Loans Receivable, Net

6 Months Ended

Jun. 30, 2020

Loans receivable, net at June 30, 2020 and December 31, 2019 consisted of the following (in thousands):



	June 30, 2020			December 31, 2019
Commercial:
Commercial and industrial	$	910,762		$	396,434
Commercial real estate – owner occupied	1,199,742			792,653
Commercial real estate – investor	3,449,160			2,296,410
Total commercial	5,559,664			3,485,497
Consumer:
Residential real estate	2,426,277			2,321,157
Home equity loans and lines	320,627			318,576
Other consumer	71,721			89,422
Total consumer	2,818,625			2,729,155
Total loans	8,378,289			6,214,652
Deferred origination (fees) costs, net	(4,300		)	9,880
Allowance for credit losses	(38,509		)	(16,852		)
Total loans, net	$	8,335,480		$	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
June 30, 2020
Commercial and industrial
Pass	$	494,385	$	42,054	$	34,477	$	67,037	$	46,039	$	68,244	$	133,133	$	885,369
Special Mention	—		458		847		1,765		870		1,184		86		5,210
Substandard	226		3,600		1,790		1,073		62		4,512		8,920		20,183
Total commercial and industrial	494,611		46,112		37,114		69,875		46,971		73,940		142,139		910,762
Commercial real estate - owner occupied
Pass	62,342		157,535		144,739		142,470		130,281		496,150		21,296		1,154,813
Special Mention	—		191		—		1,389		88		5,510		388		7,566
Substandard	—		2,122		2,817		2,921		3,740		25,670		93		37,363
Total commercial real estate - owner occupied	62,342		159,848		147,556		146,780		134,109		527,330		21,777		1,199,742
Commercial real estate - investor
Pass	338,589		679,959		387,875		462,567		335,427		957,182		199,816		3,361,415
Special Mention	—		27		—		11,003		6,033		22,661		9,178		48,902
Substandard	—		178		1,553		460		5,487		25,031		6,134		38,843
Total commercial real estate - investor	338,589		680,164		389,428		474,030		346,947		1,004,874		215,128		3,449,160
Residential real estate ⁽¹⁾
Pass	316,112		522,831		312,066		202,088		172,264		891,044		—		2,416,405
Special Mention	—		—		325		—		—		4,102		—		4,427
Substandard	—		—		—		221		—		5,224		—		5,445
Total residential real estate	316,112		522,831		312,391		202,309		172,264		900,370		—		2,426,277
Consumer ⁽¹⁾
Pass	12,116		33,276		105,211		31,029		19,788		178,537		7,545		387,502
Special Mention	—		79		—		—		—		257		—		336
Substandard	—		—		—		—		—		4,510		—		4,510
Total consumer	12,116		33,355		105,211		31,029		19,788		183,304		7,545		392,348
Total loans	$	1,223,770	$	1,442,310	$	991,700	$	924,023	$	720,079	$	2,689,818	$	386,589	$	8,378,289


(1)	For residential and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.

An analysis of the allowance for credit losses on loans for the three and six months ended June 30, 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 June 30, 2020
Allowance for credit losses on loans
Balance at beginning of period	$	6,649		$	3,096		$	7,159		$	8,417		$	4,314		$	—		$	29,635
Credit loss (benefit) expense	(1,697		)	(334		)	1,701			9,056			(84		)	—			8,642
Charge-offs	—			—			(26		)	(71		)	(72		)	—			(169		)
Recoveries	27			3			26			283			62			—			401
Balance at end of period	$	4,979		$	2,765		$	8,860		$	17,685		$	4,220		$	—		$	38,509
For the three months ended June 30, 2019
Allowance for credit losses on loans
Balance at beginning of period	$	1,647		$	3,438		$	8,242		$	1,965		$	367		$	1,046		$	16,705
Credit loss (benefit) expense	(34		)	(439		)	117			729			285			(302		)	356
Charge-offs	—			(132		)	(65		)	(768		)	(173		)	—			(1,138		)
Recoveries	26			1			112			40			33			—			212
Balance at end of period	$	1,639		$	2,868		$	8,406		$	1,966		$	512		$	744		$	16,135
For the six months ended June 30, 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	(168		)	952			4,078			12,641			(264		)	—			17,239
Initial allowance for credit losses on PCD loans	1,221			26			260			109			1,023			—			2,639
Charge-offs	—			—			(26		)	(1,346		)	(181		)	—			(1,553		)
Recoveries	52			3			60			446			70			—			631
Balance at end of period	$	4,979		$	2,765		$	8,860		$	17,685		$	4,220		$	—		$	38,509
For the six months ended June 30, 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	(53		)	1,112			(685		)	705			175			(278		)	976
Charge-offs	—			(522		)	(86		)	(1,193		)	(205		)	—			(2,006		)
Recoveries	83			1			407			41			56			—			588
Balance at end of period	$	1,639		$	2,868		$	8,406		$	1,966		$	512		$	744		$	16,135

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 June 30, 2020, the Company had collateral dependent loans with an amortized cost balance as follows: commercial and industrial of $6.6 million, commercial real estate - owner occupied of $5.5 million, and commercial real estate - investor of $15.7 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 $2.6 million at June 30, 2020. The amount of foreclosed residential real estate property held by the Company was $248,000 at June 30, 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 and six months ended June 30, 2019 were $31.5 million and $30.9 million, respectively.

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 and six months ended June 30, 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 June 30, 2019				Six months ended June 30, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	249	$	1	$	708	$	4
Commercial real estate – owner occupied	3,808		80		4,337		122
Commercial real estate – investor	10,882		22		10,501		158
Residential real estate	10,104		140		10,090		271
Consumer	3,270		48		3,171		94
	$	28,313	$	291	$	28,807	$	649
With an allowance recorded:
Commercial and industrial	$	—	$	—	$	—	$	—
Commercial real estate – owner occupied	3,197		—		—		—
Commercial real estate – investor	—		—		2,131		36
Residential real estate	—		—		—		—
Consumer	—		—		—		—
	$	3,197	$	—	$	2,131	$	36

The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of June 30, 2020 and December 31, 2019 (in thousands). The June 30, 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).



	June 30, 2020		December 31, 2019
Commercial and industrial	$	8,211	$	207
Commercial real estate – owner occupied	5,629		4,811
Commercial real estate – investor	17,922		2,917
Residential real estate	7,676		7,181
Consumer	3,119		2,733
	$	42,557	$	17,849

At June 30, 2020, there were no commitments to lend additional funds to borrowers whose loans are in non-accrual status.

At June 30, 2020 and December 31, 2019, loans in the amount of $42.6 million and $17.8 million, respectively, were three or more months delinquent or in the process of foreclosure. At June 30, 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 June 30, 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 June 30, 2020 and December 31, 2019 by loan portfolio segment (in thousands). The June 30, 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
June 30, 2020
Commercial and industrial	$	307	$	—	$	2,246	$	2,553	$	908,209	$	910,762
Commercial real estate – owner occupied	793		143		2,392		3,328		1,196,414		1,199,742
Commercial real estate – investor	1,857		2,000		10,299		14,156		3,435,004		3,449,160
Residential real estate	943		7,119		4,032		12,094		2,414,183		2,426,277
Consumer	1,528		336		4,510		6,374		385,974		392,348
	$	5,428	$	9,598	$	23,479	$	38,505	$	8,339,784	$	8,378,289
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 June 30, 2020 and December 31, 2019, troubled debt restructured (“TDR”) loans totaled $22.6 million and $24.6 million, respectively. Included in the non-accrual loan total at June 30, 2020, and December 31, 2019, were $6.2 million and $6.6 million, respectively, of troubled debt restructurings. At June 30, 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 June 30, 2020 and December 31, 2019, which totaled $16.4 million and $18.0 million, respectively.

The following table presents information about troubled debt restructurings which occurred during the three and six months ended June 30, 2020 and 2019, and troubled debt restructurings modified within the previous year and which defaulted during the three and six months ended June 30, 2020 and 2019 (dollars in thousands):



	Number of Loans	Pre-modification Recorded Investment	Post-modification Recorded Investment
Three months ended June 30, 2020
Troubled Debt Restructurings:
Commercial real estate – owner occupied	1	1,112	1,143
Residential real estate	2	205	213



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



	Number of Loans	Pre-modification Recorded Investment		Post-modification Recorded Investment

Six months ended June 30, 2020
Troubled Debt Restructurings:
Consumer	4	$	159	$	177
Commercial real estate – owner occupied	1	1,112		1,143
Residential real estate	4	431		447



	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 June 30, 2019
Troubled Debt Restructurings:
Consumer	4	$	442	$	462
Residential real estate	2	332		351



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



	Number of Loans	Pre-modification Recorded Investment		Post-modification Recorded Investment
Six months ended June 30, 2019
Troubled Debt Restructurings:
Consumer	4	$	442	$	462
Residential real estate	5	921		972



	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. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans at June 30, 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	$	26,354	$	24,667
Allowance for credit losses at acquisition	1,343		1,296
Non-credit discount at acquisition	3,589		5,334
Par value of acquired loans at acquisition	$	31,286	$	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 and six months ended June 30, 2019 (in thousands):



	Three Months Ended June 30,			Six Months Ended June 30,
	2019				2019
Beginning balance	$	4,193			$	3,630
Acquisition	—				691
Accretion	(531		)		(1,184		)
Reclassification from non-accretable difference	(479		)		46
Ending balance	$	3,183			$	3,183