Loans and Related Allowance for Loan Losses

9 Months Ended

Sep. 30, 2020

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.

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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.