Note 4 - Loans and Allowance for Loan Losses

Categories of loans include:


	(Dollars in Thousands)
	March 31, 2019		December 31, 2018
Commercial	$	64,710	$	61,551
Commercial real estate:
Construction		41,186		36,829
Other		179,692		180,800
Residential real estate		89,061		88,797
Consumer:
Auto		837		841
Other		2,436		2,726
Total Loans		377,922		371,544
Less: Allowance for loan losses		(4,399)		(4,373)
Net loans	$	373,523	$	367,171

The following table sets forth an analysis of our allowance for loan losses for the three months ending March 31, 2019 and 2018.


	(Dollars in Thousands)
March 31, 2019	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Beginning balance	$	592	$	3,122	$	611	$	9	$	39	$	4,373
Provision (credit) for loan losses		59		(62)		5		5		(7)		—
Loans charged-off		—		—		—		(5)		—		(5)
Recoveries		18		12		1		—		—		31
Total ending allowance balance	$	669	$	3,072	$	617	$	9	$	32	$	4,399


	(Dollars in Thousands)
March 31, 2018	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Beginning balance	$	633	$	3,515	$	554	$	10	$	12	$	4,724
Provision (credit) for loan losses		22		(40)		45		—		3		30
Loans charged-off		(38)		—		(27)		(1)		—		(66)
Recoveries		—		—		4		1		—		5
Total ending allowance balance	$	617	$	3,475	$	576	$	10	$	15	$	4,693

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2019 and December 31, 2018, which includes net deferred loan fees. Accrued interest receivable of $1.4 million at both March 31, 2019 and December 31, 2018, is not considered significant and therefore not included in the recorded investment in loans presented in the following tables.


	(Dollars in Thousands)
March 31, 2019	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	50	$	—	$	—	$	—	$	50
Collectively evaluated		669		3,022		617		9		32		4,349
Total ending allowance balance	$	669	$	3,072	$	617	$	9	$	32	$	4,399

Loans:
Individually evaluated for impairment	$	—	$	1,249	$	137	$	3	$	—	$	1,389
Collectively evaluated		64,710		219,629		88,924		3,270		—		376,533
Total ending loans balance	$	64,710	$	220,878	$	89,061	$	3,273	$	—	$	377,922


	(Dollars in Thousands)
December 31, 2018	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	48	$	—	$	—	$	—	$	48
Collectively evaluated		592		3,074		611		9		39		4,325
Total ending allowance balance	$	592	$	3,122	$	611	$	9	$	39	$	4,373

Loans:
Individually evaluated for impairment	$	—	$	1,270	$	147	$	4	$	—	$	1,421
Collectively evaluated		61,551		216,359		88,650		3,563		—		370,123
Total ending loans balance	$	61,551	$	217,629	$	88,797	$	3,567	$	—	$	371,544

The following table presents information related to impaired loans by class of loans as of March 31, 2019 and December 31, 2018. In this table presentation the unpaid principal balance of the loans has not been reduced by partial net charge-offs and the recorded investment of the loans was reduced by partial net charge-offs.


	(Dollars in Thousands)						(Dollars in Thousands)
	March 31, 2019						December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Other		1,182		1,182		—		1,202		1,202		—
Residential real estate		137		137		—		147		147		—
Consumer:
Other		3		3		—		4		4		—
Subtotal	$	1,322	$	1,322	$	—	$	1,353	$	1,353	$	—

With an allowance recorded:
Commercial real estate:
Other	$	67	$	67	$	50	$	68	$	68	$	48
Subtotal	$	67	$	67	$	50	$	68	$	68	$	48
Total	$	1,389	$	1,389	$	50	$	1,421	$	1,421	$	48

Information on impaired loans for the three months ending March 31, 2019 and 2018 is as follows:


	(Dollars in Thousands)						(Dollars in Thousands)
	March 31, 2019						March 31, 2018
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Commercial	$	—	$	—	$	—	$	1	$	—	$	—
Commercial real estate:
Other		1,260		17		1		2,078		25		1
Residential real estate		137		2		—		157		2		1
Consumer:
Other		3		—		—		6		—		—
Total	$	1,400	$	19	$	1	$	2,242	$	27	$	2

The recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2019 and December 31, 2018 are summarized below:


	(Dollars in Thousands)				(Dollars in Thousands)
	March 31, 2019				December 31, 2018
	Loans Past Due 90 Days and Over and Still Accruing		Nonaccrual		Loans Past Due 90 Days and Over and Still Accruing		Nonaccrual

Commercial real estate:
Other		—		1,183		—		1,202
Residential real estate		—		87		—		96
Total	$	—	$	1,270	$	—	$	1,298

Nonaccrual loans and loans past due 90 days still on accrual include individually classified impaired loans.

The following tables present the aging of the recorded investment in past due loans as of March 31, 2019 and December 31, 2018 by class of loans. Non-accrual loans are included and have been categorized based on their payment status:


	(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 and Over Days Past Due		Total Past Due		Current		Total
March 31, 2019
Commercial	$	156	$	—	$	—	$	156	$	64,554	$	64,710
Commercial real estate:
Construction		—		—		—		—		41,186		41,186
Other		117		—		—		117		179,575		179,692
Residential real estate		53		74		87		214		88,847		89,061
Consumer:
Auto		—		—		—		—		837		837
Other		—		—		—		—		2,436		2,436
Subtotal	$	326	$	74	$	87	$	487	$	377,435	$	377,922


	(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 and Over Days Past Due		Total Past Due		Current		Total
December 31, 2018
Commercial	$	—	$	11	$	—	$	11	$	61,540	$	61,551
Commercial real estate:
Construction		—		—		—		—		36,829		36,829
Other		—		—		—		—		180,800		180,800
Residential real estate		—		37		97		134		88,663		88,797
Consumer:
Auto		—		—		—		—		841		841
Other		5		—		—		5		2,721		2,726
Subtotal	$	5	$	48	$	97	$	150	$	371,394	$	371,544

Troubled Debt Restructurings:

The Company reported total troubled debt restructurings of $1.3 million as of March 31, 2019 and December 31, 2018. The Company has no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings. Troubled debt restructurings are included in impaired loans. The modifications of the terms of these loans included reducing the interest rate, granting an interest only payment period, or extending the terms of the debt for customers experiencing financial difficulties. Of the five troubled debt restructurings reported at quarter end, three loans totaling $120,000 were on accrual status and two loans totaling $1.2 million were on non-accrual status.

There were no troubled debt restructurings that occurred during the three months ending March 31, 2019, and no troubled debt restructuring that occurred during the three months ending March 31, 2018.

Specific allocations of $50,000 and $46,000 were reported for troubled debt restructurings as of March 31, 2019 and March 31, 2018. No payment defaults or charge-offs were reported for troubled debt restructuring during the three months ending March 31, 2019 and March 31, 2018.

The terms of certain other loans were modified during the three months ending March 31, 2019 and 2018 that did not meet the definition of a troubled debt restructuring. These loans modified during the three months ending March 31, 2019 have a total recorded investment of $16.0 million as of March 31, 2019. These loans modified during the three months ending March 31, 2018 had a total recorded investment of $8.7 million as of March 31, 2018. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate loans with an outstanding balance greater than $25 thousand and is reviewed on a monthly basis. For residential real estate and consumer loans the analysis primarily involves monitoring the past due status of these loans and at such time that these loans are past due, the Company evaluates the loans to determine if a change in risk category is warranted. The Company uses the following definitions for 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 or of the institution's credit position 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. All loans in all loan categories are assigned risk ratings. Based on the most recent analyses performed, the risk category of loans by class of loans is as follows:


	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2019
Commercial	$	64,459	$	—	$	251	$	—	$	64,710
Commercial real estate:
Construction		41,186		—		—		—		41,186
Other		178,342		—		1,350		—		179,692
Residential real estate		88,974		—		87		—		89,061
Consumer:
Auto		837		—		—		—		837
Other		2,428		—		8		—		2,436
Total	$	376,226	$	—	$	1,696	$	—	$	377,922


	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2018
Commercial	$	60,961	$	—	$	590	$	—	$	61,551
Commercial real estate:
Construction		36,829		—		—		—		36,829
Other		179,419		—		1,381		—		180,800
Residential real estate		88,664		—		133		—		88,797
Consumer:
Auto		841		—		—		—		841
Other		2,719		—		7		—		2,726
Total	$	369,433	$	—	$	2,111	$	—	$	371,544