Note 4 – Loans

Major classifications of loans were as follows:


	September 30, 2018		December 31, 2017
Commercial	$	306,407	$	272,851
Leases		70,661		68,325
Real estate - commercial		804,184		750,991
Real estate - construction		112,873		85,162
Real estate - residential		393,598		313,397
Home equity lines of credit "HELOC"		122,022		112,833
Other 1		12,969		13,383
Total loans, excluding deferred loan costs and PCI loans		1,822,714		1,616,942
Net deferred loan costs		1,348		680
Total loans, excluding PCI loans		1,824,062		1,617,622
PCI loans, net of purchase accounting adjustments		10,887		-
Total loans	$	1,834,949	$	1,617,622

1 The “Other” class includes consumer and overdrafts.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company’s access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. With selected exceptions, the Bank makes loans solely within its market area. There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, although the real estate related categories listed above represent 78.1% and 78.0% of the portfolio at September 30, 2018, and December 31, 2017, respectively.

Aged analysis of past due loans by class of loans was as follows:


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
September 30, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	1,074	$	-	$	6	$	1,080	$	305,327	$	-	$	306,407	$	6
Leases		-		-		-		-		70,661		-		70,661		-
Real estate - commercial
Owner occupied general purpose		1,022		-		-		1,022		164,304		1,625		166,951		-
Owner occupied special purpose		891		-		-		891		188,984		410		190,285		-
Non-owner occupied general purpose		346		3,422		-		3,768		293,979		142		297,889		-
Non-owner occupied special purpose		-		-		-		-		85,171		3,099		88,270		-
Retail properties		624		-		-		624		46,252		-		46,876		-
Farm		1,241		-		-		1,241		12,672		-		13,913		-
Real estate - construction
Homebuilder		-		-		-		-		4,556		-		4,556		-
Land		-		-		-		-		3,841		-		3,841		-
Commercial speculative		-		-		-		-		56,052		-		56,052		-
All other		38		-		-		38		48,277		109		48,424		-
Real estate - residential
Investor		952		-		-		952		70,102		364		71,418		-
Multifamily		1,304		-		73		1,377		179,645		-		181,022		76
Owner occupied		780		136		-		916		136,678		3,564		141,158		-
HELOC		1,422		92		-		1,514		119,880		628		122,022		-
Other 1		42		1		-		43		14,234		40		14,317		-
Total, excluding PCI loans	$	9,736	$	3,651	$	79	$	13,466	$	1,800,615	$	9,981	$	1,824,062	$	82
PCI loans, net of purchase accounting adjustments		3,415		-		-		3,415		5,174		2,298		10,887		-
Total	$	13,151	$	3,651	$	79	$	16,881	$	1,805,789	$	12,279	$	1,834,949	$	82


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2017	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	995	$	275	$	-	$	1,270	$	271,581	$	-	$	272,851	$	-
Leases		-		-		-		-		68,147		178		68,325		-
Real estate - commercial
Owner occupied general purpose		1,136		-		-		1,136		144,267		455		145,858		-
Owner occupied special purpose		226		-		-		226		170,546		342		171,114		-
Non-owner occupied general purpose		-		593		-		593		273,203		1,163		274,959		-
Non-owner occupied special purpose		-		-		248		248		92,923		-		93,171		254
Retail properties		-		-		-		-		49,538		1,081		50,619		-
Farm		-		-		-		-		15,270		-		15,270		-
Real estate - construction
Homebuilder		129		-		-		129		2,221		-		2,350		-
Land		1,124		-		-		1,124		1,319		-		2,443		-
Commercial speculative		-		-		-		-		32,028		-		32,028		-
All other		-		-		-		-		48,140		201		48,341		-
Real estate - residential
Investor		-		-		-		-		55,248		372		55,620		-
Multifamily		-		-		-		-		125,049		4,723		129,772		-
Owner occupied		74		-		-		74		123,257		4,674		128,005		-
HELOC		491		278		-		769		110,872		1,192		112,833		-
Other 1		37		-		-		37		14,019		7		14,063		-
Total	$	4,212	$	1,146	$	248	$	5,606	$	1,597,628	$	14,388	$	1,617,622	$	254

1 The “Other” class includes consumer, overdrafts and net deferred costs.

Credit Quality Indicators

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, historical payment experience, and current economic trends. This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and residential mortgages. Loans with a classified risk rating are reviewed quarterly regardless of size or loan type. The Company uses the following definitions for classified 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 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 Bank 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.

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.

Credit Quality Indicators by class of loans were as follows:


September 30, 2018			Special
	Pass		Mention		Substandard 2		Doubtful		Total
Commercial	$	303,176	$	2,878	$	353	$	-	$	306,407
Leases		70,661		-		-		-		70,661
Real estate - commercial
Owner occupied general purpose		160,999		1,489		4,463		-		166,951
Owner occupied special purpose		183,375		2,883		4,027		-		190,285
Non-owner occupied general purpose		289,438		834		7,617		-		297,889
Non-owner occupied special purpose		83,648		1,523		3,099		-		88,270
Retail Properties		45,074		-		1,802		-		46,876
Farm		11,423		1,249		1,241		-		13,913
Real estate - construction
Homebuilder		4,556		-		-		-		4,556
Land		3,841		-		-		-		3,841
Commercial speculative		56,052		-		-		-		56,052
All other		46,152		1,990		282		-		48,424
Real estate - residential
Investor		70,315		-		1,103		-		71,418
Multifamily		177,845		-		3,177		-		181,022
Owner occupied		135,625		511		5,022		-		141,158
HELOC		120,193		-		1,829		-		122,022
Other 1		14,262		-		55		-		14,317
Total, excluding PCI loans	$	1,776,635	$	13,357	$	34,070	$	-	$	1,824,062
PCI loans, net of purchase accounting adjustments		-		-		10,887		-		10,887
Total	$	1,776,635	$	13,357	$	44,957	$	-	$	1,834,949


December 31, 2017			Special
	Pass		Mention		Substandard 2		Doubtful		Total
Commercial	$	270,889	$	1,962	$	-	$	-	$	272,851
Leases		67,500		-		825		-		68,325
Real estate - commercial
Owner occupied general purpose		142,843		1,927		1,088		-		145,858
Owner occupied special purpose		169,621		1,152		341		-		171,114
Non-owner occupied general purpose		271,731		2,065		1,163		-		274,959
Non-owner occupied special purpose		89,582		-		3,589		-		93,171
Retail Properties		48,321		1,217		1,081		-		50,619
Farm		11,755		1,029		2,486		-		15,270
Real estate - construction
Homebuilder		2,350		-		-		-		2,350
Land		2,443		-		-		-		2,443
Commercial speculative		32,028		-		-		-		32,028
All other		46,913		1,052		376		-		48,341
Real estate - residential
Investor		55,172		-		448		-		55,620
Multifamily		125,049		-		4,723		-		129,772
Owner occupied		122,178		561		5,266		-		128,005
HELOC		110,934		-		1,899		-		112,833
Other 1		14,043		-		20		-		14,063
Total	$	1,583,352	$	10,965	$	23,305	$	-	$	1,617,622

1 The “Other” class includes consumer, overdrafts and net deferred costs.

2 The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

The Company had $1.0 million and $1.3 million in residential real estate loans in the process of foreclosure as of September 30, 2018, and December 31, 2017, respectively.

The following tables set forth the recorded investments, unpaid principal balance and related allowance, excluding purchased credit-impaired loans, by class of loans for the three and nine months ended September 30, 2018:


							Three Months Ended				Nine Months Ended
	As of September 30, 2018						September 30, 2018				September 30, 2018
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		1,614		1,699		-		1,263		2		1,035		5
Owner occupied special purpose		409		538		-		417		-		375		-
Non-owner occupied general purpose		142		158		-		91		-		653		-
Non-owner occupied special purpose		-		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		50		74		-		121		-		125		-
Residential
Investor		365		466		-		368		-		369		-
Multifamily		-		-		-		-		-		2,361		-
Owner occupied		3,855		5,326		-		4,050		11		4,532		29
HELOC		634		739		-		687		-		880		1
Other 1		14		15		-		15		-		10		-
Total impaired loans with no recorded allowance		7,083		9,015		-		7,012		13		10,340		35

With an allowance recorded
Commercial		-		-		-		-		-		-		-
Leases		-		-		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		518		518		46		259		22		259		22
Owner occupied special purpose		-		-		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		-		-		-		-
Non-owner occupied special purpose		3,099		3,575		139		3,099		-		1,550		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		59		59		42		30		-		29		-
Residential
Investor		810		810		10		812		11		820		33
Multifamily		-		-		-		-		-		-		-
Owner occupied		3,710		3,710		49		3,678		35		3,576		108
HELOC		1,420		1,420		61		1,371		17		1,203		41
Other 1		26		26		26		14		-		13		-
Total impaired loans with a recorded allowance		9,642		10,118		373		9,263		85		7,450		204
Total impaired loans	$	16,725	$	19,133	$	373	$	16,275	$	98	$	17,790	$	239

1 The “Other” class includes consumer, overdrafts and net deferred costs.

Impaired loans by class of loans as of December 31, 2017, and for the three and nine months ended September 30, 2017, were as follows:


							Three Months Ended				Nine Months Ended
	As of December 31, 2017						September 30, 2017				September 30, 2017
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	212	$	-	$	123	$	-
Leases		178		213		-		208		-		281		-
Commercial real estate
Owner occupied general purpose		455		495		-		458		-		1,169		-
Owner occupied special purpose		342		498		-		363		-		372		-
Non-owner occupied general purpose		1,163		1,538		-		1,180		1		1,481		2
Non-owner occupied special purpose		-		-		-		-		-		507		-
Retail properties		1,081		1,177		-		1,129		-		1,146		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		34		-		37		-
All other		201		229		-		178		-		206		-
Residential
Investor		372		676		-		1,475		16		1,607		36
Multifamily		4,723		4,965		-		4,791		-		2,379		-
Owner occupied		5,208		6,680		-		8,179		54		8,987		119
HELOC		1,125		1,313		-		1,981		12		2,237		27
Other 1		7		8		-		9		-		104		-
Total impaired loans with no recorded allowance		14,855		17,792		-		20,197		83		20,636		184

With an allowance recorded
Commercial		-		-		-		-		-		-		-
Leases		-		-		-		120		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		-		-		123		-
Non-owner occupied special purpose		-		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		-		-		-		-		-		-		-
Residential
Investor		829		829		10		-		-		-		-
Multifamily		-		-		-		-		-		-		-
Owner occupied		3,443		3,443		43		-		-		402		-
HELOC		985		985		91		25		2		26		2
Other 1		-		-		-		-		-		-		-
Total impaired loans with a recorded allowance		5,257		5,257		144		145		2		551		2
Total impaired loans	$	20,112	$	23,049	$	144	$	20,342	$	85	$	21,187	$	186

1 The “Other” class includes consumer, overdrafts and net deferred costs.

Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties. Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower. These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications. The Bank participates in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments.

The specific allocation of the allowance for loan and lease losses for TDRs is determined by calculating the present value of the TDR cash flows by discounting the original payment less an assumption for probability of default at the original note’s issue rate, and adding this amount to the present value of collateral less selling costs. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e., specific reserve) as a component of the allowance for loan and lease losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for loan and lease losses also includes an allowance based on a loss migration analysis for each loan category on loans and leases that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

TDRs that were modified during the period are as follows:


	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2018					Nine Months Ended September 30, 2018
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Owner occupied general purpose
Other1	1	$	427	$	424	1	$	427	$	424
Owner occupied special purpose
Other1	-		-		-	1		110		52
Real estate - residential
Owner occupied
HAMP2	1		211		211	3		383		331
Other1	1		34		29	1		34		29
HELOC
HAMP2	1		26		26	1		26		26
Rate3						1		24		24
Other1	2		93		92	9		596		587
Total	6	$	791	$	782	17	$	1,600	$	1,473


	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2017					Nine Months Ended September 30, 2017
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
HELOC
Other1	2	$	155	$	147	6	$	399	$	388
Total	2	$	155	$	147	6	$	399	$	388

1 Other: Change of terms from bankruptcy court.

2 HAMP: Home Affordable Modification Program.

3 Rate: Refers to interest rate reduction.

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no TDR default activity for the periods ended September 30, 2018 and September 30, 2017, for loans that were restructured within the 12 month period prior to default.

The following table details the accretable discount on all of the Company’s purchased loans, both non-PCI loans and PCI loans as of September 30, 2018.


	Accretable Discount - Non-PCI Loans		Accretable Discount - PCI Loans		Non-Accretable Discount - PCI Loans		Total
Beginning balance, July 1, 2018	$	2,995	$	1,373	$	6,403	$	10,771
Purchases		-		-		-		-
Accretion		(312)		(129)		(334)		(775)
Transfer1		(373)		(26)		-		(399)
Ending balance, September 30, 2018	$	2,310	$	1,218	$	6,069	$	9,597

1 Transfer was due to loans moved to OREO.