Note 4 – Loans

Major classifications of loans were as follows:


	March 31, 2019		December 31, 2018
Commercial	$	324,450	$	314,323
Leases		87,730		78,806
Real estate - commercial		835,904		820,941
Real estate - construction		94,787		108,390
Real estate - residential		399,866		407,068
HELOC		133,859		140,442
Other 1		14,018		14,439
Total loans, excluding deferred loan costs and PCI loans		1,890,614		1,884,409
Net deferred loan costs		1,681		1,653
Total loans, excluding PCI loans		1,892,295		1,886,062
PCI loans, net of purchase accounting adjustments		10,851		10,965
Total loans	$	1,903,146	$	1,897,027

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 76.9% and 77.9% of the portfolio at March 31, 2019, and December 31, 2018, 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
March 31, 2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	10	$	-	$	-	$	10	$	324,440	$	-	$	324,450	$	-
Leases		110		-		-		110		87,506		114		87,730		-
Real estate - commercial
Owner occupied general purpose		349		90		-		439		155,821		1,732		157,992		-
Owner occupied special purpose		599		2,021		-		2,620		188,132		516		191,268		-
Non-owner occupied general purpose		775		378		-		1,153		317,566		3,486		322,205		-
Non-owner occupied special purpose		-		-		-		-		97,074		2,960		100,034		-
Retail properties		1,159		-		-		1,159		49,441		-		50,600		-
Farm		-		-		-		-		13,805		-		13,805		-
Real estate - construction
Homebuilder		-		-		-		-		4,456		-		4,456		-
Land		-		-		-		-		2,686		-		2,686		-
Commercial speculative		-		350		-		350		54,503		-		54,853		-
All other		-		-		-		-		32,689		103		32,792		-
Real estate - residential
Investor		803		-		-		803		68,650		337		69,790		-
Multi-family		-		-		-		-		190,478		-		190,478		-
Owner occupied		282		10		-		292		136,177		3,129		139,598		-
HELOC		211		359		1		571		132,310		978		133,859		1
Other 1		8		30		3		41		15,630		28		15,699		3
Total, excluding PCI loans	$	4,306	$	3,238	$	4	$	7,548	$	1,871,364	$	13,383	$	1,892,295	$	4
PCI loans, net of purchase accounting adjustments		1,872		-		-		1,872		6,746		2,233		10,851		-
Total	$	6,178	$	3,238	$	4	$	9,420	$	1,878,110	$	15,616	$	1,903,146	$	4


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2018	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	58	$	-	$	352	$	410	$	313,913	$	-	$	314,323	$	361
Leases		-		-		-		-		78,806		-		78,806		-
Real estate - commercial
Owner occupied general purpose		1,768		-		33		1,801		160,892		1,579		164,272		36
Owner occupied special purpose		826		135		-		961		192,426		395		193,782		-
Non-owner occupied general purpose		2,832		203		-		3,035		286,115		4,236		293,386		-
Non-owner occupied special purpose		-		-		-		-		106,036		3,099		109,135		-
Retail properties		-		620		-		620		45,968		-		46,588		-
Farm		-		-		-		-		13,778		-		13,778		-
Real estate - construction
Homebuilder		-		-		-		-		5,102		-		5,102		-
Land		266		-		-		266		2,478		-		2,744		-
Commercial speculative		-		-		350		350		55,060		-		55,410		355
All other		-		-		-		-		45,028		106		45,134		-
Real estate - residential
Investor		801		156		-		957		69,148		353		70,458		-
Multi-family		545		-		179		724		195,504		-		196,228		180
Owner occupied		1,241		705		-		1,946		135,360		3,076		140,382		-
HELOC		775		-		-		775		138,801		866		140,442		-
Other 1		53		5		3		61		16,000		31		16,092		3
Total, excluding PCI loans	$	9,165	$	1,824	$	917	$	11,906	$	1,860,415	$	13,741	$	1,886,062	$	935
PCI loans, net of purchase accounting adjustments		1,452		-		-		1,452		7,248		2,265		10,965		-
Total	$	10,617	$	1,824	$	917	$	13,358	$	1,867,663	$	16,006	$	1,897,027	$	935

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

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:


March 31, 2019			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	316,162	$	1,213	$	7,075	$	-	$	324,450
Leases		87,616		-		114		-		87,730
Real estate - commercial
Owner occupied general purpose		152,313		1,364		4,315		-		157,992
Owner occupied special purpose		183,197		2,055		6,016		-		191,268
Non-owner occupied general purpose		314,375		201		7,629		-		322,205
Non-owner occupied special purpose		95,578		1,496		2,960		-		100,034
Retail Properties		48,833		608		1,159		-		50,600
Farm		11,365		1,218		1,222		-		13,805
Real estate - construction
Homebuilder		4,456		-		-		-		4,456
Land		2,686		-		-		-		2,686
Commercial speculative		54,853		-		-		-		54,853
All other		30,203		-		2,589		-		32,792
Real estate - residential
Investor		68,799		-		991		-		69,790
Multi-Family		189,673		318		487		-		190,478
Owner occupied		134,735		135		4,728		-		139,598
HELOC		131,880		13		1,966		-		133,859
Other 1		15,671		-		28		-		15,699
Total, excluding PCI loans	$	1,842,395	$	8,621	$	41,279	$	-	$	1,892,295
PCI loans, net of purchase accounting adjustments		815		2,893		7,143		-		10,851
Total	$	1,843,210	$	11,514	$	48,422	$	-	$	1,903,146


December 31, 2018			Special
	Pass		Mention		Substandard 2		Doubtful		Total
Commercial	$	305,993	$	8,193	$	137	$	-	$	314,323
Leases		78,806		-		-		-		78,806
Real estate - commercial
Owner occupied general purpose		157,334		1,660		5,278		-		164,272
Owner occupied special purpose		186,218		3,429		4,135		-		193,782
Non-owner occupied general purpose		284,818		202		8,366		-		293,386
Non-owner occupied special purpose		104,526		1,510		3,099		-		109,135
Retail Properties		44,805		-		1,783		-		46,588
Farm		11,307		1,249		1,222		-		13,778
Real estate - construction
Homebuilder		5,102		-		-		-		5,102
Land		2,744		-		-		-		2,744
Commercial speculative		55,410		-		-		-		55,410
All other		42,524		-		2,610		-		45,134
Real estate - residential
Investor		69,242		-		1,216		-		70,458
Multi-Family		195,249		-		979		-		196,228
Owner occupied		135,858		-		4,524		-		140,382
HELOC		138,553		-		1,889		-		140,442
Other 1		16,061		-		31		-		16,092
Total, excluding PCI loans	$	1,834,550	$	16,243	$	35,269	$	-	$	1,886,062
PCI loans, net of purchase accounting adjustments		907		2,906		7,152		-		10,965
Total	$	1,835,457	$	19,149	$	42,421	$	-	$	1,897,027

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

The Company had $443,000 and $448,000 in residential real estate loans in the process of foreclosure as of March 31, 2019, and December 31, 2018, respectively.

The following tables set forth the recorded investments, unpaid principal balance and related allowance, excluding purchased credit-impaired loans, by class of loans as of March 31, 2019 and for the three months then ended:


							Three Months Ended
	As of March 31, 2019						March 31, 2019
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		114		154		-		57		-
Commercial real estate
Owner occupied general purpose		1,810		2,015		-		1,735		1
Owner occupied special purpose		516		661		-		455		-
Non-owner occupied general purpose		576		589		-		857		-
Non-owner occupied special purpose		2,960		3,575		-		1,480		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		103		131		-		76		-
Residential
Investor		337		450		-		345		-
Multi-Family		-		-		-		-		-
Owner occupied		3,611		5,192		-		3,485		10
HELOC		961		1,087		-		923		-
Other 1		5		6		-		6		-
Total impaired loans with no recorded allowance		10,993		13,860		-		9,419		11

With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		174		174		72		285		6
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		2,968		3,951		21		3,033		2
Non-owner occupied special purpose		-		-		-		1,549		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		29		-
Residential
Investor		802		802		4		805		11
Multi-Family		-		-		-		-		-
Owner occupied		3,440		3,440		42		3,558		41
HELOC		1,423		1,423		71		1,390		20
Other 1		23		24		12		23		-
Total impaired loans with a recorded allowance		8,830		9,814		222		10,672		80
Total impaired loans	$	19,823	$	23,674	$	222	$	20,091	$	91

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

Impaired loans by class of loans as of December 31, 2018, and for the three months ended March 31, 2018, were as follows:


							Three Months Ended
	As of December 31, 2018						March 31, 2018
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-
Leases		-		-		-		89		-
Commercial real estate
Owner occupied general purpose		1,659		1,782		-		417		-
Owner occupied special purpose		395		530		-		391		-
Non-owner occupied general purpose		1,138		1,159		-		602		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		541		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		49		73		-		199		-
Residential
Investor		353		459		-		366		-
Multi-Family		-		-		-		2,362		-
Owner occupied		3,359		4,882		-		5,178		9
HELOC		884		1,003		-		1,125		-
Other 1		7		7		-		12		-
Total impaired loans with no recorded allowance		7,844		9,895		-		11,282		9

With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		396		396		3		152		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		3,098		4,038		97		-		-
Non-owner occupied special purpose		3,099		3,575		139		1,788		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		57		58		1		-		-
Residential
Investor		808		808		4		826		11
Multi-Family		-		-		-		-		-
Owner occupied		3,676		3,679		46		3,559		37
HELOC		1,357		1,357		49		1,064		11
Other 1		24		25		13		-		-
Total impaired loans with a recorded allowance		12,515		13,936		352		7,389		59
Total impaired loans	$	20,359	$	23,831	$	352	$	18,671	$	68

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
	Three Months Ended March 31, 2019
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Investor occupied general purpose
Other1	1	$	58	$	58
Real estate - residential
Owner occupied
HAMP2	1		105		9
HELOC
HAMP2	1		39		34
Other1	1		39		38
Total	4	$	241	$	139


	TDR Modifications
	Three Months Ended March 31, 2018
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Investor
Deferral3	1	$	165	$	74
HELOC
Rate4	1		24		24
Other1	4		218		217
Total	6	$	407	$	315

1 Other: Change of terms from bankruptcy court.

2 HAMP: Home Affordable Modification Program.

3 Deferral: Refers to the deferral of principal.

4 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 March 31, 2019, and March 31, 2018, 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 March 31, 2019. The Company’s PCI loans were recorded commensurate with the second quarter 2018 acquisition of ABC Bank; no PCI loans were held prior to that time. Non-PCI loan activity during the first quarter of 2018 stemmed from the Company’s acquisition of the Chicago branch of Talmer Bank and Trust in late 2016. The accretable discount recorded in the first quarter of 2018 totaled $148,000; the balance of the non-PCI loan discount was $694,000 as of March 31, 2018.


	Accretable Discount- Non-PCI Loans		Accretable Discount- PCI Loans		Non-Accretable Discount-PCI Loans		Total
Beginning balance, January 1, 2019	$	1,867	$	1,099	$	5,969	$	8,935
Purchases		-		-		-		-
Accretion		(365)		(14)		-		(379)
Ending balance, March 31, 2019	$	1,502	$	1,085	$	5,969	$	8,556