Loans and Related Allowance for Loan Losses

6 Months Ended

Jun. 30, 2020

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.