Note 4 – Loans

Major classifications of loans were as follows:


	September 30, 2019		December 31, 2018
Commercial	$	333,664	$	314,323
Leases		108,152		78,806
Real estate - commercial		826,780		820,941
Real estate - construction		91,066		108,390
Real estate - residential		388,511		407,068
HELOC		126,309		140,442
Other 1		14,140		14,439
Total loans, excluding deferred loan costs and PCI loans		1,888,622		1,884,409
Net deferred loan costs		2,054		1,653
Total loans, excluding PCI loans		1,890,676		1,886,062
PCI loans, net of purchase accounting adjustments		9,135		10,965
Total loans	$	1,899,811	$	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 75.4% and 77.9% of the portfolio at September 30, 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
September 30, 2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	-	$	-	$	-	$	-	$	333,516	$	148	$	333,664	$	-
Leases		-		-		-		-		108,078		74		108,152		-
Real estate - commercial
Owner occupied general purpose		1,397		1,216		-		2,613		140,928		1,183		144,724		-
Owner occupied special purpose		1,416		93		-		1,509		173,835		1,591		176,935		-
Non-owner occupied general purpose		623		-		-		623		328,870		564		330,057		-
Non-owner occupied special purpose		-		-		-		-		106,043		2,960		109,003		-
Retail properties		597		-		-		597		51,015		1,122		52,734		-
Farm		-		-		-		-		13,327		-		13,327		-
Real estate - construction
Homebuilder		93		-		-		93		5,142		-		5,235		-
Land		-		-		-		-		12,258		-		12,258		-
Commercial speculative		-		-		-		-		51,991		-		51,991		-
All other		-		-		-		-		21,488		94		21,582		-
Real estate - residential
Investor		-		496		-		496		68,114		379		68,989		-
Multi-family		1		-		-		1		183,475		-		183,476		-
Owner occupied		106		307		-		413		132,933		2,700		136,046		-
HELOC		627		93		18		738		124,556		1,015		126,309		19
Other 1		7		-		-		7		16,165		22		16,194		-
Total, excluding PCI loans	$	4,867	$	2,205	$	18	$	7,090	$	1,871,734	$	11,852	$	1,890,676	$	19
PCI loans, net of purchase accounting adjustments		865		-		-		865		6,474		1,796		9,135		-
Total	$	5,732	$	2,205	$	18	$	7,955	$	1,878,208	$	13,648	$	1,899,811	$	19


															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:


September 30, 2019			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	316,680	$	8,905	$	8,079	$	-	$	333,664
Leases		108,078		-		74		-		108,152
Real estate - commercial
Owner occupied general purpose		140,867		851		3,006		-		144,724
Owner occupied special purpose		170,525		4,819		1,591		-		176,935
Non-owner occupied general purpose		325,621		590		3,846		-		330,057
Non-owner occupied special purpose		106,043		-		2,960		-		109,003
Retail Properties		51,015		597		1,122		-		52,734
Farm		10,899		1,218		1,210		-		13,327
Real estate - construction
Homebuilder		5,235		-		-		-		5,235
Land		12,258		-		-		-		12,258
Commercial speculative		51,991		-		-		-		51,991
All other		21,318		-		264		-		21,582
Real estate - residential
Investor		68,005		-		984		-		68,989
Multi-Family		183,046		-		430		-		183,476
Owner occupied		132,146		134		3,766		-		136,046
HELOC		124,185		139		1,985		-		126,309
Other 1		15,832		340		22		-		16,194
Total, excluding PCI loans	$	1,843,744	$	17,593	$	29,339	$	-	$	1,890,676
PCI loans, net of purchase accounting adjustments		825		-		8,310		-		9,135
Total	$	1,844,569	$	17,593	$	37,649	$	-	$	1,899,811


December 31, 2018			Special
	Pass		Mention		Substandard		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 $425,000 and $448,000 in residential real estate loans in the process of foreclosure as of September 30, 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 September 30, 2019, and the average recorded investment and interest income recognized for the three and nine months ended September 30, 2019:


							Three Months Ended				Nine Months Ended
	As of September 30, 2019						September 30, 2019				September 30, 2019
			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		74		75		-		43		-		37		-
Commercial real estate
Owner occupied general purpose		1,254		1,328		-		1,108		2		1,457		5
Owner occupied special purpose		1,591		1,748		-		1,045		-		993		-
Non-owner occupied general purpose		564		595		-		566		-		851		-
Non-owner occupied special purpose		2,960		3,575		-		2,960		-		1,480		-
Retail properties		1,122		1,159		-		1,130		-		561		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		94		131		-		98		-		71		-
Residential
Investor		379		500		-		381		-		366		-
Multi-Family		-		-		-		-		-		-		-
Owner occupied		3,059		4,595		-		3,078		11		3,209		32
HELOC		1,032		1,407		-		1,075		-		958		1
Other 1		4		4		-		4		-		6		-
Total impaired loans with no recorded allowance		12,133		15,117		-		11,488		13		9,989		38

With an allowance recorded
Commercial		148		150		110		149		-		74		-
Leases		-		-		-		57		-		-		-
Commercial real estate
Owner occupied general purpose		125		125		36		395		3		260		11
Owner occupied special purpose		-		-		-		-		-		-		-
Non-owner occupied general purpose		55		55		1		55		2		1,577		4
Non-owner occupied special purpose		-		-		-		-		-		1,549		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		-		-		-		-		-		29		-
Residential
Investor		791		791		10		795		13		799		35
Multi-Family		-		-		-		-		-		-		-
Owner occupied		3,280		3,280		55		3,321		37		3,478		117
HELOC		1,359		1,359		55		1,370		20		1,358		59
Other 1		18		20		7		19		-		21		-
Total impaired loans with a recorded allowance		5,776		5,780		274		6,161		75		9,145		226
Total impaired loans	$	17,909	$	20,897	$	274	$	17,649	$	88	$	19,134	$	264

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

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 December 31, 2018, and the average recorded investment and interest income recognized for the three and nine months ended September 30, 2018:


							Three Months Ended				Nine Months Ended
	As of December 31, 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		1,659		1,782		-		1,263		2		1,035		5
Owner occupied special purpose		395		530		-		417		-		375		-
Non-owner occupied general purpose		1,138		1,159		-		91		-		653		-
Non-owner occupied special purpose		-		-		-		-		-		-		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		49		73		-		121		-		125		-
Residential
Investor		353		459		-		368		-		369		-
Multi-Family		-		-		-		-		-		2,361		-
Owner occupied		3,359		4,882		-		4,050		11		4,532		29
HELOC		884		1,003		-		687		-		880		1
Other 1		7		7		-		15		-		10		-
Total impaired loans with no recorded allowance		7,844		9,895		-		7,012		13		10,340		35

With an allowance recorded
Commercial		-		-		-		-		-		-		-
Leases		-		-		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		396		396		3		259		22		259		22
Owner occupied special purpose		-		-		-		-		-		-		-
Non-owner occupied general purpose		3,098		4,038		97		-		-		-		-
Non-owner occupied special purpose		3,099		3,575		139		3,099		-		1,550		-
Retail properties		-		-		-		-		-		-		-
Farm		-		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-		-
All other		57		58		1		30		-		29		-
Residential
Investor		808		808		4		812		11		820		33
Multi-Family		-		-		-		-		-		-		-
Owner occupied		3,676		3,679		46		3,678		35		3,576		108
HELOC		1,357		1,357		49		1,371		17		1,203		41
Other 1		24		25		13		14		-		13		-
Total impaired loans with a recorded allowance		12,515		13,936		352		9,263		85		7,450		204
Total impaired loans	$	20,359	$	23,831	$	352	$	16,275	$	98	$	17,790	$	239

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, 2019					Nine Months Ended September 30, 2019
	# 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
Non-owner occupied general purpose
Other1	-	$	-	$	-	1	$	58	$	55
Retail properties
Other1	1		1,159		1,122	1		1,159		1,122
Real estate - residential
Owner occupied
HAMP2	-		-		-	3		399		297
HELOC
HAMP2	-		-		-	1		39		34
Other1	-		-		-	1		39		38
Total	1	$	1,159	$	1,122	7	$	1,694	$	1,546


	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

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, 2019 and September 30, 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 September 30, 2019 and September 30, 2018. The Company acquired non-PCI loans when it purchased the Chicago branch of Talmer Bank and Trust in late 2016 and in its acquisition of ABC Bank in 2018. The accretable discount recorded in the third quarter of 2019 totaled $1.0 million; the balance of the non-PCI loan discount was $6.6 million as of September 30, 2019. In the third quarter of 2018, the accretable discount totaled $775,000; the balance of the non-PCI loan discount was $9.6 million as of September 30, 2018. The accretable discount recorded for the nine months ended 2019 totaled $1.8 million; the balance of the non-PCI loan discount was $6.6 million as of September 30, 2019. For the nine months ended 2018, the accretable discount totaled $2.0 million; the balance of the non-PCI loan discount was $9.6 million as of September 30, 2018.


Purchased Accounting Accretion

For the Three Months Ended	Accretable Discount- Non-PCI Loans		Accretable Discount- PCI Loans		Non-Accretable Discount- PCI Loans		Total
Beginning balance, July 1, 2019	$	1,216	$	931	$	5,500	$	7,647
Accretion		(217)		(218)		(606)		(1,041)
Transfer		-		1		(1)		-
Ending balance, September 30, 2019	$	999	$	714	$	4,893	$	6,606



For the Three Months Ended	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
Accretion		(312)		(129)		(334)		(775)
Transfer		(373)		(26)		-		(399)
Ending balance, September 30, 2018	$	2,310	$	1,218	$	6,069	$	9,597


For the Nine Months Ended	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
Accretion		(868)		(340)		(606)		(1,814)
Charge-offs		-		(48)		(467)		(515)
Transfer		-		3		(3)		-
Ending balance, September 30, 2019	$	999	$	714	$	4,893	$	6,606


For the Nine Months Ended	Accretable Discount - Non-PCI Loans		Accretable Discount - PCI Loans		Non-Accretable Discount - PCI Loans		Total
Beginning balance, January 1, 2018	$	835	$	-	$	-	$	835
Purchases		3,182		1,551		6,536		11,269
Accretion		(1,334)		(305)		(334)		(1,973)
Transfer		(373)		(28)		(133)		(534)
Ending balance, September 30, 2018	$	2,310	$	1,218	$	6,069	$	9,597