Loans and Related Allowance for Loan Losses | Note 6 – Loans and Related Allowance for Loan Losses The following table summarizes the primary segments of the loan portfolio at March 31, 2020 and December 31, 2019: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Total March 31, 2020 Individually evaluated for impairment $ 3,351 $ 8,661 $ — $ 3,259 $ 3 $ 15,274 Collectively evaluated for impairment $ 334,337 $ 112,672 $ 123,509 $ 431,710 $ 36,230 $ 1,038,458 Total loans $ 337,688 $ 121,333 $ 123,509 $ 434,969 $ 36,233 $ 1,053,732 December 31, 2019 Individually evaluated for impairment $ 3,179 $ 8,570 $ 30 $ 3,391 $ 4 $ 15,174 Collectively evaluated for impairment $ 332,325 $ 109,320 $ 122,322 $ 436,782 $ 36,195 $ 1,036,944 Total loans $ 335,504 $ 117,890 $ 122,352 $ 440,173 $ 36,199 $ 1,052,118 The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard within the internal risk rating system at March 31, 2020 and December 31, 2019: (in thousands) Pass Special Mention Substandard Total March 31, 2020 Commercial real estate Non owner-occupied $ 163,935 $ 2,729 $ 1,819 $ 168,483 All other CRE 160,695 2,725 5,785 169,205 Acquisition and development 1-4 family residential construction 14,407 — — 14,407 All other A&D 98,549 18 8,359 106,926 Commercial and industrial 115,774 1,454 6,281 123,509 Residential mortgage Residential mortgage - term 363,076 54 5,900 369,030 Residential mortgage - home equity 64,528 137 1,274 65,939 Consumer 36,142 3 88 36,233 Total $ 1,017,106 $ 7,120 $ 29,506 $ 1,053,732 December 31, 2019 Commercial real estate Non owner-occupied $ 164,584 $ 2,765 $ 1,864 $ 169,213 All other CRE 157,407 6,556 2,328 166,291 Acquisition and development 1-4 family residential construction 10,781 — — 10,781 All other A&D 98,823 18 8,268 107,109 Commercial and industrial 116,221 2,896 3,235 122,352 Residential mortgage Residential mortgage - term 365,899 59 5,597 371,555 Residential mortgage - home equity 67,143 139 1,336 68,618 Consumer 36,047 4 148 36,199 Total $ 1,016,905 $ 12,437 $ 22,776 $ 1,052,118 The increase of $6.7 million in the substandard category from December 31, 2019 to March 31, 2020 was primarily due to one large relationship in the “ALL other CRE” and “Commercial and Industrial” categories. This loan is current and well collateralized and is not considered impaired. It was classified as substandard due to a reduction in cash flows and a slight deterioration in the borrower’s balance sheet. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at March 31, 2020 and December 31, 2019: (in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days+ Past Due Total Past Due and Accruing Non- Accrual Total Loans March 31, 2020 Commercial real estate Non owner-occupied $ 168,465 $ — $ — $ — $ — $ 18 $ 168,483 All other CRE 167,826 385 114 13 512 867 169,205 Acquisition and development 1-4 family residential construction 14,407 — — — — — 14,407 All other A&D 98,518 116 — 134 250 8,158 106,926 Commercial and industrial 123,414 95 — — 95 — 123,509 Residential mortgage Residential mortgage - term 366,018 1,306 62 476 1,844 1,168 369,030 Residential mortgage - home equity 64,492 349 300 — 649 798 65,939 Consumer 35,927 245 58 — 303 3 36,233 Total $ 1,039,067 $ 2,496 $ 534 $ 623 $ 3,653 $ 11,012 $ 1,053,732 December 31, 2019 Commercial real estate Non owner-occupied $ 169,180 $ — $ — $ — $ — $ 33 $ 169,213 All other CRE 165,289 — 355 — 355 647 166,291 Acquisition and development 1-4 family residential construction 10,781 — — — — — 10,781 All other A&D 98,916 — — 135 135 8,058 107,109 Commercial and industrial 122,050 272 — — 272 30 122,352 Residential mortgage Residential mortgage - term 368,631 267 967 471 1,705 1,219 371,555 Residential mortgage - home equity 67,121 288 286 65 639 858 68,618 Consumer 35,834 261 46 54 361 4 36,199 Total $ 1,037,802 $ 1,088 $ 1,654 $ 725 $ 3,467 $ 10,849 $ 1,052,118 Non-accrual loans totaled $11.0 million at March 31, 2020, compared to $10.8 million at December 31, 2019. The increase in non-accrual balances at March 31, 2020 was primarily related to one new CRE loan of $0.2 million. Management continues to monitor the $8.0 million A&D participation loan that was added to non-accrual loans in the first quarter of 2019. This loan is serviced by another lender and is now under a forbearance agreement. Management established a specific allocation at the time the loan was placed into non-accrual and believes that the $2.1 million at March 31, 2020 is adequate based upon an appraisal obtained in the second quarter of 2019. Discussions are currently underway for the sale of the property or notes. The Request for Proposal process was delayed by COVID-19. Non-accrual loans that have been subject to partial charge-offs totaled $0.1 million both at March 31, 2020 and December 31, 2019. Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $0.2 million and $0.1 million at March 31, 2020 and December 31, 2019, respectively. All foreclosure and repossession activity have been temporarily suspended as a result of the COVID-19 pandemic and the federal and state guidance issued in response thereto. As a percentage of the loan portfolio, accruing loans past due 30 days or more increased to 0.35%, compared to 0.33% at December 31, 2019 which offset the decrease in the 60-89 days past due. The following table summarizes the primary segments of the ALL at March 31, 2020 and December 31, 2019, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total March 31, 2020 Individually evaluated for impairment $ 7 $ 2,211 $ — $ 15 $ — $ — $ 2,233 Collectively evaluated for impairment $ 3,809 $ 1,852 $ 1,682 $ 4,571 $ 365 $ 500 $ 12,779 Total ALL $ 3,816 $ 4,063 $ 1,682 $ 4,586 $ 365 $ 500 $ 15,012 December 31, 2019 Individually evaluated for impairment $ 9 $ 2,142 $ — $ 22 $ — $ — $ 2,173 Collectively evaluated for impairment $ 2,873 $ 1,532 $ 1,341 $ 3,806 $ 312 $ 500 $ 10,364 Total ALL $ 2,882 $ 3,674 $ 1,341 $ 3,828 $ 312 $ 500 $ 12,537 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, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at March 31, 2020 and December 31, 2019: 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 March 31, 2020 Commercial real estate Non owner-occupied $ 115 $ 7 $ 18 $ 133 $ 8,142 All other CRE — — 3,218 3,218 3,218 Acquisition and development 1-4 family residential construction — — 285 285 285 All other A&D 8,287 2,211 89 8,376 8,449 Commercial and industrial — — — — 2,213 Residential mortgage Residential mortgage – term 737 15 1,724 2,461 2,644 Residential mortgage – home equity — — 798 798 811 Consumer — — 3 3 16 Total impaired loans $ 9,139 $ 2,233 $ 6,135 $ 15,274 $ 25,778 December 31, 2019 Commercial real estate Non owner-occupied $ 116 $ 9 $ 33 $ 149 $ 8,224 All other CRE — — 3,030 3,030 3,030 Acquisition and development 1-4 family residential construction — — 291 291 291 All other A&D 8,219 2,142 60 8,279 8,340 Commercial and industrial — — 30 30 2,266 Residential mortgage Residential mortgage – term 865 22 1,668 2,533 2,724 Residential mortgage – home equity — — 858 858 986 Consumer — — 4 4 4 Total impaired loans $ 9,200 $ 2,173 $ 5,974 $ 15,174 $ 25,865 The following tables present the activity in the ALL for the three-month periods ended March 31, 2020 and 2019: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total ALL balance at January 1, 2020 $ 2,882 $ 3,674 $ 1,341 $ 3,828 $ 312 $ 500 $ 12,537 Charge-offs — (15) (101) (98) (132) — (346) Recoveries 66 14 15 26 46 — 167 Provision 868 390 427 830 139 — 2,654 ALL balance at March 31, 2020 $ 3,816 $ 4,063 $ 1,682 $ 4,586 $ 365 $ 500 $ 15,012 ALL balance at January 1, 2019 $ 2,780 $ 1,721 $ 1,187 $ 4,544 $ 315 $ 500 $ 11,047 Charge-offs — (29) — (12) (68) — (109) Recoveries 29 12 51 108 61 — 261 Provision (34) 634 (113) (143) 5 — 349 ALL balance at March 31, 2019 $ 2,775 $ 2,338 $ 1,125 $ 4,497 $ 313 $ 500 $ 11,548 The ALL is based on estimates, and actual losses may vary from current estimates. Management believes that 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 by class and related interest income recognized for the periods indicated: Three months ended Three months ended March 31, 2020 March 31, 2019 (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 $ 141 $ 2 $ — $ 280 $ 3 $ — All other CRE 3,124 37 — 4,516 38 — Acquisition and development 1-4 family residential construction 288 3 — 313 5 — All other A&D 8,328 3 1 4,040 3 — Commercial and industrial 15 — — 22 — — Residential mortgage Residential mortgage – term 2,497 22 — 3,462 28 8 Residential mortgage – home equity 828 — — 818 — — Consumer 4 — — 17 — — Total $ 15,225 $ 67 $ 1 $ 13,468 $ 77 $ 8 The Bank modifies loan terms in the normal course of business. Among other reasons, modifications might be made in an effort to retain the loan relationship, to remain competitive in the current interest rate environment and/or to re-amortize or extend the loan’s term to better match the loan’s payment stream with the borrower’s cash flow. A modified loan is considered to be a troubled debt restructuring (“TDR”) when the Bank has determined that the borrower is troubled (i.e., experiencing financial difficulties). The Bank evaluates the probability that the borrower will be in payment default on any of its debt obligations 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. Section 4013 of the CARES Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Corporation continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for credit losses on its loan portfolio. See Note 2 to the financial statements included elsewhere in this report for additional information. There were 15 loans totaling $4.1 million and $4.2 million that were classified as TDRs at March 31, 2020 and December 31, 2019, respectively. The following tables present the volume and recorded investment in TDR’s at the times they were modified, by class and type of modification that occurred during the periods indicated: During the three months ended March 31, 2020, there were no new TDRs and no modifications on existing TDRs. There were no payment defaults under TDRs. During the three months ended March 31, 2019, there were no new TDRs but two existing TDRs that had reached their modification maturity dates were re-modified. These re-modifications did not impact the ALL. During the three months ended March 31, 2019, there were no payment defaults under TDRs. Temporary Rate Modification Extension of Maturity Modification of Payment and Other Terms (in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment Three months ended March 31, 2019 Commercial real estate Non owner-occupied — $ — — $ — — $ — All other CRE — — — — — — Acquisition and development 1-4 family residential construction — — — — — — All other A&D — — — — 1 227 Commercial and industrial — — — — — — Residential mortgage Residential mortgage – term — — — — 1 243 Residential mortgage – home equity — — — — — — Consumer — — — — — — Total — $ — — $ — 2 $ 470 |