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Allowance For Loan Losses
 9 Months Ended
Sep. 30, 2019
Receivables [Abstract]  
Allowance For Loan Losses Allowance For Loan Losses
 
Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio.  Management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors.
 
Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance.  Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these loan types is often based more upon specific credit reviews, with consideration given to the potential impairment of certain credits and historical loss rates, adjusted for economic conditions and other inherent risk factors.
 
    
The following table summarizes the activity in the allowance for loan losses, by portfolio loan classification, for the nine months ended September 30, 2019 and 2018 (in thousands).  The allocation of a portion of the allowance in one portfolio segment does not preclude its availability to absorb losses in other portfolio segments. The following table also presents the balance in the allowance for loan loss disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans, by portfolio segment, as of September 30, 2019 and December 31, 2018 (in thousands). 
 
Commercial and
Commercial
Residential
 
 
DDA
 
 
Industrial
Real Estate
Real Estate
Home Equity
Consumer
Overdrafts
Total
Nine months ended September 30, 2019
 
 
 
 
 
 
 
Allowance for loan losses
Beginning balance
$
4,060

$
4,495

$
4,116

$
1,268

$
319

$
1,708

$
15,966

Charge-offs
(68
)
(394
)
(922
)
(160
)
(478
)
(1,985
)
(4,007
)
Recoveries
183

614

282

—

211

1,112

2,402

(Recovery of) provision
(1,471
)
(1,619
)
162

85

591

1,077

(1,175
)
Ending balance
$
2,704

$
3,096

$
3,638

$
1,193

$
643

$
1,912

$
13,186

 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 

 

 

 

 

 

 

Allowance for loan losses
 

 

 

 

 

 

 

Beginning balance
$
4,571

$
6,183

$
5,212

$
1,138

$
62

$
1,670

$
18,836

Charge-offs
(724
)
(349
)
(464
)
(219
)
(560
)
(1,976
)
(4,292
)
Recoveries
1,625

538

275

—

130

1,109

3,677

(Recovery of) provision
(1,583
)
(1,775
)
(557
)
385

709

911

(1,910
)
Ending balance
$
3,889

$
4,597

$
4,466

$
1,304

$
341

$
1,714

$
16,311

 
 
 
 
 
 
 
 
Three months ended September 30, 2019
 
 
 
 
 
 
 
Allowance for loan losses
Beginning balance
$
2,796

$
3,469

$
3,959

$
1,211

$
509

$
1,851

$
13,795

Charge-offs
(17
)
(216
)
(291
)
(43
)
(182
)
(772
)
(1,521
)
Recoveries
43

7

157

—

68

363

638

(Recovery of) provision
(118
)
(164
)
(187
)
25

248

470

274

Ending balance
$
2,704

$
3,096

$
3,638

$
1,193

$
643

$
1,912

$
13,186

 
 
 
 
 
 
 
 
Three months ended September 30, 2018
 

 

 

 

 

 

 

Allowance for loan losses
 

 

 

 

 

 

 

Beginning balance
$
3,727

$
5,930

$
4,579

$
1,160

$
268

$
1,212

$
16,876

Charge-offs
—

(74
)
(237
)
(115
)
(206
)
(704
)
(1,336
)
Recoveries
147

166

116

—

25

344

798

(Recovery of) provision
15

(1,425
)
8

259

254

862

(27
)
Ending balance
$
3,889

$
4,597

$
4,466

$
1,304

$
341

$
1,714

$
16,311

 
 
 
 
 
 
 
 
As of September 30, 2019
 

 

 

 

 

 

 

Allowance for loan losses
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
—

$
884

$
—

$
—

$
—

$
—

$
884

Collectively
2,429

2,156

3,638

1,193

636

1,912

11,964

Acquired with deteriorated credit quality
275

56

—

—

7

—

338

Total
$
2,704

$
3,096

$
3,638

$
1,193

$
643

$
1,912

$
13,186

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Loans
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
501

$
9,282

$
—

$
—

$
—

$
—

$
9,783

Collectively
295,183

1,413,933

1,641,254

150,808

54,695

4,638

3,560,511

Acquired with deteriorated credit quality
1,243

8,768

2,162

—

104

—

12,277

Total
$
296,927

$
1,431,983

$
1,643,416

$
150,808

$
54,799

$
4,638

$
3,582,571

 
 
 
 
 
 
 
 
As of December 31, 2018
 

 

 

 

 

 

 

Allowance for loan losses
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
—

$
428

$
—

$
—

$
—

$
—

$
428

Collectively
4,059

4,015

4,116

1,268

312

1,708

15,478

Acquired with deteriorated credit quality
1

52

—

—

7

—

60

Total
$
4,060

$
4,495

$
4,116

$
1,268

$
319

$
1,708

$
15,966

 
 
 
 
 
 
 
 
Loans
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
651

$
9,855

$
—

$
—

$
—

$
—

$
10,506

Collectively
284,018

1,433,674

1,633,241

153,496

51,077

6,328

3,561,834

Acquired with deteriorated credit quality
1,645

11,413

2,097

—

113

—

15,268

Total
$
286,314

$
1,454,942

$
1,635,338

$
153,496

$
51,190

$
6,328

$
3,587,608



Credit Quality Indicators
 
All commercial loans within the portfolio are subject to internal risk rating.  All non-commercial loans are evaluated based on payment history.  The Company’s internal risk ratings for commercial loans are:  Exceptional, Good, Acceptable, Pass/Watch, Special Mention, Substandard and Doubtful.  Each internal risk rating is defined in the loan policy using the following criteria:  balance sheet yields; ratios and leverage; cash flow spread and coverage; prior history; capability of management; market position/industry; potential impact of changing economic, legal, regulatory or environmental conditions; purpose; structure; collateral support; and guarantor support.  Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process.  Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of probable loss.
 
The Company categorizes loans into risk categories based on relevant information regarding the customer’s debt service ability, capacity and overall collateral position, along with other economic trends and historical payment performance.  The risk rating for each credit is updated when the Company receives current financial information, the loan is reviewed by the Company’s internal loan review and credit administration departments, or the loan becomes delinquent or impaired.  The risk grades are updated a minimum of annually for loans rated Exceptional, Good, Acceptable, or Pass/Watch.  Loans rated Special Mention, Substandard or Doubtful are reviewed at least quarterly.  The Company uses the following definitions for its risk ratings:

Risk Rating
Description
Pass ratings:
 
   (a) Exceptional
Loans classified as exceptional are secured with liquid collateral conforming to the internal loan policy.  Loans rated within this category pose minimal risk of loss to the bank. 
   (b) Good
Loans classified as good have similar characteristics that include a strong balance sheet, satisfactory debt service coverage ratios, strong management and/or guarantors, and little exposure to economic cycles. Loans in this category generally have a low chance of loss to the bank.
   (c) Acceptable
Loans classified as acceptable have acceptable liquidity levels, adequate debt service coverage ratios, experienced management, and have average exposure to economic cycles.  Loans within this category generally have a low risk of loss to the bank. 
   (d) Pass/Watch
Loans classified as pass/watch have erratic levels of leverage and/or liquidity, cash flow is volatile and the borrower is subject to moderate economic risk.  A borrower in this category poses a low to moderate risk of loss to the bank. 
Special Mention
Loans classified as special mention have a potential weakness(es) that deserves management’s close attention.  The potential weakness could result in deterioration of the loan repayment or the bank’s credit position at some future date.  A loan rated in this category poses a moderate loss risk to the bank. 
Substandard
Loans classified as substandard reflect a customer with a well defined weakness that jeopardizes the liquidation of the debt.  Loans in this category have the possibility that the bank will sustain some loss if the deficiencies are not corrected and the bank’s collateral value is weakened by the financial deterioration of the borrower. 
Doubtful
Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that make collection of the full contract amount highly improbable.  Loans rated in this category are most likely to cause the bank to have a loss due to a collateral shortfall or a negative capital position. 

The following table presents the Company’s commercial loans by credit quality indicators, by portfolio loan classification (in thousands):
 
Commercial and Industrial
Commercial Real Estate
Total
September 30, 2019
 
 
 
Pass
$
262,591

$
1,374,974

$
1,637,565

Special mention
2,373

13,765

16,138

Substandard
31,963

43,244

75,207

Doubtful
—

—

—

Total
$
296,927

$
1,431,983

$
1,728,910

 
 
 
 
December 31, 2018
 

 

 

Pass
$
250,856

$
1,402,821

$
1,653,677

Special mention
27,886

5,696

33,582

Substandard
7,572

46,425

53,997

Doubtful
—

—

—

Total
$
286,314

$
1,454,942

$
1,741,256


     
    
    
The following table presents the Company's non-commercial loans by payment performance, by portfolio loan classification (in thousands):
 
Performing
Non-Performing
Total
September 30, 2019
 
 
 
Residential real estate
$
1,640,496

$
2,920

$
1,643,416

Home equity
150,298

510

150,808

Consumer
54,799

—

54,799

DDA overdrafts
4,638

—

4,638

Total
$
1,850,231

$
3,430

$
1,853,661

 
 
 
 
December 31, 2018
 
 
 
Residential real estate
$
1,630,892

$
4,446

$
1,635,338

Home equity
153,334

162

153,496

Consumer
51,188

2

51,190

DDA overdrafts
6,322

6

6,328

Total
$
1,841,736

$
4,616

$
1,846,352



Aging Analysis of Accruing and Non-Accruing Loans
 
Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods that generally result in level rates of return.  Loan origination fees, and certain direct costs, are deferred and amortized as an adjustment to the yield over the term of the loan.  The accrual of interest generally is discontinued when a loan becomes 90 days past due as to principal or interest for all loan types.  However, any loan may be placed on non-accrual status if the Company receives information that indicates a borrower is unable to meet the contractual terms of its respective loan agreement.  Other indicators considered for placing a loan on non-accrual status include the borrower’s involvement in bankruptcies, foreclosures, repossessions, litigation and any other situation resulting in doubt as to whether full collection of contractual principal and interest is attainable.  When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses.  Management may elect to continue the accrual of interest when the net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in the process of collection.

Generally for all loan classes, interest income during the period the loan is non-performing is recorded on a cash basis after recovery of principal is reasonably assured.  Cash payments received on nonperforming loans are typically applied directly against the outstanding principal balance until the loan is fully repaid.  Generally, loans are restored to accrual status when the obligation is brought current, the borrower has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
 
Generally, all loan types are considered past due when the contractual terms of a loan are not met and the borrower is 30 days or more past due on a payment.  Furthermore, residential and home equity loans are generally subject to charge-off when the loan becomes 120 days past due, depending on the estimated fair value of the collateral less cost to dispose, versus the outstanding loan balance.  Commercial loans are generally charged off when the loan becomes 120 days past due.  Open-end consumer loans are generally charged off when the loan becomes 180 days past due.
 
    
    
The following table presents an aging analysis of the Company’s accruing and non-accrual loans, by portfolio loan classification (in thousands):
 
 
September 30, 2019
 
Accruing
 
 
 
Current
30-59 days
60-89 days
Over 90 days
Non-accrual
Total
Residential real estate
$
1,633,987

$
5,817

$
692

$
350

$
2,570

$
1,643,416

Home equity
149,544

749

6

40

469

150,808

Commercial and industrial
294,341

415

50

62

2,059

296,927

Commercial real estate
1,420,608

1,276

—

—

10,099

1,431,983

Consumer
54,675

124

—

—

—

54,799

DDA overdrafts
4,012

613

13

—

—

4,638

Total
$
3,557,167

$
8,994

$
761

$
452

$
15,197

$
3,582,571

 
 
 
 
 
 
 
 
December 31, 2018
 
Accruing
 
 
 
Current
30-59 days
60-89 days
Over 90 days
Non-accrual
Total
Residential real estate
$
1,621,073

$
8,607

$
1,213

$
170

$
4,275

$
1,635,338

Home equity
152,083

1,240

11

24

138

153,496

Commercial and industrial
284,140

397

49

52

1,676

286,314

Commercial real estate
1,445,896

487

94

4

8,461

1,454,942

Consumer
50,894

253

41

1

1

51,190

DDA overdrafts
5,840

467

15

6

—

6,328

Total
$
3,559,926

$
11,451

$
1,423

$
257

$
14,551

$
3,587,608


The following table presents the Company’s impaired loans, by class (in thousands). The difference between the unpaid principal balance and the recorded investment generally reflects amounts that have been previously charged-off. There are no impaired residential, home equity, or consumer loans.

 
September 30, 2019
December 31, 2018
 
 
Unpaid
 
 
Unpaid
 
 
Recorded
Principal
Related
Recorded
Principal
Related
 
Investment
Balance
Allowance
Investment
Balance
Allowance
With no related allowance recorded:
 
 
 
 
 
 
Commercial and industrial
$
501

$
501

$
—

$
651

$
651

$
—

Commercial real estate
3,534

3,559

—

6,870

6,895

—

Total
$
4,035

$
4,060

$
—

$
7,521

$
7,546

$
—

 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
Commercial and industrial
$
—

$
—

$
—

$
—

$
—

$
—

Commercial real estate
5,748

5,748

884

2,985

2,985

428

Total
$
5,748

$
5,748

$
884

$
2,985

$
2,985

$
428



     
    
The following table presents information related to the average recorded investment and interest income recognized on the Company’s impaired loans, by class (in thousands):
 
Nine months ended September 30,
 
2019
2018
 
Average
Interest
Average
Interest
 
Recorded
Income
Recorded
Income
 
Investment
Recognized
Investment
Recognized
With no related allowance recorded:
 
 
 
 
Commercial and industrial
$
570

—

$
910

$
—

Commercial real estate
4,558

41

3,873

7

Total
$
5,128

$
41

$
4,783

$
7

 
 
 
 
 
With an allowance recorded:
 
 
 
 
Commercial and industrial
$
—

$
—

$
—

$
—

Commercial real estate
4,800

136

5,730

179

Total
$
4,800

$
136

$
5,730

$
179



     Approximately $0.1 million and $0.2 million of interest income would have been recognized during the nine months ended September 30, 2019 and 2018, respectively, if such loans had been current in accordance with their original terms.  There were no commitments to provide additional funds on non-accrual, impaired or other potential problem loans at September 30, 2019.

Loan Modifications

The Company’s policy on loan modifications typically does not allow for modifications that would be considered a concession from the Company.  However, when there is a modification, the Company evaluates each modification to determine if the modification constitutes a troubled debt restructuring (“TDR”) in accordance with ASU 2011-02, whereby a modification of a loan would be considered a TDR when both of the following conditions are met: (1) a borrower is experiencing financial difficulty and (2) the modification constitutes a concession.  When determining whether the borrower is experiencing financial difficulties, the Company reviews whether the borrower is currently in payment default on any of its debt or whether it is probable that the borrower would be in payment default in the foreseeable future without the modification.  Other indicators of financial difficulty include whether the borrower has declared or is in the process of declaring bankruptcy, the borrower’s ability to continue as a going concern, and the borrower’s projected cash flow to service its debt (including principal and interest) in accordance with the contractual terms for the foreseeable future, without a modification.

Regulatory guidance requires loans to be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged by the bankruptcy court, and the borrower has not reaffirmed the debt. The filing of bankruptcy is deemed to be evidence that the borrower is in financial difficulty and the discharge of the debt by the bankruptcy court is deemed to be a concession granted to the borrower.
    
The following tables set forth the Company’s TDRs (in thousands). Substantially all of the Company's TDRs are accruing interest.
 
September 30, 2019
December 31, 2018
 
 
Total
Total
Commercial and industrial
$
83

$
98

Commercial real estate
8,100

8,205

Residential real estate
21,320

23,521

Home equity
3,034

3,030

Consumer
—

—

Total
$
32,537

$
34,854

 
 
New TDRs
 
Nine months ended September 30,
 
2019
2018
 
Pre
Post
 
Pre
Post
 
Modification
Modification
 
Modification
Modification
 
Outstanding
Outstanding
 
Outstanding
Outstanding
Number of
Recorded
Recorded
Number of
Recorded
Recorded
Contracts
Investment
Investment
Contracts
Investment
Investment
Commercial and industrial
—

$
—

$
—

—

$
—

$
—

Commercial real estate
—

—

—

—

—

—

Residential real estate
29

2,076

2,076

22

1,465

1,465

Home equity
8

213

213

9

200

200

Consumer
—

—

—

—

—

—

Total
37

$
2,289

$
2,289

31

$
1,665

$
1,665