Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	March 31, 2020		December 31, 2019
Commercial	$	364,626	$	332,842
Leases		126,237		119,751
Commercial real estate - Investor		503,905		520,095
Commercial real estate - Owner occupied		349,595		345,504
Construction		78,159		69,617
Residential real estate - Investor		69,429		71,105
Residential real estate - Owner occupied		129,982		136,023
Multifamily		195,297		189,773
HELOC		93,165		91,605
HELOC - Purchased		30,880		31,852
Other 1		15,929		12,258
Total loans, excluding deferred loan costs and PCI loans		1,957,204		1,920,425
Net deferred loan costs		-		1,786
Total loans, excluding PCI loans		1,957,204		1,922,211
PCI loans		-		8,601
Total loans, including deferred loan costs and PCI loans	$	1,957,204	$	1,930,812
Allowance for credit losses on loans		(30,045)		(19,789)
Net loans2	$	1,927,159	$	1,911,023

1 The “Other” segment for 2020 includes consumer and overdrafts in this table and in subsequent tables within this footnote 4 - Loans and Allowance for Credit Losses on Loans.

2 Excludes accrued interest receivable of $6.4 million and $6.5 million at March 31, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.

In connection with the Company’s adoption of ASU 2016-13 as of January 1, 2020, the PCI loans and deferred fees and costs are included in their respective segments. PCI loans meeting nonperforming criteria were historically excluded from our nonperforming disclosures as long as their cash flows and the timing of such cash flows continue to be estimable and probable of collection. As a result of CECL implementation on January 1, 2020, PCI loans became PCD loans. PCD loans that meet the definition of nonperforming are now included in nonperforming disclosures.

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 74.1% and 75.4% of the portfolio at March 31, 2020, and December 31, 2019, respectively.

The following table presents the collateral dependent loans and the related ACL allocated by segment of loans as of March 31, 2020:


			Accounts						ACL
March 31, 2020	Real Estate		Receivable		Other		Total		Allocation
Commercial	$	-	$	2,416	$	3	$	2,419	$	89
Leases		-		-		264		264		61
Commercial real estate - Investor		4,430		-		-		4,430		203
Commercial real estate - Owner occupied		8,459		-		-		8,459		204
Construction		2,245		-		-		2,245		852
Residential real estate - Investor		859		-		-		859		-
Residential real estate - Owner occupied		3,739		-		-		3,739		137
Multifamily		1,497		-		-		1,497		318
HELOC		1,004		-		-		1,004		-
HELOC - Purchased		114		-		-		114		-
Other		-		-		9		9		3
Total	$	22,347	$	2,416	$	276	$	25,039	$	1,867

The following table presents the activity in the allowance for credit losses (“ACL”) for the three months ended March 31, 2020. The Company’s estimate of the ACL reflects losses over the expected remaining contractual life of the loans.


			Impact of		Provision
	Beginning		Adopting		for Credit						Ending
Allowance for credit losses	Balance		ASC 326		Losses		Charge-offs		Recoveries		Balance
Three months ended March 31, 2020
Commercial	$	3,015	$	(292)	$	539	$	97	$	12	$	3,177
Leases		1,262		501		127		-		-		1,890
Commercial real estate - Investor		6,218		(741)		536		13		21		6,021
Commercial real estate - Owner occupied		3,678		(848)		329		1,109		1		2,051
Construction		513		1,334		2,184		-		-		4,031
Residential real estate - Investor		601		740		534		-		21		1,896
Residential real estate - Owner occupied		1,257		1,320		769		1		23		3,368
Multifamily		1,444		1,732		674		-		-		3,850
HELOC		1,161		1,526		(485)		83		141		2,260
HELOC - Purchased		-		-		850		-		-		850
Other		640		607		(558)		98		60		651
	$	19,789	$	5,879	$	5,499	$	1,401	$	279	$	30,045

The following table presents activity in the allowance for loan and lease losses for the three months ended at March 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


			Provision
	Beginning		for Loan						Ending
Allowance for loan and lease losses:	Balance		Losses		Charge-offs		Recoveries		Balance
Three months ended March 31, 2019
Commercial	$	2,832	$	202	$	12	$	30	$	3,052
Leases		734		71		-		-		805
Commercial real estate - Investor		5,492		207		144		20		5,575
Commercial real estate - Owner occupied		3,835		(603)		87		3		3,148
Construction		969		(24)		-		(1)		944
Residential real estate - Investor		629		(3)		6		16		636
Residential real estate - Owner occupied		1,302		4		12		26		1,320
Multifamily		1,143		2		-		8		1,153
HELOC		1,449		(170)		-		46		1,325
HELOC - Purchased		-		-		-		-		-
Other1		621		764		84		57		1,358
	$	19,006	$	450	$	345	$	205	$	19,316

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

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


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
March 31, 2020	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	1,032	$	46	$	2,279	$	3,357	$	361,269	$	364,626	$	-
Leases		613		63		123		799		125,438		126,237		-
Commercial real estate - Investor		2,235		-		1,422		3,657		500,248		503,905		59
Commercial real estate - Owner occupied		5,062		2,080		4,060		11,202		338,393		349,595		-
Construction		675		-		555		1,230		76,929		78,159		555
Residential real estate - Investor		291		100		696		1,087		68,342		69,429		-
Residential real estate - Owner occupied		4,183		167		2,139		6,489		123,493		129,982		736
Multifamily		1,815		561		69		2,445		192,852		195,297		-
HELOC		1,459		-		329		1,788		91,377		93,165		56
HELOC - Purchased		49		-		65		114		30,766		30,880		-
Other		537		3		8		548		15,381		15,929		-
Total	$	17,951	$	3,020	$	11,745	$	32,716	$	1,924,488	$	1,957,204	$	1,406


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 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
Commercial real estate - Investor		626		95		343		1,064		517,336		1,695		520,095		348
Commercial real estate - Owner occupied		2,469		1,026		-		3,495		336,829		5,180		345,504		-
Construction		26		-		-		26		69,498		93		69,617		-
Residential real estate - Investor		141		125		-		266		70,051		788		71,105		-
Residential real estate - Owner occupied		3,450		1,351		-		4,801		128,650		2,572		136,023		-
Multifamily		10		1,700		-		1,710		187,995		68		189,773		-
HELOC		735		50		18		803		89,438		1,364		91,605		20
HELOC - Purchased		-		-		-		-		31,672		180		31,852		-
Other 1		28		-		-		28		13,997		19		14,044		-
Total, excluding PCI		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

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

The table presents loans on nonaccrual for which there was no related allowance for credit losses as of March 31, 2020, and December 31, 2019:


	March 31, 2020				December 31, 2019
			Nonaccrual				Nonaccrual
	Nonaccrual		With no ACL		Nonaccrual		With no ACL
Commercial	$	2,418	$	2,279	$	144	$	-
Leases		187		69		329		70
Commercial real estate - Investor		1,750		1,750		1,695		1,590
Commercial real estate - Owner occupied		7,436		7,357		5,180		2,366
Construction		2,245		50		93		93
Residential real estate - Investor		859		859		788		788
Residential real estate - Owner occupied		3,406		3,406		2,572		2,475
Multifamily		69		69		68		68
HELOC		1,004		1,004		1,364		1,154
HELOC - Purchased		114		114		180		180
Other		9		1		19		2
Total, excluding PCI loans		19,497		16,958		12,432		8,786
PCI loans, net of purchase accounting adjustments		-		-		2,963		2,963
Total	$	19,497	$	16,958	$	15,395	$	11,749

The Company recognized $152,000 of interest on nonaccrual loans during the three months ended March 31, 2020.

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. The Company follows guidance of ASC 310-20 when determining whether a modification, extension, or renewal of a loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period financing receivables. The following table summarizes loans held for investment by year of origination and the related credit quality indicators at March 31, 2020:


															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	13,380	$	48,708	$	20,606	$	10,684	$	3,837	$	4,074	$	232,347	$	-	$	333,636
Special Mention		-		11,152		-		17		394		49		8,118		-		19,730
Substandard1		-		246		2,672		-		2,188		-		6,154		-		11,260
Total commercial		13,380		60,106		23,278		10,701		6,419		4,123		246,619		-		364,626

Leases
Pass		14,148		65,670		22,923		10,133		9,848		2,892		-		-		125,614
Special Mention		-		359		-		-		-		-		-		-		359
Substandard1		-		-		-		77		187		-		-		-		264
Total leases		14,148		66,029		22,923		10,210		10,035		2,892		-		-		126,237

Commercial real estate - Investor
Pass		10,194		187,200		113,009		80,622		61,530		43,051		1,412		-		497,018
Special Mention		-		153		-		583		19		59		-		-		814
Substandard1		-		4,059		146		-		275		1,593		-		-		6,073
Total commercial real estate - investor		10,194		191,412		113,155		81,205		61,824		44,703		1,412		-		503,905

Commercial real estate - Owner occupied
Pass		28,511		60,137		86,544		48,503		54,557		48,603		1,828		-		328,683
Special Mention		-		557		560		2,805		5,325		1,161		-		-		10,408
Substandard1		1,046		3,498		1,054		2,509		1,691		706		-		-		10,504
Total commercial real estate - owner occupied		29,557		64,192		88,158		53,817		61,573		50,470		1,828		-		349,595

Construction
Pass		9,239		36,982		16,472		3,248		1,035		1,339		7,388		-		75,703
Special Mention		42		-		-		-		-		-		-		-		42
Substandard1		-		-		2,364		-		-		50		-		-		2,414
Total construction		9,281		36,982		18,836		3,248		1,035		1,389		7,388		-		78,159

Residential real estate - Investor
Pass		3,599		22,824		12,634		10,586		3,543		13,388		1,403		-		67,977
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		346		-		644		4		-		458		-		-		1,452
Total residential real estate - investor		3,945		22,824		13,278		10,590		3,543		13,846		1,403		-		69,429

Residential real estate - Owner occupied
Pass		1,505		27,584		16,814		26,024		11,519		39,578		2,390		-		125,414
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		73		-		625		386		3,484		-		-		4,568
Total residential real estate - owner occupied		1,505		27,657		16,814		26,649		11,905		43,062		2,390		-		129,982

Multifamily
Pass		4,167		56,534		45,839		46,900		13,903		20,624		312		-		188,279
Special Mention		-		-		1,634		-		10		-		-		-		1,644
Substandard1		-		-		2,374		619		-		2,381		-		-		5,374
Total multifamily		4,167		56,534		49,847		47,519		13,913		23,005		312		-		195,297

HELOC
Pass		957		3,541		2,448		2,916		1,176		1,500		78,986		-		91,524
Special Mention		-		-		-		-		-		-		13		-		13
Substandard1		29		9		50		67		29		555		889		-		1,628
Total HELOC		986		3,550		2,498		2,983		1,205		2,055		79,888		-		93,165

HELOC - Purchased
Pass		-		-		-		-		-		30,766		-		-		30,766
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		65		49		-		-		-		-		-		114
Total HELOC - purchased		-		65		49		-		-		30,766		-		-		30,880

Other
Pass		258		3,442		1,334		551		737		423		8,835		-		15,580
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		340		8		1		-		-		-		349
Total other		258		3,442		1,674		559		738		423		8,835		-		15,929

Total loans
Pass		85,958		512,622		338,623		240,167		161,685		206,238		334,901		-		1,880,194
Special Mention		42		12,221		2,194		3,405		5,748		1,269		8,131		-		33,010
Substandard1		1,421		7,950		9,693		3,909		4,757		9,227		7,043		-		44,000
Total loans	$	87,421	$	532,793	$	350,510	$	247,481	$	172,190	$	216,734	$	350,075	$	-	$	1,957,204

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

Credit quality indicators by loan segment at December 31, 2019 were as follows:


December 31, 2019			Special
	Pass		Mention		Substandard2		Doubtful		Total
Commercial	$	307,948	$	13,206	$	11,688	$	-	$	332,842
Leases		119,045		377		329		-		119,751
Commercial real estate - Investor		510,640		4,529		4,926				520,095
Commercial real estate - Owner occupied		330,891		6,657		7,956		-		345,504
Construction		69,355		-		262		-		69,617
Residential real estate - Investor		69,715		-		1,390		-		71,105
Residential real estate - Owner occupied		132,258		134		3,631		-		136,023
Multifamily		187,560		1,710		503		-		189,773
HELOC		89,804		12		1,789		-		91,605
HELOC - Purchased		31,672		-		180				31,852
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

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 $585,000 and $831,000 in residential real estate loans in the process of foreclosure as of March 31, 2020, and December 31, 2019, respectively.

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:

There was no TDR activity for the period ended March 31, 2020.


	TDR Modifications
	Three Months Ended March 31, 2019
	# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment
Troubled debt restructurings
Commercial real estate - owner occupied
Other1	1	$	58	$	58
Residential real estate - owner occupied
HAMP2	1		105		9
HELOC
HAMP2	1		39		34
Other1	1		39		38
Total	4	$	241	$	139

1 Other: Change of terms from bankruptcy court.

2 HAMP: Home Affordable Modification Program.

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, 2020, and March 31, 2019, for loans that were restructured within the 12 month period prior to default.