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 September 30, 2020 and December 31, 2019: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Total September 30, 2020 Individually evaluated for impairment $ 3,380 $ 7,932 $ — $ 3,170 $ 31 $ 14,513 Collectively evaluated for impairment $ 349,892 $ 119,367 $ 277,723 $ 395,539 $ 35,311 $ 1,177,832 Total loans $ 353,272 $ 127,299 $ 277,723 $ 398,709 $ 35,342 $ 1,192,345 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 $ 148.9 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 September 30, 2020 and December 31, 2019: (in thousands) Pass Special Mention Substandard Total September 30, 2020 Commercial real estate Non owner-occupied $ 165,472 $ 9,204 $ 1,772 $ 176,448 All other CRE 166,899 3,358 6,567 176,824 Acquisition and development 1-4 family residential construction 21,684 — — 21,684 All other A&D 98,057 17 7,541 105,615 Commercial and industrial 260,294 5,005 12,424 277,723 Residential mortgage Residential mortgage - term 328,232 287 6,157 334,676 Residential mortgage - home equity 63,100 — 933 64,033 Consumer 35,226 3 113 35,342 Total $ 1,138,964 $ 17,874 $ 35,507 $ 1,192,345 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 $ 12.7 million in the substandard category from December 31, 2019 to September 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 special mention category is due to the addition of three hotel loans totaling $ 6.5 million in the non-owner occupied category as business continues to be a reduced capacity thereby reducing cash flows. The increase in the commercial and industrial category is related to one medical profession loan. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at September 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 September 30, 2020 Commercial real estate Non owner-occupied $ 176,439 $ — $ — $ — $ — $ 9 $ 176,448 All other CRE 175,906 — — — — 918 176,824 Acquisition and development 1-4 family residential construction 21,684 — — — — — 21,684 All other A&D 98,157 — — 11 11 7,447 105,615 Commercial and industrial 271,012 6,711 — — 6,711 — 277,723 Residential mortgage Residential mortgage - term 331,474 65 951 726 1,742 1,460 334,676 Residential mortgage - home equity 63,435 43 — 76 119 479 64,033 Consumer 35,218 58 35 — 93 31 35,342 Total $ 1,173,325 $ 6,877 $ 986 $ 813 $ 8,676 $ 10,344 $ 1,192,345 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 September 30, 2020 includes $ 148.9 million of PPP loans. Non-accrual loans totaled $ 10.3 million at September 30, 2020, compared to $ 10.8 million at December 31, 2019. The decrease in non-accrual balances at September 30, 2020 was primarily due to the charge-off of $ 1.1 million of a specific allocation attributable to the $ 8.3 million A&D participation loan that was added to non-accrual loans in the first quarter of 2019. The property collateralizing the loan was acquired at foreclosure in November 2020 and was added to OREO at a carrying value of $ 7.2 million. During the third quarter of 2020, a purchase agreement for a parcel of acreage within the development was signed with a large warehouse franchise with an anticipated closing date in December 2020. This loan is serviced by another lender. A new appraisal is in process; however, based on the sales contract price, management re-evaluated the reserve and determined that $ 1.1 million of the $ 2.4 million specific allocation be charged off and the remaining $ 1.3 million reversed. Due to the continued uncertainty in the market surrounding the pandemic and increases in allowance qualitative factors, the $ 1.3 million was re-allocated to the collectively determined portion of the allowance. We anticipate a reduction to the OREO balance of approximately $ 2.0 million once the sale of the parcel is consummated (anticipated in December 2020). Non-accrual loans that have been subject to partial charge-offs totaled $ 7.3 million at September 30, 2020 and $ 0.2 million December 31, 2019 . Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $ 0.3 million and $ 0.1 million at September 30, 2020 and December 31, 2019, respectively. All foreclosure and repossession activity has been temporarily suspended as a result of COVID-19. The foreclosure process on the A&D participation loan, as noted above, was imminent prior to the onset of the pandemic. As a percentage of the loan portfolio, accruing loans past due 30 days or more increased to 0.73 %, including PPP loans, or 0.83 % excluding PPP loans compared to 0.67 % at September 30, 2019. This increase is related to one credit totaling $ 6.7 million which was due to a delay in the preparation of a forbearance agreement. The following table summarizes the primary segments of the ALL at September 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 September 30, 2020 Individually evaluated for impairment $ 5 $ 42 $ — $ 25 $ — $ — $ 72 Collectively evaluated for impairment $ 5,289 $ 2,381 $ 2,184 $ 5,382 $ 381 $ 500 $ 16,117 Total ALL $ 5,294 $ 2,423 $ 2,184 $ 5,407 $ 381 $ 500 $ 16,189 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 September 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 September 30, 2020 Commercial real estate Non owner-occupied $ 113 $ 5 $ 9 $ 122 $ 8,127 All other CRE — — 3,258 3,258 3,258 Acquisition and development 1-4 family residential construction — — 272 272 272 All other A&D 392 42 7,268 7,660 8,812 Commercial and industrial — — — — 2,214 Residential mortgage Residential mortgage – term 744 25 1,947 2,691 2,862 Residential mortgage – home equity — — 479 479 493 Consumer 31 — — 31 56 Total impaired loans $ 1,280 $ 72 $ 13,233 $ 14,513 $ 26,094 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 nine and three month periods ended September 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 — ( 1,144 ) ( 232 ) ( 108 ) ( 274 ) — ( 1,758 ) Recoveries 69 29 149 66 116 — 429 Provision 2,343 ( 136 ) 926 1,621 227 — 4,981 ALL balance at September 30, 2020 $ 5,294 $ 2,423 $ 2,184 $ 5,407 $ 381 $ 500 $ 16,189 ALL balance at January 1, 2019 $ 2,780 $ 1,721 $ 1,187 $ 4,544 $ 315 $ 500 $ 11,047 Charge-offs — ( 29 ) ( 75 ) ( 86 ) ( 212 ) — ( 402 ) Recoveries 67 132 77 259 122 — 657 Provision ( 162 ) 1,556 6 ( 818 ) 87 — 669 ALL balance at September 30, 2019 $ 2,685 $ 3,380 $ 1,195 $ 3,899 $ 312 $ 500 $ 11,971 (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total ALL balance at July 1, 2020 $ 4,527 $ 4,498 $ 1,997 $ 5,106 $ 386 $ 500 $ 17,014 Charge-offs — ( 1,113 ) — ( 10 ) ( 51 ) — ( 1,174 ) Recoveries 3 7 133 18 28 — 189 Provision 764 ( 969 ) 54 293 18 — 160 ALL balance at September 30, 2020 $ 5,294 $ 2,423 $ 2,184 $ 5,407 $ 381 $ 500 $ 16,189 ALL balance at July 1, 2019 $ 2,735 $ 3,294 $ 1,147 $ 3,981 $ 319 $ 500 $ 11,976 Charge-offs — — ( 70 ) — ( 76 ) — ( 146 ) Recoveries 37 21 1 64 31 — 154 Provision ( 87 ) 65 117 ( 146 ) 38 — ( 13 ) ALL balance at September 30, 2019 $ 2,685 $ 3,380 $ 1,195 $ 3,899 $ 312 $ 500 $ 11,971 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: Nine months ended Nine months ended September 30, 2020 September 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 $ 134 $ 6 $ — $ 241 $ 9 $ — All other CRE 3,201 109 — 4,644 113 68 Acquisition and development 1-4 family residential construction 282 9 — 232 10 — All other A&D 8,243 9 1 6,062 12 — Commercial and industrial 16 — — 25 — — Residential mortgage Residential mortgage – term 2,531 62 — 3,082 75 10 Residential mortgage – home equity 651 — 3 873 — 4 Consumer 18 — — 12 — — Total $ 15,076 $ 195 $ 4 $ 15,171 $ 219 $ 82 Three months ended Three months ended September 30, 2020 September 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 $ 127 $ 3 $ — $ 201 $ 3 $ — All other CRE 3,278 36 — 4,773 37 68 Acquisition and development 1-4 family residential construction 276 3 — 152 1 — All other A&D 8,158 3 — 8,085 6 — Commercial and industrial 18 — — 27 — — Residential mortgage Residential mortgage – term 2,565 19 — 2,701 22 — Residential mortgage – home equity 474 — — 928 — 2 Consumer 33 — — 7 — — Total $ 14,929 $ 64 $ — $ 16,874 $ 69 $ 70 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., nine 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 September 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 Nine months ended September 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 — — 2 430 — — 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 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 Nine months ended September 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 1 149 — — 1 243 Residential mortgage – home equity — — — — — — Consumer — — — — — — Total 1 $ 149 — $ — 2 $ 470 During the nine months ended September 30, 2020, there were no new TDRs but nine existing TDRs that had reached their modification maturity dates were re-modified. These re-modifications did not impact the ALL. During the nine months ended September 30, 2020, there were no payment defaults. During the nine months ended September 30, 2019, there was one new TDR due to a mortgage hardship and two existing TDRs that had reached their modification maturity dates were re-modified. There was no impact to the ALL from the new TDR or the re-modifications. During the nine months ended September 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 September 30, 2020 Commercial real estate Non owner-occupied — $ — — $ — — $ — All other CRE — — — — — — Acquisition and development 1-4 family residential construction — — — — — — All other A&D — — 1 213 — — Commercial and industrial — — — — — — Residential mortgage Residential mortgage – term — — 1 227 1 111 Residential mortgage – home equity — — — — — — Consumer — — — — — — Total — $ — 2 $ 440 1 $ 111 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 September 30, 2019 Commercial real estate Non owner-occupied — $ — — $ — — $ — All other CRE — — — — — — Acquisition and development 1-4 family residential construction — — — — — — All other A&D — — — — — — Commercial and industrial — — — — — — Residential mortgage Residential mortgage – term 1 149 — — — — Residential mortgage – home equity — — — — — — Consumer — — — — — — Total 1 $ 149 — $ — — $ — During the three months ended September 30, 2020, there were no new TDRs but three 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 September 30, 2020, there were no payment defaults under TDRs. During the three months ended September 30, 2019, there was one new TDR, no modifications on existing TDRs and no payment defaults. There was no impact to the ALL from the new TDR. |