Loans | NOTE 8. Loans The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for loan losses as of June 30, 2020 and December 31, 2019: (In thousands) June 30, 2020 December 31, 2019 SBA loans held for investment $ 36,966 $ 35,767 SBA PPP loans 136,039 — Commercial loans SBA 504 loans 23,299 26,726 Commercial other 121,961 112,014 Commercial real estate 586,332 578,643 Commercial real estate construction 61,160 47,649 Residential mortgage loans 469,987 467,706 Consumer loans Home equity 67,592 69,589 Consumer other 78,569 73,935 Total loans held for investment $ 1,581,905 $ 1,412,029 SBA loans held for sale 10,602 13,529 Total loans $ 1,592,507 $ 1,425,558 Loans are made to individuals as well as commercial entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Bank. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type. A description of the Company’s different loan segments follows: SBA Loans: On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various relief programs and measures that the U.S. Department of the Treasury, the Small Business Administration, the Federal Reserve Board (“FRB”) and other federal banking agencies have implemented or may implement. The CARES Act provides assistance to small businesses through the establishment of the SBA Paycheck Protection Program ("PPP"). The PPP generally provides small businesses with funds to pay up to 24 weeks of payroll costs, including certain benefits. The funds are provided in the form of loans that may be fully or partially forgiven when used for payroll costs, interest on mortgages, rent, and utilities. The payments on these loans will be deferred for up to six months. Loans made after June 5, 2020, mature in five years, and loans made prior to June 5, 2020, mature in two years but can be extended to five years if the lender agrees. Forgiveness of the PPP loans is based on the borrower maintaining or quickly rehiring employees and maintaining salary levels. Most small businesses with 500 or fewer employees are eligible. Applications for the PPP loans started on April 3, 2020 and was extended through August 8, 2020. As an existing SBA 7(a) lender, the Company opted to participate in the program. Commercial Loans: Residential Mortgage and Consumer Loans: Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan. A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans. The Company minimizes its credit risk by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins when we initiate contact regarding a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors, are analyzed before a loan is submitted for approval. The loan portfolio is then subject to on-going internal reviews for credit quality which in part is derived from ongoing collection and review of borrowers’ financial information, as well as independent credit reviews by an outside firm. The Company’s extension of credit is governed by the Credit Risk Policy which was established to control the quality of the Company’s loans. This policy and the underlying procedures are reviewed and approved by the Board of Directors on a regular basis. Credit Ratings For SBA 7(a), SBA 504 and commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. A loan’s internal risk rating is updated at least annually and more frequently if circumstances warrant a change in risk rating. The Company uses a 1 through 10 loan grading system that follows regulatory accepted definitions. Pass: Special Mention: Substandard: A risk rating of 9 is used for borrowers that have all the weaknesses inherent in a loan with a risk rating of 8, with the added characteristic that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. The possibility of loss is extremely high, but because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures; capital injection; perfecting liens on additional collateral; and refinancing plans. Partial charge-offs are likely. Loss: For residential mortgage and consumer loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. These credit quality indicators are updated on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ultimate ability to collect interest on a loan. At June 30, 2020, the Company owned $648 thousand in residential consumer properties that were included in OREO in the Consolidated Balance Sheets, compared to $1.7 million at December 31, 2019. Additionally, there were $6.4 million of residential consumer loans in the process of foreclosure at June 30, 2020, compared to $3.6 million at December 31, 2019. The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of June 30, 2020: June 30, 2020 SBA & Commercial loans - Internal risk ratings (In thousands) Pass Special mention Substandard Total SBA loans held for investment $ 35,691 $ — $ 1,275 $ 36,966 SBA PPP loans 136,007 — 32 136,039 Commercial loans SBA 504 loans 23,275 — 24 23,299 Commercial other 117,793 2,500 1,668 121,961 Commercial real estate 568,819 46 17,467 586,332 Commercial real estate construction 61,160 — — 61,160 Total commercial loans 771,047 2,546 19,159 792,752 Total SBA and commercial loans $ 942,745 $ 2,546 $ 20,466 $ 965,757 Residential mortgage & Consumer loans - Performing/Nonperforming (In thousands) Performing Nonperforming Total Residential mortgage loans $ 463,795 $ 6,192 $ 469,987 Consumer loans Home equity 67,087 505 67,592 Consumer other 78,569 — 78,569 Total consumer loans 145,656 505 146,161 Total residential mortgage and consumer loans $ 609,451 $ 6,697 $ 616,148 The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2019: December 31, 2019 SBA & Commercial loans - Internal risk ratings (In thousands) Pass Special mention Substandard Total SBA loans held for investment $ 34,202 $ 1,115 $ 450 $ 35,767 Commercial loans SBA 504 loans 24,878 1,808 40 26,726 Commercial other 107,220 3,361 1,433 112,014 Commercial real estate 576,326 758 1,559 578,643 Commercial real estate construction 47,649 — — 47,649 Total commercial loans 756,073 5,927 3,032 765,032 Total SBA and commercial loans $ 790,275 $ 7,042 $ 3,482 $ 800,799 Residential mortgage & Consumer loans - Performing/Nonperforming (In thousands) Performing Nonperforming Total Residential mortgage loans $ 463,770 $ 3,936 $ 467,706 Consumer loans Home equity 69,589 — 69,589 Consumer other 73,915 20 73,935 Total consumer loans 143,504 20 143,524 Total residential mortgage and consumer loans $ 607,274 $ 3,956 $ 611,230 Nonperforming and Past Due Loans Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. Loans past due 90 days or more and still accruing interest are not included in nonperforming loans and generally represent loans that are well collateralized and in the process of collection. The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors. The Company values its collateral through the use of appraisals, broker price opinions, and knowledge of its local market. The following tables set forth an aging analysis of past due and nonaccrual loans as of June 30, 2020 and December 31, 2019: June 30, 2020 90+ days 30 ‑ 59 days 60 ‑ 89 days and still Nonaccrual Total past (In thousands) past due past due accruing (1) due Current Total loans SBA loans held for investment $ 828 $ 606 $ — $ 2,331 $ 3,765 $ 33,201 $ 36,966 SBA PPP loans — — — 32 32 136,007 136,039 Commercial loans SBA 504 loans — — — — — 23,299 23,299 Commercial other — 71 — 10 81 121,880 121,961 Commercial real estate — — — 403 403 585,929 586,332 Commercial real estate construction — — — — — 61,160 61,160 Residential mortgage loans 2,958 — — 6,192 9,150 460,837 469,987 Consumer loans Home equity 170 — — 505 675 66,917 67,592 Consumer other — — — — — 78,569 78,569 Total loans held for investment 3,956 677 — 9,473 14,106 1,567,799 1,581,905 SBA loans held for sale — — — — — 10,602 10,602 Total loans $ 3,956 $ 677 $ — $ 9,473 $ 14,106 $ 1,578,401 $ 1,592,507 (1) At June 30, 2020, nonaccrual loans included $307 thousand of loans guaranteed by the SBA. December 31, 2019 90+ days 30 ‑ 59 days 60 ‑ 89 days and still Nonaccrual Total past (In thousands) past due past due accruing (1) due Current Total loans SBA loans held for investment $ 1,048 $ — $ — $ 1,164 $ 2,212 $ 33,555 $ 35,767 Commercial loans SBA 504 loans — 1,808 — — 1,808 24,918 26,726 Commercial other 71 — — 316 387 111,627 112,014 Commercial real estate 215 — — 213 428 578,215 578,643 Commercial real estate construction — — — — — 47,649 47,649 Residential mortgage loans 4,383 1,676 930 3,936 10,925 456,781 467,706 Consumer loans Home equity 1,446 178 — — 1,624 67,965 69,589 Consumer other — 113 — 20 133 73,802 73,935 Total loans held for investment 7,163 3,775 930 5,649 17,517 1,394,512 1,412,029 SBA loans held for sale — — — — — 13,529 13,529 Total loans $ 7,163 $ 3,775 $ 930 $ 5,649 $ 17,517 $ 1,408,041 $ 1,425,558 (1) At December 31, 2019, nonaccrual loans included $59 thousand of loans guaranteed by the SBA. Impaired Loans The Company has defined impaired loans to be all nonperforming loans individually evaluated for impairment and TDRs. Management considers a loan impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract. Impairment is evaluated on an individual basis for SBA and commercial loans. The following table provides detail on the Company’s impaired loans that are individually evaluated for impairment with the associated allowance amount, if applicable, as of June 30, 2020: June 30, 2020 Unpaid principal Recorded Specific (In thousands) balance investment reserves With no related allowance: SBA loans held for investment (1) $ 1,884 $ 1,784 $ — Commercial loans Commercial other 684 684 — Total commercial loans 684 684 — Residential mortgage loans 4,871 4,766 — Consumer loans: Home equity 505 505 — Total impaired loans with no related allowance 7,944 7,739 — With an allowance: SBA loans held for investment (1) 356 272 177 Commercial loans Commercial other 28 10 10 Commercial real estate 903 403 403 Total commercial loans 931 413 413 Residential mortgage loans 1,426 1,426 256 Total impaired loans with a related allowance 2,713 2,111 846 Total individually evaluated impaired loans: SBA loans held for investment (1) 2,240 2,056 177 Commercial loans Commercial other 28 10 10 Commercial real estate 1,587 1,087 403 Total commercial loans 1,615 1,097 413 Residential mortgage loans 6,297 6,192 256 Consumer loans: Home equity 505 505 — Total individually evaluated impaired loans $ 10,657 $ 9,850 $ 846 (1) Balances are reduced by amount guaranteed by the SBA of $307 thousand at June 30, 2020. The following table provides detail on the Company’s impaired loans that are individually evaluated for impairment with the associated allowance amount, if applicable, as of December 31, 2019: December 31, 2019 Unpaid principal Recorded Specific (In thousands) balance investment reserves With no related allowance: SBA loans held for investment (1) $ 1,224 $ 1,064 $ — Commercial loans Commercial real estate 213 213 — Total commercial loans 213 213 — Total impaired loans with no related allowance 1,437 1,277 — With an allowance: SBA loans held for investment (1) 157 41 41 Commercial loans Commercial other 816 316 316 Commercial real estate 705 705 57 Total commercial loans 1,521 1,021 373 Total impaired loans with a related allowance 1,678 1,062 414 Total individually evaluated impaired loans: SBA loans held for investment (1) 1,381 1,105 41 Commercial loans Commercial other 816 316 316 Commercial real estate 918 918 57 Total commercial loans 1,734 1,234 373 Total individually evaluated impaired loans $ 3,115 $ 2,339 $ 414 (1) Balances are reduced by amount guaranteed by the SBA of $59 thousand at December 31, 2019. Impaired loans increased $7.5 million at June 30, 2020 compared to December 31, 2019. The increase in impaired loans was primarily due to the inclusion of residential and consumer loan evaluations, and the addition of seven commercial loans totaling $987 thousand. The following table presents the average recorded investments in impaired loans and the related amount of interest recognized during the time period in which the loans were impaired for the three and six months ended June 30, 2020 and 2019. The average balances are calculated based on the month-end balances of impaired loans. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method, and therefore no interest income is recognized. The interest income recognized on impaired loans noted below represents primarily accruing TDRs and nominal amounts of income recognized on a cash basis for well-collateralized impaired loans. For the three months ended June 30, 2020 2019 Interest Interest income income Average recognized Average recognized recorded on impaired recorded on impaired (In thousands) investment loans investment loans SBA loans held for investment (1) $ 1,265 $ 3 $ 618 $ 4 Commercial loans Commercial other 99 12 — — Commercial real estate 1,282 33 1,486 9 Residential mortgage loans 6,054 52 — — Consumer loans Home equity 505 4 — — Total $ 9,205 $ 104 $ 2,104 $ 13 For the six months ended June 30, 2020 2019 Interest Interest income income Average recognized Average recognized recorded on impaired recorded on impaired (In thousands) investment loans investment loans SBA loans held for investment (1) $ 1,197 $ 6 $ 901 $ 8 Commercial loans SBA 504 loans 300 32 — — Commercial other 52 21 4 — Commercial real estate 1,165 45 1,637 17 Residential mortgage loans 5,875 81 — — Consumer loans Home equity 424 9 — — Consumer other 38 — — — Total $ 9,051 $ 194 $ 2,542 $ 25 (1) Balances are reduced by the average amount guaranteed by the SBA of $418 thousand and $84 thousand for the six months ended June 30, 2020 and 2019, respectively. TDRs The Company’s loan portfolio also includes certain loans that have been modified as TDRs. TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, unless it results in a delay in payment that is insignificant. These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both. Under the CARES Act and regulatory guidance issued in regards to the COVID-19 pandemic, loan payment deferrals for periods of up to 180 days granted to borrowers adversely effected by the pandemic are not considered TDR’s if the borrower was current on its loan payments at year end 2019 or until the deferral was granted. When the Company modifies a loan, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if the loan is collateral-dependent. If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance. This process is used, regardless of loan type, and for loans modified as TDRs that subsequently default on their modified terms. The Company had one performing TDR with a balance of $684 thousand and $705 thousand as of June 30, 2020 and December 31, 2019, respectively, which was included in the impaired loan numbers as of such dates. There were no specific reserves on the performing TDR as of June 30, 2020 compared to $57 thousand at December 31, 2019. The loan remains in accrual status since it continues to perform in accordance with the restructured terms. To date, the Company’s TDRs consisted of interest rate reductions, interest only periods, principal balance reductions, and maturity extensions. There were no loans modified during the three and six months ended June 30, 2020 and 2019 that were deemed to be TDRs. There were no loans modified as a TDR within the previous 12 months that subsequently defaulted at some point during the three and six months ended June 30, 2020. In this case, the subsequent default is defined as 90 days past due or transferred to nonaccrual status. |