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 June 30, 2020 and December 31, 2019: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Total June 30, 2020 Individually evaluated for impairment $ 3,429 $ 8,934 $ 18 $ 2,908 $ 34 $ 15,323 Collectively evaluated for impairment $ 336,885 $ 117,404 $ 272,168 $ 409,570 $ 35,590 $ 1,171,617 Total loans $ 340,314 $ 126,338 $ 272,186 $ 412,478 $ 35,624 $ 1,186,940 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 $ 435,033 $ 36,195 $ 1,035,195 Total loans $ 335,504 $ 117,890 $ 122,352 $ 438,424 $ 36,199 $ 1,050,369 The increase in the commercial and industrial portfolio in the table above includes $ 144.4 million of PPP loans which are 100 % guaranteed by the SBA and no allowance for loan loss (“ALL”) has been assigned to them. 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 June 30, 2020 and December 31, 2019: (in thousands) Pass Special Mention Substandard Total June 30, 2020 Commercial real estate Non owner-occupied $ 166,113 $ 2,729 $ 1,795 $ 170,637 All other CRE 160,551 3,390 5,736 169,677 Acquisition and development 1-4 family residential construction 19,618 — — 19,618 All other A&D 98,178 18 8,524 106,720 Commercial and industrial 257,472 1,867 12,847 272,186 Residential mortgage Residential mortgage - term 340,392 154 7,296 347,842 Residential mortgage - home equity 63,657 136 843 64,636 Consumer 35,472 3 149 35,624 Total $ 1,141,453 $ 8,297 $ 37,190 $ 1,186,940 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 364,150 59 5,597 369,806 Residential mortgage - home equity 67,143 139 1,336 68,618 Consumer 36,047 4 148 36,199 Total $ 1,015,156 $ 12,437 $ 22,776 $ 1,050,369 The increase of $ 14.4 million in the substandard category from December 31, 2019 to June 30, 2020 was primarily due to two large relationships in the “All other CRE” and “Commercial and Industrial” categories. These loans are current and well collateralized and are not considered impaired. They were classified as substandard due to a reduction in cash flows and a slight deterioration in the borrower’s balance sheet. The increase in the residential mortgage term is related to one large credit in this amount of $ 1.5 million. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at June 30, 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 June 30, 2020 Commercial real estate Non owner-occupied $ 170,620 $ — $ — $ — $ — $ 17 $ 170,637 All other CRE 168,721 — — — — 956 169,677 Acquisition and development 1-4 family residential construction 19,618 — — — — — 19,618 All other A&D 98,270 — 11 — 11 8,439 106,720 Commercial and industrial 272,118 — 50 — 50 18 272,186 Residential mortgage Residential mortgage - term 345,117 5 1,236 294 1,535 1,190 347,842 Residential mortgage - home equity 63,939 245 25 — 270 427 64,636 Consumer 35,450 92 45 3 140 34 35,624 Total $ 1,173,853 $ 342 $ 1,367 $ 297 $ 2,006 $ 11,081 $ 1,186,940 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 366,882 267 967 471 1,705 1,219 369,806 Residential mortgage - home equity 67,121 288 286 65 639 858 68,618 Consumer 35,834 261 46 54 361 4 36,199 Total $ 1,036,053 $ 1,088 $ 1,654 $ 725 $ 3,467 $ 10,849 $ 1,050,369 The current status of commercial and industrial loans at June 30, 2020 includes $ 144.4 million of PPP loans. Non-accrual loans totaled $ 11.1 million at June 30, 2020, compared to $ 10.8 million at December 31, 2019. The increase in non-accrual balances at June 30, 2020 was primarily related to one new commercial real estate (“CRE”) loan of $ 0.2 million. Management continues to monitor the $ 8.2 million acquisition and development 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 in the foreclosure process and progress has been delayed due to COVID-19. The anticipated foreclosure date has been tentatively set for September 2020. Management believes that the specific allocation for this loan of $ 2.3 million at June 30, 2020 is adequate based upon an appraisal obtained in the second quarter of 2019. Discussions are currently underway for the sale of a parcel of acreage within the development. Obtaining a new appraisal is planned to be concurrent with the transfer of the collateral to Other Real Estate Owned (“OREO”). Non-accrual loans that have been subject to partial charge-offs totaled $ 0.2 million at June 30, 2020 and at 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 June 30, 2020 and December 31, 2019, respectively. All foreclosure and repossession activity has been temporarily suspended by the State as a result of COVID-19. As a percentage of the loan portfolio, accruing loans past due 30 days or more decreased to 0.17 %, including PPP loans, or 0.19 % excluding PPP compared to 0.46 % at June 30, 2019. The following table summarizes the primary segments of the ALL at June 30, 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 June 30, 2020 Individually evaluated for impairment $ 6 $ 2,321 $ 1 $ 29 $ 2 $ — $ 2,359 Collectively evaluated for impairment $ 4,521 $ 2,177 $ 1,996 $ 5,077 $ 384 $ 500 $ 14,655 Total ALL $ 4,527 $ 4,498 $ 1,997 $ 5,106 $ 386 $ 500 $ 17,014 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 June 30, 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 June 30, 2020 Commercial real estate Non owner-occupied $ 114 $ 6 $ 17 $ 131 $ 8,140 All other CRE — — 3,298 3,298 3,298 Acquisition and development 1-4 family residential construction — — 279 279 279 All other A&D 8,455 2,321 200 8,655 8,739 Commercial and industrial 18 1 — 18 2,246 Residential mortgage Residential mortgage – term 846 29 1,592 2,438 2,614 Residential mortgage – home equity — — 470 470 484 Consumer 33 2 1 34 59 Total impaired loans $ 9,466 $ 2,359 $ 5,857 $ 15,323 $ 25,859 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 six and three month periods ended June 30, 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 — ( 31 ) ( 232 ) ( 98 ) ( 223 ) — ( 584 ) Recoveries 66 22 16 48 88 — 240 Provision 1,579 833 872 1,328 209 — 4,821 ALL balance at June 30, 2020 $ 4,527 $ 4,498 $ 1,997 $ 5,106 $ 386 $ 500 $ 17,014 ALL balance at January 1, 2019 $ 2,780 $ 1,721 $ 1,187 $ 4,544 $ 315 $ 500 $ 11,047 Charge-offs — ( 29 ) ( 5 ) ( 86 ) ( 136 ) — ( 256 ) Recoveries 30 111 76 195 91 — 503 Provision ( 75 ) 1,491 ( 111 ) ( 672 ) 49 — 682 ALL balance at June 30, 2019 $ 2,735 $ 3,294 $ 1,147 $ 3,981 $ 319 $ 500 $ 11,976 (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total ALL balance at April 1, 2020 $ 3,816 $ 4,063 $ 1,682 $ 4,586 $ 365 $ 500 $ 15,012 Charge-offs — ( 16 ) ( 131 ) — ( 91 ) — ( 238 ) Recoveries — 8 1 22 42 — 73 Provision 711 443 445 498 70 — 2,167 ALL balance at June 30, 2020 $ 4,527 $ 4,498 $ 1,997 $ 5,106 $ 386 $ 500 $ 17,014 ALL balance at April 1, 2019 $ 2,775 $ 2,338 $ 1,125 $ 4,497 $ 313 $ 500 $ 11,548 Charge-offs — — ( 5 ) ( 74 ) ( 68 ) — ( 147 ) Recoveries 1 99 25 87 30 — 242 Provision ( 41 ) 857 2 ( 529 ) 44 — 333 ALL balance at June 30, 2019 $ 2,735 $ 3,294 $ 1,147 $ 3,981 $ 319 $ 500 $ 11,976 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: Six months ended Six months ended June 30, 2020 June 30, 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 $ 138 $ 3 $ — $ 270 $ 6 $ — All other CRE 3,182 73 — 4,853 76 — Acquisition and development 1-4 family residential construction 285 6 — 310 9 — All other A&D 8,436 6 1 5,306 6 — Commercial and industrial 16 — — 24 — — Residential mortgage Residential mortgage – term 2,477 43 — 3,261 53 10 Residential mortgage – home equity 709 — 3 854 — 2 Consumer 14 — — 14 — — Total $ 15,257 $ 131 $ 4 $ 14,892 $ 150 $ 12 Three months ended Three months ended June 30, 2020 June 30, 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 $ 132 $ 1 $ — $ 258 $ 3 $ — All other CRE 3,258 36 — 4,807 38 — Acquisition and development 1-4 family residential construction 282 3 — 307 4 — All other A&D 8,515 3 — 7,772 3 — Commercial and industrial 9 — — 27 — — Residential mortgage Residential mortgage – term 2,450 21 — 2,941 25 2 Residential mortgage – home equity 634 — 3 925 — 2 Consumer 19 — — 16 — — Total $ 15,299 $ 64 $ 3 $ 17,053 $ 73 $ 4 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 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 14 and 15 loans totaling $ 4.0 million and $ 4.2 million, respectively, that were classified as TDRs at June 30, 2020 and December 31, 2019, respectively. The following tables present the volume and recorded investment in TDRs at the times they were modified, by class and type of modification that occurred during the periods indicated: 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 Six months ended June 30, 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 — — 1 217 — — Commercial and industrial — — — — — — Residential mortgage Residential mortgage – term 1 46 1 230 2 245 Residential mortgage – home equity — — — — — — Consumer — — — — — — Total 1 $ 46 2 $ 447 3 $ 2,471 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 Six months ended June 30, 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 During the six months ended June 30, 2020, there were no new TDRs but six existing TDRs that had reached their modification maturity dates were re-modified. These re-modifications did not impact the ALL. During the six months ended June 30, 2020, there were no payment defaults. During the six months ended June 30, 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 six months ended June 30, 2019, there were no payment defaults. 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 June 30, 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 — — 1 217 — — Commercial and industrial — — — — — — Residential mortgage Residential mortgage – term 1 46 1 230 2 245 Residential mortgage – home equity — — — — — — Consumer — — — — — — Total 1 $ 46 2 $ 447 3 $ 2,471 During the three months ended June 30, 2020, there were no new TDRs but six 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 June 30, 2020, there were no payment defaults under TDRs. During the three months ended June 30, 2019, there were no new TDRs, no modifications on existing TDRs and no payment defaults. |