Loans and Allowance for Credit Losses on Loans

6 Months Ended

Jun. 30, 2021

Loans and Allowance for Credit Losses on Loans

Loans and Allowance for Credit Losses on Loans

Note 3 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:

	June 30, 2021		December 31, 2020
Commercial 1	$	344,084	$	407,159
Leases		154,512		141,601
Commercial real estate - Investor		569,745		582,042
Commercial real estate - Owner occupied		318,259		333,070
Construction		100,544		98,486
Residential real estate - Investor		50,127		56,137
Residential real estate - Owner occupied		105,419		116,388
Multifamily		161,628		189,040
HELOC		72,475		80,908
HELOC - Purchased		14,436		19,487
Other 2		12,137		10,533
Total loans		1,903,366		2,034,851
Allowance for credit losses on loans		(28,639)		(33,855)
Net loans3	$	1,874,727	$	2,000,996

¹ Includes $70.2 million and $74.1 million of Paycheck Protection Program (“PPP”) loans at June 30, 2021 and December 31, 2020, respectively.

² The “Other” segment includes consumer and overdrafts in this table and in subsequent tables within Note 3 - Loans and Allowance for Credit Losses on Loans.

³ Excludes accrued interest receivable of $6.5 million and $7.0 million at June 30, 2021 and December 31, 2020, 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 seeks to assure access to collateral, in the event of borrower default, 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 73.2% and 72.5% of the portfolio at June 30, 2021, and December 31, 2020, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.  

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three months and six months ended June 30, 2021 and June 30, 2020:

			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended June 30, 2021
Commercial	$	3,276	$	(485)	$	207	$	17	$	2,601
Leases		3,382		34		28		-		3,388
Commercial real estate - Investor		7,908		2,509		-		20		10,437
Commercial real estate - Owner occupied		1,722		(615)		31		10		1,086
Construction		3,719		(671)		-		-		3,048
Residential real estate - Investor		1,803		(838)		-		10		975
Residential real estate - Owner occupied		2,528		(723)		-		61		1,866
Multifamily		4,265		(999)		-		-		3,266
HELOC		1,713		(181)		5		77		1,604
HELOC - Purchased		295		(66)		-		-		229
Other		356		(228)		30		41		139
Ending Balance, June 30, 2021	$	30,967	$	(2,263)	$	301	$	236	$	28,639

			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Six months ended June 30, 2021
Commercial	$	2,812	$	(39)	$	209	$	37	$	2,601
Leases		3,888		(472)		28		-		3,388
Commercial real estate - Investor		9,205		1,192		-		40		10,437
Commercial real estate - Owner occupied		2,251		(1,349)		34		218		1,086
Construction		4,054		(1,006)		-		-		3,048
Residential real estate - Investor		1,740		(1,041)		-		276		975
Residential real estate - Owner occupied		2,714		(958)		-		110		1,866
Multifamily		3,625		(359)		-		-		3,266
HELOC		1,749		(229)		17		101		1,604
HELOC - Purchased		199		30		-		-		229
Other		1,618		(1,502)		55		78		139
Ending Balance, June 30, 2021	$	33,855	$	(5,733)	$	343	$	860	$	28,639

			Impact of		Provision for
	Beginning		Adopting		(Release of)						Ending
Allowance for credit losses	Balance		ASC 326		Credit 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
Residential real estate - Investor		1,896		-		319		4		6		2,217
Residential 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
Other		651		-		61		41		29		700
Ending Balance, June 30, 2020	$	30,045	$	-	$	1,395	$	406	$	239	$	31,273

			Impact of		Provision for
Allowance for credit losses	Beginning		Adopting		(Release of)						Ending
Six months ended June 30, 2020	Balance		ASC 326		Credit Losses		Charge-offs		Recoveries		Balance
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
Ending Balance, June 30, 2020	$	19,789	$	5,879	$	6,894	$	1,807	$	518	$	31,273

The ACL on loans excludes $2.2 million, $3.0 million and $5.0 million of allowance for unfunded commitments, recorded within Other Liabilities, as of June 30, 2021, December 31, 2020 and June 30, 2020, respectively.

The following tables presents the collateral dependent loans and the related ACL allocated by segment of loans as of June 30, 2021 and December 31, 2020:

			Accounts								ACL
June 30, 2021	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	-	$	-	$	427	$	427	$	204
Leases		-		-		2,098		602		2,700		781
Commercial real estate - Investor		8,106		-		-		-		8,106		2,002
Commercial real estate - Owner occupied		4,547		-		-		2,534		7,081		1
Construction		5,601		-		-		-		5,601		1,135
Residential real estate - Investor		824		-		-		-		824		-
Residential real estate - Owner occupied		3,553		-		-		-		3,553		3
Multifamily		4,568		-		-		109		4,677		404
HELOC		824		-		-		-		824		18
Other		195		-		-		2		197		2
Total	$	28,218	$	-	$	2,098	$	3,674	$	33,990	$	4,550
			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
Other		-		-		-		4		4		4
Total	$	25,150	$	1,070	$	2,377	$	656	$	29,253	$	2,637

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
June 30, 2021 1	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	15	$	-	$	-	$	15	$	344,069	$	344,084	$	-
Leases		-		41		96		137		154,375		154,512		-
Commercial real estate - Investor		272		695		1,213		2,180		567,565		569,745		-
Commercial real estate - Owner occupied		3,583		-		2,977		6,560		311,699		318,259		-
Construction		-		-		3,165		3,165		97,379		100,544		-
Residential real estate - Investor		-		872		289		1,161		48,966		50,127		-
Residential real estate - Owner occupied		151		624		419		1,194		104,225		105,419		136
Multifamily		602		3,787		69		4,458		157,170		161,628		-
HELOC		546		13		144		703		71,772		72,475		-
HELOC - Purchased		-		181		-		181		14,255		14,436		-
Other		14		1		195		210		11,927		12,137		-
Total	$	5,183	$	6,214	$	8,567	$	19,964	$	1,883,402	$	1,903,366	$	136

													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 506 loans which totaled $237.8 million modified under the CARES Act.  As of June 30, 2021, 18 loans of the original 506 loans deferred, or $9.1 million, had an active deferral request and were in compliance with modified terms; 488 loans which totaled $228.7 million had resumed payments or paid off.  Details of loans in active deferral is below:

June 30, 2021	1st Deferral		2nd Deferral		3rd Deferral		Total
Loans modified under CARES Act, in deferral	$	1,020	$	4,623	$	3,411	$	9,054
Loans modified under CARES Act, in nonaccrual, within deferral above		234		-		2,132		2,366

The table presents all nonaccrual loans as of June 30, 2021, and December 31, 2020:

Nonaccrual loan detail	June 30, 2021		December 31, 2020
Commercial	$	-	$	1,125
Leases		2,526		2,638
Commercial real estate - Investor		1,915		1,632
Commercial real estate - Owner occupied		7,078		9,262
Construction		3,470		-
Residential real estate - Investor		840		928
Residential real estate - Owner occupied		3,227		3,206
Multifamily		2,723		2,437
HELOC		810		1,052
HELOC - Purchased		-		-
Other		195		-
Total	$	22,784	$	22,280

The Company recognized $28,000 of interest on nonaccrual loans during the three months ended June 30, 2021.

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.

Credit quality indicators by loan segment and loan origination date at June 30, 2021, were as follows:

															Revolving
															Loans
															Converted
													Revolving		To Term
	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
Commercial
Pass	$	87,813	$	35,182		27,621		12,621		4,678		2,498	$	170,178	$	-	$	340,591
Special Mention		567		1,189		191		-		-		-		1,064		-		3,011
Substandard		-		247		-		40		-		195		-		-		482
Total commercial		88,380		36,618		27,812		12,661		4,678		2,693		171,242		-		344,084
Leases
Pass		38,261		51,699		42,759		11,932		3,229		3,452		-		-		151,332
Special Mention		-		173		-		-		-		-		-		-		173
Substandard		-		-		1,413		687		42		865		-		-		3,007
Total leases		38,261		51,872		44,172		12,619		3,271		4,317		-		-		154,512
Commercial real estate - Investor
Pass		58,023		158,457		145,880		80,702		52,065		51,276		1,407		-		547,810
Special Mention		-		-		10,662		-		6,033		177		-		-		16,872
Substandard		2,216		514		1,147		190		-		996		-		-		5,063
Total commercial real estate - investor		60,239		158,971		157,689		80,892		58,098		52,449		1,407		-		569,745
Commercial real estate - Owner occupied
Pass		41,806		68,003		48,974		54,119		40,946		52,871		2,247		-		308,966
Special Mention		-		591		-		-		-		-		-		-		591
Substandard		-		3,743		1,753		80		1,436		1,690		-		-		8,702
Total commercial real estate - owner occupied		41,806		72,337		50,727		54,199		42,382		54,561		2,247		-		318,259
Construction
Pass		23,941		42,760		17,077		1,633		523		1,248		6,881		-		94,063
Special Mention		-		-		1,088		-		-		-		-		-		1,088
Substandard		179		-		3,291		1,923		-		-		-		-		5,393
Total construction		24,120		42,760		21,456		3,556		523		1,248		6,881		-		100,544
Residential real estate - Investor
Pass		1,576		7,676		11,638		7,253		7,430		11,618		1,854		-		49,045
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		585		-		497		-		-		1,082
Total residential real estate - investor		1,576		7,676		11,638		7,838		7,430		12,115		1,854		-		50,127
Residential real estate - Owner occupied
Pass		5,921		17,378		19,929		8,303		11,738		35,651		1,921		-		100,841
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		65		47		-		409		181		3,876		-		-		4,578
Total residential real estate - owner occupied		5,986		17,425		19,929		8,712		11,919		39,527		1,921		-		105,419
Multifamily
Pass		14,999		29,431		28,436		38,226		25,518		8,988		34		-		145,632
Special Mention		-		-		6,900		619		-		-		-		-		7,519

Substandard		-		68		602		3,943		919		2,945		-		-		8,477
Total multifamily		14,999		29,499		35,938		42,788		26,437		11,933		34		-		161,628
HELOC
Pass		17		2,188		2,060		1,290		1,638		1,187		62,897		-		71,277
Special Mention		-		-		-		-		-		-		108		-		108
Substandard		-		29		-		32		34		238		757		-		1,090
Total HELOC		17		2,217		2,060		1,322		1,672		1,425		63,762		-		72,475
HELOC - Purchased
Pass		-		-		-		-		-		14,436		-		-		14,436
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		14,436		-		-		14,436
Other
Pass		3,024		1,829		702		249		144		244		5,943		-		12,135
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		2		-		-		-		-		2
Total other		3,024		1,829		702		251		144		244		5,943		-		12,137
Total loans
Pass		275,381		414,603		345,076		216,328		147,909		183,469		253,362		-		1,836,128
Special Mention		567		1,953		18,841		619		6,033		177		1,172		-		29,362
Substandard		2,460		4,648		8,206		7,891		2,612		11,302		757		-		37,876
Total loans	$	278,408	$	421,204	$	372,123	$	224,838	$	156,554	$	194,948	$	255,291	$	-	$	1,903,366

Credit quality indicators by loan segment and loan origination date at December 31, 2020, 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

The Company had $632,000 and $546,000 in residential real estate loans in the process of foreclosure as of June 30, 2021, and December 31, 2020, 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.

There were no TDR activity for the three and six months ended June 30, 2021.  

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		balance
Troubled debt restructurings
Residential real estate - Owner occupied
HAMP1	2		256		253	2		256		253
Total	2	$	256	$	253	2	$	256	$	253

¹  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 June 30, 2021, and June 30, 2020, for loans that were restructured within the prior 12 month period.