Loans and Allowance for Credit Losses on Loans

9 Months Ended

Sep. 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:

	September 30, 2020		December 31, 2019
Commercial	$	436,277	$	332,842
Leases		133,676		119,751
Commercial real estate - Investor		548,970		520,095
Commercial real estate - Owner occupied		335,978		345,504
Construction		91,856		69,617
Residential real estate - Investor		61,923		71,105
Residential real estate - Owner occupied		114,283		136,023
Multifamily		188,398		189,773
HELOC		85,882		91,605
HELOC - Purchased		22,312		31,852
Other 1		10,772		12,258
Total loans, excluding deferred loan costs and PCI loans 2		2,030,327		1,920,425
Net deferred loan costs		-		1,786
Total loans, excluding PCI loans 2		2,030,327		1,922,211
PCI loans		-		8,601
Total loans, including deferred loan costs and PCI loans 2	$	2,030,327	$	1,930,812
Allowance for credit losses on loans		(32,918)		(19,789)
Net loans 3	$	1,997,409	$	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 $7.1 million and $6.5 million at September 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 71.4% and 75.4% of the portfolio at September 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 September 30, 2020:

			Accounts								ACL
September 30, 2020	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,543	$	64	$	-	$	1,607	$	65
Leases		-		-		3,744		-		3,744		911
Commercial real estate - Investor		4,580		-		-		-		4,580		92
Commercial real estate - Owner occupied		10,846		-		-		-		10,846		198
Construction		1,883		-		-		-		1,883		944
Residential real estate - Investor		935		-		-		-		935		-
Residential real estate - Owner occupied		3,559		-		-		-		3,559		11
Multifamily		2,305		-		-		-		2,305		384
HELOC		1,047		-		-		-		1,047		96
HELOC - Purchased		-		-		-		-		-		-
Other		-		-		-		10		10		6
Total	$	25,155	$	1,543	$	3,808	$	10	$	30,516	$	2,707

The following table presents the activity in the allowance for credit losses (“ACL”) for the three and nine months ended September 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 September 30, 2020
Commercial	$	2,292	$	-	$	98	$	5	$	12	$	2,397
Leases		2,012		-		1,965		119		-		3,858
Commercial real estate - Investor		7,725		-		783		-		102		8,610
Commercial real estate - Owner occupied		2,521		-		(535)		145		565		2,406
Construction		4,431		-		406		60		1		4,778
Real estate - Investor		2,217		-		(290)		3		18		1,942
Real estate - Owner occupied		3,204		-		(508)		-		25		2,721
Multifamily		3,518		-		(301)		-		-		3,217
HELOC		2,255		-		(359)		-		52		1,948
HELOC - Purchased		398		-		(43)		66		-		289
Other1		700		-		64		53		41		752
	$	31,273	$	-	$	1,280	$	451	$	816	$	32,918

Nine months ended September 30, 2020
Commercial	$	3,015	$	(292)	$	(250)	$	124	$	48	$	2,397
Leases		1,262		501		2,214		119		-		3,858
Commercial real estate - Investor		6,218		(741)		3,009		15		139		8,610
Commercial real estate - Owner occupied		3,678		(848)		556		1,546		566		2,406
Construction		513		1,334		2,990		60		1		4,778
Residential real estate - Investor		601		740		564		8		45		1,942
Residential real estate - Owner occupied		1,257		1,320		30		43		157		2,721
Multifamily		1,444		1,732		41		-		-		3,217
HELOC		1,161		1,526		(902)		85		248		1,948
HELOC - Purchased		-		-		355		66		-		289
Other		640		607		(433)		192		130		752
	$	19,789	$	5,879	$	8,174	$	2,258	$	1,334	$	32,918

The ACL on loans excludes $4.0 million of allowance for unfunded commitments, recorded within Other Liabilities, as of September 30, 2020.

The following table presents activity in the allowance for loan and lease losses for the three and nine months ended at September 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 September 30, 2019
Commercial	$	3,377	$	(49)	$	20	$	10	$	3,318
Leases		961		66		47		-		980
Commercial real estate - Investor		6,307		(431)		159		12		5,729
Commercial real estate - Owner occupied		2,973		428		-		-		3,401
Construction		820		(7)		7		-		806
Real estate - Investor		586		(6)		1		7		586
Real estate - Owner occupied		1,204		62		2		15		1,279
Multifamily		1,230		(78)		-		-		1,152
HELOC		1,304		(79)		19		21		1,227
HELOC - Purchased		38		(2)		-		-		36
Other1		572		646		142		61		1,137
	$	19,372	$	550	$	397	$	126	$	19,651

Nine months ended September 30, 2019
Commercial	$	2,832	$	539	$	99	$	46	$	3,318
Leases		734		293		47		-		980
Commercial real estate - Investor		5,492		496		303		44		5,729
Commercial real estate - Owner occupied		3,835		(308)		129		3		3,401
Construction		969		(156)		8		1		806
Residential real estate - Investor		629		(62)		7		26		586
Residential real estate - Owner occupied		1,302		(61)		14		52		1,279
Multifamily		1,143		1		-		8		1,152
HELOC		1,449		(232)		69		79		1,227
HELOC - Purchased		-		265		229		-		36
Other1		621		675		311		152		1,137
	$	19,006	$	1,450	$	1,216	$	411	$	19,651

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

Aged analysis of past due loans by segments 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
September 30, 20201	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	56	$	-	$	1,368	$	1,424	$	434,853	$	436,277	$	-
Leases		64		105		339		508		133,168		133,676		169
Commercial real estate - Investor		6		128		1,655		1,789		547,181		548,970		-
Commercial real estate - Owner occupied		1,965		-		7,618		9,583		326,395		335,978		207
Construction		-		-		-		-		91,856		91,856		-
Residential real estate - Investor		63		-		324		387		61,536		61,923		-
Residential real estate - Owner occupied		220		500		391		1,111		113,172		114,283		44
Multifamily		2,664		-		707		3,371		185,027		188,398		-
HELOC		313		19		175		507		85,375		85,882		2
HELOC - Purchased		-		-		-		-		22,312		22,312		-
Other2		14		-		-		14		10,758		10,772		-
Total	$	5,365	$	752	$	12,577	$	18,694	$	2,011,633	$	2,030,327	$	422

¹ Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.  There were 468 loans which totaled $226.2 million modified under the CARES Act.  As of September 30, 2020, 96 loans of the original 468 loans deferred, or $54.1 million, had an active deferral request and were in compliance with modified terms; 372 loans which totaled $172.1 million had resumed payments.

² The “Other” segment includes consumer and overdrafts.

															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” segment includes consumer, overdrafts and net deferred costs.

The table presents all nonaccrual loans and loans on nonaccrual for which there was no related allowance for credit losses as of September 30, 2020, and December 31, 2019:

	September 30, 2020				December 31, 2019
			Nonaccrual				Nonaccrual
	Nonaccrual		With no ACL		Nonaccrual		With no ACL
Commercial	$	1,605	$	50	$	144	$	-
Leases		1,910		1,910		329		70
Commercial real estate - Investor		2,021		2,021		1,695		1,590
Commercial real estate - Owner occupied		8,428		5,944		5,180		2,366
Construction		-		-		93		93
Residential real estate - Investor		935		935		788		788
Residential real estate - Owner occupied		3,229		3,229		2,572		2,475
Multifamily		895		895		68		68
HELOC		1,047		835		1,364		1,154
HELOC - Purchased		-		-		180		180
Other		6		-		19		2
Total, excluding PCI loans		20,076		15,819		12,432		8,786
PCI loans, net of purchase accounting adjustments		-		-		2,963		2,963
Total	$	20,076	$	15,819	$	15,395	$	11,749

The Company recognized $93,000 of interest on nonaccrual loans during the three months ended September 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 the 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 September 30, 2020:

															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	161,595	$	42,502	$	16,568	$	7,215	$	3,096	$	2,755	$	188,270	$	-	$	422,001
Special Mention		443		1,564		68		13		4		16		6,176		-		8,284
Substandard1		2,252		52		2,036		-		-		13		1,639		-		5,992
Total commercial		164,290		44,118		18,672		7,228		3,100		2,784		196,085		-		436,277
Leases
Pass		39,333		55,923		18,937		7,755		6,463		1,196		-		-		129,607
Special Mention		-		799		-		-		-		-		-		-		799
Substandard1		-		1,255		1,004		64		467		480		-		-		3,270
Total leases		39,333		57,977		19,941		7,819		6,930		1,676		-		-		133,676
Commercial real estate - Investor
Pass		128,123		168,503		92,140		70,566		56,666		24,362		868		-		541,228
Special Mention		1,816		-		231		-		99		-		-		-		2,146
Substandard1		474		3,783		-		-		345		994		-		-		5,596
Total commercial real estate - investor		130,413		172,286		92,371		70,566		57,110		25,356		868		-		548,970
Commercial real estate - Owner occupied
Pass		55,107		54,702		78,655		45,928		51,895		30,174		1,083		-		317,544
Special Mention		925		-		464		2,141		5,246		-		-		-		8,776
Substandard1		185		2,454		1,088		1,695		708		3,528		-		-		9,658
Total commercial real estate - owner occupied		56,217		57,156		80,207		49,764		57,849		33,702		1,083		-		335,978
Construction
Pass		28,182		40,302		6,972		589		245		1,283		9,136		-		86,709
Special Mention		39		-		-		-		-		-		-		-		39
Substandard1		-		3,058		2,050		-		-		-		-		-		5,108
Total construction		28,221		43,360		9,022		589		245		1,283		9,136		-		91,856
Residential real estate - Investor
Pass		10,497		14,632		11,721		8,488		2,558		11,985		516		-		60,397
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		340		-		614		-		99		473		-		-		1,526
Total residential real estate - investor		10,837		14,632		12,335		8,488		2,657		12,458		516		-		61,923
Residential real estate - Owner occupied
Pass		8,747		23,545		12,094		18,796		10,716		33,867		2,682		-		110,447
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		48		-		412		221		535		2,620		-		-		3,836
Total residential real estate - owner occupied		8,795		23,545		12,506		19,017		11,251		36,487		2,682		-		114,283
Multifamily
Pass		27,856		37,940		45,291		45,516		13,143		10,514		202		-		180,462
Special Mention		-		-		1,544		552		7		-		-		-		2,103

Substandard1		69		-		2,687		901		119		2,057		-		-		5,833
Total multifamily		27,925		37,940		49,522		46,969		13,269		12,571		202		-		188,398
HELOC
Pass		2,185		2,287		1,697		2,471		694		1,197		73,772		-		84,303
Special Mention		-		-		-		-		-		-		13		-		13
Substandard1		-		-		88		37		265		93		1,083		-		1,566
Total HELOC		2,185		2,287		1,785		2,508		959		1,290		74,868		-		85,882
HELOC - Purchased
Pass		-		-		-		-		-		22,312		-		-		22,312
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		22,312		-		-		22,312
Other
Pass		995		1,415		451		320		468		324		6,527		-		10,500
Special Mention		-		-		-		-		-		-		-		-		-
Substandard1		-		-		266		6		-		-		-		-		272
Total other		995		1,415		717		326		468		324		6,527		-		10,772
Total loans
Pass		462,620		441,751		284,526		207,644		145,944		139,969		283,056		-		1,965,510
Special Mention		3,223		2,363		2,307		2,706		5,356		16		6,189		-		22,160
Substandard1		3,368		10,602		10,245		2,924		2,538		10,258		2,722		-		42,657
Total loans	$	469,211	$	454,716	$	297,078	$	213,274	$	153,838	$	150,243	$	291,967	$	-	$	2,030,327

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” segment 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 $541,000 and $831,000 in residential real estate loans in the process of foreclosure as of September 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 credit 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 credit 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 credit 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, 2020					Nine Months Ended September 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	1	$	154	$	153	3	$	410	$	404
Total	1	$	154	$	153	3	$	410	$	404

	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
Commercial real estate - Investor
Other2	1	$	1,159	$	1,122	2	$	1,217	$	1,177
Residential real estate - Owner occupied
HAMP1	-		-		-	3		399		297
HELOC
HAMP1	-		-		-	1		39		34
Other2	-		-		-	1		39		38
Total	1	$	1,159	$	1,122	7	$	1,694	$	1,546

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