Note 5: Loans

Major classifications of loans were as follows as of December 31, were as follows:


	2019		2018
Commercial	$	332,842	$	314,323
Leases		119,751		78,806
Real estate - commercial		865,599		820,941
Real estate - construction		69,617		108,390
Real estate - residential		396,901		407,068
HELOC		123,457		140,442
Other 1		12,258		14,439
Total loans, excluding deferred loan costs and PCI loans		1,920,425		1,884,409
Net deferred loan costs		1,786		1,653
Total loans, excluding PCI loans		1,922,211		1,886,062
PCI loans, net of purchase accounting adjustments		8,601		10,965
Total loans	$	1,930,812	$	1,897,027

1 The “Other” class includes consumer loans and overdrafts.

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 December 31, 2019, and December 31, 2018, respectively.

Aged analysis of past due loans by class of loans as of December 31, were as follows:


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	1,271	$	925	$	2,103	$	4,299	$	328,399	$	144	$	332,842	$	2,132
Leases		362		-		81		443		118,979		329		119,751		128
Real estate - commercial
Owner occupied general purpose		1,725		686		-		2,411		146,323		792		149,526		-
Owner occupied special purpose		512		340		-		852		173,346		4,388		178,586		-
Non-owner occupied general purpose		626		95		343		1,064		317,923		549		319,536		348
Non-owner occupied special purpose		-		-		-		-		146,483		-		146,483		-
Retail properties		-		-		-		-		52,930		1,146		54,076		-
Farm		232		-		-		232		17,160		-		17,392		-
Real estate - construction
Homebuilder		-		-		-		-		5,300		-		5,300		-
Land		-		-		-		-		12,379		-		12,379		-
Commercial speculative		-		-		-		-		37,571		-		37,571		-
All other		26		-		-		26		14,248		93		14,367		-
Real estate - residential
Investor		141		125		-		266		70,051		788		71,105		-
Multi-family		10		1,700		-		1,710		187,995		68		189,773		-
Owner occupied		3,450		1,351		-		4,801		128,650		2,572		136,023		-
HELOC		735		50		18		803		121,110		1,544		123,457		20
Other 1		28		-		-		28		13,997		19		14,044		-
Total, excluding PCI loans	$	9,118	$	5,272	$	2,545	$	16,935	$	1,892,844	$	12,432	$	1,922,211	$	2,628
PCI loans, net of purchase accounting adjustments		261		-		-		261		5,377		2,963		8,601		-
Total	$	9,379	$	5,272	$	2,545	$	17,196	$	1,898,221	$	15,395	$	1,930,812	$	2,628


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
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 loans, 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 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.

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 as of December 31, were as follows:


2019			Special
	Pass		Mention		Substandard2		Doubtful		Total
Commercial	$	307,948	$	13,206	$	11,688	$	-	$	332,842
Leases		119,045		377		329		-		119,751
Real estate - commercial
Owner occupied general purpose		144,292		2,967		2,267		-		149,526
Owner occupied special purpose		171,444		2,663		4,479		-		178,586
Non-owner occupied general purpose		315,340		416		3,780		-		319,536
Non-owner occupied special purpose		142,958		3,525		-		-		146,483
Retail Properties		52,342		588		1,146		-		54,076
Farm		15,155		1,027		1,210		-		17,392
Real estate - construction
Homebuilder		5,300		-		-		-		5,300
Land		12,379		-		-		-		12,379
Commercial speculative		37,571		-		-		-		37,571
All other		14,105		-		262		-		14,367
Real estate - residential
Investor		69,715		-		1,390		-		71,105
Multi-Family		187,560		1,710		503		-		189,773
Owner occupied		132,258		134		3,631		-		136,023
HELOC		121,476		12		1,969		-		123,457
Other 1		13,685		-		359		-		14,044
Total, excluding PCI loans	$	1,862,573	$	26,625	$	33,013	$	-	$	1,922,211
PCI loans, net of purchase accounting adjustments		573		261		7,767		-		8,601
Total	$	1,863,146	$	26,886	$	40,780	$	-	$	1,930,812


2018			Special
	Pass		Mention		Substandard2		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.

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

The Company had $831,000 and $448,000 in consumer mortgage loans in the process of foreclosure as of December 31, 2019 and December 31, 2018, respectively.

Impaired loans, which include nonaccrual loans and troubled debt restructurings, by class of loan as of December 31, were as follows:


	2019						2018
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	-	$	-
Leases		70		73		-		-		-		-
Commercial real estate
Owner occupied general purpose		861		915		-		1,659		1,782		-
Owner occupied special purpose		1,573		2,069		-		395		530		-
Non-owner occupied general purpose		444		471		-		1,138		1,159		-
Non-owner occupied special purpose		-		-		-		-		-		-
Retail properties		1,146		1,183		-		-		-		-
Farm		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-
Land		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-
All other		93		132		-		49		73		-
Residential
Investor		872		1,022		-		353		459		-
Multi-Family		68		68		-		-		-		-
Owner occupied		2,924		4,415		-		3,359		4,882		-
HELOC		1,394		1,866		-		884		1,003		-
Other 1		2		3		-		7		7		-
Total impaired loans with no recorded allowance		9,447		12,217		-		7,844		9,895		-


With an allowance recorded
Commercial		144		147		93		-		-		-
Leases		259		259		100		-		-		-
Commercial real estate
Owner occupied general purpose		106		106		1		396		396		3
Owner occupied special purpose		2,815		2,815		815		-		-		-
Non-owner occupied general purpose		159		170		14		3,098		4,038		97
Non-owner occupied special purpose		-		-		-		3,099		3,575		139
Retail properties		-		-		-		-		-		-
Farm		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-
Land		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-
All other		-		-		-		57		58		1
Residential
Investor		787		787		10		808		808		4
Multi-Family		-		-		-		-		-		-
Owner occupied		3,249		3,251		40		3,676		3,679		46
HELOC		1,034		1,035		56		1,357		1,357		49
Other 1		17		19		6		24		25		13
Total impaired loans with a recorded allowance		8,570		8,589		1,135		12,515		13,936		352
Total impaired loans, excluding PCI loans	$	18,017	$	20,806	$	1,135	$	20,359	$	23,831	$	352
PCI loans, net of purchase accounting adjustments		2,624		4,686		77		-		-		-
Total impaired loans	$	20,641	$	25,492	$	1,212	$	20,359	$	23,831	$	352

1 The “Other” class includes consumer loans and overdraft.

Average recorded investment and interest income recognized on impaired loans by class of loan for the years ending December 31, were as follows:


	Year Ended				Year Ended				Year Ended
	December 31, 2019				December 31, 2018				December 31, 2017
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial	$	-	$	-	$	-	$	-	$	120	$	-
Lease		35		-		89		-		272		-
Commercial real estate
Owner occupied general purpose		1,260		6		1,057		8		1,168		-
Owner occupied special purpose		984		-		369		-		364		-
Non-owner occupied general purpose		791		-		1,150		-		1,453		-
Non-owner occupied special purpose		-		-		-		-		507		-
Retail properties		573		-		541		-		1,130		-
Farm		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-
Land		-		-		-		-		-		-
Commercial speculative		-		-		-		-		37		-
All other		71		-		125		-		204		-
Residential
Investor		613		8		362		-		1,106		-
Multi-Family		34		-		2,362		-		2,362		-
Owner occupied		3,141		43		4,283		39		7,516		44
HELOC		1,139		5		1,005		1		1,804		1
Other 1		5		-		7		-		4		-
Total impaired loans with no recorded allowance		8,646		62		11,350		48		18,047		45


With an allowance recorded
Commercial		72		-		-		-		-		-
Leases		129		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		251		13		198		29		-		-
Owner occupied special purpose		1,408		-		-		-		-		-
Non-owner occupied general purpose		1,628		4		1,549		-		123		-
Non-owner occupied special purpose		1,550		-		1,549		-		-		-
Retail properties		-		-		-		-		-		-
Farm		-		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-		-
Land		-		-		-		-		-		-
Commercial speculative		-		-		-		-		-		-
All other		28		-		29		-		-		-
Residential
Investor		798		44		818		43		414		43
Multi-Family		-		-		-		-		-		-
Owner occupied		3,462		156		3,560		150		2,123		123
HELOC		1,196		52		1,171		56		493		35
Other 1		20		-		12		-		-		-
Total impaired loans with a recorded allowance		10,542		269		8,886		278		3,153		201
Total impaired loans, excluding PCI loans	$	19,188	$	331	$	20,236	$	326	$	21,200	$	246
PCI loans, net of purchase accounting adjustments		1,312		132		-		-		-		-
Total impaired loans	$	20,500	$	463	$	20,236	$	326	$	21,200	$	246

1 The “Other” class includes consumer loans and overdrafts.

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 ALLL on a TDR is determined by either discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell, if repayment of the loan is collateral-dependent. 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 ALLL 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.

Loans that were modified during the period are summarized as follows:


	TDR Modifications
	Year Ended December 31, 2019
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Owner occupied general purpose
Deferral1	1	$	421	$	418
Non-owner occupied general purpose
Other2	1		58		54
Retail properties
Other2	1		1,159		1,146
Real estate - residential
Owner occupied
HAMP3	3		399		293
HELOC
Other2	1		39		38
Total	7	$	2,076	$	1,949


	TDR Modifications
	Year Ended December 31, 2018
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Owner occupied general purpose
Other2	1	$	427	$	396
Owner occupied special purpose
Other2	1		110		46
Real estate - construction
All other
HAMP3	1		58		56
Real estate - residential
Owner occupied
HAMP3	4		502		443
Other2	1		34		29
HELOC
HAMP3	3		117		115
Rate4	1		24		24
Other2	9		622		600
Total	21	$	1,894	$	1,709

1 Deferral: Refers to the deferral of principal

2 Other: Change of terms from bankruptcy court

3 HAMP: Home Affordable Modification Program

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 were $39,000 of HELOC TDRs that defaulted during year 2019 and none during year 2018.

The Bank had no commitments to borrowers whose loans were classified as impaired at December 31, 2019.

The following table details the accretable discount on all of the Company’s purchased loans, both non-PCI loans and PCI loans as of December 31 were as follows:


	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		(1,050)		(413)		(606)		(2,069)
Charge-offs		-		(170)		(1,387)		(1,557)
Transfer		-		6		(6)		-
Ending balance, December 31, 2019	$	817	$	522	$	3,970	$	5,309


	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		(1,777)		(424)		(434)		(2,635)
Transfer		(373)		(28)		(133)		(534)
Ending balance, December 31, 2018	$	1,867	$	1,099	$	5,969	$	8,935

Loans to principal officers, directors, and their affiliates, which are made in the ordinary course of business, as of December 31, were as follows:


	2019		2018
Beginning balance	$	1,417	$	1,524
New loans		635		89
Repayments and other reductions		(1,025)		(196)
Change in related party status		(64)		-
Ending balance	$	963	$	1,417