| Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses | Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses Loan and lease receivables consist of the following: March 31, December 31, (In Thousands) Commercial real estate: Commercial real estate — owner occupied $ 212,698 $ 203,476 Commercial real estate — non-owner occupied 479,061 484,427 Land development 47,503 42,666 Construction 169,894 161,562 Multi-family 184,490 167,868 1-4 family 33,255 34,340 Total commercial real estate 1,126,901 1,094,339 Commercial and industrial 466,277 462,321 Direct financing leases, net 32,724 33,170 Consumer and other: Home equity and second mortgages 8,377 8,438 Other 23,367 20,789 Total consumer and other 31,744 29,227 Total gross loans and leases receivable 1,657,646 1,619,057 Less: Allowance for loan and lease losses 20,449 20,425 Deferred loan fees 1,000 1,402 Loans and leases receivable, net $ 1,636,197 $ 1,597,230 The total amount of the Corporation’s ownership of SBA loans comprised of the following: March 31, December 31, (In Thousands) Retained, unguaranteed portions of sold SBA loans $ 23,403 $ 23,898 Other SBA loans (1) 22,880 22,024 Total SBA loans $ 46,283 $ 45,922 (1) Primarily consisted of SBA CAPLine, Express, and impaired loans that were repurchased from the secondary market, all of which are not saleable. As of March 31, 2019 and December 31, 2018 , $14.7 million and $13.2 million of SBA loans were considered impaired, respectively. Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans. The total principal amount of the guaranteed portions of SBA loans sold during the three months ended March 31, 2019 and 2018 was $2.3 million and $3.1 million , respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three months ended March 31, 2019 and 2018 have been derecognized in the unaudited Consolidated Financial Statements. The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements. The total outstanding balance of sold SBA loans at March 31, 2019 and December 31, 2018 was $81.4 million and $83.3 million , respectively. The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended March 31, 2019 and 2018 was $6.8 million and $19.7 million , respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at March 31, 2019 and December 31, 2018 was $130.9 million and $129.7 million , respectively. As of March 31, 2019 and December 31, 2018 , the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $212.8 million and $208.9 million , respectively. No loans in this participation portfolio were considered impaired as of March 31, 2019 and December 31, 2018 . The Corporation does not share in the participant’s portion of any potential charge-offs. The total amount of loan participations purchased on the unaudited Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 was $550,000 and $569,000 , respectively. The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators: March 31, 2019 Category I II III IV Total (Dollars in Thousands) Commercial real estate: Commercial real estate — owner occupied $ 182,067 $ 17,097 $ 8,368 $ 5,166 $ 212,698 Commercial real estate — non-owner occupied 442,930 35,142 958 31 479,061 Land development 44,393 960 — 2,150 47,503 Construction 169,720 — 174 — 169,894 Multi-family 184,490 — — — 184,490 1-4 family 31,151 1,238 698 168 33,255 Total commercial real estate 1,054,751 54,437 10,198 7,515 1,126,901 Commercial and industrial 385,166 19,228 45,991 15,892 466,277 Direct financing leases, net 25,251 3,943 3,530 — 32,724 Consumer and other: Home equity and second mortgages 8,253 75 49 — 8,377 Other 23,065 — — 302 23,367 Total consumer and other 31,318 75 49 302 31,744 Total gross loans and leases receivable $ 1,496,486 $ 77,683 $ 59,768 $ 23,709 $ 1,657,646 Category as a % of total portfolio 90.28 % 4.69 % 3.60 % 1.43 % 100.00 % December 31, 2018 Category I II III IV Total (Dollars in Thousands) Commercial real estate: Commercial real estate — owner occupied $ 177,222 $ 15,085 $ 5,506 $ 5,663 $ 203,476 Commercial real estate — non-owner occupied 458,185 24,873 1,338 31 484,427 Land development 39,472 981 — 2,213 42,666 Construction 161,360 — 202 — 161,562 Multi-family 167,868 — — — 167,868 1-4 family 32,004 1,451 707 178 34,340 Total commercial real estate 1,036,111 42,390 7,753 8,085 1,094,339 Commercial and industrial 374,371 19,370 51,474 17,106 462,321 Direct financing leases, net 26,013 6,090 1,067 — 33,170 Consumer and other: Home equity and second mortgages 8,385 3 50 — 8,438 Other 20,499 — — 290 20,789 Total consumer and other 28,884 3 50 290 29,227 Total gross loans and leases receivable $ 1,465,379 $ 67,853 $ 60,344 $ 25,481 $ 1,619,057 Category as a % of total portfolio 90.51 % 4.19 % 3.73 % 1.57 % 100.00 % Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers, or as other circumstances dictate. The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management. Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team, or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers, and continued review of such borrowers’ compliance with the terms of their respective agreements. Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends, or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by subcommittees of the Bank’s Loan Committee. Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and subcommittees of the Bank’s Loan Committee on a monthly basis. Category IV — Loans and leases in this category are considered to be impaired. Impaired loans and leases, with the exception of performing troubled debt restructurings, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement. Impaired loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment. Loans and leases in this category are monitored by management and subcommittees of the Bank’s Loan Committee on a monthly basis. The delinquency aging of the loan and lease portfolio by class of receivable was as follows: March 31, 2019 30-59 60-89 Greater Total Past Due Current Total Loans and Leases (Dollars in Thousands) Accruing loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 207,532 $ 207,532 Non-owner occupied — — — — 479,030 479,030 Land development — — — — 45,353 45,353 Construction — — — — 169,894 169,894 Multi-family — — — — 184,490 184,490 1-4 family — — — — 33,255 33,255 Commercial and industrial 757 — — 757 449,628 450,385 Direct financing leases, net — — — — 32,724 32,724 Consumer and other: Home equity and second mortgages 2 — — 2 8,375 8,377 Other — — — — 23,066 23,066 Total 759 — — 759 1,633,347 1,634,106 Non-accruing loans and leases Commercial real estate: Owner occupied — — 4,809 4,809 357 5,166 Non-owner occupied — — 31 31 — 31 Land development — — 119 119 2,031 2,150 Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — — — Commercial and industrial 933 3,035 11,581 15,549 343 15,892 Direct financing leases, net — — — — — — Consumer and other: Home equity and second mortgages — — — — — — Other — — 265 265 36 301 Total 933 3,035 16,805 20,773 2,767 — 23,540 Total loans and leases Commercial real estate: Owner occupied — — 4,809 4,809 207,889 212,698 Non-owner occupied — — 31 31 479,030 479,061 Land development — — 119 119 47,384 47,503 Construction — — — — 169,894 169,894 Multi-family — — — — 184,490 184,490 1-4 family — — — — 33,255 33,255 Commercial and industrial 1,690 3,035 11,581 16,306 449,971 466,277 Direct financing leases, net — — — — 32,724 32,724 Consumer and other: Home equity and second mortgages 2 — — 2 8,375 8,377 Other — — 265 265 23,102 23,367 Total $ 1,692 $ 3,035 $ 16,805 $ 21,532 $ 1,636,114 $ 1,657,646 Percent of portfolio 0.10 % 0.18 % 1.02 % 1.30 % 98.70 % 100.00 % December 31, 2018 30-59 60-89 Greater Total Past Due Current Total Loans and Leases (Dollars in Thousands) Accruing loans and leases Commercial real estate: Owner occupied $ 157 $ — $ — $ 157 $ 197,656 $ 197,813 Non-owner occupied — 2,272 — 2,272 482,124 484,396 Land development — — — — 40,453 40,453 Construction 14,824 — — 14,824 146,738 161,562 Multi-family — — — — 167,868 167,868 1-4 family 363 60 — 423 33,917 34,340 Commercial and industrial 826 247 — 1,073 444,144 445,217 Direct financing leases, net — — — — 33,170 33,170 Consumer and other: Home equity and second mortgages — — — — 8,438 8,438 Other — — — — 20,499 20,499 Total 16,170 2,579 — 18,749 1,575,007 1,593,756 Non-accruing loans and leases Commercial real estate: Owner occupied 483 — 5,180 5,663 — 5,663 Non-owner occupied — — 31 31 — 31 Land development — — 119 119 2,094 2,213 Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — — — Commercial and industrial 2,322 — 12,108 14,430 2,674 17,104 Direct financing leases, net — — — — — — Consumer and other: Home equity and second mortgages — — — — — — Other — — 279 279 11 290 Total 2,805 — 17,717 20,522 4,779 25,301 Total loans and leases Commercial real estate: Owner occupied 640 — 5,180 5,820 197,656 203,476 Non-owner occupied — 2,272 31 2,303 482,124 484,427 Land development — — 119 119 42,547 42,666 Construction 14,824 — — 14,824 146,738 161,562 Multi-family — — — — 167,868 167,868 1-4 family 363 60 — 423 33,917 34,340 Commercial and industrial 3,148 247 12,108 15,503 446,818 462,321 Direct financing leases, net — — — — 33,170 33,170 Consumer and other: Home equity and second mortgages — — — — 8,438 8,438 Other — — 279 279 20,510 20,789 Total $ 18,975 $ 2,579 $ 17,717 $ 39,271 $ 1,579,786 $ 1,619,057 Percent of portfolio 1.17 % 0.16 % 1.09 % 2.42 % 97.58 % 100.00 % The Corporation’s total impaired assets consisted of the following: March 31, December 31, (In Thousands) Non-accrual loans and leases Commercial real estate: Commercial real estate — owner occupied $ 5,166 $ 5,663 Commercial real estate — non-owner occupied 31 31 Land development 2,150 2,213 Construction — — Multi-family — — 1-4 family — — Total non-accrual commercial real estate 7,347 7,907 Commercial and industrial 15,892 17,104 Direct financing leases, net — — Consumer and other: Home equity and second mortgages — — Other 301 290 Total non-accrual consumer and other loans 301 290 Total non-accrual loans and leases 23,540 25,301 Foreclosed properties, net 2,547 2,547 Total non-performing assets 26,087 27,848 Performing troubled debt restructurings 169 180 Total impaired assets $ 26,256 $ 28,028 March 31, December 31, Total non-accrual loans and leases to gross loans and leases 1.42 % 1.56 % Total non-performing assets to total gross loans and leases plus foreclosed properties, net 1.57 1.72 Total non-performing assets to total assets 1.30 1.42 Allowance for loan and lease losses to gross loans and leases 1.23 1.26 Allowance for loan and lease losses to non-accrual loans and leases 86.87 80.73 As of March 31, 2019 and December 31, 2018 , $9.6 million and $7.6 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively. There were no unfunded commitments associated with troubled debt restructured loans and leases as of March 31, 2019 . All loans and leases modified as a troubled debt restructuring are measured for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a default, is considered in the determination of an appropriate level of the allowance for loan and lease losses. The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable: For the Three Months Ended March 31, 2019 Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment (Dollars in Thousands) Commercial and industrial 4 $ 2,077 $ 2,077 During the three months ended March 31, 2018, no loans were modified to a troubled debt restructuring. There were no loans and leases modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the three months ended March 31, 2019 and 2018 . The following represents additional information regarding the Corporation’s impaired loans and leases, including performing troubled debt restructurings, by class: As of and for the Three Months Ended March 31, 2019 Recorded (1) Unpaid Impairment Average (2) Foregone Interest Net (In Thousands) With no impairment reserve recorded: Commercial real estate: Owner occupied $ 776 $ 776 $ — $ 4,725 $ 21 $ 355 $ (334 ) Non-owner occupied 31 71 — 229 1 — 1 Land development 2,150 6,447 — 2,198 16 — 16 Construction — — — — — — — Multi-family — — — — — — — 1-4 family 168 173 — 171 — 6 (6 ) Commercial and industrial 3,794 4,337 — 12,172 140 307 (167 ) Direct financing leases, net — — — — — — — Consumer and other: Home equity and second mortgages — — — — — — — Other 265 931 — 252 13 — 13 Total 7,184 12,735 — 19,747 191 668 (477 ) With impairment reserve recorded: Commercial real estate: Owner occupied 4,390 5,749 690 680 107 — 107 Non-owner occupied — — — — — — — Land development — — — — — — — — — — Construction — — — — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 12,098 12,211 3,984 3,805 420 — 420 Direct financing leases, net — — — — — — — Consumer and other: Home equity and second mortgages — — — — — — — Other 37 37 37 20 — — — Total 16,525 17,997 4,711 4,505 527 — 527 Total: Commercial real estate: Owner occupied 5,166 6,525 690 5,405 128 355 (227 ) Non-owner occupied 31 71 — 229 1 — 1 Land development 2,150 6,447 — 2,198 16 — 16 Construction — — — — — — — Multi-family — — — — — — — 1-4 family 168 173 — 171 — 6 (6 ) Commercial and industrial 15,892 16,548 3,984 15,977 560 307 253 Direct financing leases, net — — — — — — — Consumer and other: Home equity and second mortgages — — — — — — — Other 302 968 37 272 13 — 13 Grand total $ 23,709 $ 30,732 $ 4,711 $ 24,252 $ 718 $ 668 $ 50 (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. (2) Average recorded investment is calculated primarily using daily average balances. As of and for the Year Ended December 31, 2018 Recorded Investment (1) Unpaid Principal Balance Impairment Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no impairment reserve recorded: Commercial real estate: Owner occupied $ 1,273 $ 1,273 $ — $ 6,638 $ 756 $ 197 $ 559 Non-owner occupied 31 72 — 33 2 — 2 Land development 2,213 6,510 — 2,366 68 — 68 Construction — — — 2,148 219 — 219 Multi-family — — — — — — — 1-4 family 178 183 — 808 42 81 (39 ) Commercial and industrial 6,828 7,527 — 8,809 1,058 980 78 Direct financing leases, net — — — — — — — Consumer and other: Home equity and second mortgages — — — 1 — 46 (46 ) Other 279 945 — 305 55 — 55 Total 10,802 16,510 — 21,108 2,200 1,304 896 With impairment reserve recorded: Commercial real estate: Owner occupied 4,390 5,749 675 635 182 — 182 Non-owner occupied — — — — — — — Land development — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 10,278 10,278 3,710 4,687 1,096 — 1,096 Direct financing leases, net — — — — — — — Consumer and other: Home equity and second mortgages — — — — — — — Other 11 11 11 1 — — — Total 14,679 16,038 4,396 5,323 1,278 — 1,278 Total: Commercial real estate: Owner occupied 5,663 7,022 675 7,273 938 197 741 Non-owner occupied 31 72 — 33 2 — 2 Land development 2,213 6,510 — 2,366 68 — 68 Construction — — — 2,148 219 — 219 Multi-family — — — — — — — 1-4 family 178 183 — 808 42 81 (39 ) Commercial and industrial 17,106 17,805 3,710 13,496 2,154 980 1,174 Direct financing leases, net — — — — — — — Consumer and other: Home equity and second mortgages — — — 1 — 46 (46 ) Other 290 956 11 306 55 — 55 Grand total $ 25,481 $ 32,548 $ 4,396 $ 26,431 $ 3,478 $ 1,304 $ 2,174 (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. (2) Average recorded investment is calculated primarily using daily average balances. The difference between the recorded investment of loans and leases and the unpaid principal balance of $7.0 million and $7.1 million as of March 31, 2019 and December 31, 2018 , respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases. Impaired loans and leases also included $169,000 and $180,000 of loans as of March 31, 2019 and December 31, 2018 , respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession in terms. When a loan is placed on non-accrual, interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income. Cash payments collected on non-accrual loans are first applied to such loan’s principal. Foregone interest represents the interest that was contractually due on the loan but not received or recorded. To the extent the amount of principal on a non-accrual loan is fully collected and additional cash is received, the Corporation will recognize interest income. To determine the level and composition of the allowance for loan and lease losses, the Corporation categorizes the portfolio into segments with similar risk characteristics. First, the Corporation evaluates loans and leases for potential impairment classification. The Corporation analyzes each loan and lease determined to be impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows. The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance. A summary of the activity in the allowance for loan and lease losses by portfolio segment is as follows: As of and for the Three Months Ended March 31, 2019 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 11,662 $ 8,079 $ 684 $ 20,425 Charge-offs — (48 ) — (48 ) Recoveries 1 19 3 23 Net recoveries (charge-offs) 1 (29 ) 3 (25 ) Provision for loan and lease losses (458 ) 435 72 49 Ending balance $ 11,205 $ 8,485 $ 759 $ 20,449 As of and for the Three Months Ended March 31, 2018 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 10,131 $ 8,225 $ 407 $ 18,763 Charge-offs (2,175 ) (490 ) (20 ) (2,685 ) Recoveries 13 2 69 84 Net (charge-offs) recoveries (2,162 ) (488 ) 49 (2,601 ) Provision for loan and lease losses 2,021 414 41 2,476 Ending balance $ 9,990 $ 8,151 $ 497 $ 18,638 The following tables provide information regarding the allowance for loan and lease losses and balances by type of allowance methodology. As of March 31, 2019 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for loan and lease losses: Collectively evaluated for impairment $ 10,515 $ 4,501 $ 722 $ 15,738 Individually evaluated for impairment 690 3,984 37 4,711 Loans acquired with deteriorated credit quality — — — — Total $ 11,205 $ 8,485 $ 759 $ 20,449 Loans and lease receivables: Collectively evaluated for impairment $ 1,119,386 $ 483,109 $ 31,442 $ 1,633,937 Individually evaluated for impairment 7,368 15,890 302 23,560 Loans acquired with deteriorated credit quality 147 2 — 149 Total $ 1,126,901 $ 499,001 $ 31,744 $ 1,657,646 As of December 31, 2018 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for loan and lease losses: Collectively evaluated for impairment $ 10,987 $ 4,369 $ 673 $ 16,029 Individually evaluated for impairment 675 3,710 11 4,396 Loans acquired with deteriorated credit quality — — — — Total $ 11,662 $ 8,079 $ 684 $ 20,425 Loans and lease receivables: Collectively evaluated for impairment $ 1,086,254 $ 478,385 $ 28,937 $ 1,593,576 Individually evaluated for impairment 7,914 17,104 290 25,308 Loans acquired with deteriorated credit quality 171 2 — 173 Total $ 1,094,339 $ 495,491 $ 29,227 $ 1,619,057 |
