NOTE 5 Loans and Allowance for Loan Losses

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


	December 31,		December 31,
(dollars in thousands)	2019		2018
Commercial
Commercial and industrial	$	479,144	$	510,706
Real estate construction		26,378		18,965
Commercial real estate		494,703		439,963
Total commercial		1,000,225		969,634
Consumer
Residential real estate first mortgage		457,155		448,143
Residential real estate junior lien		177,373		188,855
Other revolving and installment		86,526		95,218
Total consumer		721,054		732,216
Total loans	$	1,721,279	$	1,701,850

Total loans include net deferred loan fees and costs of $1.0 million and $1.7 million at December 31, 2019 and 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 past due aging analysis of total loans outstanding, by portfolio segment, as of December 31, 2019 and 2018, respectively:


	December 31, 2019
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	473,900	$	382	$	—	$	4,862	$	479,144
Real estate construction		26,251		127		—		—		26,378
Commercial real estate		492,707		556		—		1,440		494,703
Total commercial		992,858		1,065		—		6,302		1,000,225
Consumer
Residential real estate first mortgage		455,244		666		448		797		457,155
Residential real estate junior lien		176,915		184		—		274		177,373
Other revolving and installment		86,172		348		—		6		86,526
Total consumer		718,331		1,198		448		1,077		721,054
Total loans	$	1,711,189	$	2,263	$	448	$	7,379	$	1,721,279


	December 31, 2018
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		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

Interest income foregone on nonaccrual loans approximated $0.4 million, $0.3 million, and $0.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.

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 portfolio segment and risk category, as of December 31, 2019 and 2018:


	December 31, 2019
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	448,306	$	9,585	$	21,253	$	—	$	479,144
Real estate construction		25,119		282		977		—		26,378
Commercial real estate		462,294		2,359		30,050		—		494,703
Total commercial	$	935,719	$	12,226	$	52,280	$	—	$	1,000,225
Consumer
Residential real estate first mortgage		456,358		—		797		—		457,155
Residential real estate junior lien		176,122		—		1,251		—		177,373
Other revolving and installment		86,520		—		6		—		86,526
Total consumer		719,000		—		2,054		—		721,054
Total loans	$	1,654,719	$	12,226	$	54,334	$	—	$	1,721,279


	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 pool 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 years ending December 31, 2019, 2018, and 2017:


	Year ended December 31, 2019
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	12,127	$	5,213	$	(6,540)	$	1,470	$	12,270
Real estate construction		250		51		(1)		3		303
Commercial real estate		6,279		(1,467)		—		150		4,962
Total commercial		18,656		3,797		(6,541)		1,623		17,535
Consumer
Residential real estate first mortgage		1,156		292		—		—		1,448
Residential real estate junior lien		805		1,825		(465)		232		2,397
Other revolving and installment		380		383		(572)		161		352
Total consumer		2,341		2,500		(1,037)		393		4,197
Unallocated		1,177		1,015		—		—		2,192
Total	$	22,174	$	7,312	$	(7,578)	$	2,016	$	23,924


	Year ended December 31, 2018
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	7,589	$	6,911	$	(3,123)	$	750	$	12,127
Real estate construction		343		(35)		(60)		2		250
Commercial real estate		4,909		1,889		(600)		81		6,279
Total commercial		12,841		8,765		(3,783)		833		18,656
Consumer
Residential real estate first mortgage		1,411		(226)		(29)		—		1,156
Residential real estate junior lien		902		(171)		(133)		207		805
Other revolving and installment		499		(24)		(308)		213		380
Total consumer		2,812		(421)		(470)		420		2,341
Unallocated		911		266		—		—		1,177
Total	$	16,564	$	8,610	$	(4,253)	$	1,253	$	22,174


	Year ended December 31, 2017
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	6,702	$	3,244	$	(3,287)	$	930	$	7,589
Real estate construction		480		(416)		—		279		343
Commercial real estate		4,484		352		—		73		4,909
Total commercial		11,666		3,180		(3,287)		1,282		12,841
Consumer
Residential real estate first mortgage		1,126		182		—		103		1,411
Residential real estate junior lien		907		247		(1,124)		872		902
Other revolving and installment		400		276		(429)		252		499
Total consumer		2,433		705		(1,553)		1,227		2,812
Unallocated		1,516		(605)		—		—		911
Total	$	15,615	$	3,280	$	(4,840)	$	2,509	$	16,564

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


	December 31, 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	$	976	$	478,168	$	479,144	$	189	$	12,081	$	—	$	12,270
Real estate construction		—		26,378		26,378		—		303		—		303
Commercial real estate		5,925		488,778		494,703		2,946		2,016		—		4,962
Total commercial		6,901		993,324		1,000,225		3,135		14,400		—		17,535
Consumer
Residential real estate first mortgage		782		456,373		457,155		—		1,448		—		1,448
Residential real estate junior lien		266		177,107		177,373		—		2,397		—		2,397
Other revolving and installment		5		86,521		86,526		3		349		—		352
Total consumer		1,053		720,001		721,054		3		4,194		—		4,197
Total loans	$	7,954	$	1,713,325	$	1,721,279	$	3,138	$	18,594	$	2,192	$	23,924


	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.


	December 31, 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	$	639	$	727	$	189	$	2,660	$	2,752	$	2,059
Commercial real estate		5,718		5,823		2,946		1,499		1,517		455
Residential real estate first mortgage		—		—		—		—		—		—
Residential real estate junior lien		—		—		—		4		4		4
Other revolving and installment		5		6		3		19		20		20
Total impaired loans with a valuation allowance		6,362		6,556		3,138		4,182		4,293		2,538
Impaired loans without a valuation allowance
Commercial and industrial		337		1,110		—		1,285		1,422		—
Commercial real estate		207		236		—		185		218		—
Residential real estate first mortgage		782		797		—		352		504		—
Residential real estate junior lien		266		372		—		555		697		—
Other revolving and installment		—		—		—		1		2		—
Total impaired loans without a valuation allowance		1,592		2,515		—		2,378		2,843		—
Total impaired loans
Commercial and industrial		976		1,837		189		3,945		4,174		2,059
Commercial real estate		5,925		6,059		2,946		1,684		1,735		455
Residential real estate first mortgage		782		797		—		352		504		—
Residential real estate junior lien		266		372		—		559		701		4
Other revolving and installment		5		6		3		20		22		20
Total impaired loans	$	7,954	$	9,071	$	3,138	$	6,560	$	7,136	$	2,538

The table below presents the average recorded investment in impaired loans and interest income for the three years ending December 31, 2019, 2018, and 2017:


	Year Ended December 31,
	2019				2018				2017
	Average				Average				Average
	Recorded		Interest		Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	839	$	16	$	3,163	$	—	$	2,605	$	148
Real estate construction		—		—		—		—		—		—
Commercial real estate		5,891		—		1,558		—		234		9
Residential real estate first mortgage		—		—		—		—		—		—
Residential real estate junior lien		—		—		4		—		317		18
Other revolving and installment		20		—		28		—		79		6
Total impaired loans with a valuation allowance		6,750		16		4,753		—		3,235		181
Impaired loans without a valuation allowance
Commercial and industrial		2,434		30		1,595		35		1,676		89
Real estate construction		—		—		—		—		65		3
Commercial real estate		212		8		223		9		—		—
Residential real estate first mortgage		230		—		533		—		620		37
Residential real estate junior lien		338		4		718		6		1,963		123
Other revolving and installment		3		—		3		—		10		—
Total impaired loans without a valuation allowance		3,217		42		3,072		50		4,334		252
Total impaired loans
Commercial and industrial		3,273		46		4,758		35		4,281		237
Real estate construction										65		3
Commercial real estate		6,103		8		1,781		9		234		9
Residential real estate first mortgage		230		—		533		—		620		37
Residential real estate junior lien		338		4		722		6		2,280		141
Other revolving and installment		23		—		31		—		89		6
Total impaired loans	$	9,967	$	58	$	7,825	$	50	$	7,569	$	433

Loans with a carrying value of $1.2 billion and $1.1 billion were pledged at December 31, 2019 and 2018, respectively, to secure FHLB borrowings, 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, or 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 modified as a troubled debt restructuring as a result of extending the amortization period. As of December 31, 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 a $24 thousand specific reserve for the loan losses allocated to the loan modified as a 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. In December 2019, this loan was charged off.

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.