NOTE 4 Loans and Allowance for Loan Losses

The following table presents total loans outstanding, by portfolio segment, as of September 30, 2019 and December 31, 2018:


	September 30,		December 31,
(dollars in thousands)	2019		2018
Commercial
Commercial and industrial	$	485,183	$	510,706
Real estate construction		21,674		18,965
Commercial real estate		444,600		439,963
Total commercial		951,457		969,634
Consumer
Residential real estate first mortgage		459,763		448,143
Residential real estate junior lien		182,516		188,855
Other revolving and installment		92,351		95,218
Total consumer		734,630		732,216
Total loans	$	1,686,087	$	1,701,850

Total loans include net deferred loan fees and costs of $1.1 million and $1.7 million at September 30, 2019 and December 31, 2018, respectively.

Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed regularly to identify loans for nonaccrual status.

The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of September 30, 2019 and December 31, 2018:


	September 30, 2019
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonperforming		Loans
Commercial
Commercial and industrial	$	481,480	$	1,561	$	45	$	2,097	$	485,183
Real estate construction		21,224		450		—		—		21,674
Commercial real estate		443,129		—		—		1,471		444,600
Total commercial		945,833		2,011		45		3,568		951,457
Consumer
Residential real estate first mortgage		456,981		2,105		—		677		459,763
Residential real estate junior lien		181,646		14		—		856		182,516
Other revolving and installment		92,176		169		—		6		92,351
Total consumer		730,803		2,288		—		1,539		734,630
Total loans	$	1,676,636	$	4,299	$	45	$	5,107	$	1,686,087


	December 31, 2018
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonperforming		Loans
Commercial
Commercial and industrial	$	504,313	$	2,815	$	—	$	3,578	$	510,706
Real estate construction		18,965		—		—		—		18,965
Commercial real estate		438,446		—		—		1,517		439,963
Total commercial		961,724		2,815		—		5,095		969,634
Consumer
Residential real estate first mortgage		444,470		2,411		—		1,262		448,143
Residential real estate junior lien		187,502		769		—		584		188,855
Other revolving and installment		94,615		581		—		22		95,218
Total consumer		726,587		3,761		—		1,868		732,216
Total loans	$	1,688,311	$	6,576	$	—	$	6,963	$	1,701,850

The Company’s consumer loan portfolio is primarily comprised of both secured and unsecured loans that are relatively small and are evaluated at origination on a centralized basis against standardized underwriting criteria. The Company generally does not risk rate consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Credit quality for the consumer loan portfolio is measured by delinquency rates, nonaccrual amounts and actual losses incurred.

The Company assigns a risk rating to all commercial loans, except pools of homogeneous loans, and periodically performs detailed internal and external reviews of risk rated loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the estimated fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each individual loan.

The Company’s ratings are aligned to pass and criticized categories. The criticized category includes special mention, substandard, and doubtful risk ratings. The risk ratings are defined as follows:

Pass: A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well‑defined weakness or weaknesses that jeopardize the repayment of the debt. Well‑defined weaknesses include a borrower’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company 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 repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible and charged off immediately.

The tables below present total loans outstanding, by loan portfolio segment, and risk category as of September 30, 2019 and December 31, 2018:


	September 30, 2019
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	453,707	$	10,439	$	20,781	$	256	$	485,183
Real estate construction		20,396		284		994		—		21,674
Commercial real estate		420,060		673		23,867		—		444,600
Total commercial	$	894,163	$	11,396	$	45,642	$	256	$	951,457
Consumer
Residential real estate first mortgage		459,086		—		677		—		459,763
Residential real estate junior lien		180,344		—		2,172		—		182,516
Other revolving and installment		92,345		—		6		—		92,351
Total consumer		731,775		—		2,855		—		734,630
Total loans	$	1,625,938	$	11,396	$	48,497	$	256	$	1,686,087


	December 31, 2018
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	459,565	$	12,055	$	37,523	$	1,563	$	510,706
Real estate construction		17,910		—		1,055		—		18,965
Commercial real estate		407,178		6,304		26,481		—		439,963
Total commercial	$	884,653	$	18,359	$	65,059	$	1,563	$	969,634
Consumer
Residential real estate first mortgage		448,124		—		19		—		448,143
Residential real estate junior lien		186,370		—		2,485		—		188,855
Other revolving and installment		95,218		—		—		—		95,218
Total consumer		729,712		—		2,504		—		732,216
Total loans	$	1,614,365	$	18,359	$	67,563	$	1,563	$	1,701,850

The adequacy of the allowance for loan losses is assessed at the end of each quarter. The allowance for loan losses includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogeneous pools and collectively evaluated for impairment. The factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors.

The following tables present, by loan portfolio segment, a summary of the changes in the allowance for loan losses for the three and nine months ended September 30, 2019 and 2018:


	Three months ended September 30, 2019
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	11,694	$	(962)	$	(324)	$	538	$	10,946
Real estate construction		323		25		—		—		348
Commercial real estate		5,765		(4)		—		—		5,761
Total commercial		17,782		(941)		(324)		538		17,055
Consumer
Residential real estate first mortgage		1,155		(139)		—		—		1,016
Residential real estate junior lien		710		157		(20)		49		896
Other revolving and installment		380		1		(31)		28		378
Total consumer		2,245		19		(51)		77		2,290
Unallocated		1,219		2,420		—		—		3,639
Total	$	21,246	$	1,498	$	(375)	$	615	$	22,984


	Nine months ended September 30, 2019
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	12,127	$	3,263	$	(5,275)	$	831	$	10,946
Real estate construction		250		97		(1)		2		348
Commercial real estate		6,279		(668)		—		150		5,761
Total commercial		18,656		2,692		(5,276)		983		17,055
Consumer
Residential real estate first mortgage		1,156		(140)		—		—		1,016
Residential real estate junior lien		805		113		(154)		132		896
Other revolving and installment		380		388		(513)		123		378
Total consumer		2,341		361		(667)		255		2,290
Unallocated		1,177		2,462		—		—		3,639
Total	$	22,174	$	5,515	$	(5,943)	$	1,238	$	22,984


	Three months ended September 30, 2018
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,024	$	1,452	$	(424)	$	126	$	11,178
Real estate construction		395		(109)		—		—		286
Commercial real estate		6,478		(72)		—		20		6,426
Total commercial		16,897		1,271		(424)		146		17,890
Consumer
Residential real estate first mortgage		1,486		(142)		—		—		1,344
Residential real estate junior lien		830		20		(47)		11		814
Other revolving and installment		483		31		(99)		26		441
Total consumer		2,799		(91)		(146)		37		2,599
Unallocated		173		350		—		—		523
Total	$	19,869	$	1,530	$	(570)	$	183	$	21,012


	Nine months ended September 30, 2018
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	7,589	$	6,158	$	(3,078)	$	509	$	11,178
Real estate construction		343		1		(60)		2		286
Commercial real estate		4,909		1,458		—		59		6,426
Total commercial		12,841		7,617		(3,138)		570		17,890
Consumer
Residential real estate first mortgage		1,411		(38)		(29)		—		1,344
Residential real estate junior lien		902		(145)		(133)		190		814
Other revolving and installment		499		34		(236)		144		441
Total consumer		2,812		(149)		(398)		334		2,599
Unallocated		911		(388)		—		—		523
Total	$	16,564	$	7,080	$	(3,536)	$	904	$	21,012

The following tables present the recorded investment in loans and related allowance for loan losses, by loan portfolio segment, disaggregated on the basis of the Company’s impairment methodology, as of September 30, 2019 and December 31, 2018:


	September 30, 2019
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Unallocated		Total
Commercial
Commercial and industrial	$	2,513	$	482,670	$	485,183	$	1,429	$	9,517	$	—	$	10,946
Real estate construction		—		21,674		21,674		—		348		—		348
Commercial real estate		1,480		443,120		444,600		352		5,409		—		5,761
Total commercial		3,993		947,464		951,457		1,781		15,274		—		17,055
Consumer
Residential real estate first mortgage		355		459,408		459,763		—		1,016		—		1,016
Residential real estate junior lien		804		181,712		182,516		324		572		—		896
Other revolving and installment		5		92,346		92,351		2		376		—		378
Total consumer		1,164		733,466		734,630		326		1,964		—		2,290
Total loans	$	5,157	$	1,680,930	$	1,686,087	$	2,107	$	17,238	$	3,639	$	22,984


	December 31, 2018
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Unallocated		Total
Commercial
Commercial and industrial	$	3,945	$	506,761	$	510,706	$	2,059	$	10,068	$	—	$	12,127
Real estate construction		—		18,965		18,965		—		250		—		250
Commercial real estate		1,684		438,279		439,963		455		5,824		—		6,279
Total commercial		5,629		964,005		969,634		2,514		16,142		—		18,656
Consumer
Residential real estate first mortgage		352		447,791		448,143		—		1,156		—		1,156
Residential real estate junior lien		559		188,296		188,855		4		801		—		805
Other revolving and installment		20		95,198		95,218		20		360		—		380
Total consumer		931		731,285		732,216		24		2,317		—		2,341
Total loans	$	6,560	$	1,695,290	$	1,701,850	$	2,538	$	18,459	$	1,177	$	22,174

The tables below summarize key information on impaired loans. These impaired loans may have estimated losses which are included in the allowance for loan losses.


	September 30, 2019						December 31, 2018
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
(dollars in thousands)	Investment		Principal		Allowance		Investment		Principal		Allowance
Impaired loans with a valuation allowance
Commercial and industrial	$	1,757	$	1,900	$	1,429	$	2,660	$	2,752	$	2,059
Commercial real estate		1,480		1,595		352		1,499		1,517		455
Residential real estate first mortgage		—		—		—		—		—		—
Residential real estate junior lien		536		619		324		4		4		4
Other revolving and installment		4		4		2		19		20		20
Total impaired loans with a valuation allowance		3,777		4,118		2,107		4,182		4,293		2,538
Impaired loans without a valuation allowance
Commercial and industrial		756		1,077		—		1,285		1,422		—
Commercial real estate		—		—		—		185		218		—
Residential real estate first mortgage		355		367		—		352		504		—
Residential real estate junior lien		268		290		—		555		697		—
Other revolving and installment		1		1		—		1		2		—
Total impaired loans without a valuation allowance		1,380		1,735		—		2,378		2,843		—
Total impaired loans
Commercial and industrial		2,513		2,977		1,429		3,945		4,174		2,059
Commercial real estate		1,480		1,595		352		1,684		1,735		455
Residential real estate first mortgage		355		367		—		352		504		—
Residential real estate junior lien		804		909		324		559		701		4
Other revolving and installment		5		5		2		20		22		20
Total impaired loans	$	5,157	$	5,853	$	2,107	$	6,560	$	7,136	$	2,538

The table below presents the average recorded investment in impaired loans and interest income for the three and nine months ended September 30, 2019 and 2018:


	Three months ended September 30,
	2019				2018
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	1,964	$	4	$	1,961	$	9
Commercial real estate		1,623		2		1,767		2
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		619		1		63		1
Other revolving and installment		5		—		39		—
Total impaired loans with a valuation allowance		4,211		7		3,830		12
Impaired loans without a valuation allowance
Commercial and industrial		1,206		7		1,073		—
Commercial real estate		—		—		842		—
Residential real estate first mortgage		183		—		525		—
Residential real estate junior lien		297		—		394		—
Other revolving and installment		2		—		3		—
Total impaired loans without a valuation allowance		1,688		7		2,837		—
Total impaired loans
Commercial and industrial		3,170		11		3,034		9
Commercial real estate		1,623		2		2,609		2
Residential real estate first mortgage		183		—		525		—
Residential real estate junior lien		916		1		457		1
Other revolving and installment		7		—		42		—
Total impaired loans	$	5,899	$	14	$	6,667	$	12


	Nine Months Ended September 30,
	2019				2018
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	2,473	$	12	$	2,026	$	27
Commercial real estate		1,668		6		1,793		7
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		621		3		63		2
Other revolving and installment		5		—		43		—
Total impaired loans with a valuation allowance		4,767		21		3,925		36
Impaired loans without a valuation allowance
Commercial and industrial		2,979		23		1,130		—
Commercial real estate		—		—		747		—
Residential real estate first mortgage		92		—		539		—
Residential real estate junior lien		302		—		403		1
Other revolving and installment		4		—		3		—
Total impaired loans without a valuation allowance		3,377		23		2,822		1
Total impaired loans
Commercial and industrial		5,452		35		3,156		27
Commercial real estate		1,668		6		2,540		7
Residential real estate first mortgage		92		—		539		—
Residential real estate junior lien		923		3		466		3
Other revolving and installment		9		—		46		—
Total impaired loans	$	8,144	$	44	$	6,747	$	37

Loans with a carrying value of $1.1 billion as of September 30, 2019 and December 31, 2018, were pledged to secure public deposits, and for other purposes required or permitted by law.

Under certain circumstances, the Company will provide borrowers relief through loan restructurings. A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt.

During the first quarter of 2019 there was one loan that was modified as a troubled debt restructuring as a result of extending the amortization period. As of September 30, 2019, the carrying value of the restructured loan was $0.2 million. The loan is currently performing according to the modified terms and there was no specific reserve for the loan losses allocated to the loan modified as troubled debt restructuring. During the first quarter of 2018, there was one loan modified as a troubled debt restructuring as a result of adjusting the interest rate below current market levels. The balance at the time of restructuring was $1.0 million. As of December 31, 2018, the carrying value of the restructured loan was $0.2 million. The loan is currently performing according to the modified terms and there was no specific reserve for loan losses allocated to the loan modified as troubled debt restructuring.

The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.