Loans and the Allowance for Loan Losses | Note 6. Loans and the Allowance for Loan Losses Loans receivable - The following table sets forth the composition of the Company’s loan portfolio, including net deferred loan fees, at June 30, 2019 and December 31, 2018: June 30, December 31, 2019 2018 (dollars in thousands) Commercial $ 1,052,559 $ 988,758 Commercial real estate 3,111,274 2,778,167 Commercial construction 602,213 465,389 Residential real estate 326,661 309,991 Consumer 2,041 2,594 Gross loans 5,094,748 4,544,899 Net deferred loan fees (4,256 ) (3,807 ) Total loans receivable $ 5,090,492 $ 4,541,092 At June 30, 2019 and December 31, 2018, loan balances of approximately $2.5 billion and $2.3 billion, respectively, were pledged to secure borrowings from the FHLB of New York. Purchased Credit-Impaired Loans - The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment in those loans is as follows at June 30, 2019 and December 31, 2018. June 30, December 31, 2019 2018 (dollars in thousands) Commercial $ 5,399 $ 2,509 Commercial real estate 1,305 - $ 6,704 $ 2,509 For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during either the three and six months ended June 30, 2019 and June 30, 2018. There were no reversals from the allowance for loan losses during the three and six months ended June 30, 2019 and June 30, 2018. The following table presents the accretable yield, or income expected to be collected, on the purchased credit-impaired loans for three and six months ended June 30, 2019 and June 30, 2018: Three Months Three Months Ended Ended June 30, 2019 June 30, 2018 (dollars in thousands) Balance at April 1 $ 2,213 $ 1,322 Accretion of income (575 ) (63 ) Balance at June 30 $ 1,638 $ 1,259 Six Months Six Months Ended Ended June 30, 2019 June 30, 2018 (dollars in thousands) Balance at January 1 $ 1,134 $ 1,387 New loans purchased 1,286 Accretion of income (782 ) (128 ) Balance at June 30 $ 1,638 $ 1,259 Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans included in loans receivable by loan class as of June 30, 2019 and December 31, 2018: June 30, December 31, 2019 2018 (dollars in thousands) Commercial $ 28,433 $ 29,340 Commercial real estate 12,686 15,135 Commercial construction 3,579 2,934 Residential real estate 5,219 4,446 Total nonaccrual loans $ 49,917 $ 51,855 Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment. Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. All loans past due 90 days or greater and all impaired loans are included in the appropriate category below. The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) at June 30, 2019 and December 31, 2018: June 30, 2019 Special Pass Mention Substandard Doubtful Total (dollars in thousands) Commercial $ 997,503 $ 19,269 $ 35,787 $ - $ 1,052,559 Commercial real estate 3,084,014 7,622 19,638 - 3,111,274 Commercial construction 589,165 4,106 8,942 - 602,213 Residential real estate 321,316 - 5,345 - 326,661 Consumer 2,034 - 7 - 2,041 Gross loans $ 4,994,032 $ 30,997 $ 69,719 $ - $ 5,094,748 December 31, 2018 Special Pass Mention Substandard Doubtful Total (dollars in thousands) Commercial $ 951,610 $ 3,371 $ 33,777 $ - $ 988,758 Commercial real estate 2,742,989 12,574 22,604 - 2,778,167 Commercial construction 453,598 5,515 6,276 - 465,389 Residential real estate 305,414 - 4,577 - 309,991 Consumer 2,576 - 18 - 2,594 Gross loans $ 4,456,187 $ 21,460 $ 67,252 $ - $ 4,544,899 The following table provides an analysis of the impaired loans by segment as of June 30, 2019 and December 31, 2018: June 30, 2019 Unpaid Recorded Principal Related Investment Balance Allowance No related allowance recorded (dollars in thousands) Commercial $ 32,559 $ 79,328 Commercial real estate 17,162 17,317 Commercial construction 6,047 6,047 Residential real estate 3,175 3,519 Total (no related allowance) $ 58,943 $ 106,211 With an allowance recorded Commercial real estate $ 393 $ 393 $ 29 Commercial construction 2,894 2,895 162 Residential real estate 253 265 22 Total (with allowance) $ 3,540 $ 3,553 $ 213 Total Commercial $ 32,559 $ 79,328 $ - Commercial real estate 17,555 17,710 29 Commercial construction 8,941 8,942 162 Residential real estate 3,428 3,784 22 Total $ 62,483 $ 109,764 $ 213 December 31, 2018 Unpaid Recorded Principal Related Investment Balance Allowance No related allowance recorded (dollars in thousands) Commercial $ 29,896 $ 83,596 Commercial real estate 16,839 17,935 Commercial construction 9,240 9,240 Residential real estate 2,209 2,521 Total (no related allowance) $ 58,184 $ 113,292 With an allowance recorded Commercial real estate $ 1,488 $ 1,488 $ 7 Residential real estate 260 266 29 $ 1,748 $ 1,754 $ 36 Total Commercial $ 29,896 $ 83,596 $ - Commercial real estate 18,327 19,423 7 Commercial construction 9,240 9,240 - Residential real estate 2,469 2,787 29 Total $ 59,932 $ 115,046 $ 36 The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by segment as of and for the three and six months ended June 30, 2019 and 2018: Three Months Ended June 30, Six Months Ended June 30, 2019 2018 2019 2018 Average Interest Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income Recorded Income Investment Recognized Investment Recognized Investment Recognized Investment Recognized (dollars in thousands) Impaired loans Commercial $ 33,663 $ 82 $ 38,770 $ 35 $ 33,066 $ 164 $ 42,056 $ 66 Commercial real estate 17,205 68 23,422 127 17,170 143 23,504 370 Commercial construction 6,048 25 9,225 176 6,049 80 9,845 295 Residential real estate 3,198 - 2,569 - 3,195 - 2,599 - Total $ 60,114 $ 175 $ 73,986 $ 338 $ 59,480 $ 387 $ 78,004 $ 731 Impaired loans (allowance): Commercial real estate $ 393 $ - $ 8,544 $ 11 $ 393 $ - $ 8,548 $ 23 Commercial construction 2,850 42 - - 2,818 85 - - Residential real estate 255 - - - 256 - - - Total $ 3,498 $ 42 $ 8,544 $ 11 $ 3,467 $ 85 $ 8,548 $ 23 Total impaired loans: Commercial $ 33,663 $ 82 $ 38,770 $ 35 $ 33,066 $ 164 $ 42,056 $ 66 Commercial real estate 17,598 68 31,966 138 17,563 143 32,052 393 Commercial construction 8,898 67 9,225 176 8,867 165 9,845 295 Residential mortgage 3,453 - 2,569 - 3,451 - 2,599 - Total $ 63,612 $ 217 $ 82,530 $ 349 $ 62,947 $ 472 $ 86,552 $ 754 Included in impaired loans at June 30, 2019 and December 31, 2018 are loans that are deemed troubled debt restructurings. The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other. Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due at June 30, 2019 and December 31, 2018: June 30, 2019 90 Days or Greater Past Total Past 30-59 Days 60-89 Days Due and Still Due and Past Due Past Due Accruing Nonaccrual Nonaccrual Current Gross Loans (dollars in thousands) Commercial $ 1,130 $ 3,035 $ 3,006 $ 28,433 $ 35,604 $ 1,016,955 $ 1,052,559 Commercial real estate - 1,148 - 12,686 13,834 3,097,440 3,111,274 Commercial construction - 3,530 - 3,579 7,109 595,104 602,213 Residential real estate 681 - - 5,219 5,900 320,761 326,661 Consumer 3 20 - - 23 2,018 2,041 Total $ 1,814 $ 7,733 $ 3,006 $ 49,917 $ 62,470 $ 5,032,278 $ 5,094,748 The amount reported 90 days or greater past due and still accruing as of June 30, 2019 are comprised of PCI loans, net of their fair value marks, which are accreting income per their valuation at date of acquisition. December 31, 2018 90 Days or Greater Past Total Past 30-59 Days 60-89 Days Due and Still Due and Past Due Past Due Accruing Nonaccrual Nonaccrual Current Gross Loans Commercial $ 1,673 $ - $ 1,647 $ 29,340 $ 32,660 $ 956,098 $ 988,758 Commercial real estate 6,162 1,840 - 15,135 23,137 2,755,030 2,778,167 Commercial construction 2,496 564 - 2,934 5,994 459,395 465,389 Residential real estate 3,455 119 - 4,446 8,020 301,971 309,991 Consumer - - - - - 2,594 2,594 Total $ 13,786 $ 2,523 $ 1,647 $ 51,855 $ 69,811 $ 4,475,088 $ 4,544,899 The amount reported 90 days or greater past due and still accruing as of December 31, 2018 are comprised of PCI loans, net of their fair value marks, which are accreting income per their valuation at date of acquisition. The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for loan losses that are allocated to each loan portfolio segment: June 30, 2019 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) ALLL Individually evaluated for impairment $ - $ 29 $ 162 $ 22 $ - $ - $ 213 Collectively evaluated for impairment 8,521 20,456 5,380 1,186 2 740 36,285 Acquired portfolio 200 1,000 - - - - 1,200 Acquired with deteriorated credit quality - - - - - - - Total $ 8,721 $ 21,485 $ 5,542 $ 1,208 $ 2 $ 740 $ 37,698 Gross loans Individually evaluated for impairment $ 32,559 $ 17,555 $ 8,941 $ 3,428 $ - $ 62,483 Collectively evaluated for impairment 901,858 2,694,372 552,712 277,490 1,716 4,428,148 Acquired portfolio 112,743 398,042 40,560 45,743 325 597,413 Acquired with deteriorated credit quality 5,399 1,305 - - - 6,704 Total $ 1,052,559 $ 3,111,274 $ 602,213 $ 326,661 $ 2,041 $ 5,094,748 Decem ber 31, 2018 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Allowance for loan losses Individually evaluated for impairment $ - $ 7 $ - $ 29 $ - $ - $ 36 Collectively evaluated for impairment 9,675 17,840 4,519 1,237 2 445 33,718 Acquired portfolio 200 1,000 - - - - 1,200 Acquired with deteriorated credit quality - - - - - - - Total $ 9,875 $ 18,847 $ 4,519 $ 1,266 $ 2 $ 445 $ 34,954 Gross loans Individually evaluated for impairment $ 29,896 $ 18,327 $ 9,240 $ 2,469 $ - $ 59,932 Collectively evaluated for impairment 949,129 2,500,132 456,149 263,449 2,484 4,171,343 Acquired portfolio 7,224 259,708 - 44,073 110 311,115 Acquired with deteriorated credit quality 2,509 - - - - 2,509 Total $ 988,758 $ 2,778,167 $ 465,389 $ 309,991 $ 2,594 $ 4,544,899 The Company’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan losses (“ALLL”) methodology as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. A summary of the activity in the ALLL is as follows: Three Months Ended June 30, 2019 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance at March 31, 2019 $ 8,660 $ 21,561 $ 4,982 $ 1,166 $ 1 $ 488 $ 36,858 Charge-offs - (406 ) - - - - (406 ) Recoveries 115 30 - 1 - - 146 Provision (54 ) 300 560 41 1 252 1,100 Balance at June 30, 2019 $ 8,721 $ 21,485 $ 5,542 $ 1,208 $ 2 $ 740 $ 37,698 Three Months Ended June 30, 2018 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance at March 31, 2018 $ 8,550 $ 17,435 $ 4,772 $ 1,109 $ 2 $ 661 $ 32,529 Charge-offs (46 ) - - - (1 ) - (47 ) Recoveries 12 - - - - - 12 Provision for loan losses 444 786 40 58 2 (230 ) 1,100 Balance at June 30, 2018 $ 8,960 $ 18,221 $ 4,812 $ 1,167 $ 3 $ 431 $ 33,594 Six Months Ended June 30, 2019 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance at December 31, 2018 $ 9,875 $ 18,847 $ 4,519 $ 1,266 $ 2 $ 445 $ 34,954 Charge-offs - (3,082 ) - - - - (3,082 ) Recoveries 186 30 - 3 7 - 226 Provision (1,340 ) 5,690 1,023 (61 ) (7 ) 295 5,600 Balance at June 30, 2019 $ 8,721 $ 21,485 $ 5,542 $ 1,208 $ 2 $ 740 $ 37,698 Six Months Ended June 30, 2018 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance at December 31, 2017 $ 8,233 $ 17,112 $ 4,747 $ 1,050 $ 1 $ 605 $ 31,748 Charge-offs (17,066 ) - - (18 ) (1 ) - (17,085 ) Recoveries 31 - - - - - 31 Provision 17,762 1,109 65 135 3 (174 ) 18,900 Balance at June 30, 2018 $ 8,960 $ 18,221 $ 4,812 $ 1,167 $ 3 $ 431 $ 33,594 Troubled Debt Restructurings Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status. At June 30, 2019, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings. As of June 30, 2019, TDRs totaled $39.1 million, of which $22.8 million were on nonaccrual status and $16.3 million were performing under their restructured terms. As of December 31, 2018, TDRs totaled $34.5 million, of which $23.3 million were on nonaccrual status and $11.2 million were performing under their restructured terms. The Company has allocated $162 thousand and $147 thousand of specific allowance for the six months ended June 30, 2019 and June 30, 2018, respectively. There were no charge-offs in connection with a loan modification at the time of modification during the three and six months ended June 30, 2019. There were no TDRs for which there was a payment default within twelve months following the modification during the three and six months ended June 30, 2019. The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2019: Pre-Modification Post-Modification Outstanding Outstanding Number of Recorded Recorded Loans Investment Investment Troubled debt restructurings: (dollars in thousands) Commercial 4 $ 4,186 $ 4,186 Commercial real estate 2 2,635 2,635 Commercial construction 2 2,101 2,101 Total 8 $ 8,922 $ 8,922 These eight loan modifications included interest rate reductions and maturity extensions. The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2018: Pre-Modification Post-Modification Outstanding Outstanding Number of Recorded Recorded Loans Investment Investment Troubled debt restructurings: (dollars in thousands) Commercial 30 $ 15,613 $ 15,613 Commercial real estate 1 60 60 Commercial construction 2 1,839 1,839 Residential 2 454 454 Total 35 $ 17,966 $ 17,966 Included in the commercial loan segment of the troubled debt restructurings are 27 taxi medallion loans totaling $11.2 million. These loan modifications included interest rate reductions and maturity extensions. All 27 taxi medallion loans included above were on nonaccrual status prior to modification, and remain on nonaccrual status post-modification. |