Loans Receivable, Net

3 Months Ended

Mar. 31, 2020

Loans receivable, net at March 31, 2020 and December 31, 2019 consisted of the following (in thousands):



	March 31, 2020			December 31, 2019
Commercial:
Commercial and industrial	$	502,760		$	396,434
Commercial real estate – owner occupied	1,220,983			792,653
Commercial real estate – investor	3,331,662			2,296,410
Total commercial	5,055,405			3,485,497
Consumer:
Residential real estate	2,458,641			2,321,157
Home equity loans and lines	335,624			318,576
Other consumer	82,920			89,422
Total consumer	2,877,185			2,729,155
Total loans	7,932,590			6,214,652
Deferred origination costs, net	10,586			9,880
Allowance for credit losses	(29,635		)	(16,852		)
Total loans, net	$	7,913,541		$	6,207,680

The Company categorizes all loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation and current economic trends, among other factors. The Company uses the following definitions for risk ratings:

Pass: Loans classified as Pass are well protected by the paying capacity and net worth of the borrower.

Special Mention: Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.

Substandard: Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

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 liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The following table summarizes total loans by year of origination and internally assigned credit grades and risk characteristics (in thousands):



	2020		2019		2018		2017		2016		2015 and prior		Revolving lines of credit		Total
March 31, 2020
Commercial and industrial
Pass	$	7,718	$	61,109	$	60,217	$	47,452	$	47,051	$	111,383	$	147,529	$	482,459
Special Mention	—		—		112		832		712		54		800		2,510
Substandard	400		—		3,912		1,497		72		7,877		4,033		17,791
Total commercial and industrial	8,118		61,109		64,241		49,781		47,835		119,314		152,362		502,760
Commercial real estate - owner occupied
Pass	59,276		154,245		138,376		143,086		136,276		531,105		22,560		1,184,924
Special Mention	—		191		—		1,399		1,396		1,439		306		4,731
Substandard	—		2,138		410		2,431		2,391		23,958		—		31,328
Total commercial real estate - owner occupied	59,276		156,574		138,786		146,916		140,063		556,502		22,866		1,220,983
Commercial real estate - investor
Pass	200,651		662,802		410,180		511,079		345,525		983,984		144,341		3,258,562
Special Mention	—		29		—		3,031		5,950		19,709		8,768		37,487
Substandard	—		178		664		—		5,069		25,691		4,011		35,613
Total commercial real estate - investor	200,651		663,009		410,844		514,110		356,544		1,029,384		157,120		3,331,662
Residential real estate
Pass	138,889		588,723		347,761		220,624		182,541		976,664		—		2,455,202
Special Mention	—		—		—		221		144		3,074		—		3,439
Substandard	—		—		—		—		—		—		—		—
Total residential real estate	138,889		588,723		347,761		220,845		182,685		979,738		—		2,458,641
Consumer
Pass	6,665		37,024		119,311		34,358		21,322		194,187		2,514		415,381
Special Mention	—		—		—		—		—		530		—		530
Substandard	—		—		35		—		—		2,598		—		2,633
Total consumer	6,665		37,024		119,346		34,358		21,322		197,315		2,514		418,544
Total loans	$	413,599	$	1,506,439	$	1,080,978	$	966,010	$	748,449	$	2,882,253	$	334,862	$	7,932,590

An analysis of the allowance for credit losses on loans for the three months ended March 31, 2020 and 2019 is as follows (in thousands):



	Commercial and Industrial			Commercial Real Estate – Owner Occupied			Commercial Real Estate – Investor			Residential Real Estate			Consumer			Unallocated			Total
For the three months ended March 31, 2020
Allowance for credit losses on loans
Balance at beginning of period	$	1,458		$	2,893		$	9,883		$	2,002		$	591		$	25		$	16,852
Impact of CECL adoption	2,416			(1,109		)	(5,395		)	3,833			2,981			(25		)	2,701
Credit loss expense	1,529			1,286			2,377			3,585			(180		)	—			8,597
Initial allowance for credit losses on PCD loans	1,221			26			260			109			1,023						2,639
Charge-offs	—			—			—			(1,275		)	(109		)	—			(1,384		)
Recoveries	25			—			34			163			8			—			230
Balance at end of period	$	6,649		$	3,096		$	7,159		$	8,417		$	4,314		$	—		$	29,635
For the three months ended March 31, 2019
Allowance for credit losses on loans
Balance at beginning of period	$	1,609		$	2,277		$	8,770		$	2,413		$	486		$	1,022		$	16,577
Credit loss (benefit) expense	(19		)	1,550			(802		)	(23		)	(110		)	24			620
Charge-offs	—			(389		)	(21		)	(427		)	(31		)	—			(868		)
Recoveries	57			—			295			2			22			—			376
Balance at end of period	$	1,647		$	3,438		$	8,242		$	1,965		$	367		$	1,046		$	16,705

A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. At March 31, 2020, the Company had collateral dependent loans with an amortized cost balance as follows: commercial and industrial of $782,000, commercial real estate - owner occupied of $4.2 million, and commercial real estate - investor of $7.6 million. In addition, the Company had residential and consumer loans collateralized by residential real estate, which are in the process of foreclosure, with an amortized cost balance of $3.3 million at March 31, 2020. The amount of foreclosed residential real estate property held by the Company was $334,000 at March 31, 2020.

In accordance with ASC 310, prior to the adoption of ASU 2016-13, the following table presents the balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019, excluding PCD loans (in thousands):



	Commercial and Industrial		Commercial Real Estate – Owner Occupied		Commercial Real Estate – Investor		Residential Real Estate		Consumer		Unallocated		Total
December 31, 2019
Allowance for credit losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	—	$	474	$	—	$	—	$	2	$	—	$	476
Collectively evaluated for impairment	1,458		2,419		9,883		2,002		589		25		16,376
Total ending allowance balance	$	1,458	$	2,893	$	9,883	$	2,002	$	591	$	25	$	16,852
Loans:
Loans individually evaluated for impairment	$	243	$	6,163	$	5,584	$	11,009	$	3,511	$	—	$	26,510
Loans collectively evaluated for impairment	395,848		785,778		2,279,114		2,309,812		404,325		—		6,174,877
Total ending loan balance	$	396,091	$	791,941	$	2,284,698	$	2,320,821	$	407,836	$	—	$	6,201,387

As of December 31, 2019, the Company defined an impaired loan as non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt

restructurings. At December 31, 2019, the impaired loan portfolio totaled $26.5 million for which there was $476,000 specific allocation in the allowance for credit losses. The average balance of impaired loans for the three months ended March 31, 2019 were $32.1 million.

In accordance with ASC 310, prior to the adoption of ASU 2016-13, the summary of loans individually evaluated for impairment by loan portfolio segment as of December 31, 2019 and for the three months ended March 31, 2019, is as follows, excluding PCI loans (in thousands):



	Unpaid Principal Balance		Recorded Investment		Allowance for Credit Losses Allocated
As of December 31, 2019
With no related allowance recorded:
Commercial and industrial	$	265	$	243	$	—
Commercial real estate – owner occupied	4,062		3,968		—
Commercial real estate – investor	6,665		5,584		—
Residential real estate	11,009		11,009		—
Consumer	3,734		3,509		—
	$	25,735	$	24,313	$	—
With an allowance recorded:
Commercial and industrial	$	—	$	—	$	—
Commercial real estate – owner occupied	2,376		2,195		474
Commercial real estate – investor	—		—		—
Residential real estate	—		—		—
Consumer	2		2		2
	$	2,378	$	2,197	$	476



	Three Months Ended March 31, 2019
	Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	938	$	3
Commercial real estate – owner occupied	4,153		42
Commercial real estate – investor	11,667		136
Residential real estate	10,046		131
Consumer	3,071		46
	$	29,875	$	358
With an allowance recorded:
Commercial and industrial	$	—	$	—
Commercial real estate – owner occupied	2,250		36
Commercial real estate – investor	—		—
Residential real estate	—		—
Consumer	—		—
	$	2,250	$	36

The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of March 31, 2020 and December 31, 2019 (in thousands). The March 31, 2020 balances include PCD loans while the December 31, 2019 balances exclude PCI loans (in accordance with ASC 310, prior to the adoption of ASU 2016-13 on January 1, 2020).



	March 31, 2020		December 31, 2019
Commercial and industrial	$	782	$	207
Commercial real estate – owner occupied	4,219		4,811
Commercial real estate – investor	9,123		2,917
Residential real estate	6,690		7,181
Consumer	3,075		2,733
	$	23,889	$	17,849

At March 31, 2020, there were no commitments to lend additional funds to borrowers whose loans are in non-accrual status.

At March 31, 2020 and December 31, 2019, loans in the amount of $23.9 million and $17.8 million, respectively, were three or more months delinquent or in the process of foreclosure. At March 31, 2020, the non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At March 31, 2020 and December 31, 2019, there were no loans that were ninety days or greater past due and still accruing interest.

The following table presents the aging of the recorded investment in past due loans as of March 31, 2020 and December 31, 2019 by loan portfolio segment (in thousands). The March 31, 2020 balances include PCD loans while the December 31, 2019 balances exclude PCI loans (in accordance with ASC 310, prior to the adoption of ASU 2016-13 on January 1, 2020).



	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
March 31, 2020
Commercial and industrial	$	3,052	$	575	$	207	$	3,834	$	498,926	$	502,760
Commercial real estate – owner occupied	8,883		1,307		392		10,582		1,210,401		1,220,983
Commercial real estate – investor	19,152		2,595		7,466		29,213		3,302,449		3,331,662
Residential real estate	18,363		206		3,234		21,803		2,436,838		2,458,641
Consumer	1,825		530		2,633		4,988		413,556		418,544
	$	51,275	$	5,213	$	13,932	$	70,420	$	7,862,170	$	7,932,590
December 31, 2019
Commercial and industrial	$	100	$	—	$	207	$	307	$	395,784	$	396,091
Commercial real estate – owner occupied	1,541		1,203		1,040		3,784		788,157		791,941
Commercial real estate – investor	381		938		2,792		4,111		2,280,587		2,284,698
Residential real estate	8,161		3,487		2,859		14,507		2,306,314		2,320,821
Consumer	1,048		491		2,388		3,927		403,909		407,836
	$	11,231	$	6,119	$	9,286	$	26,636	$	6,174,751	$	6,201,387

The Company classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. One-to-four family and consumer loans where the borrower’s debt is discharged in a bankruptcy filing are also considered troubled debt restructurings. For these loans, the Bank retains its security interest in the real estate collateral. At March 31, 2020 and December 31, 2019, troubled debt restructured (“TDR”) loans totaled $22.4 million and $24.6 million, respectively. Included in the non-accrual loan total at March 31, 2020, and December 31, 2019, were $6.2 million and $6.6 million, respectively, of troubled debt restructurings. At March 31, 2020, and December 31, 2019, the Company had $424,000 and $476,000, respectively, of specific reserves allocated to loans that are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are generally returned to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans, the Company also has loans classified as accruing troubled debt restructurings at March 31, 2020 and December 31, 2019, which totaled $16.1 million and $18.0 million, respectively.

The following table presents information about troubled debt restructurings which occurred during the three months ended March 31, 2020 and 2019, and troubled debt restructurings modified within the previous year and which defaulted during the three months ended March 31, 2020 and 2019 (dollars in thousands):



	Number of Loans	Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended March 31, 2020
Troubled Debt Restructurings:
Consumer	4	$	159	$	177
Residential real estate	2	226		234



	Number of Loans	Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:	None	None



	Number of Loans	Pre-modification Recorded Investment	Post-modification Recorded Investment
Three Months Ended March 31, 2019
Troubled Debt Restructurings:
Residential real estate	3	589	621



	Number of Loans	Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted	None	None

In response to the COVID-19 pandemic and its economic impact to customers, a short-term modification program that complies with the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. This program allows for a deferral of payments for 90 days, which may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Under recently issued guidance, provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans at March 31, 2020 and will not be reported as past due during the deferral period.

As part of the Two River and Country Bank acquisitions, the Company has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows (in thousands):



	Two River January 1, 2020		Country Bank January 1, 2020
Purchase price of loans at acquisition	$	26,104	$	24,667
Allowance for credit losses at acquisition	1,343		1,296
Non-credit discount at acquisition	2,562		5,334
Par value of acquired loans at acquisition	$	30,009	$	31,297

In accordance with ASC 310, prior to the adoption of ASU 2016-13,the following table summarizes the changes in accretable yield for PCI loans during the three months ended March 31, 2019 (in thousands):



	Three Months Ended March 31,
		2019
Beginning balance		$	3,630
Acquisition		1,171
Accretion		(653		)
Reclassification from non-accretable difference		45
Ending balance		$	4,193