30, 2020.

Nine months ended September 30, 2019
				(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,368	$	8,844	$	106	$	1,121	$	345	$	14,784
Charge-offs		(248)		(56)		(94)		-		-		(398)
Recoveries		786		-		13		-		-		799
Provision (Credit)		290		152		114		(325)		(34)		197
Ending balance	$	5,196	$	8,940	$	139	$	796	$	311	$	15,382

* Includes construction loans

Note: Loan balances do not include $1.6 million of unamortized yield adjustments as of September 30, 2019.

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The following table presents the allocation of the allowance for loan losses according to portfolio segment summarized on the basis of the Company’s impairment methodology as of September 30, 2020 and December 31, 2020:

September 30, 2020
(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Ending balance:
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-
Individually evaluated for impairment		1,103		154		-		-		-		1,257
Collectively evaluated for impairment		4,115		13,309		36		1,365		519		19,344
Total	$	5,218	$	13,463	$	36	$	1,365	$	519	$	20,601
Loans:
Ending balance:
Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	870	$	-	$	870
Individually evaluated for impairment		7,160		10,502		-		3,138		1,492		22,292
Collectively evaluated for impairment		440,932		794,133		412		367,351		83,371		1,686,199
Total	$	448,092	$	804,635	$	412	$	371,359	$	84,863	$	1,709,361

* Includes construction loans

‎

December 31, 2019
(in thousands)
	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Ending balance:
Individually evaluated for impairment	$	442	$	9	$	21	$	5	$	-	$	477
Collectively evaluated for impairment		4,105		8,996		134		1,066		397		14,698
Total	$	4,547	$	9,005	$	155	$	1,071	$	397	$	15,175
Loans:
Ending balance:
Individually evaluated for impairment	$	6,558	$	7,791	$	21	$	2,804	$	1,453	$	18,627
Collectively evaluated for impairment		244,639		735,093		1,905		156,835		67,898		1,206,370
Total	$	251,197	$	742,884	$	1,926	$	159,639	$	69,351	$	1,224,997

* Includes construction loans

Impaired Loans

The following tables provide data, at the class level, for impaired loans as of the dates indicated:

			At September 30, 2020
		Recorded Investment			Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With no related allowance recorded:			(in thousands)
Commercial and industrial	$	2,358		$	2,580	$	-	$	2,624	$	79	$	29
Residential real estate:
Residential		3,954			4,314		-		4,018		76		49
Construction		-			-		-		-		-		-
Commercial real estate:
Commercial		5,824			6,398		-		6,056		180		36
Construction		1,306			1,352		-		1,326		26		-
Home equities		1,492			1,714		-		1,565		41		16
Consumer and other		-			-		-		-		-		-
Total impaired loans	$	14,934		$	16,358	$	-	$	15,589	$	402	$	130

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		At September 30, 2020
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With a related allowance recorded:		(in thousands)
Commercial and industrial	$	4,802	$	4,942	$	1,103	$	4,941	$	189	$	15
Residential real estate:
Residential		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		3,372		3,396		154		3,378		101		10
Construction		-		-		-		-		-		-
Home equities		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	8,174	$	8,338	$	1,257	$	8,319	$	290	$	25

		At September 30, 2020
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	7,160	$	7,522	$	1,103	$	7,565	$	268	$	44
Residential real estate:
Residential		3,954		4,314		-		4,018		76		49
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		9,196		9,794		154		9,434		281		46
Construction		1,306		1,352		-		1,326		26		-
Home equities		1,492		1,714		-		1,565		41		16
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	23,108	$	24,696	$	1,257	$	23,908	$	692	$	155

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		At December 31, 2019
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With no related allowance recorded:		(in thousands)
Commercial and industrial	$	3,798	$	4,112	$	-	$	4,046	$	118	$	143
Residential real estate:
Residential		2,744		3,003		-		2,823		73		63
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		6,019		6,521		-		6,293		225		72
Construction		1,335		1,352		-		1,344		23		50
Home equities		1,453		1,687		-		1,525		64		30
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	15,349	$	16,675	$	-	$	16,031	$	503	$	358

		At December 31, 2019
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With a related allowance recorded:		(in thousands)
Commercial and industrial	$	2,760	$	2,808	$	442	$	2,764	$	109	$	63
Residential real estate:
Residential		60		62		5		61		3		1
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		197		197		4		197		8		4
Construction		240		246		5		242		8		9
Home equities		-		-		-		-		-		-
Consumer and other		21		23		21		22		-		1
Total impaired loans	$	3,278	$	3,336	$	477	$	3,286	$	128	$	78

		At December 31, 2019
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	6,558	$	6,920	$	442	$	6,810	$	227	$	206
Residential real estate:
Residential		2,804		3,065		5		2,884		76		64
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		6,216		6,718		4		6,490		233		76
Construction		1,575		1,598		5		1,586		31		59
Home equities		1,453		1,687		-		1,525		64		30
Consumer and other		21		23		21		22		-		1
Total impaired loans	$	18,627	$	20,011	$	477	$	19,317	$	631	$	436

Troubled debt restructurings

The following tables summarize the loans that were classified as troubled debt restructurings (“TDRs”) as of the dates indicated:

		September 30, 2020
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	1,828	$	1,618	$	210	$	360
Residential real estate:
Residential		1,741		589		1,152		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		3,463		2,965		498		-
Construction		-		-		-		-
Home equities		562		129		433		-
Consumer and other		-		-		-		-
Total TDR loans	$	7,594	$	5,301	$	2,293	$	360

		December 31, 2019
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	2,052	$	328	$	1,724	$	26
Residential real estate:
Residential		1,815		449		1,366		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		3,632		3,075		557		-
Construction		-		-		-		-
Home equities		738		175		563		-
Consumer and other		21		-		21		21
Total TDR loans	$	8,258	$	4,027	$	4,231	$	47

Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable. All of the Company’s restructurings were allowed in an effort to maximize its ability to collect on loans where borrowers were experiencing financial difficulty.

The reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective interest rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. This reserve methodology is used because all TDR loans are considered impaired.

The Company’s TDRs have various agreements that involve deferral of principal payments, or interest-only payments, for a period (usually 12 months or less) to allow the borrower time to improve cash flow or sell the property. Other common concessions leading to the designation of a TDR are lines of credit that are termed-out and/or extensions of maturities at rates that are less than the prevailing market rates given the risk profile of the borrower.

‎

In late March 2020, federal banking regulators issued guidance that modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders do not need to be identified as a TDR if the loan was current at the time a modification plan was implemented. The CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. As of September 30, 2020, the Company had applied this guidance and had made 381 modifications of commercial loans with principal balances totaling $368 million, and 298 modifications of consumer loans with principal balances totaling $37 million.

The following tables present TDR activity by the type of concession granted to the borrower for the three and nine month periods ended September 30, 2020 and 2019:

	Three months ended September 30, 2020					Three months ended September 30, 2019
	(Recorded Investment in thousands)					(Recorded Investment in thousands)
Troubled Debt Restructurings by Type of Concession	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and Industrial:
Extension of maturity	-	$	-	$	-	1	$	21	$	21
Term-out line of credit	-		-		-	1		42		42
Residential Real Estate & Construction:
Extension of maturity and
interest rate reduction	1		97		97	3		307		307
Commercial Real Estate & Construction	-		-		-	-		-		-
Home Equities:
Extension of maturity and
interest rate reduction	-		-		-	1		110		110
Consumer and other loans	-		-		-	-		-		-
Other	-		-		-	-		-		-

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	Nine months ended September 30, 2020					Nine months ended September 30, 2019
	(Recorded Investment in thousands)					(Recorded Investment in thousands)
Troubled Debt Restructurings by Type of Concession	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and Industrial:
Extension of maturity	-	$	-	$	-	1	$	21	$	21
Term-out line of credit	-		-		-	1		42		42
Residential Real Estate & Construction:
Combination of concessions	1		56		56	-		-		-
Extension of maturity and
interest rate reduction	1		97		97	3		307		307
Commercial Real Estate & Construction	-		-		-	-		-		-
Home Equities:
Extension of maturity and
interest rate reduction	-		-		-	3		390		390
Consumer and other loans	-		-		-	-		-		-

The general practice of the Bank is to work with borrowers so that they are able to repay their loan in full. If a borrower continues to be delinquent or cannot meet the terms of a TDR and the loan is determined to be uncollectible, the loan will be charged-off to its collateral value. A loan is considered in default when the loan is 90 days past due. Loans which were classified as TDRs during the previous 12 months which defaulted during the nine month periods ended September 30, 2020 and 2019 were not material.

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