NOTE 7 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES

The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the years ended December 31, 2019 and 2018:


	Commercial				Commercial		Residential		Consumer
	and				Real		Real		and
(Dollars in thousands)	Industrial		Construction		Estate		Estate		Other		Unallocated		Total
Year Ended :
December 31, 2019
Beginning balance	$	603	$	663	$	5,575	$	1,371	$	23	$	540	$	8,775
Charge-offs		(198)		—		(473)		(499)		(76)		—		(1,246)
Recoveries		3		—		124		71		9		—		207
Provision		767		(126)		1,491		395		53		(49)		2,531
Ending balance	$	1,175	$	537	$	6,717	$	1,338	$	9	$	491	$	10,267
December 31, 2018
Beginning balance	$	208	$	336	$	5,185	$	1,032	$	26	$	548	$	7,335
Charge-offs		(11)		—		(26)		(22)		(69)		—		(128)
Recoveries		3		—		17		91		20		—		131
Provision		403		327		399		270		46		(8)		1,437
Ending balance	$	603	$	663	$	5,575	$	1,371	$	23	$	540	$	8,775

The following table presents the balance in the allowance of loan losses at December 31, 2019 and 2018 disaggregated on the basis of our impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of our impairment methodology:


	Allowance for Loan Losses						Loans Receivable
					Balance
			Balance		Related to
			Loans		Loans
			Individually		Collectively				Individually		Collectively
			Evaluated for		Evaluated for				Evaluated for		Evaluated for
(Dollars in thousands)	Balance		Impairment		Impairment		Balance		Impairment (a)		Impairment
December 31, 2019
Commercial and industrial	$	1,175	$	353	$	822	$	124,937	$	835	$	124,102
Construction		537		—		537		125,291		250		125,041
Commercial real estate		6,717		296		6,421		995,220		7,176		988,044
Residential real estate		1,338		67		1,271		382,567		6,002		376,565
Consumer and other loans		9		—		9		2,097		—		2,097
Unallocated		491		—		—		—		—		—
Total	$	10,267	$	716	$	9,060	$	1,630,112	$	14,263	$	1,615,849
December 31, 2018
Commercial and industrial	$	603	$	152	$	451	$	81,709	$	372	$	81,337
Construction		663		—		663		142,321		—		142,321
Commercial real estate		5,575		274		5,301		878,449		15,760		862,689
Residential real estate		1,371		89		1,282		370,955		4,572		366,383
Consumer and other loans		23		—		23		2,393		—		2,393
Unallocated		540		—		—		—		—		—
Total	$	8,775	$	515	$	7,720	$	1,475,827	$	20,704	$	1,455,123

An age analysis of loans receivable which were past due as of December 31, 2019 and 2018 is as follows:


													Recorded
													Investment
					Greater						Total		> 90 Days
	30-59 Days		60-89 days		Than		Total Past				Financing		and
(Dollars in thousands)	Past Due		Past Due		90 Days (a)		Due		Current		Receivables		Accruing
December 31, 2019
Commercial and industrial	$	300	$	5	$	701	$	1,006	$	123,931	$	124,937	$	—
Construction		—		—		—		—		125,291		125,291		—
Commercial real estate		6,326		68		5,643		12,037		983,183		995,220		—
Residential real estate		563		520		5,070		6,153		376,414		382,567		—
Consumer and other		14		1		1		16		2,081		2,097		—
Total	$	7,203	$	594	$	11,415	$	19,212	$	1,610,900	$	1,630,112	$	—
December 31, 2018
Commercial and industrial	$	491	$	—	$	372	$	863	$	80,846	$	81,709	$	—
Construction		—		582		—		582		141,739		142,321		—
Commercial real estate		2,282		—		15,760		18,042		860,407		878,449		—
Residential real estate		393		35		4,572		5,000		365,955		370,955		—
Consumer and other		4		1		—		5		2,388		2,393		—
Total	$	3,170	$	618	$	20,704	$	24,492	$	1,451,335	$	1,475,827	$	—

(a)

includes loans greater than 90 days past due and still accruing and non-accrual loans. At both December 31, 2019 and 2018, there were no loans 90 days past due and still accruing.

Loans for which the accrual of interest has been discontinued, excluding PCI loans, at December 31, 2019 and 2018 were:


(Dollars in thousands)	December 31, 2019		December 31, 2018
Commercial and industrial	$	701	$	372
Construction		—		—
Commercial real estate		5,643		15,760
Residential real estate		5,070		4,572
Consumer and other		1		—
Total	$	11,415	$	20,704

Loans are made to individuals as well as commercial entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Company. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type. A description of the Company’s different loan segments follows:

Commercial Loans: Commercial credit is extended primarily to middle market and small business customers. Commercial loans are generally made in the Company’s market place for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans will generally be guaranteed in full or for a meaningful amount by the businesses’ major owners. Underwriting of commercial loans is based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

Residential Mortgage and Consumer Loans: The Company originates mortgage and consumer loans including principally residential real estate and home equity lines and loans. Each loan type is evaluated on debt to income, type of collateral and loan to collateral value, credit history and Company relationship with the borrower.

In determining the adequacy of the allowance for loan losses, the Company estimates losses based on the identification of specific problem loans through its credit review process and also estimates losses inherent in other loans on an aggregate basis by loan type. The credit review process includes the independent evaluation of the loan officer assigned risk ratings by the Chief Credit Officer and a third party loan review company. Such risk ratings are assigned loss component factors that reflect the Company’s loss estimate for each group of loans. It is management’s and the board of directors’ responsibility to oversee the lending process to ensure that all credit risks are properly identified, monitored, and controlled, and that loan pricing, terms, and other safeguards against non-performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-rating system. Factors considered in assigning risk ratings and loss component factors include: borrower specific information related to expected future cash flows and operating results, collateral values, financial condition, payment status and other information; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative measurements.

The Company’s risk-rating system as defined below is consistent with the system used by regulatory agencies and consistent with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the regulatory definitions of classified assets.

Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation. The Company has five categories within the Pass classification depending on strength of repayment sources, collateral values and financial condition of the borrower.

Special Mention: This category represents loans performing to contractual terms and conditions; however the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in financial condition that could potentially threaten the borrowers’ future ability to repay our loan principal and interest or fees due.

Substandard: This category represents loans that the primary source of repayment has significantly deteriorated or weakened which has or could threaten the borrowers’ ability to make scheduled payments. The weaknesses require close supervision by the Company’s management and there is a distinct possibility that the Company could sustain some loss if the deficiencies are not corrected. Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due. Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral.

Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured. The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors must be continuously monitored. Once these factors are questionable the loan should be considered for full or partial charge-off.

Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as active assets of the Company is not warranted. Such loans are fully charged off.

Residential and consumer loans are rated non-performing if they are delinquent in payments ninety or more days, or a TDR with less than six (6) months current contractual performance or past maturity. All other residential and consumer loans not rated pass or better are reviewed on a case by case basis at the time of a credit event.

The following tables illustrate the Company’s corporate credit risk profile by creditworthiness category as of December 31, 2019 and 2018:


			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
December 31, 2019
Commercial and industrial	$	124,102	$	—	$	835	$	—	$	124,937
Construction		122,689		2,352		250		—		125,291
Commercial real estate		982,480		5,520		7,220		—		995,220
	$	1,229,271	$	7,872	$	8,305	$	—	$	1,245,448

December 31, 2018
Commercial and industrial	$	80,977	$	32	$	700	$	—	$	81,709
Construction		141,871		—		450		—		142,321
Commercial real estate		855,180		3,908		19,361		—		878,449
	$	1,078,028	$	3,940	$	20,511	$	—	$	1,102,479


	Residential Real		Consumer
(Dollars in thousands)	Estate		and other
December 31, 2019
Performing	$	377,497	$	2,096
Non-Performing		5,070		1
Total	$	382,567	$	2,097

December 31, 2018
Performing	$	366,408	$	2,393
Non-Performing		4,547		—
Total	$	370,955	$	2,393

The following table reflects information regarding the Company’s impaired loans as of December 31, 2019 and 2018 and for the years then ended:


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Recognized
December 31, 2019
With no related allowance recorded:
Commercial and industrial	$	345	$	495	$	—	$	184	$	8
Construction		250		250		—		250		—
Commercial real estate		6,632		5,790		—		10,474		170
Residential real estate		5,450		5,775		—		4,831		100
With an allowance recorded:
Commercial and industrial		490		491		353		406		7
Commercial real estate		544		498		296		947		10
Residential real estate		552		548		67		505		3
Consumer and other		—		—		—		—		—
Total:
Commercial and industrial		835		986		353		590		15
Construction		250		250		—		250		—
Commercial real estate		7,176		6,288		296		11,421		180
Residential real estate		6,002		6,323		67		5,336		103
Consumer and other		—		—		—		—		—
	$	14,263	$	13,847	$	716	$	17,597	$	298


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Recognized
December 31, 2018
With no related allowance recorded:
Commercial and industrial	$	—	$	10	$	—	$	4	$	—
Construction		—		—		—		21		—
Commercial real estate		13,745		13,745		—		9,774		102
Residential real estate		2,790		2,790		—		3,082		48
With an allowance recorded:
Commercial and industrial		372		572		152		195		—
Commercial real estate		2,015		2,437		274		1,291		4
Residential real estate		1,782		2,329		89		714		—
Consumer and other		—		—		—		—		—
Total:
Commercial and industrial		372		582		152		199		—
Construction		—		—		—		21		—
Commercial real estate		15,760		16,182		274		11,065		106
Residential real estate		4,572		5,119		89		3,796		48
Consumer and other		—		—		—		—		—
	$	20,704	$	21,883	$	515	$	15,081	$	154

The average recorded investment in impaired loans is calculated using the average of impaired loans over the past five quarter-end periods. The Company recognizes income on impaired loans by recording all payments as a reduction of principal on such loans.

Impaired loans include loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection.

The following table presents the recorded investment in troubled debt restructured loans as of December 31, 2019 and 2018 based on payment performance status:


	Commercial		Commercial &		Residential
(Dollars in thousands)	Real Estate		Industrial		Real Estate		Total
December 31, 2019
Performing	$	416	$	131	$	909	$	1,456
Non-performing		395		35		638		1,068
Total	$	811	$	166	$	1,547	$	2,524
December 31, 2018
Performing	$	431	$	—	$	475	$	906
Non-performing		1,531		—		517		2,048
Total	$	1,962	$	—	$	992	$	2,954

Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote. As of December 31, 2019, we have not committed to lend additional amounts to customers with outstanding loans that are classified as TDRs.

There were four TDRs with an outstanding balance of $768 thousand that occurred during the year ended December 31, 2019. There was one TDR with an outstanding balance of $306 thousand that occurred during the year ended December 31, 2018. The following table summarizes TDRs that occurred during the years ended December 31, 2019 and 2018.


				Post-Modification
		Pre-Modification		Outstanding
		Outstanding Recorded		Recorded
(Dollars in thousands)	Number of Loans	Investment		Investment
December 31, 2019
Commercial & industrial	1	$	135	$	133
Residential real estate	3		636		635


				Post-Modification
		Pre-Modification		Outstanding
		Outstanding Recorded		Recorded
(Dollars in thousands)	Number of Loans	Investment		Investment
December 31, 2018
Residential real estate	1	$	514	$	306

The TDRs described above did not require an allocation of the allowance for credit losses, nor were any charge-offs recorded subsequent to modification during the years ended December 31, 2019 and 2018.

There were no TDRs for which there were payment defaults within twelve months following the date of the restructuring for the year ended December 31, 2019.

There were no TDRs for which there was a payment default within twelve months following the date of the restructuring for the year ended December 31, 2018.

Loans are considered to be in payment default once they are greater than 30 days contractually past due under the modified terms. There were no charge-offs on defaulted TDRs during the years ended December 31, 2019 and 2018.