Allowance For Loan Losses

12 Months Ended

Dec. 31, 2019

ALLOWANCE FOR LOAN LOSSES

Management systematically monitors the loan portfolio and the appropriateness of the allowance for loan losses on a quarterly basis to provide for probable incurred 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 in excess of $1 million are selected at least annually for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the appropriateness of the allowance. Due to the nature of commercial lending, evaluation of the appropriateness of the allowance as it relates to these types of 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 summarizes the activity in the allowance for loan loss, by portfolio segment (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 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 (in thousands).



	Commercial and industrial			Commercial real estate			Residential real estate			Home equity			Consumer			DDA overdrafts			Total
December 31, 2019
Allowance for loan loss
Beginning balance	$	4,060		$	4,495		$	4,116		$	1,268		$	319		$	1,708		$	15,966
Charge-offs	(261		)	(1,358		)	(787		)	(294		)	(1,177		)	(2,777		)	(6,654		)
Recoveries	764			624			369			—			265			1,505			3,527
(Recovery of) provision	(2,504		)	(1,155		)	(250		)	213			1,568			878			(1,250		)
Ending balance	$	2,059		$	2,606		$	3,448		$	1,187		$	975		$	1,314		$	11,589

December 31, 2018
Allowance for loan loss
Beginning balance	$	4,571		$	6,183		$	5,212		$	1,138		$	62		$	1,670		$	18,836
Charge-offs	(733		)	(369		)	(682		)	(219		)	(769		)	(2,701		)	(5,473		)
Recoveries	2,152			732			367			—			166			1,496			4,913
(Recovery of) provision	(1,930		)	(2,051		)	(781		)	349			860			1,243			(2,310		)
Ending balance	$	4,060		$	4,495		$	4,116		$	1,268		$	319		$	1,708		$	15,966

December 31, 2017
Allowance for loan loss
Beginning balance	$	4,206		$	6,573		$	6,680		$	1,417		$	82		$	772		$	19,730
Charge-offs	(400		)	(720		)	(1,637		)	(403		)	(60		)	(2,714		)	(5,934		)
Recoveries	58			112			294			45			63			1,462			2,034
(Recovery of) provision	707			218			(125		)	79			(23		)	2,150			3,006
Ending balance	$	4,571		$	6,183		$	5,212		$	1,138		$	62		$	1,670		$	18,836

As of December 31, 2019
Allowance for loan loss
Evaluated for impairment:
Individually	$	—		$	87		$	—		$	—		$	—		$	—		$	87
Collectively	1,784			2,488			3,448			1,187			968			1,314			11,189
Acquired with deteriorated credit quality	275			31			—			—			7			—			313
Total	$	2,059		$	2,606		$	3,448		$	1,187		$	975		$	1,314		$	11,589

Loans
Evaluated for impairment:
Individually	$	501		$	6,190		$	—		$	—		$	—		$	—		$	6,691
Collectively	306,372			1,445,522			1,638,204			148,928			54,160			4,760			3,597,946
Acquired with deteriorated credit quality	1,142			8,025			2,192			—			103			—			11,462
Total	$	308,015		$	1,459,737		$	1,640,396		$	148,928		$	54,263		$	4,760		$	3,616,099



	Commercial and industrial		Commercial real estate		Residential real estate		Home equity		Consumer		DDA overdrafts		Total
As of December 31, 2018
Allowance for loan loss
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 non-commercial loans are evaluated based on payment history. A performing loan is a loan to a borrower that has and is expected to fulfill the contractual terms of the loan agreement. The borrower generally makes the contractual payments on the due date, is expected to continue to pay timely, is not in default and has not been placed on nonaccrual. A non-performing loan is a loan that is generally past due 90 days or greater and/or is classified as non-accrual. All commercial loans within the portfolio are subject to internal risk grading. 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, overall collateral position along with other economic trends, and historical payment performance. The risk grades for each credit are updated when the Company receives current financial information, the loan is reviewed by the Company’s internal loan review/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 and the risk grade within this pool of loans is generally updated on an annual basis.
(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 within this category are generally reviewed on an annual basis. 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 or 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 class (in thousands):



	Commercial and industrial		Commercial real estate		Total
December 31, 2019
Pass	$	276,847	$	1,408,644	$	1,685,491
Special mention	2,472		13,838		16,310
Substandard	28,696		37,255		65,951
Doubtful	—		—		—
Total	$	308,015	$	1,459,737	$	1,767,752

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 class (in thousands):



	Performing		Non-Performing		Total
December 31, 2019
Residential real estate	$	1,636,920	$	3,476	$	1,640,396
Home equity	148,397		531		148,928
Consumer	54,263		—		54,263
DDA overdrafts	4,760		—		4,760
Total	$	1,844,340	$	4,007	$	1,848,347

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

The following presents an aging analysis of the Company’s accruing and non-accruing loans, by class (in thousands):



	December 31, 2019
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Non-accrual		Total
Residential real estate	$	1,629,519	$	5,758	$	1,643	$	83	$	3,393	$	1,640,396
Home equity	147,441		840		116		—		531		148,928
Commercial and industrial	306,375		243		31		184		1,182		308,015
Commercial real estate	1,451,773		1,514		66		—		6,384		1,459,737
Consumer	54,075		156		32		—		—		54,263
DDA overdrafts	4,030		644		86		—		—		4,760
Total	$	3,593,213	$	9,155	$	1,974	$	267	$	11,490	$	3,616,099

	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 presents the Company’s individually evaluated impaired loans, by class (in thousands):



	December 31, 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	3,546		3,572		—		6,870		6,895		—
Total	$	4,047	$	4,073	$	—	$	7,521	$	7,546	$	—

With an allowance recorded:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate	2,644		2,644		87		2,985		2,985		428
Total	$	2,644	$	2,644	$	87	$	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):



	For the year ended
	December 31, 2019				December 31, 2018				December 31, 2017
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	578	$	—	$	845	$	—	$	1,086	$	—
Commercial real estate	4,388		41		4,623		39		4,534		69
Total	$	4,966	$	41	$	5,468	$	39	$	5,620	$	69

With an allowance recorded:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate	4,261		162		5,043		220		4,307		149
Total	$	4,261	$	162	$	5,043	$	220	$	4,307	$	149

If the Company's non-accrual and impaired loans had been current in accordance with their original terms, approximately $0.2 million of interest income would have been recognized during the years ended December 31, 2019, 2018 and 2017. There were no commitments to provide additional funds on non-accrual or impaired loans at December 31, 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 debtor is currently in payment default on any of its debt or whether it is probable that the debtor would be in payment default in the foreseeable future without the modification. Other indicators of financial difficulty include whether the debtor has declared or is in the process of declaring bankruptcy, the debtor’s ability to continue as a going concern, or the debtor’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):



	December 31, 2019		December 31, 2018
Commercial and industrial	$	—	$	98
Commercial real estate	4,973		8,205
Residential real estate	21,029		23,521
Home equity	3,628		3,030
Consumer	—		—
Total TDRs	$	29,630	$	34,854



	New TDRs					New TDRs					New TDRs
	For the year ended					For the year ended					For the year ended
	December 31, 2019					December 31, 2018					December 31, 2017
		Pre		Post			Pre		Post				Pre		Post
		Modification		Modification			Modification		Modification				Modification		Modification
		Outstanding		Outstanding			Outstanding		Outstanding				Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded		Number of		Recorded		Recorded
	Contracts	Investment		Investment		Contracts	Investment		Investment		Contracts		Investment		Investment
Commercial and industrial	—	$	—	$	—	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate	—	—		—		—	—		—		2		3,098		3,003
Residential real estate	31	2,531		2,531		33	2,326		2,326		33		3,987		3,987
Home equity	10	967		967		10	274		274		13		271		271
Consumer	—	—		—		—	—		—		—		—		—
	41	$	3,498	$	3,498	43	$	2,600	$	2,600	$	48	$	7,356	$	7,261

The Company had one TDR that subsequently defaulted in 2019. The loan balance was approximately $3.0 million and the subsequent default resulted in a charge-off of $0.7 million and the remaining balance was transferred to OREO during 2019.