Loans | 8. Loans Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics. Loans receivable consist of the following: September 30, 2020 December 31, 2019 (In Thousands) Real Estate: Residential $ 1,194,940 $ 324,773 Commercial 2,328,944 1,506,026 Construction 580,060 305,305 4,103,944 2,136,104 Other Loans: Commercial 1,263,565 578,071 Home equity and improvement 281,010 122,864 Consumer finance 128,995 37,649 1,673,570 738,584 Loans before deferred loan origination fees and costs 5,777,514 2,874,688 Deduct: Undisbursed construction loan funds (300,174 ) (126,108 ) Net deferred loan origination fees and costs (6,792 ) (2,259 ) Allowance for credit losses (88,917 ) (31,243 ) Total loans $ 5,381,631 $ 2,715,078 The following table discloses allowance for credit loss activity for the quarters ended September 30, 2020 and 2019 by portfolio segment (In Thousands): Quarter Ended September 30, 2020 Residential Real Estate Commercial Real Estate Construction Commercial Home Equity and Improvement Consumer Finance Total Beginning Allowance $ 23,783 $ 44,057 $ 1,137 $ 11,839 $ 4,216 $ 3,523 $ 88,555 Charge-Offs — (4,172 ) — — (12 ) (35 ) (4,219 ) Recoveries 7 581 — 266 41 28 923 Provisions (1) (5,622 ) 8,109 1,352 1,139 148 (1,468 ) 3,658 Ending Allowance $ 18,168 $ 48,575 $ 2,489 $ 13,244 $ 4,393 $ 2,048 $ 88,917 (1) Allowance/provision are not comparable to prior periods due to the adoption of CECL. Quarter Ended September 30, 2019 Residential Real Estate Commercial Real Estate Construction Commercial Home Equity and Improvement Consumer Finance Total Beginning Allowance $ 2,793 $ 15,251 $ 887 $ 7,888 $ 1,763 $ 352 $ 28,934 Charge-Offs (74 ) — — (25 ) (12 ) (80 ) (191 ) Recoveries 6 61 — 30 77 6 180 Provisions 213 883 216 (5 ) (76 ) 96 1,327 Ending Allowance $ 2,938 $ 16,195 $ 1,103 $ 7,888 $ 1,752 $ 374 $ 30,250 The following table discloses allowance for credit loss activity for the nine months ended September 30, 2020 and 2019 by portfolio segment (In Thousands): Year-to-date Period Ended September 30, 2020 1-4 Family Residential Real Estate Commercial Real Estate Construction Commercial Home Equity and Improvement Consumer Finance Total Beginning Allowance $ 2,867 $ 16,302 $ 996 $ 9,003 $ 1,700 $ 375 $ 31,243 Impact of ASC 326 Adoption 1,765 3,682 (223 ) (2,263 ) (521 ) (86 ) 2,354 Acquisition related allowance for credit loss (PCD) 1,077 4,053 — 2,272 248 48 7,698 Charge-Offs (257 ) (4,237 ) (1 ) (133 ) (98 ) (222 ) (4,948 ) Recoveries 223 1,110 — 1,602 177 146 3,258 Provisions (1)(2) 12,493 27,665 1,717 2,763 2,887 1,787 49,312 Ending Allowance $ 18,168 $ 48,575 $ 2,489 $ 13,244 $ 4,393 $ 2,048 $ 88,917 (1) Allowance/provision are not comparable to prior periods due to the adoption of CECL. (2) Provision for the nine months ended September, 30, 2020, includes $25.9 million as a result of the Merger with UCFC in the first quarter. Year-to-date Period Ended September 30, 2019 1-4 Family Residential Real Estate Commercial Real Estate Construction Commercial Home Equity and Improvement Consumer Finance Total Beginning Allowance $ 2,881 $ 15,142 $ 682 $ 7,281 $ 2,026 $ 319 $ 28,331 Charge-Offs (257 ) (15 ) — (225 ) (109 ) (255 ) (861 ) Recoveries 176 450 — 136 161 36 959 Provisions 138 618 421 696 (326 ) 274 1,821 Ending Allowance $ 2,938 $ 16,195 $ 1,103 $ 7,888 $ 1,752 $ 374 $ 30,250 The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019 (in thousands): As of December 31, 2019 Residential Real Estate Commercial Real Estate Construction Commercial Home Equity and Improvement Consumer Finance Total Allowance for credit loss attributable to: Individually evaluated for impairment $ 115 $ 85 $ — $ 174 $ 48 $ — $ 422 Collectively evaluated for impairment 2,752 16,217 996 8,829 1,652 375 30,821 Acquired with deteriorated credit quality — — — — — — — Total Allowance $ 2,867 $ 16,302 $ 996 $ 9,003 $ 1,700 $ 375 $ 31,243 Loans: Individually evaluated for impairment $ 7,049 $ 21,132 $ — $ 6,655 $ 759 $ 28 $ 35,623 Collectively evaluated for impairment 318,106 1,490,306 206,721 573,244 122,963 37,808 2,749,148 Acquired with deteriorated credit quality 989 921 — 12 — — 1,922 Total loans $ 326,144 $ 1,512,359 $ 206,721 $ 579,911 $ 123,722 $ 37,836 $ 2,786,693 The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans for the three and nine months ended September 30, 2019 (in thousands): Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 Average Balance Interest Income Recognized Cash Basis Income Recognized Average Balance Interest Income Recognized Cash Basis Income Recognized Residential Owner Occupied $ 5,251 $ 50 $ 50 $ 5,005 $ 138 $ 131 Residential Non Owner Occupied 2,113 28 27 2,078 106 106 Total Residential Real Estate 7,364 78 77 7,083 244 237 CRE Owner Occupied 6,367 45 45 7,082 268 222 CRE Non Owner Occupied 1,898 19 19 1,943 70 63 Multi-Family Real Estate 175 5 5 604 32 32 Agriculture Land 12,981 168 114 13,206 544 405 Other CRE 479 13 11 810 66 61 Total Commercial Real Estate 21,900 250 194 23,645 980 783 Construction — — — — — — Commercial Working Capital 6,224 55 55 7,302 281 217 Agriculture Production — — — — — — Commercial Other 1,372 15 14 1,597 63 59 Total Commercial 7,596 70 69 8,899 344 276 Home Equity and Improvement 868 6 6 893 26 24 Consumer Finance 17 — — 26 1 1 Total Impaired Loans $ 37,745 $ 404 $ 346 $ 40,546 $ 1,595 $ 1,321 The following table presents the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of September 30, 2020 (in thousands): September 30, 2020 Real Estate Equipment and Machinery Inventory and Receivables Vehicles Total Real Estate: Residential $ 7,792 $ — $ — $ — $ 7,792 Commercial 26,769 — — — 26,769 Construction — — — — — Other Loans: Commercial 2,077 8,377 8,132 171 18,757 Home equity and improvement — — — — — Consumer finance — — — — — Total $ 36,638 $ 8,377 $ 8,132 $ 171 $ 53,318 The following table presents loans individually evaluated for impairment by class of loans (in thousands): December 31, 2019 Unpaid Principal Balance* Recorded Investment Allowance for Credit Loss Allocated With no allowance recorded: Residential Owner Occupied $ 86 $ 86 $ — Residential Non Owner Occupied 962 967 — Total Residential Real Estate 1,048 1,053 — CRE Owner Occupied 5,098 4,814 — CRE Non Owner Occupied 1,815 1,006 — Multi-Family Real Estate 128 130 — Agriculture Land 12,734 12,792 — Other CRE — — — Total Commercial Real Estate 19,775 18,742 — Construction — — — Commercial Working Capital 5,417 5,435 — Agriculture Production — — — Commercial Other 469 471 — Total Commercial 5,886 5,906 — Home Equity and Improvement 151 151 — Consumer Finance — — — Total loans with no allowance recorded $ 26,860 $ 25,852 $ — With an allowance recorded: Residential Owner Occupied $ 5,137 $ 4,977 $ 104 Residential Non Owner Occupied 1,014 1,019 11 Total Residential Real Estate 6,151 5,996 115 CRE Owner Occupied 2,085 1,623 60 CRE Non Owner Occupied 317 319 13 Multi-Family Real Estate — — — Agriculture Land 262 268 3 Other CRE 401 180 9 Total Commercial Real Estate 3,065 2,390 85 Construction — — — Commercial Working Capital 682 450 150 Agriculture Production — — — Commercial Other 318 299 24 Total Commercial 1,000 749 174 Home Equity and Improvement 654 608 48 Consumer Finance 28 28 — Total loans with an allowance recorded $ 10,898 $ 9,771 $ 422 *Presented gross of charge-offs Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. All loans greater than 90 days past due are placed on non-accrual status. Effective January 1, 2020 with the adoption of ASC Topic 326, the Company began including non-accrual purchase credit deteriorated (“PCD”) loans in its non-performing loans. As such, the non-performing loans as of September 30, 2020 include PCD loans accounted for pursuant to ASC Topic 326 as these loans are individually evaluated. The non-performing loans do not include PCD (formerly purchase credit impaired (“PCI”)) loans as of December 31, 2019, as the PCD loans prior to adopting ASC Topic 326 were evaluated on a pool basis. The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned as of the dates indicated: September 30, 2020 December 31, 2019 (In Thousands) Non-accrual loans $ 48,360 $ 13,437 Loans over 90 days past due and still accruing — — Total non-performing loans 48,360 13,437 Real estate and other assets held for sale 521 100 Total non-performing assets $ 48,881 $ 13,537 Troubled debt restructuring, still accruing $ 8,499 $ 8,486 The following table presents the aging of the amortized cost in past due and non- accrual loans as of September 30, 2020, by class of loans (In Thousands): Current 30 - 59 days 60 - 89 days 90 + days Total Past Due Total Non- Accrual Real Estate: Residential 1,164,301 182 9,604 — 9,786 8,622 Commercial 2,292,281 196 507 — 703 12,336 Construction 277,936 — 1,587 — 1,587 363 Other Loans: Commercial 1,221,219 137 75 — 212 749 Home equity and improvement 270,007 3,777 758 — 4,535 1,704 Consumer finance 125,829 1,584 874 — 2,458 857 PCD 49,744 230 1,360 — 1,590 23,729 Total Loans $ 5,401,317 $ 6,106 $ 14,765 $ — $ 20,871 $ 48,360 The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2019 , by class of loans (In Thousands): Current 30 - 59 days 60 - 89 days 90 + days Total Past Due Total Non Accrual Real Estate: Residential 323,600 1,328 570 646 2,544 2,411 Commercial 1,509,132 339 172 2,716 3,227 7,609 Construction 206,721 — — — — — Other Loans: Commercial 576,988 273 206 2,444 2,923 2,961 Home equity and improvement 122,487 956 240 39 1,235 449 Consumer finance 37,622 143 64 7 214 7 Total Loans $ 2,776,550 $ 3,039 $ 1,252 $ 5,852 $ 10,143 $ 13,437 Troubled Debt Restructurings As of September 30, 2020, and December 31, 2019, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $18.8 million and $15.1 million, respectively. The Company allocated $1,067,000 and $388,000 of specific reserves to those loans at September 30, 2020, and December 31, 2019, respectively, and had committed to lend additional amounts totaling up to $389,000 and $226,000 at September 30, 2020, and December 31, 2019, respectively. The Company has responded to the pandemic in numerous ways, including by actively participating in the Paycheck Protection Program (“PPP”) and distributing $443.3 million to small businesses in our markets. Additionally, the Company is working with borrowers impacted by the COVID-19 pandemic and providing modifications to include either interest only deferral or principal and interest deferral. These modifications range from one to nine months. Through September 30, 2020, the Company had approximately $482.7 million in deferrals. A majority of these modifications are excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. A breakout of deferrals by loan category is as follows (in thousands): Balance deferred Residential real estate $ 40,676 Commercial real estate 333,212 Construction 51,592 Commercial 49,751 Home equity and improvement 2,506 Consumer finance 5,005 Total $ 482,742 The following table is a breakout of commercial deferrals, which represent $434.6 million of the tot al Commercial deferral expirations Balance July $ 277,010 August 123,851 September 12,226 October 14,000 November 5,076 December 2,392 Total $ 434,555 The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Each TDR is uniquely designed to meet the specific needs of the borrower. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions and converting revolving credit lines to term loans. Additional collateral or an additional guarantor is often requested when granting a concession. Commercial mortgage loans modified in a TDR often involve temporary interest-only payments, re-amortization of remaining debt in order to lower payments and sometimes reducing the interest rate lower than the current market rate. Residential mortgage loans modified in a TDR are comprised of loans where monthly payments are lowered, either through interest rate reductions or principal only payments for a period of time, to accommodate the borrowers’ financial needs, interest is capitalized into principal, or the term and amortization are extended. Home equity modifications are made infrequently and usually involve providing an interest rate that is lower than the borrower would be able to obtain due to credit issues. All retail loans where the borrower is in bankruptcy are classified as TDRs regardless of whether or not a concession is made. Of the loans modified in a TDR as of September 30, 2020, $10.4 million were on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate. The following tables present loans by class modified as TDRs that occurred during the three and nine month periods ending September 30, 2020, and September 30, 2019: Loans Modified as a TDR for the Three Months Ended September 30, 2020 ($ in thousands) Loans Modified as a TDR for the Nine Months Ended September 30, 2020 ($ in thousands) Troubled Debt Restructurings Number of Loans Recorded Investment (as of period end) Number of Loans Recorded Investment (as of period end) Real Estate: Residential 1 $ 51 6 $ 660 Commercial 1 451 5 7,327 Construction — — — — Other Loans: Commercial 3 7,347 8 7,503 Home equity and improvement 3 66 4 92 Consumer finance — — — — Total 8 $ 7,915 23 $ 15,582 The loans described above increased the allowance for credit losses (“ACL”) by $758,000 and $790,000 in the three and nine month periods ending September 30, 2020. Loans Modified as a TDR for the Three Months Ended September 30, 2019 ($ in thousands) Loans Modified as a TDR for the Nine Months Ended September 30, 2019 ($ in thousands) Troubled Debt Restructurings Number of Loans Recorded Investment (as of period end) Number of Loans Recorded Investment (as of period end) Real Estate: Residential 3 $ 218 10 $ 1,118 Commercial — Construction — Other Loans: Commercial 2 241 4 253 Home equity and improvement — 2 26 Consumer finance — — Total 5 $ 459 16 $ 1,397 The loans described above increased the allowance for loan losses (“ALLL”), which is now known as the ACL under CECL, by $11,000 and $32,000 in the three and nine month periods ending September 30, 2019. The following tables present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three and nine month periods ended September 30, 2020, and September 30, 2019: Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 ($ in thousands) ($ in thousands) Troubled Debt Restructurings That Subsequently Defaulted Number of Loans Recorded Investment (as of period end) Number of Loans Recorded Investment (as of period end) Real Estate: Residential 2 $ 211 8 $ 647 Commercial 2 128 4 322 Construction — — — — Other Loans: Commercial — — 2 250 Home equity and improvement 1 4 4 330 Consumer finance — — 1 21 Total 5 $ 343 19 $ 1,570 The TDRs that subsequently defaulted described above increased the ACL by $16,000 and $61,000 for the three month and nine month period ended September 30, 2020. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 ($ in thousands) ($ in thousands) Troubled Debt Restructurings That Subsequently Defaulted Number of Loans Recorded Investment (as of period end) Number of Loans Recorded Investment (as of period end) Real Estate: Residential — $ — 1 $ 76 Commercial — — Construction — — — — Other Loans: Commercial — — 3 2,248 Home equity and improvement — — 1 61 Consumer finance — — — — Total — $ — 5 $ 2,385 The TDRs that subsequently defaulted described above had no effect on the In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. Credit Quality Indicators Loans are categorized 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, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. Premier uses the following definitions for risk ratings: 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 institution'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 obligor 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 institution 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. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of September 30, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands): Class Unclassified Special Mention Substandard Doubtful Total classified Total Real Estate: Residential 1,179,490 268 2,951 — 2,951 1,182,709 Commercial 2,165,668 108,011 31,641 — 31,641 2,305,320 Construction 256,743 23,143 — — — 279,886 Other Loans: Commercial 1,188,604 24,618 8,958 — 8,958 1,222,180 Home equity and improvement 275,831 — 415 — 415 276,246 Consumer finance 129,025 — 119 — 119 129,144 PCD 28,867 11,442 34,754 — 34,754 75,063 Total Loans $ 5,224,228 $ 167,482 $ 78,838 $ — $ 78,838 $ 5,470,548 As of December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands): Class Unclassified Special Mention Substandard Doubtful Total classified Total Real Estate: Residential 322,250 415 3,479 — 3,479 326,144 Commercial 1,462,065 27,197 23,097 — 23,097 1,512,359 Construction 205,076 1,645 — — — 206,721 Other Loans: Commercial 548,012 24,162 7,737 — 7,737 579,911 Home equity and improvement 123,407 — 315 — 315 123,722 Consumer finance 37,816 — 20 — 20 37,836 Total Loans $ 2,698,626 $ 53,419 $ 34,648 $ — $ 34,648 $ 2,786,693 The table below presents the amortized cost basis of loans by credit quality indicator and class of loans based on the most recent analysis performed ($ in thousands): Term of loans by origination 2020 2019 2018 2017 2016 Prior Revolving Loans Total As of September 30, 2020 Real Estate Residential: Risk Rating Pass $ 125,421 $ 218,510 $ 154,561 $ 149,717 $ 155,430 $ 373,173 $ 2,678 $ 1,179,490 Special Mention — — 55 — 119 94 — 268 Substandard — — 168 — 210 2,573 2,951 Doubtful — — — — — — — — Total $ 125,421 $ 218,510 $ 154,784 $ 149,717 $ 155,759 $ 375,840 $ 2,678 $ 1,182,709 Commercial: Risk Rating Pass $ 389,956 $ 450,107 $ 326,896 $ 324,772 $ 215,844 $ 441,861 $ 16,232 $ 2,165,668 Special Mention 6,031 7,229 20,294 43,354 10,213 19,893 997 108,011 Substandard — 284 7,225 2,065 1,423 18,393 2,251 31,641 Doubtful — — — — — — — — Total $ 395,987 $ 457,620 $ 354,415 $ 370,191 $ 227,480 $ 480,147 $ 19,480 $ 2,305,320 Construction: Risk Rating Pass $ 160,203 $ 64,944 $ 15,822 $ 11,727 $ 3,898 $ 149 $ - $ 256,743 Special Mention 12,500 — 10,643 — — — — 23,143 Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 172,703 $ 64,944 $ 26,465 $ 11,727 $ 3,898 $ 149 $ - $ 279,886 Other Loans Commercial: Risk Rating Pass $ 578,907 $ 159,783 $ 88,449 $ 50,745 $ 26,127 $ 29,800 $ 254,793 $ 1,188,604 Special Mention 1,000 1,881 2,662 2,447 — 5,208 11,420 24,618 Substandard 105 233 569 554 313 1,397 5,787 8,958 Doubtful — — — — — — — — Total $ 580,012 $ 161,897 $ 91,680 $ 53,746 $ 26,440 $ 36,405 $ 272,000 $ 1,222,180 Home equity and Improvement: Risk Rating Pass $ 5,088 $ 8,274 $ 4,911 $ 8,633 $ 8,530 $ 31,999 $ 208,396 $ 275,831 Special Mention — — — — — — — — Substandard — — — — — 115 300 415 Doubtful — — — — — — — — Total $ 5,088 $ 8,274 $ 4,911 $ 8,633 $ 8,530 $ 32,114 $ 208,696 $ 276,246 Consumer Finance: Risk Rating Pass $ 36,327 $ 41,252 $ 22,426 $ 12,651 $ 5,512 $ 3,622 $ 7,235 $ 129,025 Special Mention — — — — — — — — Substandard 8 99 4 — 8 — — 119 Doubtful — — — — — — — — Total $ 36,335 $ 41,351 $ 22,430 $ 12,651 $ 5,520 $ 3,622 $ 7,235 $ 129,144 PCD: Risk Rating Pass $ 6,465 $ 314 $ 685 $ 588 $ 1,961 $ 17,547 $ 1,307 $ 28,867 Special Mention — 202 1,398 3,585 1,162 4,026 1,069 11,442 Substandard — — — 14,506 2,811 5,180 12,257 34,754 Doubtful — — — — — — — — Total $ 6,465 $ 516 $ 2,083 $ 18,679 $ 5,934 $ 26,753 $ 14,633 $ 75,063 Allowance for Credit Losses ( “ ACL ” ) The Company has adopted ASU 2016-13 (Topic 326 – Credit Losses) to calculate the ACL, which requires a projection of credit loss over the contract lifetime of the credit adjusted for prepayment tendencies. This valuation account is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loan. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans. The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s portfolio segments. These segments are further disaggregated into the loan pools for monitoring. When computing allowance levels, a model of risk characteristics, such as loss history and delinquency status, along with current conditions and a supportable forecast is used to determine credit loss assumptions. The Company is generally utilizing two methodologies to analyze loan pools, DCF and probability of default/loss given default (“PD/LGD”). A default can be triggered by one of several different asset quality factors including past due status, non-accrual status or if the loan has had a charge-off. The PD/LGD utilizes charge off data from the Federal Financial Institutions Examination Council to construct a default rate. The Company estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss experience over a three-year period. This default rate is further segmented based on the risk of the credit assigning a higher default rate to riskier credits. The DCF methodology was selected as the most appropriate for loan segments with longer average lives and regular payment structures. The DCF model has two key components, the loss driver analysis combined with a cash flow analysis. The contractual cash flow is adjusted for PD/LGD and prepayment speed to establish a reserve level. The prepayment studies are updated quarterly by a third-party for each applicable pool. The remaining life method was selected for the consumer loan segment since the pool contains loans with many different structures and payment streams and collateral. The weighted average remaining life uses an average annual charge-off rate applied to the contractual term, further adjusted for estimated prepayments to determine the unadjusted historical charge-off rate for the remaining balance of assets. Portfolio Segments Loan Pool Methodology Loss Drivers Residential real estate 1-4 Family nonowner occupied DCF National unemployment 1-4 Family owner occupied DCF National unemployment Commercial real estate Commercial real estate nonowner occupied DCF National unemployment Commercial real estate owner occupied DCF National unemployment Multi Family DCF National unemployment Agriculture Land DCF National unemployment Other commercial real estate DCF National unemployment Construction secured by real estate Construction PD/LGD Call report loss history Commercial Commercial working capital PD/LGD Call report loss history Agriculture production PD/LGD Call report loss history Other commercial PD/LGD Call report loss history Home equity and improvement Home equity and improvement PD/LGD Call report loss history Consumer finance Consumer finance Remaining life Call report loss history According to the accounting standard an entity may make an accounting policy election not to measure an allowance for credit losses for accrued interest receivable if the entity writes off the applicable accrued interest receivable balance in a timely manner. The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables for all loan segments. Current policy dictates that a loan will be placed on nonaccrual status, with the current accrued interest receivable balance being written off, upon the loan being 90 days delinquent or when the loan is deemed to be collateral dependent and the collateral analysis shows less than 1.2 times discounted collateral coverage based on a current assessment of the value of the collateral. In addition to the ASC Topic 326 requires the Company to establish a liability for anticipated credit losses for unfunded commitments. To accomplish this, the company must first establishes a loss expectation for extended (funded) commitments. This loss expectation, expressed as a ratio to the amortized cost basis, is then applied to the portion of unfunded commitments not considered unilaterally cancelable, and considered by the company’s management as likely to fund over the life of the instrument. At September 30, 2020, the Company had $1.4 billion in unfunded commitments and set aside $6.0 million in anticipated credit losses. This reserve is recorded in other liabilities as opposed to the ACL. The determination of ACL is complex and the Company makes decisions on the effects of matters that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgements as to the facts and circumstances related to particular situations or credits. There may be significant changes in the ACL in future periods determined by prevailing factors at that point in time along with future forecasts. Purchased Loans As a result of the Merger, the Company acquired $2.3 billion in loans. Par value of purchased loans follows (in thousands): 2020 Par value of acquired loans at acquisition $ 2,314,588 Credit discount 34,610 Non-credit discount/(premium) at acquisition (8,497 ) Purchase price of loans at acquisition $ 2,340,701 Under ASU Topic 326, when loans are purchased with evidence of more than insignificant deterioration of credit, they are accounted for as PCD. PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. On January 31, 2020, the Company acquired PCD loans with a fair value of $79.1 million, credit discount $7.7 million and a noncredit discount of $4.1 million . Loan Balance ACL Balance (In Thousands) Real Estate: Residential $ 15,157 $ 175 Commercial 24,797 2,199 Construction — — 39,954 2,374 Other Loans: Commercial 29,407 4,261 Home equity and improvement 4,764 222 Consumer finance 938 37 35,109 4,520 Total $ 75,063 $ 6,894 At September 30, 2020 the Company had $1.8 million in loans that had previously been accounted for as purchase credit impaired. Foreclosure Proceedings Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $6.0 million as of September 30, 2020, and $981,000 as of December 31, 2019. The increase is primarily a result of the Merger. |