LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the allowance, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the simple interest method based on the principal balance outstanding. Interest is

not

accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.

Our total loans at

March 31, 2020

were

$2.90

billion compared to

$2.86

billion at

December 31, 2019,

an increase of

$44.9

million, or

1.6%.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at

March 31, 2020

and

December 31, 2019,

and the percentage change in loans from the end of

2019

to the end of the

first

quarter of

2020,

are as follows:

											Percent
	March 31, 2020					December 31, 2019					Increase
	Balance		%			Balance		%			(Decrease)

Commercial:
Commercial and industrial	$	873,679,000		30.1	%	$	846,551,000		29.6	%		3.2	%
Vacant land, land development, and residential construction		62,908,000		2.2			56,119,000		2.0			12.1
Real estate – owner occupied		579,229,000		20.0			579,003,000		20.3			0.1
Real estate – non-owner occupied		823,366,000		28.3			835,346,000		29.2			(1.4	)
Real estate – multi-family and residential rental		133,148,000		4.6			124,525,000		4.4			6.9
Total commercial		2,472,330,000		85.2			2,441,544,000		85.5			1.3

Retail:
Home equity and other		72,875,000		2.5			75,374,000		2.6			(3.3	)
1-4 family mortgages		356,338,000		12.3			339,749,000		11.9			4.9
Total retail		429,213,000		14.8			415,123,000		14.5			3.4

Total loans	$	2,901,543,000		100.0	%	$	2,856,667,000		100.0	%		1.6	%

Nonperforming loans as of

March 31, 2020

and

December 31, 2019

were as follows:

	March 31,		December 31,
	2020		2019

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		3,469,000		2,284,000

Total nonperforming loans	$	3,469,000	$	2,284,000

The recorded principal balance of nonperforming loans was as follows:

	March 31,		December 31,
	2020		2019
Commercial:
Commercial and industrial	$	156,000	$	0
Vacant land, land development, and residential construction		326,000		0
Real estate – owner occupied		287,000		134,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		1,000		2,000
Total commercial		770,000		136,000

Retail:
Home equity and other		279,000		255,000
1-4 family mortgages		2,420,000		1,893,000
Total retail		2,699,000		2,148,000

Total nonperforming loans	$	3,469,000	$	2,284,000

An age analysis of past due loans is as follows as of

March 31, 2020:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current		Total Loans		Recorded Balance > 89 Days and Accruing

Commercial:
Commercial and industrial	$	123,000	$	579,000	$	0	$	702,000	$	872,977,000	$	873,679,000	$	0
Vacant land, land development, and residential construction		482,000		0		43,000		525,000		62,383,000		62,908,000		0
Real estate – owner occupied		0		0		232,000		232,000		578,997,000		579,229,000		0
Real estate – non-owner occupied		0		0		0		0		823,366,000		823,366,000		0
Real estate – multi-family and residential rental		181,000		0		0		181,000		132,967,000		133,148,000		0
Total commercial		786,000		579,000		275,000		1,640,000		2,470,690,000		2,472,330,000		0

Retail:
Home equity and other		172,000		27,000		58,000		257,000		72,618,000		72,875,000		0
1-4 family mortgages		514,000		0		381,000		895,000		355,443,000		356,338,000		0
Total retail		686,000		27,000		439,000		1,152,000		428,061,000		429,213,000		0

Total past due loans	$	1,472,000	$	606,000	$	714,000	$	2,792,000	$	2,898,751,000	$	2,901,543,000	$	0

An age analysis of past due loans is as follows as of

December 31, 2019:

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current		Total Loans		Recorded Balance > 89 Days and Accruing

Commercial:
Commercial and industrial	$	0	$	0	$	0	$	0	$	846,551,000	$	846,551,000	$	0
Vacant land, land development, and residential construction		191,000		0		0		191,000		55,928,000		56,119,000		0
Real estate – owner occupied		0		0		134,000		134,000		578,869,000		579,003,000		0
Real estate – non-owner occupied		0		0		0		0		835,346,000		835,346,000		0
Real estate – multi-family and residential rental		0		0		0		0		124,525,000		124,525,000		0
Total commercial		191,000		0		134,000		325,000		2,441,219,000		2,441,544,000		0

Retail:
Home equity and other		171,000		65,000		20,000		256,000		75,118,000		75,374,000		0
1-4 family mortgages		745,000		29,000		529,000		1,303,000		338,446,000		339,749,000		0
Total retail		916,000		94,000		549,000		1,559,000		413,564,000		415,123,000		0

Total past due loans	$	1,107,000	$	94,000	$	683,000	$	1,884,000	$	2,854,783,000	$	2,856,667,000	$	0

Impaired loans as of

March 31, 2020,

and average impaired loans for the

three

months ended

March 31, 2020,

were as follows:

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	10,167,000	$	10,167,000	$	0	$	9,148,000
Vacant land, land development and residential construction		199,000		199,000		0		142,000
Real estate – owner occupied		4,905,000		4,857,000		0		2,762,000
Real estate – non-owner occupied		0		0		0		89,000
Real estate – multi-family and residential rental		26,000		5,000		0		7,000
Total commercial		15,297,000		15,228,000		0		12,148,000

Retail:
Home equity and other		1,359,000		1,273,000		0		1,241,000
1-4 family mortgages		4,851,000		2,683,000		0		2,325,000
Total retail		6,210,000		3,956,000		0		3,566,000

Total with no related allowance recorded	$	21,507,000	$	19,184,000	$	0	$	15,714,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	2,172,000	$	2,172,000	$	1,071,000	$	1,315,000
Vacant land, land development and residential construction		385,000		385,000		85,000		192,000
Real estate – owner occupied		203,000		203,000		13,000		640,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		0
Total commercial		2,760,000		2,760,000		1,169,000		2,147,000

Retail:
Home equity and other		414,000		396,000		289,000		440,000
1-4 family mortgages		613,000		613,000		154,000		485,000
Total retail		1,027,000		1,009,000		443,000		925,000

Total with an allowance recorded	$	3,787,000	$	3,769,000	$	1,612,000	$	3,072,000

Total impaired loans:
Commercial	$	18,057,000	$	17,988,000	$	1,169,000	$	14,295,000
Retail		7,237,000		4,965,000		443,000		4,491,000
Total impaired loans	$	25,294,000	$	22,953,000	$	1,612,000	$	18,786,000

Impaired loans as of

December 31, 2019,

and average impaired loans for the

three

months ended

March 31, 2019,

were as follows:

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	8,129,000	$	8,129,000	$	0	$	9,487,000
Vacant land, land development and residential construction		85,000		85,000		0		92,000
Real estate – owner occupied		715,000		667,000		0		1,582,000
Real estate – non-owner occupied		178,000		178,000		0		31,000
Real estate – multi-family and residential rental		29,000		9,000		0		26,000
Total commercial		9,136,000		9,068,000		0		11,218,000

Retail:
Home equity and other		1,279,000		1,209,000		0		1,062,000
1-4 family mortgages		3,272,000		1,968,000		0		2,191,000
Total retail		4,551,000		3,177,000		0		3,253,000

Total with no related allowance recorded	$	13,687,000	$	12,245,000	$	0	$	14,471,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	460,000	$	458,000	$	202,000	$	5,416,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		1,078,000		1,078,000		982,000		2,823,000
Real estate – non-owner occupied		0		0		0		199,000
Real estate – multi-family and residential rental		0		0		0		135,000
Total commercial		1,538,000		1,536,000		1,184,000		8,573,000

Retail:
Home equity and other		502,000		485,000		356,000		775,000
1-4 family mortgages		358,000		356,000		83,000		748,000
Total retail		860,000		841,000		439,000		1,523,000

Total with an allowance recorded	$	2,398,000	$	2,377,000	$	1,623,000	$	10,096,000

Total impaired loans:
Commercial	$	10,674,000	$	10,604,000	$	1,184,000	$	19,791,000
Retail		5,411,000		4,018,000		439,000		4,776,000
Total impaired loans	$	16,085,000	$	14,622,000	$	1,623,000	$	24,567,000

Impaired loans for which

allocation of the allowance for loan losses has been made generally reflect situations whereby the loans have been charged-down to estimated collateral value. Interest income recognized on accruing troubled debt restructurings totaled

$0.3

million during the

first

quarter of

2020

and

2019.

interest income was recognized on nonaccrual loans during either the

first

quarter of

2020

2019.

Lost interest income on nonaccrual loans totaled less than

$0.1

million during the

first

quarter of

2020

and

2019.

Credit Quality Indicators.

We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a

ten

grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The risk assessment for retail loans is primarily based on the type of collateral.

Credit quality indicators were as follows as of

March 31, 2020:

Commercial credit exposure – credit risk profiled by internal credit risk grades:

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental

Internal credit risk grade groupings:
Grades 1 – 4	$	528,288,000	$	24,943,000	$	340,680,000	$	562,617,000	$	74,923,000
Grades 5 – 7		333,023,000		37,263,000		233,258,000		260,617,000		58,088,000
Grades 8 – 9		12,368,000		702,000		5,291,000		132,000		137,000
Total commercial	$	873,679,000	$	62,908,000	$	579,229,000	$	823,366,000	$	133,148,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Performing		72,596,000		353,918,000
Nonperforming		279,000		2,420,000
Total retail	$	72,875,000	$	356,338,000

Credit quality indicators were as follows as of

December 31, 2019:

Commercial credit exposure – credit risk profiled by internal credit risk grades:

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental

Internal credit risk grade groupings:
Grades 1 – 4	$	521,920,000	$	26,065,000	$	351,671,000	$	563,087,000	$	85,152,000
Grades 5 – 7		309,824,000		29,716,000		220,980,000		272,124,000		39,203,000
Grades 8 – 9		14,807,000		338,000		6,352,000		135,000		170,000
Total commercial	$	846,551,000	$	56,119,000	$	579,003,000	$	835,346,000	$	124,525,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Performing		75,119,000		337,856,000
Nonperforming		255,000		1,893,000
Total retail	$	75,374,000	$	339,749,000

All commercial loans are graded using the following criteria:

	Grade 1.	“Exceptional” Loans with this rating contain very little, if any, risk.

	Grade 2.	“Outstanding” Loans with this rating have excellent and stable sources of repayment and conform to bank policy and regulatory requirements.

	Grade 3.	“Very Good” Loans with this rating have strong sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are acceptable.

	Grade 4.	“Good” Loans with this rating have solid sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are modest.

	Grade 5.	“Acceptable” Loans with this rating exhibit acceptable sources of repayment and conform with most bank policies and all regulatory requirements. These are for loans for which repayment risks are satisfactory.

	Grade 6.	“Monitor” Loans with this rating are considered to have emerging weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if further deterioration is observed, these credits will be downgraded to the criticized asset report.

	Grade 7.	“Special Mention” Loans with this rating have potential weaknesses that deserve 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.

	Grade 8.	“Substandard” Loans with this rate are inadequately protected by current sound net worth, paying capacity of the obligor, or of the pledged collateral, if any. A Substandard loan normally has one or more well-defined weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility of loss if the deficiencies are not corrected.

	Grade 9.	“Doubtful” Loans with this rating exhibit all the weaknesses inherent in the Substandard classification and where collection or liquidation in full is highly questionable and improbable.

	Grade 10.	“Loss” Loans with this rating are considered uncollectable, and of such little value that continuance as an active asset is not warranted.

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditor’s rights in order to preserve our collateral position.

Activity in the allowance for loan losses and the recorded investments in loans as of and during the

three

months ended

March 31, 2020

are as follows:

	Commercial			Retail
	Loans			Loans			Unallocated			Total

Allowance for loan losses:
Beginning balance	$	21,070,000		$	2,749,000		$	70,000		$	23,889,000
Provision for loan losses		573,000			247,000			(70,000	)		750,000
Charge-offs		(13,000	)		(27,000	)		0			(40,000	)
Recoveries		120,000			109,000			0			229,000
Ending balance	$	21,750,000		$	3,078,000		$	0		$	24,828,000

Ending balance: individually evaluated for impairment	$	1,169,000		$	443,000		$	0		$	1,612,000

Ending balance: collectively evaluated for impairment	$	20,581,000		$	2,635,000		$	0		$	23,216,000


Total loans:
Ending balance	$	2,472,330,000		$	429,213,000					$	2,901,543,000

Ending balance: individually evaluated for impairment	$	17,988,000		$	4,965,000					$	22,953,000

Ending balance: collectively evaluated for impairment	$	2,454,342,000		$	424,248,000					$	2,878,590,000

Activity in the allowance for loan losses for loans during the

three

months ended

March 31, 2019

and the recorded investments in loans as of

December 31, 2019

are as follows:

	Commercial		Retail
	Loans		Loans			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	19,619,000	$	2,717,000		$	44,000	$	22,380,000
Provision for loan losses		562,000		104,000			184,000		850,000
Charge-offs		0		(174,000	)		0		(174,000	)
Recoveries		30,000		49,000			0		79,000
Ending balance	$	20,211,000	$	2,696,000		$	228,000	$	23,135,000

Ending balance: individually evaluated for impairment	$	936,000	$	411,000		$	0	$	1,347,000

Ending balance: collectively evaluated for impairment	$	19,275,000	$	2,285,000		$	228,000	$	21,788,000


Total loans:
Ending balance	$	2,441,544,000	$	415,123,000				$	2,856,667,000

Ending balance: individually evaluated for impairment	$	10,986,000	$	4,070,000				$	15,056,000

Ending balance: collectively evaluated for impairment	$	2,430,558,000	$	411,053,000				$	2,841,611,000

Loans modified as troubled debt restructurings during the

three

months ended

March 31, 2020

were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance

Commercial:
Commercial and industrial		6	$	6,539,000	$	6,536,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		8		3,661,000		4,259,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total commercial		14		10,200,000		10,795,000

Retail:
Home equity and other		3		65,000		52,000
1-4 family mortgages		0		0		0
Total retail		3		65,000		52,000

Total loans		17	$	10,265,000	$	10,847,000

Loans modified as troubled debt restructurings during the

three

months ended

March 31, 2019

were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance

Commercial:
Commercial and industrial		11	$	3,164,000	$	3,164,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		2		760,000		749,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total commercial		13		3,924,000		3,913,000

Retail:
Home equity and other		4		70,000		70,000
1-4 family mortgages		1		32,000		32,000
Total retail		5		102,000		102,000

Total loans		18	$	4,026,000	$	4,015,000

The following loans, modified as troubled debt restructurings within the previous

twelve

months, became over

days past due within the

three

months ended

March 31, 2020 (

amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		1		97,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		1		97,000

Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0

Total		1	$	97,000

The following loans, modified as troubled debt restructurings within the previous

twelve

months, became over

days past due within the

three

months ended

March 31, 2019 (

amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		0		0
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		0		0

Retail:
Home equity and other		2		54,000
1-4 family mortgages		0		0
Total retail		2		54,000

Total		2	$	54,000

Activity for loans categorized as troubled debt restructurings during the

three

months ended

March 31, 2020

is as follows:

	Commercial and Industrial			Commercial Vacant Land, Land Development, and Residential Construction			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Commercial Real Estate - Multi-Family and Residential Rental

Commercial Loan Portfolio:
Beginning Balance	$	8,587,000		$	85,000		$	1,145,000		$	178,000		$	7,000
Charge-Offs		0			0			0			0			0
Payments		(2,832,000	)		(3,000	)		(988,000	)		(4,000	)		(4,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		6,449,000			0			3,654,000			0			0
Ending Balance	$	12,204,000		$	82,000		$	3,811,000		$	174,000		$	3,000

	Retail			Retail
	Home Equity			1-4 Family
	and Other			Mortgages
Retail Loan Portfolio:
Beginning Balance	$	1,415,000		$	724,000
Charge-Offs		0			0
Payments		(29,000	)		(9,000	)
Transfers to ORE		0			0
Net Additions/Deletions		66,000			0
Ending Balance	$	1,452,000		$	715,000

Activity for loans categorized as troubled debt restructurings during the

three

months ended

March 31, 2019

is as follows:

	Commercial and Industrial			Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Commercial Real Estate - Multi-Family and Residential Rental

Commercial Loan Portfolio:
Beginning Balance	$	14,138,000		$	0	$	3,100,000		$	210,000		$	24,000
Charge-Offs		0			0		0			0			0
Payments		(1,666,000	)		0		(48,000	)		(21,000	)		(3,000	)
Transfers to ORE		0			0		(97,000	)		0			0
Net Additions/Deletions		3,138,000			0		740,000			0			0
Ending Balance	$	15,610,000		$	0	$	3,695,000		$	189,000		$	21,000

	Retail			Retail
	Home Equity			1-4 Family
	and Other			Mortgages
Retail Loan Portfolio:
Beginning Balance	$	1,402,000		$	578,000
Charge-Offs		0			0
Payments		(28,000	)		(11,000	)
Transfers to ORE		0			0
Net Additions/Deletions		70,000			32,000
Ending Balance	$	1,444,000		$	599,000

The allowance related to loans categorized as troubled debt restructurings was as follows:

	March 31,		December 31,
	2020		2019

Commercial:
Commercial and industrial	$	953,000	$	202,000
Vacant land, land development, and residential construction		1,000		0
Real estate – owner occupied		3,000		982,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		957,000		1,184,000

Retail:
Home equity and other		246,000		311,000
1-4 family mortgages		154,000		83,000
Total retail		400,000		394,000

Total related allowance	$	1,357,000	$	1,578,000

In general, our policy dictates that a renewal or modification of an

- or

-rated commercial loan meets the criteria of a troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt restructuring assessment procedures. Loan relationships rated

contain significant financial weaknesses, resulting in a distinct possibility of loss, while relationships rated

reflect vital financial weaknesses, resulting in a highly questionable ability on our part to collect principal. We believe borrowers warranting such ratings would have difficulty obtaining financing from other market participants. Thus, due to the lack of comparable market rates for loans with similar risk characteristics, we believe

- or

-rated loans renewed or modified were done so at below market rates. Loans that are identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when assessing these credits in our allowance for loan losses calculation.