5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2019 and December 31, 2018 are summarized as follows. Net deferred loan costs were $903 and $744 at September 30, 2019 and December 31, 2018.


		September 30, 2019		December 31, 2018
Commercial	$	497,985	$	494,134
Real estate:
Commercial		976,258		907,803
Residential		299,209		299,876
Consumer		107,638		121,453
Total	$	1,881,090	$	1,823,266

The changes in the allowance for loan losses account by major classification of loan for the three and nine months ended September 30, 2019 and 2018 are summarized as follows:


			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2019	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
Charge-offs		(26)		(34)		(104)		(144)		(308)
Recoveries		12				11		47		70
Provisions		(205)		762		34		109		700
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392

			Real estate
September 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2018	$	5,191	$	10,058	$	3,156	$	1,168	$	19,573
Charge-offs		(148)		(63)				(117)		(328)
Recoveries		12		26		13		67		118
Provisions		414		421		153		62		1,050
Ending balance	$	5,469	$	10,442	$	3,322	$	1,180	$	20,413


			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2019	$	5,516	$	10,736	$	3,892		1,235		21,379
Charge-offs		(113)		(383)		(406)		(356)		(1,258)
Recoveries		22				27		122		171
Provisions		498		1,417		43		142		2,100
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392

			Real estate
September 30, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2018	$	5,513	$	8,944	$	3,111	$	1,392	$	18,960
Charge-offs		(150)		(1,232)		(381)		(389)		(2,152)
Recoveries		128		83		80		164		455
Provisions		(22)		2,647		512		13		3,150
Ending balance	$	5,469	$	10,442	$	3,322	$	1,180	$	20,413

The allocation of the allowance for loan losses and the related loans by major classifications of loans at September 30, 2019 and December 31, 2018 is summarized as follows:


			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392
Ending balance: individually evaluated for impairment		394		225		196				815
Ending balance: collectively evaluated for impairment	$	5,529	$	11,545	$	3,360	$	1,143	$	21,577
Loans receivable:
Ending balance	$	497,985	$	976,258	$	299,209	$	107,638	$	1,881,090
Ending balance: individually evaluated for impairment		4,772		3,603		2,450		262		11,087
Ending balance: collectively evaluated for impairment	$	493,213	$	972,655	$	296,759	$	107,376	$	1,870,003



			Real estate
December 31, 2018	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	5,516	$	10,736	$	3,892	$	1,235	$	21,379
Ending balance: individually evaluated for impairment		50		403		666		60		1,179
Ending balance: collectively evaluated for impairment	$	5,466	$	10,333	$	3,226	$	1,175	$	20,200
Loans receivable:
Ending balance	$	494,134	$	907,803	$	299,876	$	121,453	$	1,823,266
Ending balance: individually evaluated for impairment		2,237		3,121		4,071		212		9,641
Ending balance: collectively evaluated for impairment	$	491,897	$	904,682	$	295,805	$	121,241	$	1,813,625

The Company segments 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. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention.

Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

Substandard- A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful – A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss- A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at September 30, 2019 and December 31, 2018:


			Special
September 30, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	488,395	$	1,971	$	7,619	$	$	497,985
Real estate:
Commercial		948,854		2,644		24,760			976,258
Residential		296,565				2,644			299,209
Consumer		107,354				284			107,638
Total	$	1,841,168	$	4,615	$	35,307	$	$	1,881,090


			Special
December 31, 2018	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	491,531	$	869	$	1,734	$	$	494,134
Real estate:
Commercial		886,849		8,934		12,020			907,803
Residential		295,758		357		3,761			299,876
Consumer		121,229				224			121,453
Total	$	1,795,367	$	10,160	$	17,739	$	$	1,823,266

The increase in substandard loans from December 31, 2018 to September 30, 2019 is primarily associated with the reclassification of several larger commercial credits to this category. The largest relationship totals $10.4 million and consists of commercial real estate and equipment financing for a borrowing group that has encountered some financial difficulties. The second largest reclassification consists of a $5.3 million commercial real estate construction loan that experienced significant construction delays. The construction is complete and the certificate of occupancy has been issued for the property. The Bank considers both of these credit relationships to be well secured and both relationships were current as of September 30, 2019.

Information concerning nonaccrual loans by major loan classification at September 30, 2019 and December 31, 2018 is summarized as follows:


		September 30, 2019		December 31, 2018
Commercial	$	3,343	$	776
Real estate:
Commercial		3,246		2,663
Residential		1,548		2,580
Consumer		262		212
Total	$	8,399	$	6,231

The major classifications of loans by past due status are summarized as follows:


					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
September 30, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	9	$	25	$	3,396	$	3,430	$	494,555	$	497,985	$	53
Real estate:
Commercial		776		159		3,300		4,235		972,023		976,258		54
Residential		656		996		1,827		3,479		295,730		299,209		279
Consumer		435		146		262		843		106,795		107,638
Total	$	1,876	$	1,326	$	8,785	$	11,987	$	1,869,103	$	1,881,090	$	386

The Company classifies all nonaccrual loans in the greater than 90 days category.


					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2018	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	973	$	79	$	776	$	1,828	$	492,306	$	494,134
Real estate:
Commercial		1,889		218		2,736		4,843		902,960		907,803	$	73
Residential		2,486		1,545		3,430		7,461		292,415		299,876		850
Consumer		756		292		212		1,260		120,193		121,453
Total	$	6,104	$	2,134	$	7,154	$	15,392	$	1,807,874	$	1,823,266	$	923

The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 2019 and September 30, 2018, and as of and for the year ended December 31, 2018 by major loan classification:


							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2019	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	3,766	$	4,272			$	4,131	$	18	$	3,974	$	52
Real estate:
Commercial		2,981		3,219				2,969		8		2,501		31
Residential		1,644		1,974				1,132		6		1,273		17
Consumer		262		275				257				226
Total		8,653		9,740				8,489		32		7,974		100
With an allowance recorded:
Commercial		1,006		1,008		394		1,213		9		1,010		21
Real estate:
Commercial		622		1,103		225		766				1,030		10
Residential		806		813		196		1,234		8		1,651		26
Consumer												20
Total		2,434		2,924		815		3,213		17		3,711		57
Total impaired loans
Commercial		4,772		5,280		394		5,344		27		4,984		73
Real estate:
Commercial		3,603		4,322		225		3,735		8		3,531		41
Residential		2,450		2,787		196		2,366		14		2,924		43
Consumer		262		275				257				246
Total	$	11,087	$	12,664	$	815	$	11,702	$	49	$	11,685	$	157


							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2018	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	1,562	$	1,900			$	1,318	$	67
Real estate:
Commercial		1,969		2,299				2,822		28
Residential		1,970		2,658				2,193		22
Consumer		152		160				135
Total		5,653		7,017				6,468		117
With an allowance recorded:
Commercial		675		675		50		1,006		30
Real estate:
Commercial		1,152		1,323		403		1,676		18
Residential		2,101		2,328		666		1,585		22
Consumer		60		60		60		21
Total		3,988		4,386		1,179		4,288		70
Total impaired loans
Commercial		2,237		2,575		50		2,324		97
Real estate:
Commercial		3,121		3,622		403		4,498		46
Residential		4,071		4,986		666		3,778		44
Consumer		212		220		60		156
Total	$	9,641	$	11,403	$	1,179	$	10,756	$	187


							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2018	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	1,356	$	1,538			$	1,269	$	17	$	1,257	$	50
Real estate:
Commercial		3,414		3,666				3,143		5		3,036		20
Residential		2,366		3,003				2,256		7		2,249		15
Consumer		142		149				101				131
Total		7,278		8,356				6,769		29		6,673		85
With an allowance recorded:
Commercial		939		1,086	$	93		1,020		7		1,089		23
Real estate:
Commercial		1,669		1,774		462		1,712		8		1,807		18
Residential		1,312		1,508		362		1,369		5		1,456		13
Consumer		14		14		14		9				11
Total		3,934		4,382		931		4,110		20		4,363		54
Total impaired loans
Commercial		2,295		2,624		93		2,289		24		2,346		73
Real estate:
Commercial		5,083		5,440		462		4,855		13		4,843		38
Residential		3,678		4,511		362		3,625		12		3,705		28
Consumer		156		163		14		110				142
Total	$	11,212	$	12,738	$	931	$	10,879	$	49	$	11,036	$	139

Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $2,262 at September 30, 2019, $2,779 at December 31, 2018 and $3,230 at September 30, 2018.

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:

Rate Modification - A modification in which the interest rate is changed to a below market rate.

Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

Interest Only Modification - A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification - Any other type of modification, including the use of multiple categories above.

There were no loans modified as troubled debt restructurings during the three or nine months ended September 30, 2019. For the three months ended September 30, 2018, there were no loans modified as troubled debt restructurings. There was one commercial real estate loan modified as a troubled debt restructuring during the nine months ended September 30, 2018 in the amount of $340. During the three months ended September 30, 2019, there were no payment defaults on troubled debt restructings and one commercial real estate loan paid-off totaling $332. During the nine months ended September 30, 2019, there were payment defaults on two restructured commercial real estate loans with balances totaling $335 which were subsequently charged-off. During the three months ended September 30, 2018, there was one payment default on a restructured residential real estate loan with an outstanding balance of $6. During the nine months ended September 30, 2018, there were two payment defaults on restructured residential real estate loans with a total outstanding balance of $64.