LOANS AND ALLOWANCE FOR LOAN LOSSES | 4. LOANS AND ALLOWANCE FOR LOAN LOSSES The following table summarizes the composition of our loan portfolio as of June 30, 2020 and December 31, 2019 (in thousands): June 30, 2020 December 31, 2019 Loans secured by real estate: Commercial real estate - owner occupied $ 412,916 $ 414,479 Commercial real estate - non-owner occupied 591,229 559,195 Secured by farmland 16,845 17,622 Construction and land loans 122,086 150,750 Residential 1-4 family (1) 612,247 604,777 Multi- family residential 100,685 82,055 Home equity lines of credit (1) 101,218 109,006 Total real estate loans 1,957,226 1,937,884 Commercial loans 204,160 221,447 Paycheck Protection Program Loans 335,612 — Consumer loans 24,733 26,304 Subtotal 2,521,731 2,185,635 Plus (less) deferred costs (fees) on loans (10,227) 412 Total loans $ 2,511,504 $ 2,186,047 (1) Included $13.5 million of loans as of December 31, 2019, acquired in the Greater Atlantic Bank (“GAB”) transaction covered under an FDIC loss-share agreement. The agreement covering single family loans expired on December 31, 2019. Accounting policy related to the allowance for loan losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the Company’s consolidated financial results. Accretable discount on the acquired loans totaled $8.6 million and $11.2 million at June 30, 2020 and December 31, 2019, respectively. Accretion associated with the acquired loans held for investment of $1.9 million and $972 thousand was recognized during the three months ended June 30, 2020 and 2019, respectively, and $2.5 million and $1.8 million was recognized during the six months ended June 30, 2020 and 2019, respectively. Impaired loans for the portfolio were as follows (in thousands): Total Loans Unpaid Recorded Principal Related June 30, 2020 Investment (1) Balance Allowance With no related allowance recorded Commercial real estate - owner occupied $ 10,412 $ 11,122 $ — Commercial real estate - non-owner occupied (2) 7,797 7,805 — Construction and land development 119 128 — Commercial loans 5,610 6,737 — Paycheck Protection Program Loans — — — Residential 1-4 family (3) 6,079 6,746 — Other consumer loans 6 6 — Total $ 30,023 $ 32,544 $ — With an allowance recorded Commercial real estate - owner occupied $ 369 $ 370 $ 16 Commercial real estate - non-owner occupied (2) — — — Construction and land development 1,691 1,691 24 Commercial loans 2,053 2,144 1,068 Paycheck Protection Program Loans — — — Residential 1-4 family (3) 562 551 36 Other consumer loans 5 4 5 Total $ 4,680 $ 4,760 $ 1,149 Grand total $ 34,703 $ 37,304 $ 1,149 Total Loans Unpaid Recorded Principal Related December 31, 2019 Investment (1) Balance Allowance With no related allowance recorded Commercial real estate - owner occupied $ 6,890 $ 8,530 $ — Commercial real estate - non-owner occupied (2) 3,120 3,363 — Construction and land development 345 747 — Commercial loans 5,049 8,490 — Paycheck Protection Program Loans — — — Residential 1-4 family (3) 1,021 2,719 — Other consumer loans — — — Total $ 16,425 $ 23,849 $ — With an allowance recorded Commercial real estate - owner occupied $ — $ — $ — Commercial real estate - non-owner occupied (2) 176 281 1 Construction and land development — — — Commercial loans 2,498 2,533 957 Paycheck Protection Program Loans — — — Residential 1-4 family (3) 2,841 3,243 92 Other consumer loans 39 39 1 Total $ 5,554 $ 6,096 $ 1,051 Grand total $ 21,979 $ 29,945 $ 1,051 (1) Recorded investment is after cumulative prior charge offs of $2.0 million and $1.5 million as of June 30, 2020 and December 31, 2019, respectively. These loans also have aggregate SBA guarantees of $ 4.0 million and $4.4 million as of June 30, 2020 and December 31, 2019, respectively. (2) Includes loans secured by farmland and multi-family residential loans. (3) Includes home equity lines of credit. The following tables present the average recorded investment and interest income recognized for impaired loans recognized by class of loans for the three months ended June 30, 2020 and 2019 (in thousands): Total Loans Average Interest Recorded Income (loss) Three Months Ended June 30, 2020 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 11,667 $ 145 Commercial real estate - non-owner occupied (1) 7,800 51 Construction and land development 124 (10) Commercial loans 7,844 50 Paycheck Protection Program Loans — — Residential 1-4 family (2) 7,059 23 Other consumer loans 6 — Total $ 34,500 $ 259 With an allowance recorded Commercial real estate - owner occupied $ 369 $ 13 Commercial real estate - non-owner occupied (1) — — Construction and land development 1,696 52 Commercial loans 2,224 26 Paycheck Protection Program Loans — — Residential 1-4 family (2) 562 (18) Other consumer loans 5 — Total $ 4,856 $ 73 Grand total $ 39,356 $ 332 Total Loans Average Interest Recorded Income Three Months Ended June 30, 2019 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 5,433 $ 92 Commercial real estate - non-owner occupied (1) 4,901 100 Construction and land development 357 14 Commercial loans 5,524 98 Paycheck Protection Program Loans — — Residential 1-4 family (2) 1,691 48 Other consumer loans — — Total $ 17,906 $ 352 With an allowance recorded Commercial real estate - owner occupied $ — $ — Commercial real estate - non-owner occupied (1) — — Construction and land development — — Commercial loans 2,787 49 Paycheck Protection Program Loans — — Residential 1-4 family (2) 1,256 20 Other consumer loans — — Total $ 4,043 $ 69 Grand total $ 21,949 $ 421 ________________________________________ (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. The following tables present the average recorded investment and interest income recognized for impaired loans recognized by class of loans for the six months ended June 30, 2020 and 2019 (in thousands): Total Loans Average Interest Recorded Income (loss) Six Months Ended June 30, 2020 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 11,709 $ 236 Commercial real estate - non-owner occupied (1) 7,808 97 Construction and land development 125 4 Commercial loans 7,864 96 Paycheck Protection Program Loans — — Residential 1-4 family (2) 7,066 60 Other consumer loans 6 — Total $ 34,578 $ 493 With an allowance recorded Commercial real estate - owner occupied $ 369 $ 13 Commercial real estate - non-owner occupied (1) — — Construction and land development 1,700 52 Commercial loans 2,245 75 Paycheck Protection Program Loans — — Residential 1-4 family (2) 563 (18) Other consumer loans 5 — Total $ 4,882 $ 122 Grand total $ 39,460 $ 615 Total Loans Average Interest Recorded Income Six Months Ended June 30, 2019 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 5,459 $ 158 Commercial real estate - non-owner occupied (1) 4,933 137 Construction and land development 362 28 Commercial loans 5,547 109 Paycheck Protection Program Loans — — Residential 1-4 family (2) 1,703 107 Other consumer loans — — Total $ 18,004 $ 539 With an allowance recorded Commercial real estate - owner occupied $ — $ — Commercial real estate - non-owner occupied (1) — — Construction and land development — — Commercial loans 2,819 99 Paycheck Protection Program Loans — — Residential 1-4 family (2) 1,257 38 Other consumer loans — — Total $ 4,076 $ 137 Grand total $ 22,080 $ 676 ________________________________________ (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. The following tables present the aging of the recorded investment in past due loans by class of loans as of June 30, 2020 and December 31, 2019 (in thousands): 30 - 59 60 - 89 90 Days Days Days Total Nonaccrual Loans Not Total June 30, 2020 Past Due Past Due or More Past Due Loans (3) Past Due Loans (4) Total loans: Commercial real estate - owner occupied $ 1,568 $ 206 $ — $ 1,774 $ 2,788 $ 408,354 $ 412,916 Commercial real estate - non-owner occupied (1) — — — — 1,152 707,607 708,759 Construction and land development 40 — — 40 — 122,046 122,086 Commercial loans 271 413 — 684 6,707 196,769 204,160 Paycheck Protection Program Loans — — — — — 335,612 335,612 Residential 1-4 family (2) 2,474 1,103 — 3,577 4,248 705,640 713,465 Other consumer loans 24 100 — 124 35 24,574 24,733 Total $ 4,377 $ 1,822 $ — $ 6,199 $ 14,930 $ 2,500,602 $ 2,521,731 30 - 59 60 - 89 90 Days Days Days Total Nonaccrual Loans Not Total December 31, 2019 Past Due Past Due or More Past Due Loans (3) Past Due Loans Total loans: Commercial real estate - owner occupied $ 813 $ — $ — $ 813 $ — $ 413,666 $ 414,479 Commercial real estate - non-owner occupied (1) 936 — — 936 — 657,936 658,872 Construction and land development 746 275 — 1,021 — 149,729 150,750 Commercial loans 234 62 — 296 6,337 214,814 221,447 Paycheck Protection Program Loans — — — — — — — Residential 1-4 family (2) 4,060 — — 4,060 2,524 707,199 713,783 Other consumer loans 107 — — 107 39 26,158 26,304 Total $ 6,896 $ 337 $ — $ 7,233 $ 8,900 $ 2,169,502 $ 2,185,635 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. (3) Nonaccrual loans include SBA guaranteed amounts totaling $3.5 million and $4.1 million at June 30, 2020 and December 31, 2019, respectively. (4) Includes $713.0 million of loans that were subject to deferrals at July 31, 2020. Activity in the allowance for loan and lease losses by class of loan for the three months ended June 30, 2020 and 2019 is summarized below (in thousands): Commercial Commercial Real Estate Real Estate Construction Other Owner Non-owner and Land Commercial 1-4 Family Consumer Three Months Ended June 30, 2020 Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total Allowance for loan losses: Beginning balance $ 1,068 $ 2,693 $ 376 $ 5,833 $ 2,439 $ 239 $ 74 $ 12,722 Provision (recovery) for non-purchased loans 2,490 5,682 341 (157) 1,410 686 653 11,105 Recovery for purchase credit impaired loans — — — (206) — — — (206) Total provision (recovery) 2,490 5,682 341 (363) 1,410 686 653 10,899 Charge offs — — — — — (33) — (33) Recoveries — 3 — 20 5 11 — 39 Ending balance $ 3,558 $ 8,378 $ 717 $ 5,490 $ 3,854 $ 903 $ 727 $ 23,627 Three Months Ended June 30, 2019 Allowance for loan losses: Beginning balance $ 816 $ 1,831 $ 920 $ 6,106 $ 1,170 $ 253 $ 778 $ 11,874 Provision (recovery) 599 56 (118) (481) (237) 105 76 — Charge offs (782) — — — (90) (96) — (968) Recoveries 200 3 — 209 284 11 — 707 Ending balance $ 833 $ 1,890 $ 802 $ 5,834 $ 1,127 $ 273 $ 854 $ 11,613 Activity in the allowance for loan and lease losses by class of loan for the six months ended June 30, 2020 and 2019 is summarized below (in thousands): Commercial Commercial Real Estate Real Estate Construction Other Owner Non-owner and Land Commercial 1-4 Family Consumer Six Months Ended June 30, 2020 Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total Allowance for loan losses: Beginning balance $ 810 $ 1,720 $ 683 $ 5,418 $ 1,266 $ 190 $ 174 $ 10,261 Provision (recovery) for non-purchased loans 2,743 6,653 34 665 2,797 760 553 14,205 Provision for purchase credit impaired loans — — — 144 — — — 144 Total provision (recovery) 2,743 6,653 34 809 2,797 760 553 14,349 Charge offs — — — (822) (245) (65) — (1,132) Recoveries 5 5 — 85 36 18 — 149 Ending balance $ 3,558 $ 8,378 $ 717 $ 5,490 $ 3,854 $ 903 $ 727 $ 23,627 Six Months Ended June 30, 2019 Allowance for loan losses: Beginning balance $ 802 $ 1,669 $ 821 $ 7,097 $ 1,106 $ 224 $ 564 $ 12,283 Provision (recovery) 610 680 (19) (1,368) (181) 188 290 200 Charge offs (782) (462) — (167) (90) (156) — (1,657) Recoveries 203 3 — 272 292 17 — 787 Ending balance $ 833 $ 1,890 $ 802 $ 5,834 $ 1,127 $ 273 $ 854 $ 11,613 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. No allowance for credit losses has been recognized for PPP loans as these loans are fully guaranteed by the SBA. The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2020 and the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on the impairment method as of December 31, 2019 (in thousands): Commercial Commercial Real Estate Real Estate Construction Paycheck Other Owner Non-owner and Land Commercial Protection 1-4 Family Consumer June 30, 2020 Occupied Occupied (1) Development Loans Program Residential (2) Loans Unallocated Total Ending allowance balance attributable to loans: Individually evaluated for impairment $ 16 $ — $ 24 $ 1,068 $ — $ 36 $ 5 $ — $ 1,149 Collectively evaluated for impairment 3,542 8,378 693 4,422 — 3,818 898 727 22,478 Total ending allowance $ 3,558 $ 8,378 $ 717 $ 5,490 $ — $ 3,854 $ 903 $ 727 $ 23,627 Loans: Individually evaluated for impairment $ 10,412 $ 7,797 $ 119 $ 5,610 $ — $ 6,079 $ 6 $ — $ 30,023 Collectively evaluated for impairment 402,504 700,962 121,967 198,550 335,612 707,386 24,727 — 2,491,708 Total ending loan balances $ 412,916 $ 708,759 $ 122,086 $ 204,160 $ 335,612 $ 713,465 $ 24,733 $ — $ 2,521,731 December 31, 2019 Ending allowance balance attributable to loans: Individually evaluated for impairment $ — $ — $ — $ 957 $ — $ 85 $ — $ — $ 1,042 Collectively evaluated for impairment 810 1,720 683 4,461 — 1,181 190 174 9,219 Total ending allowance $ 810 $ 1,720 $ 683 $ 5,418 $ — $ 1,266 $ 190 $ 174 $ 10,261 Loans: Individually evaluated for impairment $ 6,890 $ 3,120 $ 345 $ 7,544 $ — $ 1,443 $ — $ — $ 19,342 Collectively evaluated for impairment 407,589 655,752 150,405 213,903 — 712,340 26,304 — 2,166,293 Total ending loan balances $ 414,479 $ 658,872 $ 150,750 $ 221,447 $ — $ 713,783 $ 26,304 $ — $ 2,185,635 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. Troubled Debt Restructurings A modification is classified as a TDR if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rates for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR. Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity. For the CARES Act provisions regarding TDR accounting suspension, refer to note 1 in our consolidated financial statements. There were five TDRs during the three months ended June 30, 2020 and there have been no defaults of TDRs modified during the past twelve months. Credit Quality Indicators Through its system of internal controls, Southern National evaluates and segments loan portfolio credit quality on a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified. Special Mention loans are loans that have a potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position. Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful loans have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Southern National had no loans classified Doubtful at June 30, 2020 or December 31, 2019. As of June 30, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands): Total Loans Special June 30, 2020 Mention Substandard (3) Pass Total Commercial real estate - owner occupied $ 7,721 $ 6,970 $ 398,225 $ 412,916 Commercial real estate - non-owner occupied (1) 3,515 4,653 700,591 708,759 Construction and land development — 1,691 120,395 122,086 Commercial loans 1,999 4,429 197,732 204,160 Paycheck Protection Program Loans — — 335,612 335,612 Residential 1-4 family (2) 656 1,854 710,955 713,465 Other consumer loans 115 24,618 24,733 Total $ 14,006 $ 19,597 $ 2,488,128 $ 2,521,731 Total Loans Special December 31, 2019 Mention Substandard (3) Pass Total Commercial real estate - owner occupied $ 3,821 $ 3,975 $ 406,683 $ 414,479 Commercial real estate - non-owner occupied (1) 4,193 176 654,503 658,872 Construction and land development — 690 150,060 150,750 Commercial loans 3,432 4,462 213,553 221,447 Paycheck Protection Program Loans — — — — Residential 1-4 family (2) 666 1,194 711,923 713,783 Other consumer loans 122 — 26,182 26,304 Total $ 12,234 $ 10,497 $ 2,162,904 $ 2,185,635 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. (3) Includes SBA guarantees of $1.5 million and $4.1 million as of June 30, 2020 and December 31, 2019, respectively. The amount of foreclosed residential real estate property held at June 30, 2020 and December 31, 2019 was $1.4 million and $1.4 million, respectively. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $2.0 million and $1.9 million at June 30, 2020 and December 31, 2019, respectively. |