Loans and Allowance for Credit Losses on Loans

6 Months Ended

Jun. 30, 2020

Loans and Allowance for Credit Losses on Loans

Loans and Allowance for Credit Losses on Loans

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:

	June 30, 2020		December 31, 2019
Commercial	$	441,642	$	332,842
Leases		133,293		119,751
Commercial real estate - Investor		525,714		520,095
Commercial real estate - Owner occupied		343,982		345,504
Construction		83,939		69,617
Residential real estate - Investor		69,421		71,105
Residential real estate - Owner occupied		126,303		136,023
Multifamily		197,521		189,773
HELOC		89,170		91,605
HELOC - Purchased		26,467		31,852
Other 1		14,884		12,258
Total loans, excluding deferred loan costs and PCI loans 2		2,052,336		1,920,425
Net deferred loan costs		-		1,786
Total loans, excluding PCI loans 2		2,052,336		1,922,211
PCI loans		-		8,601
Total loans, including deferred loan costs and PCI loans 2	$	2,052,336	$	1,930,812
Allowance for credit losses on loans		(31,273)		(19,789)
Net loans 3	$	2,021,063	$	1,911,023

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

²As noted in the paragraph below, for periods before the Company’s adoption of CECL on January 1, 2020, PCI loans and their related deferred loan costs (now PCD loans) were excluded from nonperforming loan disclosures and were therefore separately reported.  After the adoption of CECL, all PCD loans are now included within each relevant loan type and are not separately reported as PCI loans, because such loans are now included within the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

³ Excludes accrued interest receivable of $7.3 million and $6.5 million at June 30, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.

Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination.  Before the Company adopted CECL on January 1, 2020, PCD loans were referred to as purchased credit impaired loans, or PCI loans, and such PCI loans and their related deferred loan costs were excluded from the Company’s nonperforming loan disclosures, as long as the cash flows on such loans and the timing of such cash flows continued to be estimable and probable of collection. However, after the Company adopted CECL on January 1, 2020, PCD loans and their related deferred loan costs are now included in the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

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.  Although the Bank makes loans primarily 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.  The real estate related categories listed above represent 71.3% and 75.4% of the portfolio at June 30, 2020, and December 31, 2019, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.  

The following table presents the collateral dependent loans and the related ACL allocated by segment of loans as of June 30, 2020:

			Accounts						ACL
June 30, 2020	Real Estate		Receivable		Other		Total		Allocation
Commercial	$	6	$	2,165	$	16	$	2,187	$	12
Leases		-		-		254		254		74
Commercial real estate - Investor		4,363		-		-		4,363		126
Commercial real estate - Owner occupied		9,089		-		-		9,089		199
Construction		2,318		-		-		2,318		933
Residential real estate - Investor		845		-		-		845		-
Residential real estate - Owner occupied		3,591		-		-		3,591		214
Multifamily		2,299		-		-		2,299		482
HELOC		1,148		-		-		1,148		212
HELOC - Purchased		113		-		-		113		-
Other		-		-		13		13		8
Total	$	23,772	$	2,165	$	283	$	26,220	$	2,260

The following table presents the activity in the allowance for credit losses (“ACL”) for the three and six months ended June 30, 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 June 30, 2020
Commercial	$	3,177	$	-	$	(887)	$	22	$	24	$	2,292
Leases		1,890		-		122		-		-		2,012
Commercial real estate - Investor		6,021		-		1,690		2		16		7,725
Commercial real estate - Owner occupied		2,051		-		762		292		-		2,521
Construction		4,031		-		400		-		-		4,431
Real estate - Investor		1,896		-		319		4		6		2,217
Real estate - Owner occupied		3,368		-		(230)		43		109		3,204
Multifamily		3,850		-		(332)		-		-		3,518
HELOC		2,260		-		(58)		2		55		2,255
HELOC - Purchased		850		-		(452)		-		-		398
Other1		651		-		61		41		29		700
	$	30,045	$	-	$	1,395	$	406	$	239	$	31,273

Six months ended June 30, 2020
Commercial	$	3,015	$	(292)	$	(348)	$	119	$	36	$	2,292
Leases		1,262		501		249		-		-		2,012
Commercial real estate - Investor		6,218		(741)		2,226		15		37		7,725
Commercial real estate - Owner occupied		3,678		(848)		1,091		1,401		1		2,521
Construction		513		1,334		2,584		-		-		4,431
Residential real estate - Investor		601		740		854		5		27		2,217
Residential real estate - Owner occupied		1,257		1,320		538		43		132		3,204
Multifamily		1,444		1,732		342		-		-		3,518
HELOC		1,161		1,526		(543)		85		196		2,255
HELOC - Purchased		-		-		398		-		-		398
Other		640		607		(497)		139		89		700
	$	19,789	$	5,879	$	6,894	$	1,807	$	518	$	31,273

The following table presents activity in the allowance for loan and lease losses for the three and six months ended at June 30, 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 June 30, 2019
Commercial	$	3,052	$	386	$	67	$	6	$	3,377
Leases		805		156		-		-		961
Commercial real estate - Investor		5,719		576		-		12		6,307
Commercial real estate - Owner occupied		3,148		(133)		42		-		2,973
Construction		800		19		1		2		820
Real estate - Investor		636		(53)		-		3		586
Real estate - Owner occupied		1,320		(127)		-		11		1,204
Multifamily		1,153		77				-		1,230
HELOC		1,325		17		50		12		1,304
HELOC - Purchased		-		267		229		-		38
Other1		1,358		(735)		85		34		572
	$	19,316	$	450	$	474	$	80	$	19,372

Six months ended June 30, 2019
Commercial	$	2,832	$	588	$	79	$	36	$	3,377
Leases		734		227		-		-		961
Commercial real estate - Investor		5,492		927		144		32		6,307
Commercial real estate - Owner occupied		3,835		(736)		129		3		2,973
Construction		969		(149)		1		1		820
Residential real estate - Investor		629		(56)		6		19		586
Residential real estate - Owner occupied		1,302		(123)		12		37		1,204
Multifamily		1,143		79		-		8		1,230
HELOC		1,449		(153)		50		58		1,304
HELOC - Purchased		-		267		229		-		38
Other1		621		29		169		91		572
	$	19,006	$	900	$	819	$	285	$	19,372

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
June 30, 2020	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	-	$	13	$	2,151	$	2,164	$	439,478	$	441,642	$	-
Leases		93		415		181		689		132,604		133,293		-
Commercial real estate - Investor		242		430		1,515		2,187		523,527		525,714		-
Commercial real estate - Owner occupied		473		1,650		6,083		8,206		335,776		343,982		579
Construction		3,285		-		375		3,660		80,279		83,939		52
Residential real estate - Investor		80		160		689		929		68,492		69,421		-
Residential real estate - Owner occupied		6		314		1,307		1,627		124,676		126,303		209
Multifamily		4,133		821		69		5,023		192,498		197,521		-
HELOC		110		52		277		439		88,731		89,170		-
HELOC - Purchased		49		-		64		113		26,354		26,467		-
Other		31		1		8		40		14,844		14,884		-
Total	$	8,502	$	3,856	$	12,719	$	25,077	$	2,027,259	$	2,052,336	$	840

															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 June 30, 2020, and December 31, 2019:

	June 30, 2020				December 31, 2019
			Nonaccrual				Nonaccrual
	Nonaccrual		With no ACL		Nonaccrual		With no ACL
Commercial	$	2,168	$	2,166	$	144	$	-
Leases		181		103		329		70
Commercial real estate - Investor		1,968		1,968		1,695		1,590
Commercial real estate - Owner occupied		6,644		6,194		5,180		2,366
Construction		2,151		50		93		93
Residential real estate - Investor		845		845		788		788
Residential real estate - Owner occupied		3,259		2,626		2,572		2,475
Multifamily		69		69		68		68
HELOC		937		937		1,364		1,154
HELOC - Purchased		113		113		180		180
Other		8		1		19		2
Total, excluding PCI loans		18,343		15,072		12,432		8,786
PCI loans, net of purchase accounting adjustments		-		-		2,963		2,963
Total	$	18,343	$	15,072	$	15,395	$	11,749

The Company recognized $284,000 of interest on nonaccrual loans during the three months ended June 30, 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 June 30, 2020:

															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	153,129	$	44,105	$	18,257	$	9,747	$	3,352	$	3,368	$	191,684	$	-	$	423,642
Special Mention		120		1,609		68		15		359		32		7,170		-		9,373
Substandard1		507		23		2,623		-		1,972		-		3,502		-		8,627
Total commercial		153,756		45,737		20,948		9,762		5,683		3,400		202,356		-		441,642
Leases
Pass		29,370		61,681		21,732		8,897		8,470		2,371		-		-		132,521
Special Mention		-		518		-		-		-		-		-		-		518
Substandard1		-		-		-		73		181		-		-		-		254
Total leases		29,370		62,199		21,732		8,970		8,651		2,371		-		-		133,293
Commercial real estate - Investor
Pass		88,855		174,146		97,629		70,088		59,039		29,000		969		-		519,726
Special Mention		56		151		233		-		103		-		-		-		543
Substandard1		484		3,572		-		-		268		1,121		-		-		5,445
Total commercial real estate - investor		89,395		177,869		97,862		70,088		59,410		30,121		969		-		525,714
Commercial real estate - Owner occupied
Pass		46,088		54,932		81,718		48,807		53,601		40,323		1,163		-		326,632
Special Mention		-		-		464		2,168		5,286		-		-		-		7,918
Substandard1		1,130		2,787		1,147		1,762		1,472		1,134		-		-		9,432
Total commercial real estate - owner occupied		47,218		57,719		83,329		52,737		60,359		41,457		1,163		-		343,982
Construction
Pass		11,657		41,167		17,823		597		470		1,326		8,540		-		81,580
Special Mention		41		-		-		-		-		-		-		-		41
Substandard1		-		323		1,945		-		-		50		-		-		2,318
Total construction		11,698		41,490		19,768		597		470		1,376		8,540		-		83,939
Residential real estate - Investor
Pass		7,585		19,341		13,598		10,211		3,513		12,604		1,115		-		67,967
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		343		-		633		2		-		372		104		-		1,454
Total residential real estate - investor		7,928		19,341		14,231		10,213		3,513		12,976		1,219		-		69,421
Residential real estate - Owner occupied
Pass		6,345		26,051		15,223		23,746		11,256		37,674		1,738		-		122,033
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		48		-		267		619		547		2,789		-		-		4,270
Total residential real estate - owner occupied		6,393		26,051		15,490		24,365		11,803		40,463		1,738		-		126,303
Multifamily
Pass		10,067		54,973		45,603		45,780		13,777		19,460		207		-		189,867
Special Mention		-		-		1,527		557		8		-		-		-		2,092
Substandard1		-		-		2,103		961		124		2,374		-		-		5,562
Total multifamily		10,067		54,973		49,233		47,298		13,909		21,834		207		-		197,521
HELOC
Pass		2,550		2,470		1,763		2,605		785		1,123		76,171		-		87,467
Special Mention		-		-		-		-		-		-		13		-		13
Substandard1		-		1		73		37		259		58		1,262		-		1,690
Total HELOC		2,550		2,471		1,836		2,642		1,044		1,181		77,446		-		89,170
HELOC - Purchased

Pass		-		-		-		-		-		26,354		-		-		26,354
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		65		48		-		-		-		-		-		113
Total HELOC - purchased		-		65		48		-		-		26,354		-		-		26,467
Other
Pass		872		3,038		986		481		687		413		8,054		-		14,531
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		345		8		-		-		-		-		353
Total other		872		3,038		1,331		489		687		413		8,054		-		14,884
Total loans
Pass		356,518		481,904		314,332		220,959		154,950		174,016		289,641		-		1,992,320
Special Mention		217		2,278		2,292		2,740		5,756		32		7,183		-		20,498
Substandard1		2,512		6,771		9,184		3,462		4,823		7,898		4,868		-		39,518
Total loans	$	359,247	$	490,953	$	325,808	$	227,161	$	165,529	$	181,946	$	301,692	$	-	$	2,052,336

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 $598,000 and $831,000 in residential real estate loans in the process of foreclosure as of June 30, 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.  Additionally, in accordance with interagency guidance, short-term deferrals granted due to the COVID-19 pandemic are not considered TDRs unless the borrower was experiencing financial difficulty prior to the pandemic.

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 June 30, 2020					Six Months Ended June 30, 2020
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Residential real estate - Owner occupied
HAMP1	2	$	256	$	253	2	$	256	$	253
Total	2	$	256	$	253	2	$	256	$	253

	TDR Modifications					TDR Modifications
	Three Months Ended June 30, 2019					Six Months Ended June 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
Commercial real estate - owner occupied
Other2	-	$	-	$	-	1	$	58	$	57
Residential real estate - owner occupied
HAMP1	2		294		292	3		399		299
HELOC
HAMP1	-		-		-	1		39		34
Other2	-		-		-	1		39		39
Total	2	$	294	$	292	6	$	535	$	429

¹ HAMP: Home Affordable Modification Program.

² Other: Change of terms from bankruptcy court.

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 June 30, 2020, and June 30, 2019, for loans that were restructured within the prior 12 month period.