NOTE 4 Loans and Allowance for Loan Losses

The following table presents total loans outstanding, by portfolio segment, as of September 30, 2020 and December 31, 2019:


	September 30,		December 31,
(dollars in thousands)	2020		2019
Commercial
Commercial and industrial (1)	$	789,036	$	479,144
Real estate construction		33,169		26,378
Commercial real estate		535,216		494,703
Total commercial		1,357,421		1,000,225
Consumer
Residential real estate first mortgage		469,050		457,155
Residential real estate junior lien		152,487		177,373
Other revolving and installment		79,461		86,526
Total consumer		700,998		721,054
Total loans	$	2,058,419	$	1,721,279

(1)

Included Paycheck Protection Program, or PPP, loans of $348.9 million at September 30, 2020.

Total loans included net deferred loan fees and costs of $7.8 million and $1.0 million at September 30, 2020 and December 31, 2019, respectively. Deferred loan fees on PPP loans were $7.4 million at September 30, 2020.

Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurements 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. Loan modifications made in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020, are included as accruing current.

The following tables present a past due aging analysis of total loans outstanding, by portfolio segment, as of September 30, 2020 and December 31, 2019:


	September 30, 2020
					90 Days
	Accruing		30 - 89 Days		or More				Total
(dollars in thousands)	Current		Past Due		Past Due		Nonaccrual		Loans
Commercial
Commercial and industrial	$	784,282	$	1,914	$	—	$	2,840	$	789,036
Real estate construction		32,384		785		—		—		33,169
Commercial real estate		530,984		2,903		—		1,329		535,216
Total commercial		1,347,650		5,602		—		4,169		1,357,421
Consumer
Residential real estate first mortgage		466,551		2,042		—		457		469,050
Residential real estate junior lien		152,111		207		—		169		152,487
Other revolving and installment		79,221		240		—		—		79,461
Total consumer		697,883		2,489		—		626		700,998
Total loans	$	2,045,533	$	8,091	$	—	$	4,795	$	2,058,419


	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

The Company’s consumer loan portfolio is primarily comprised of secured loans that 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, 2020 and December 31, 2019:


	September 30, 2020
			Criticized
			Special
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial
Commercial and industrial	$	759,808	$	8,706	$	20,522	$	—	$	789,036
Real estate construction		32,140		783		246		—		33,169
Commercial real estate		501,913		7,265		26,038		—		535,216
Total commercial		1,293,861		16,754		46,806		—		1,357,421
Consumer
Residential real estate first mortgage		467,168		1,413		469		—		469,050
Residential real estate junior lien		149,290		2,005		1,192		—		152,487
Other revolving and installment		79,461		—		—		—		79,461
Total consumer		695,919		3,418		1,661		—		700,998
Total loans	$	1,989,780	$	20,172	$	48,467	$	—	$	2,058,419


	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

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, 2020 and 2019:


	Three months ended September 30, 2020
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	10,797	$	(846)	$	(10)	$	432	$	10,373
Real estate construction		443		40		—		—		483
Commercial real estate		9,948		1,828		—		95		11,871
Total commercial		21,188		1,022		(10)		527		22,727
Consumer
Residential real estate first mortgage		2,673		1,694		—		—		4,367
Residential real estate junior lien		1,102		28		—		81		1,211
Other revolving and installment		546		108		(41)		24		637
Total consumer		4,321		1,830		(41)		105		6,215
Unallocated		1,747		648		—		—		2,395
Total	$	27,256	$	3,500	$	(51)	$	632	$	31,337


	Nine months ended September 30, 2020
	Beginning		Provision for		Loan		Loan		Ending
(dollars in thousands)	Balance		Loan Losses		Charge-offs		Recoveries		Balance
Commercial
Commercial and industrial	$	12,270	$	(498)	$	(2,745)	$	1,346	$	10,373
Real estate construction		303		180		—		—		483
Commercial real estate		6,688		5,953		(865)		95		11,871
Total commercial		19,261		5,635		(3,610)		1,441		22,727
Consumer
Residential real estate first mortgage		1,448		2,914		—		5		4,367
Residential real estate junior lien		671		377		(12)		175		1,211
Other revolving and installment		352		371		(194)		108		637
Total consumer		2,471		3,662		(206)		288		6,215
Unallocated		2,192		203		—		—		2,395
Total	$	23,924	$	9,500	$	(3,816)	$	1,729	$	31,337


	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

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, 2020 and December 31, 2019:


	September 30, 2020
	Recorded Investment						Allowance for Loan Losses
	Individually		Collectively				Individually		Collectively
(dollars in thousands)	Evaluated		Evaluated		Total		Evaluated		Evaluated		Unallocated		Total
Commercial
Commercial and industrial	$	3,497	$	785,539	$	789,036	$	379	$	9,994	$	—	$	10,373
Real estate construction		—		33,169		33,169		—		483		—		483
Commercial real estate		1,525		533,691		535,216		9		11,862		—		11,871
Total commercial		5,022		1,352,399		1,357,421		388		22,339		—		22,727
Consumer
Residential real estate first mortgage		457		468,593		469,050		—		4,367		—		4,367
Residential real estate junior lien		229		152,258		152,487		19		1,192		—		1,211
Other revolving and installment		—		79,461		79,461		—		637		—		637
Total consumer		686		700,312		700,998		19		6,196		—		6,215
Total loans	$	5,708	$	2,052,711	$	2,058,419	$	407	$	28,535	$	2,395	$	31,337


	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		3,742		—		6,688
Total commercial		6,901		993,324		1,000,225		3,135		16,126		—		19,261
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		—		671		—		671
Other revolving and installment		5		86,521		86,526		3		349		—		352
Total consumer		1,053		720,001		721,054		3		2,468		—		2,471
Total loans	$	7,954	$	1,713,325	$	1,721,279	$	3,138	$	18,594	$	2,192	$	23,924

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, 2020						December 31, 2019
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
(dollars in thousands)	Investment		Principal		Allowance		Investment		Principal		Allowance
Impaired loans with a valuation allowance
Commercial and industrial	$	2,523	$	2,609	$	379	$	639	$	727	$	189
Commercial real estate		196		196		9		5,718		5,823		2,946
Residential real estate junior lien		19		20		19		—		—		—
Other revolving and installment		—		—		—		5		6		3
Total impaired loans with a valuation allowance		2,738		2,825		407		6,362		6,556		3,138
Impaired loans without a valuation allowance
Commercial and industrial		974		1,159		—		337		1,110		—
Commercial real estate		1,329		1,448		—		207		236		—
Residential real estate first mortgage		457		469		—		782		797		—
Residential real estate junior lien		210		256		—		266		372		—
Other revolving and installment		—		—		—		—		—		—
Total impaired loans without a valuation allowance		2,970		3,332		—		1,592		2,515		—
Total impaired loans
Commercial and industrial		3,497		3,768		379		976		1,837		189
Commercial real estate		1,525		1,644		9		5,925		6,059		2,946
Residential real estate first mortgage		457		469		—		782		797		—
Residential real estate junior lien		229		276		19		266		372		—
Other revolving and installment		—		—		—		5		6		3
Total impaired loans	$	5,708	$	6,157	$	407	$	7,954	$	9,071	$	3,138

The table below presents the average recorded investment in impaired loans and interest income for the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30,
	2020				2019
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	2,541	$	14	$	1,964	$	4
Commercial real estate		197		8		1,623		2
Residential real estate first mortgage		—		—		—		—
Residential real estate junior lien		19		—		619		1
Other revolving and installment		—		—		5		—
Total impaired loans with a valuation allowance		2,757		22		4,211		7
Impaired loans without a valuation allowance
Commercial and industrial		1,013		24		1,206		7
Commercial real estate		1,330		—		—		—
Residential real estate first mortgage		459		—		183		—
Residential real estate junior lien		211		3		297		—
Other revolving and installment		—		—		2		—
Total impaired loans without a valuation allowance		3,013		27		1,688		7
Total impaired loans
Commercial and industrial		3,554		38		3,170		11
Commercial real estate		1,527		8		1,623		2
Residential real estate first mortgage		459		—		183		—
Residential real estate junior lien		230		3		916		1
Other revolving and installment		—		—		7		—
Total impaired loans	$	5,770	$	49	$	5,899	$	14


	Nine Months Ended September 30,
	2020				2019
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Impaired loans with a valuation allowance
Commercial and industrial	$	3,815	$	14	$	2,473	$	12
Commercial real estate		200		8		1,668		6
Residential real estate junior lien		20		—		621		3
Other revolving and installment		—		—		5		—
Total impaired loans with a valuation allowance		4,035		22		4,767		21
Impaired loans without a valuation allowance
Commercial and industrial		1,154		26		2,979		23
Real estate construction		—		—		—		—
Commercial real estate		1,699		—		—		—
Residential real estate first mortgage		467		—		92		—
Residential real estate junior lien		217		3		302		—
Other revolving and installment		—		—		4		—
Total impaired loans without a valuation allowance		3,537		29		3,377		23
Total impaired loans
Commercial and industrial		4,969		40		5,452		35
Real estate construction		—		—		—		—
Commercial real estate		1,899		8		1,668		6
Residential real estate first mortgage		467		—		92		—
Residential real estate junior lien		237		3		923		3
Other revolving and installment		—		—		9		—
Total impaired loans	$	7,572	$	51	$	8,144	$	44

Loans with a carrying value of $1.2 billion as of September 30, 2020 and December 31, 2019, respectively, 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 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 third quarter of 2020, there were no loans modified as a TDR. As of September 30, 2020, the Company had entered into modifications on 552 loans representing $151.4 million in principal balances, since the beginning of the pandemic. Of those loans, 27 loans with a total outstanding principal balance of $16.9 million, have been granted second deferral, 56 loans with a total outstanding principal balance of $12.0 million remain on the first deferral and the remaining loans have been returned to a normal payment status. These deferrals were generally no more than 90 days in duration and were not considered TDRs in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions as issued on April 7, 2020. During the first quarter of 2019, there was one loan modified as a TDR 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 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.