Loans and Allowance for Credit Losses on Loans

12 Months Ended

Dec. 31, 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

The composition of loans by portfolio segment as of December 31, were as follows:

	2020		2019
Commercial 1	$	407,159	$	332,842
Leases		141,601		119,751
Commercial real estate - Investor		582,042		520,095
Commercial real estate - Owner occupied		333,070		345,504
Construction		98,486		69,617
Residential real estate - Investor		56,137		71,105
Residential real estate - Owner occupied		116,388		136,023
Multifamily		189,040		189,773
HELOC		80,908		91,605
HELOC - Purchased		19,487		31,852
Other 2		10,533		12,258
Total loans, excluding deferred loan costs and PCI loans 3		2,034,851		1,920,425
Net deferred loan costs		-		1,786
Total loans, excluding PCI loans 3		2,034,851		1,922,211
PCI loans		-		8,601
Total loans, including deferred loan costs and PCI loans 3	$	2,034,851	$	1,930,812
Allowance for credit losses on loans		(33,855)		(19,789)
Net loans 4	$	2,000,996	$	1,911,023

¹ Includes $74.1 million of PPP loans at December 31, 2020

²  Unless otherwise noted, the “Other” segment includes consumer loans and overdrafts in this table and in subsequent tables within Note 4 - Loans and Allowance for Credit Losses on Loans.

³  After the Company’s adoption of CECL, all PCD loans are included within each relevant portfolio segment and are not separately reported as PCI loans.

⁴  Excludes accrued interest receivable of $7.0 million and $6.5 million at December 31, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.

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 above represent 72.5% and 75.4% of the portfolio at December 31, 2020 and December 31, 2019, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.  

The following table represent the activity in the ACL for loans for the year ended December 31, 2020:

			Impact of		Provision
	Beginning		Adopting		for Credit						Ending
	Balance		ASC 326		Losses		Charge-offs		Recoveries		Balance
Commercial	$	3,015	$	(292)	$	72	$	39	$	56	$	2,812
Leases		1,262		501		2,233		206		98		3,888
Commercial real estate - Investor		6,218		(741)		4,075		512		165		9,205
Commercial real estate - Owner occupied		3,678		(848)		487		1,763		697		2,251
Construction		513		1,334		2,095		60		172		4,054
Residential real estate - Investor		601		740		350		8		57		1,740
Residential real estate - Owner occupied		1,257		1,320		(107)		43		287		2,714
Multifamily		1,444		1,732		449		-		-		3,625
HELOC		1,161		1,526		(1,198)		127		387		1,749
HELOC - Purchased		-		-		265		66		-		199
Other		640		607		445		244		170		1,618
Ending Balance, December 31, 2020	$	19,789	$	5,879	$	9,166	$	3,068	$	2,089	$	33,855

The following table presents activity in the allowance for loan and lease losses for the years ended December 31, 2019 and December 31, 2018, 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
Commercial	$	2,832	$	218	$	109	$	74	$	3,015
Leases		734		577		49		-		1,262
Commercial real estate - Investor		6,339		(497)		303		679		6,218
Commercial real estate - Owner occupied		3,515		874		716		5		3,678
Construction		969		(448)		9		1		513
Residential real estate - Investor		554		43		7		11		601
Residential real estate - Owner occupied		1,377		(86)		111		77		1,257
Multifamily		616		813		-		15		1,444
HELOC		1,449		(351)		109		172		1,161
HELOC - Purchased		-		229		229		-		-
Other		621		228		409		200		640
Ending Balance, December 31, 2019	$	19,006	$	1,600	$	2,051	$	1,234	$	19,789

			Provision
	Beginning		for Loan						Ending
Allowance for loan and lease losses:	Balance		Losses		Charge-offs		Recoveries		Balance
Commercial	$	2,453	$	263	$	41	$	157	$	2,832
Leases		692		55		13		-		734
Commercial real estate - Investor		5,020		2,255		1,376		440		6,339
Commercial real estate - Owner occupied		3,157		523		172		7		3,515
Construction		923		(5)		(16)		35		969
Residential real estate - Investor		542		(110)		(13)		109		554
Residential real estate - Owner occupied		1,304		(784)		(10)		847		1,377
Multifamily		1,345		(941)		(22)		190		616
HELOC		1,446		(214)		147		364		1,449
HELOC - Purchased		-		-		-		-		-
Other		579		186		409		265		621
Ending Balance, December 31, 2018	$	17,461	$	1,228	$	2,097	$	2,414	$	19,006

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

			Accounts								ACL
December 31, 2020	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,070	$	-	$	55	$	1,125	$	56
Leases		-		-		2,377		597		2,974		880
Commercial real estate - Investor		4,179		-		-		-		4,179		84
Commercial real estate - Owner occupied		9,726		-		-		-		9,726		195
Construction		1,891		-		-		-		1,891		952
Residential real estate - Investor		928		-		-		-		928		-
Residential real estate - Owner occupied		3,535		-		-		-		3,535		10
Multifamily		3,838		-		-		-		3,838		378
HELOC		1,053		-		-		-		1,053		78
HELOC - Purchased		-		-		-		-		-		-
Other		-		-		-		4		4		4
Total	$	25,150	$	1,070	$	2,377	$	656	$	29,253	$	2,637

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

													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
December 31, 2020 1	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	-	$	-	$	52	$	52	$	407,107	$	407,159	$	-
Leases		613		59		316		988		140,613		141,601		163
Commercial real estate - Investor		1,439		-		1,108		2,547		579,495		582,042		-
Commercial real estate - Owner occupied		1,848		958		7,309		10,115		322,955		333,070		-
Construction		1,237		-		-		1,237		97,249		98,486		-
Residential real estate - Investor		1,022		20		484		1,526		54,611		56,137		157
Residential real estate - Owner occupied		859		286		717		1,862		114,526		116,388		114
Multifamily		3,282		467		-		3,749		185,291		189,040		-
HELOC		549		50		206		805		80,103		80,908		-
HELOC - Purchased		47		-		-		47		19,440		19,487		-
Other		20		-		-		20		10,513		10,533		-
Total	$	10,916	$	1,840	$	10,192	$	22,948	$	2,011,903	$	2,034,851	$	434

¹ Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.  

There were 499 loans which totaled $231.3 million modified under the CARES Act.  As of December 31, 2020, 51 loans of the original 499 loans deferred, or $32.7 million, had an active deferral request and were in compliance with modified terms; 448 loans which totaled $198.6 million had resumed payments or paid off.  Details of loans in active deferral is below:

December 31, 2020	1st Deferral		2nd Deferral		3rd Deferral		Total
Loans modified under CARES Act, in deferral	$	9,431	$	19,906	$	3,408	$	32,745
Loans modified under CARES Act, in nonaccrual, within deferral above		999		1,230		2,121		4,350

The following table presents the age analysis of past due loans as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

															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 loans, overdrafts and net deferred costs.

The following table presents all nonaccrual loans and loans on nonaccrual for which there was no related allowance for credit losses as of:

	December 31, 2020				December 31, 2019
			Nonaccrual				Nonaccrual
	Nonaccrual		With no ACL		Nonaccrual		With no ACL
Commercial	$	1,125	$	1,070	$	144	$	-
Leases		2,638		309		329		70
Commercial real estate - Investor		1,632		1,632		1,695		1,590
Commercial real estate - Owner occupied		9,262		6,780		5,180		2,366
Construction		-		-		93		93
Residential real estate - Investor		928		928		788		788
Residential real estate - Owner occupied		3,206		3,206		2,572		2,475
Multifamily		2,437		2,437		68		68
HELOC		1,052		845		1,364		1,154
HELOC - Purchased		-		-		180		180
Other1		-		-		19		2
Total, excluding PCI loans		22,280		17,207		12,432		8,786
PCI loans, net of purchase accounting adjustments		-		-		2,963		2,963
Total	$	22,280	$	17,207	$	15,395	$	11,749

The Company recognized $70,000 of interest on nonaccrual loans during the year ended December 31, 2020. The amount of accrued interest reversed against interest income totaled $377,000 for the year ended December 31, 2020.

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:

															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	101,796	$	42,294	$	14,519	$	6,265	$	1,825	$	1,691	$	230,388	$	-	$	398,778
Special Mention		5,130		425		68		-		3		-		76		-		5,702
Substandard		273		52		1,524		-		-		-		830		-		2,679
Total commercial		107,199		42,771		16,111		6,265		1,828		1,691		231,294		-		407,159
Leases
Pass		56,605		52,168		16,830		6,545		5,242		651		-		-		138,041
Special Mention		175		163		-		-		-		-		-		-		338
Substandard		-		1,434		798		59		450		481		-		-		3,222
Total leases		56,780		53,765		17,628		6,604		5,692		1,132		-		-		141,601
Commercial real estate - Investor
Pass		173,781		158,677		92,156		66,762		55,963		15,966		1,319		-		564,624
Special Mention		2,394		9,592		220		-		95		-		-		-		12,301
Substandard		2,709		1,126		71		-		340		871		-		-		5,117
Total commercial real estate - investor		178,884		169,395		92,447		66,762		56,398		16,837		1,319		-		582,042
Commercial real estate - Owner occupied
Pass		72,605		52,809		73,719		45,315		50,000		25,507		1,324		-		321,279
Special Mention		604		-		-		-		-		-		-		-		604
Substandard		1,564		2,154		1,780		1,664		501		3,524		-		-		11,187
Total commercial real estate - owner occupied		74,773		54,963		75,499		46,979		50,501		29,031		1,324		-		333,070
Construction
Pass		50,170		24,163		7,203		539		218		1,261		9,702		-		93,256
Special Mention		38		-		-		-		-		-		-		-		38
Substandard		-		3,135		2,057		-		-		-		-		-		5,192
Total construction		50,208		27,298		9,260		539		218		1,261		9,702		-		98,486
Residential real estate - Investor
Pass		9,371		14,194		8,522		7,775		2,431		11,184		1,144		-		54,621
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		349		-		610		-		91		466		-		-		1,516
Total residential real estate - investor		9,720		14,194		9,132		7,775		2,522		11,650		1,144		-		56,137
Residential real estate - Owner occupied
Pass		18,308		23,450		10,808		15,409		10,394		31,325		2,654		-		112,348
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		47		-		412		219		526		2,836		-		-		4,040
Total residential real estate - owner occupied		18,355		23,450		11,220		15,628		10,920		34,161		2,654		-		116,388
Multifamily
Pass		40,671		30,849		44,301		38,133		12,147		7,735		197		-		174,033
Special Mention		-		6,901		-		548		-		-		-		-		7,449
Substandard		69		-		4,254		927		118		2,190		-		-		7,558
Total multifamily		40,740		37,750		48,555		39,608		12,265		9,925		197		-		189,040
HELOC
Pass		2,511		2,174		1,679		2,120		504		803		69,483		-		79,274
Special Mention		-		-		-		-		-		-		94		-		94
Substandard		-		-		86		37		271		91		1,055		-		1,540

Total HELOC		2,511		2,174		1,765		2,157		775		894		70,632		-		80,908
HELOC - Purchased
Pass		-		-		-		-		-		19,487		-		-		19,487
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		19,487		-		-		19,487
Other
Pass		1,555		574		569		229		559		341		6,702		-		10,529
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		4		-		-		-		-		-		4
Total other		1,555		574		573		229		559		341		6,702		-		10,533
Total loans
Pass		527,373		401,352		270,306		189,092		139,283		115,951		322,913		-		1,966,270
Special Mention		8,341		17,081		288		548		98		-		170		-		26,526
Substandard		5,011		7,901		11,596		2,906		2,297		10,459		1,885		-		42,055
Total loans	$	540,725	$	426,334	$	282,190	$	192,546	$	141,678	$	126,410	$	324,968	$	-	$	2,034,851

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

December 31, 2019			Special
	Pass		Mention		Substandard		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.

The Company had $546,000 and $831,000 in consumer mortgage loans in the process of foreclosure as of December 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 amount of expected loan losses for TDRs is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the underlying collateral less applicable selling costs, or the observable market price of the loan.

The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31,

2019, (ii) the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022.

The number of loans that were modified during the period, including the amortized cost basis pre- and post-modification are summarized as follows:

	TDR Modifications
	Year Ended December 31, 2020
	# of	Pre-modification		Post-modification
	contracts	balance		balance
Troubled debt restructurings
Residential real estate - Owner occupied
HAMP1	3	$	410	$	395
Total	3	$	410	$	395

	TDR Modifications
	Year Ended December 31, 2019
	# of	Pre-modification		Post-modification
	contracts	balance		balance
Troubled debt restructurings
Commercial real estate - Investor
Other2	2	$	1,217	$	1,200
Commercial real estate - Owner Occupied
Deferral3	1		421		418
Residential real estate - Owner occupied
HAMP1	3		399		293
HELOC
Other2	1		39		38
Total	7	$	2,076	$	1,949

¹ HAMP: Home Affordable Modification Program

² Other: Change of terms from bankruptcy court

³ Deferral: Refers to the deferral of principal

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 no TDRs that defaulted during year 2020 and $39,000 of HELOC TDRs that defaulted during year 2019.

As of December 31, 2020 and 2019, there were no commitments to lend additional funds to debtors whose terms have been modified in a TDR.

There were no loans purchased and/or sold during year 2020.

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

	2020		2019
Beginning balance	$	961	$	1,417
New loans		644		634
Repayments and other reductions		(822)		(1,025)
Change in related party status		-		(65)
Ending balance	$	783	$	961