NOTE 4 – 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 three months ended March 31, 2020 and 2019:


	Commercial				Commercial		Residential		Consumer
	and				Real		Real		and
(Dollars in thousands)	Industrial		Construction		Estate		Estate		Other		Unallocated		Total
Three Months Ended:
March 31, 2020
Beginning balance	$	1,175	$	537	$	6,717	$	1,338	$	9	$	491	$	10,267
Charge-offs		(343)		—		—		—		(10)		—		(353)
Recoveries		46		—		—		25		3		—		74
Provision		42		343		624		119		10		(259)		879
Ending balance	$	920	$	880	$	7,341	$	1,482	$	12	$	232	$	10,867
March 31, 2019
Beginning balance	$	603	$	663	$	5,575	$	1,371	$	23	$	540	$	8,775
Charge-offs		(45)		—		(5)		(93)		(25)		—		(168)
Recoveries		1		—		1		7		3		—		12
Provision		88		(304)		733		64		18		(28)		571
Ending balance	$	647	$	359	$	6,304	$	1,349	$	19	$	512	$	9,190

The following table presents the balance of the allowance of loan losses and loans receivable by class at March 31, 2020 and December 31, 2019 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
March 31, 2020
Commercial and industrial	$	920	$	10	$	910	$	133,654	$	309	$	133,345
Construction		880		—		880		114,734		—		114,734
Commercial real estate		7,341		291		7,050		1,056,745		7,913		1,048,832
Residential real estate		1,482		70		1,412		379,396		4,959		374,437
Consumer and other loans		12		—		12		1,903		—		1,903
Unallocated		232		—		—		—		—		—
Total	$	10,867	$	371	$	10,264	$	1,686,432	$	13,181	$	1,673,251
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

(a)

loans individually evaluated for impairment exclude PCI loans.

An age analysis of loans receivable, which were past due as of March 31, 2020 and December 31, 2019, 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
March 31, 2020
Commercial and industrial	$	—	$	—	$	212	$	212	$	133,442	$	133,654	$	—
Construction		85		—		—		85		114,649		114,734		—
Commercial real estate		3,669		65		7,337		11,071		1,045,674		1,056,745		—
Residential real estate		859		37		5,512		6,408		372,988		379,396		—
Consumer and other		40		208		—		248		1,655		1,903		—
Total	$	4,653	$	310	$	13,061	$	18,024	$	1,668,408	$	1,686,432	$	—
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	$	—

(a)

includes loans greater than 90 days past due and still accruing and non-accrual loans, excluding PCI loans. Loan deferrals made in connection with the COVID-19 pandemic continue to accrue and are not presented as past due.

Loans for which the accrual of interest has been discontinued, excluding PCI loans, at March 31, 2020 and December 31, 2019 were:


(Dollars in thousands)	March 31, 2020		December 31, 2019
Commercial and industrial	$	212	$	701
Construction		—		—
Commercial real estate		7,337		5,643
Residential real estate		5,512		5,070
Consumer and other		—		1
Total	$	13,061	$	11,415

In determining the adequacy of the allowance for loan losses, we estimate losses based on the identification of specific problem loans through our credit review process and also estimate 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 our 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 and payment status; 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.

Our risk-rating system is consistent with the classification system used by regulatory agencies and with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the regulatory definitions of classified assets. The classification system is as follows:

Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation. We have 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 management and there is a distinct possibility that we 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 is not warranted. Such loans are fully charged off.

The following tables illustrate our corporate credit risk profile by creditworthiness category as of March 31, 2020 and December 31, 2019: ໿


			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
March 31, 2020
Commercial and industrial	$	133,281	$	—	$	373	$	—	$	133,654
Construction		110,392		4,342		—		—		114,734
Commercial real estate		1,040,848		5,401		10,496		—		1,056,745
	$	1,284,520	$	9,744	$	10,869	$	—	$	1,305,133

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


	Residential Real		Consumer
(Dollars in thousands)	Estate		and other
March 31, 2020
Performing	$	372,741	$	1,903
Non-Performing		6,655		—
Total	$	379,396	$	1,903

December 31, 2019
Performing	$	377,497	$	2,096
Non-Performing		5,070		1
Total	$	382,567	$	2,097

The following table reflects information about our impaired loans, excluding PCI loans, by class as of March 31, 2020 and December 31, 2019:


	March 31, 2020						December 31, 2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	160	$	160	$	—	$	345	$	495	$	—
Construction		—		—		—		250		250		—
Commercial real estate		7,429		7,905		—		6,632		5,790		—
Residential real estate		4,554		5,142		—		5,450		5,775		—
With an allowance recorded:
Commercial and industrial		149		491		10		490		491		353
Commercial real estate		484		586		291		544		498		296
Residential real estate		405		405		70		552		548		67
Total:
Commercial and industrial		309		652		10		835		986		353
Construction		—		—		—		250		250		—
Commercial real estate		7,913		8,491		291		7,176		6,288		296
Residential real estate		4,959		5,547		70		6,002		6,323		67
	$	13,181		14,689	$	371	$	14,263	$	13,847	$	716

The following table presents the average recorded investment and income recognized for our impaired loans, excluding PCI loans, for the three months ended March 31, 2020 and 2019:


	For the Three Months Ended				For the Three Months Ended
	March 31, 2020				March 31, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	251	$	2	$	79	$	—
Construction		—		—		—		—
Commercial real estate		6,536		9		15,469		124
Residential real estate		5,558		16		3,800		18
Total impaired loans without a related allowance		12,345		27		19,348		142

With an allowance recorded:
Commercial and industrial		320		—		335		5
Commercial real estate		486		—		936		5
Residential real estate		479		—		772		—
Total impaired loans with an allowance		1,285		—		2,043		10
Total impaired loans	$	13,630	$	27	$	21,391	$	152

We recognize interest income on performing impaired loans as payments are received. On non-performing impaired loans we do not recognize interest income as all payments are recorded as a reduction of principal on such loans.

Impaired loans include loans modified in troubled debt restructurings 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 concessions rarely result in the forgiveness of principal or accrued interest. In addition, we attempt to obtain additional collateral or guarantor support when modifying such loans. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

The following table presents the recorded investment in troubled debt restructured loans, based on payment performance status:


	Commercial		Commercial &		Residential
(Dollars in thousands)	Real Estate		Industrial		Real Estate		Total
March 31, 2020
Performing	$	412	$	130	$	906	$	1,448
Non-performing		378		30		634		1,042
Total	$	790	$	160	$	1,540	$	2,490
December 31, 2019
Performing	$	416	$	131	$	909	$	1,456
Non-performing		395		35		638		1,068
Total	$	811	$	166	$	1,547	$	2,524

Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote. As of March 31, 2020, we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructuring.

There was no troubled debt restructurings during the three months ended March 31, 2020. There was one troubled debt restructuring in the amount of $514 thousand that occurred during three months ended March 31, 2019.


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

There was no troubled debt restructuring for which there was a payment default within twelve months following the date of the restructuring for the three months ended March 31, 2020. There was no troubled debt restructuring for which there was a payment default within twelve months following the date of the restructuring for the three months ended March 31, 2019.