Loans and Related Allowance for Loan Losses | 9. Loans and Related Allowance for Loan Losses The following table summarizes the primary segments of the loan portfolio as of December 31, 2021 and December 31, 2020: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Total December 31, 2021 Individually evaluated for impairment $ 2,365 $ 629 $ 90 $ 2,644 $ — $ 5,728 Collectively evaluated for impairment $ 371,926 $ 127,448 $ 180,886 $ 402,042 $ 65,657 $ 1,147,959 Total loans $ 374,291 $ 128,077 $ 180,976 $ 404,686 $ 65,657 $ 1,153,687 December 31, 2020 Individually evaluated for impairment $ 3,330 $ 842 $ — $ 3,185 $ 102 $ 7,459 Collectively evaluated for impairment $ 365,846 $ 116,119 $ 266,745 $ 375,985 $ 35,658 $ 1,160,353 Total loans $ 369,176 $ 116,961 $ 266,745 $ 379,170 $ 35,760 $ 1,167,812 In the ordinary course of business, executive officers and directors of the Corporation, including their families and companies in which certain directors are principal owners, were loan customers of the Bank. Changes in the dollar amount of loans outstanding to officers, directors and their associates were as follows for the year ended December 31: (in thousands) 2021 Balance at January 1 $ 8,857 Loans or advances 1,877 Changes due to change in status (3,910) Repayments (3,112) Balance at December 31 $ 3,712 The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard. There were no loans classified as Doubtful within the internal risk rating system as of December 31, 2021 and 2020: (in thousands) Pass Special Mention Substandard Total December 31, 2021 Commercial real estate Non owner-occupied $ 173,299 $ 12,987 $ 6,077 $ 192,363 All other CRE 174,395 2,357 5,176 181,928 Acquisition and development 1-4 family residential construction 19,924 — — 19,924 All other A&D 107,532 218 403 108,153 Commercial and industrial 161,429 5,071 14,476 180,976 Residential mortgage Residential mortgage - term 338,832 — 5,624 344,456 Residential mortgage – home equity 59,533 — 697 60,230 Consumer 65,557 — 100 65,657 Total $ 1,100,501 $ 20,633 $ 32,553 $ 1,153,687 December 31, 2020 Commercial real estate Non owner-occupied $ 178,670 $ 5,526 $ 6,322 $ 190,518 All other CRE 166,504 5,664 6,490 178,658 Acquisition and development 1-4 family residential construction 18,920 — — 18,920 All other A&D 97,648 17 376 98,041 Commercial and industrial 245,185 8,867 12,693 266,745 Residential mortgage Residential mortgage - term 309,177 283 6,117 315,577 Residential mortgage – home equity 62,804 — 789 63,593 Consumer 35,648 3 109 35,760 Total $ 1,114,556 $ 20,360 $ 32,896 $ 1,167,812 Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The increase of $7.5 million in non-owner occupied offset the decreases in the commercial and industrial and all other commercial real estate categories of $3.8 million and $3.3 million, respectively. In accordance with the CARES Act, as of December 31, 2021, total loan modifications were $9.4 million. This amount included 13 commercial loans related to real estate rental, food services and health care sectors. These loans are scheduled to return to contractual payment terms within the first quarter of 2022. Of these 13 loans, five are classified as pass, six are classified as special mention, and two classified as substandard. The pandemic triggered the Bank to proactively communicate with borrowers initially based on types of industry deemed to be at a higher risk level (i.e. hospitality, accommodations, etc.). This was then expanded to our top borrowers regardless of industry. Discussions evolved into weekly meetings between borrowers and Bank personnel; with the goal being to provide assistance to the communities we serve. The following table presents the classes of the loan portfolio at December 31, 2021 and December 31, 2020, summarized by the aging categories of performing loans and non-accrual loans. Loans under modification are reported as current in accordance with CARES Act requirements: (in thousands) Current 30-59 Day Past Due 60-89 Days Past Due 90 Days+ Past Due Total Past Due and still accruing Non- Accrual Total Loans December 31, 2021 Commercial real estate Non owner-occupied $ 192,363 $ — $ — $ — $ — $ — $ 192,363 All other CRE 181,847 — — — — 81 181,928 Acquisition and development 1-4 family residential construction 19,924 — — — — — 19,924 All other A&D 107,763 — — — — 390 108,153 Commercial and industrial 180,676 132 78 — 210 90 180,976 Residential mortgage Residential mortgage - term 340,429 159 2,222 148 2,529 1,498 344,456 Residential mortgage – home equity 59,485 238 104 — 342 403 60,230 Consumer 65,208 268 29 152 449 — 65,657 Total $ 1,147,695 $ 797 $ 2,433 $ 300 $ 3,530 $ 2,462 $ 1,153,687 December 31, 2020 Commercial real estate Non owner-occupied $ 190,510 $ — $ — $ — $ — $ 8 $ 190,518 All other CRE 177,360 408 — — 408 890 178,658 Acquisition and development 1-4 family residential construction 18,920 — — — — — 18,920 All other A&D 97,660 5 — 10 15 366 98,041 Commercial and industrial 266,708 37 — — 37 — 266,745 Residential mortgage Residential mortgage - term 312,500 63 670 710 1,443 1,634 315,577 Residential mortgage – home equity 63,036 80 63 — 143 414 63,593 Consumer 35,473 230 26 4 260 27 35,760 Total $ 1,162,167 $ 823 $ 759 $ 724 $ 2,306 $ 3,339 $ 1,167,812 Non-accrual loans that have been subject to partial charge-offs totaled $0.5 million at December 31, 2021 and $0.4 million at December 31, 2020. Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $0.2 million at December 31, 2021 and $0.4 million at December 31, 2020. Foreclosure and repossession activities were temporarily suspended as a result of COVID-19 but resumed during the third quarter 2021. Management continues to conform to federal and state mandates relative to the foreclosure processes for both Federal Backed and Non-Federal Backed mortgages. As a percentage of the loan portfolio, accruing loans past due 30 days or more increased to 0.31% at December 31, 2021 compared to 0.20% at December 31, 2020. The ALL is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans. The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement Contingencies Loss Contingencies Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL. (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total December 31, 2021 Individually evaluated for impairment $ — $ — $ 28 $ 36 $ — $ — $ 64 Collectively evaluated for impairment $ 6,032 $ 2,615 $ 2,432 $ 3,448 $ 934 $ 430 $ 15,891 Total ALL $ 6,032 $ 2,615 $ 2,460 $ 3,484 $ 934 $ 430 $ 15,955 December 31, 2020 Individually evaluated for impairment $ 4 $ 13 $ — $ 40 $ — $ — $ 57 Collectively evaluated for impairment $ 5,539 $ 2,326 $ 2,584 $ 5,110 $ 370 $ 500 $ 16,429 Total ALL $ 5,543 $ 2,339 $ 2,584 $ 5,150 $ 370 $ 500 $ 16,486 The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis. The following table presents impaired loans by class, at December 31, 2021 and December 31, 2020, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary: Impaired Loans with Specific Allowance Impaired Loans with No Specific Allowance Total Impaired Loans (in thousands) Recorded Investment Related Allowances Recorded Investment Recorded Investment Unpaid Principal Balance December 31, 2021 Commercial real estate Non owner-occupied $ — $ — $ 106 $ 106 $ 106 All other CRE — — 2,259 2,259 2,259 Acquisition and development 1-4 family residential construction — — 239 239 239 All other A&D — — 390 390 1,599 Commercial and industrial 90 28 — 90 2,304 Residential mortgage Residential mortgage - term 344 31 1,897 2,241 2,302 Residential mortgage – home equity 46 5 357 403 422 Consumer — — — — — Total impaired loans $ 480 $ 64 $ 5,248 $ 5,728 $ 9,231 December 31, 2020 Commercial real estate Non owner-occupied $ 111 $ 4 $ 8 $ 119 $ 119 All other CRE — — 3,211 3,211 3,211 Acquisition and development 1-4 family residential construction — — 266 266 266 All other A&D 276 13 300 576 1,724 Commercial and industrial — — — — 2,214 Residential mortgage Residential mortgage - term 936 34 1,910 2,846 3,031 Residential mortgage – home equity 76 6 339 415 447 Consumer — — 26 26 51 Total impaired loans $ 1,399 $ 57 $ 6,060 $ 7,459 $ 11,063 Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer pools currently utilize a rolling twelve quarters, while Commercial pools currently utilize a rolling eight quarters. “Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. The un-criticized (“pass”) pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral. There are seven geographic regions utilized – six that represent the Bank’s lending footprint and a seventh for all out-of-market credits. Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors. Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are: (i) national and local economic trends and conditions; (ii) levels of and trends in delinquency rates and non-accrual loans; (iii) trends in volumes and terms of loans; (iv) effects of changes in lending policies; (v) experience, ability, and depth of lending staff; (vi) value of underlying collateral; and (vii) concentrations of credit from a loan type, industry and/or geographic standpoint. Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances where due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged-off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value. In most cases, loans with partial charge-offs remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL. Activity in the ALL is presented for the years ended December 31, 2021 and December 31, 2020: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total ALL balance at January 1, 2021 $ 5,543 $ 2,339 $ 2,584 $ 5,150 $ 370 $ 500 $ 16,486 Charge-offs (14) (85) (2) (141) (396) — (638) Recoveries — 175 513 66 170 — 924 Provision 503 186 (635) (1,591) 790 (70) (817) ALL balance at December 31, 2021 $ 6,032 $ 2,615 $ 2,460 $ 3,484 $ 934 $ 430 $ 15,955 ALL balance at January 1, 2020 $ 2,882 $ 3,674 $ 1,341 $ 3,828 $ 312 $ 500 $ 12,537 Charge-offs — (1,172) (232) (217) (341) — (1,962) Recoveries 69 37 151 83 170 — 510 Provision 2,592 (200) 1,324 1,456 229 — 5,401 ALL balance at December 31, 2020 $ 5,543 $ 2,339 $ 2,584 $ 5,150 $ 370 $ 500 $ 16,486 The ALL is based on estimates, and actual losses will vary from current estimates. The granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. The following table presents the average recorded investment in impaired loans and related interest income recognized for the years ended December 31, 2021 and 2020: 2021 2020 (in thousands) Average investment Interest income recognized on an accrual basis Interest income recognized on a cash basis Average investment Interest income recognized on an accrual basis Interest income recognized on a cash basis Commercial real estate Non owner-occupied $ 2,836 $ 12 $ — $ 131 $ 9 $ — All other CRE 2,840 118 94 3,203 144 — Acquisition and development 1-4 family residential construction 252 11 — 278 12 — All other A&D 557 9 — 6,709 12 1 Commercial and industrial 18 — — 16 — — Residential mortgage Residential mortgage - term 2,561 70 5 2,593 82 — Residential mortgage – home equity 439 — — 604 — 4 Consumer 14 — — 20 — — Total $ 9,517 $ 220 $ 99 $ 13,554 $ 259 $ 5 In the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment, and to re-amortize or extend a loan term to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered to be a TDR when the Bank has determined that the borrower is troubled (i.e. experiencing financial difficulties) and a concession has been granted. The Bank evaluates the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations. See Note 3 for more details on loan modifications and the CARES Act. When the Bank restructures a loan to a troubled borrower, the loan terms (i.e. interest rate, payment, amortization period and/or maturity date) are modified in such a way to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default. All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status or to foreclosure. A loan may be removed from being reported as a TDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months. Further, a loan that has been removed from TDR reporting status and has been subsequently re-modified at standard market terms, may be removed from impaired status as well. The volume, type and performance of TDR activity is considered in the assessment of the local economic trend qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment. There were 12 loans totaling $3.3 million and 14 loans totaling $4.0 million that were classified as TDRs at December 31, 2021 and December 31, 2020, respectively. The following table presents the volume and recorded investment at the time of modification of TDRs by class and type of modification that occurred during the periods indicated: Temporary Rate Modification Extension of Maturity Modification of Payment and Other Terms (Dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment For the year ended December 31, 2021 Commercial real estate Non owner-occupied — $ — 1 $ 109 — $ — All other CRE — — — — — — Acquisition and development 1-4 family residential construction — — — — — — All other A&D — — 1 202 — — Commercial and industrial — — — — — — Residential mortgage Residential mortgage – term — — 2 299 — — Residential mortgage – home equity — — — — — — Consumer — — — — — — Total — $ — 4 $ 610 — $ — For the year ended December 31, 2020 Commercial real estate Non owner-occupied — $ — — $ — — $ — All other CRE — — — — 1 2,226 Acquisition and development 1-4 family residential construction — — — — — — All other A&D — — 2 430 — 0 Commercial and industrial — — — — — — Residential mortgage Residential mortgage – term 1 46 2 457 3 356 Residential mortgage – home equity — — — — — — Consumer — — — — — — Total 1 $ 46 4 $ 887 4 $ 2,582 During the years ended December 31, 2021 and 2020, there were no payment defaults. Also, there were no additional funds committed to be advanced in connection with TDRs at December 31, 2021 or 2020. |