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LOANS

12 Months Ended

Dec. 31, 2020

Note 5—LOANS

Loans summarized by category are as follows:

	December 31,
(Dollars in thousands)	2020		2019
Commercial, financial and agricultural	$	96,688	$	51,805
Real estate:
Construction		95,282		73,512
Mortgage-residential		43,928		45,357
Mortgage-commercial		573,258		527,447
Consumer:
Home equity		26,442		28,891
Other		8,559		10,016
Total	$	844,157	$	737,028

Commercial, financial, and agricultural category includes $42.2 million in PPP loans as of December 31, 2020.

Activity in the allowance for loan losses was as follows:


	Years ended December 31,
(Dollars in thousands)	2020			2019			2018
Balance at the beginning of year	$	6,627		$	6,263		$	5,797
Provision for loan losses		3,663			139			346
Charged off loans		(110	)		(145	)		(164	)
Recoveries		209			370			284
Balance at end of year	$	10,389		$	6,627		$	6,263

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 follows:

(Dollars in thousands)	Commercial		Real estate Construction			Real estate Mortgage Residential		Real estate Mortgage Commercial			Consumer Home equity		Consumer Other			Unallocated			Total
2020
Allowance for loan losses:
Beginning balance	$	427	$	111		$	367	$	4,602		$	240	$	97		$	783		$	6,627
Charge-offs		—		(2	)		—		(1	)		—		(107	)		—			(110	)
Recoveries		130		2			—		23			2		52			—			209
Provisions		221		34			174		3,231			82		83			(162	)		3,663
Ending balance	$	778	$	145		$	541	$	7,855		$	324	$	125		$	621		$	10,389

Ending balances:
Individually evaluated for impairment	$	—	$	—		$	—	$	2		$	—	$	—		$	—		$	2

Collectively evaluated for impairment		778		145			541		7,853			324		125			621			10,387

Loans receivable:
Ending balance-total	$	96,688	$	95,282		$	43,928	$	573,258		$	26,442	$	8,559		$	—		$	844,157

Ending balances:
Individually evaluated for impairment		—		—			440		5,631			42		—			—			6,113

Collectively evaluated for impairment		96,688		95,282			43,488		567,627			26,400		8,559			—			838,044

(Dollars in thousands) Commercial Real estate
Construction Real estate
Mortgage
Residential Real estate
Mortgage
Commercial Consumer
Home
equity Consumer
Other Unallocated Total

2019

Allowance for loan losses:

Beginning balance $ 430 $ 89 $ 431 $ 4,318 $ 261 $ 88 $ 646 $ 6,263

Charge-offs (12 ) — (12 ) — (1 ) (120 ) — (145 )

Recoveries 3 — — 307 15 45 — 370

Provisions 6 22 (52 ) (23 ) (35 ) 84 137 139

Ending balance $ 427 $ 111 $ 367 $ 4,602 $ 240 $ 97 $ 783 $ 6,627

Ending balances:

Individually evaluated for impairment $ — $ — $ — $ 6 $ — $ — $ — $ 6

Collectively evaluated for impairment 427 111 367 4,596 240 97 783 6,621

Loans receivable:

Ending balance-total $ 51,805 $ 73,512 $ 45,357 $ 527,447 $ 28,891 $ 10,016 $ — $ 737,028

Ending balances:

Individually evaluated for impairment 400 — 392 3,135 70 — — 3,997

Collectively evaluated for impairment 51,405 73,512 44,965 524,312 28,821 10,016 — 733,031

(Dollars in thousands) Commercial Real estate
Construction Real estate
Mortgage
Residential Real estate
Mortgage
Commercial Consumer
Home
equity Consumer
Other Unallocated Total

2018

Allowance for loan losses:

Beginning balance $ 221 $ 101 $ 461 $ 3,077 $ 308 $ 35 $ 1,594 $ 5,797

Charge-offs — — (1 ) — (23 ) (140 ) — (164 )

Recoveries 3 — 4 210 6 61 — 284

Provisions 206 (12 ) (33 ) 1,031 (30 ) 132 (948 ) 346

Ending balance $ 430 $ 89 $ 431 $ 4,318 $ 261 $ 88 $ 646 $ 6,263

Ending balances:

Individually evaluated for impairment $ — $ — $ — $ 14 $ — $ — $ — $ 14

Collectively evaluated for impairment 430 89 431 4,304 261 88 646 6,249

Loans receivable:

Ending balance-total $ 53,933 $ 58,440 $ 52,764 $ 513,833 $ 29,583 $ 9,909 $ — $ 718,462

Ending balances:

Individually evaluated for impairment — — 322 4,030 29 — — 4,381

Collectively evaluated for impairment 53,933 58,440 52,442 509,803 29,554 9,909 — 714,081

At December 31, 2020, $16.7 million of loans acquired in the Cornerstone acquisition were excluded in the evaluation of the adequacy of the allowance for loan losses. These loans were recorded at fair value at acquisition which included a credit component of approximately $1.5 million. Loans acquired prior to 2017 have been included in the evaluation of the allowance for loan losses.

The following table presents at December 31, 2020, 2019 and 2018, loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.


	December 31,
(Dollars in thousands)	2020		2019		2018
Total loans considered impaired at year end	$	6,113	$	3,997	$	4,381
Loans considered impaired for which there is a related allowance for loan loss:
Outstanding loan balance	$	123	$	256	$	453
Related allowance	$	2	$	6	$	14

Average impaired loans	$	6,375	$	4,431	$	4,128
Amount of interest earned during period of impairment	$	403	$	263	$	160

The following tables are by loan category and present at December 31, 2020, December 31, 2019 and December 31, 2018 loans individually evaluated and considered impaired under FASB ASC 310, “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

(Dollars in thousands)
December 31, 2020	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		440		499		—		440		1
Mortgage-commercial		5,508		7,980		—		5,770		388
Consumer:
Home Equity		42		47		—		42		3
Other		—		—		—		—		—

With an allowance recorded:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		—		—		—		—		—
Mortgage-commercial		123		123		2		123		11
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		440		499		—		440		1
Mortgage-commercial		5,631		8,103		2		5,893		399
Consumer:
Home Equity		42		47		—		42		3
Other		—		—		—		—		—
	$	6,113	$	8,649	$	2	$	6,375	$	403

(Dollars in thousands)

December 31, 2019 Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized

With no allowance recorded:

Commercial $ 400 $ 400 $ — $ 600 $ 49

Real estate:

Construction — — — — —

Mortgage-residential 392 460 — 439 19

Mortgage-commercial 2,879 5,539 — 2,961 170

Consumer:

Home Equity 70 73 — 76 2

Other — — — — —

With an allowance recorded:

Commercial — — — — —

Real estate:

Construction — — — — —

Mortgage-residential — — — — —

Mortgage-commercial 256 256 6 355 23

Consumer:

Home Equity — — — — —

Other — — — — —

Total:

Commercial 400 400 — 600 49

Real estate:

Construction — — — — —

Mortgage-residential 392 460 — 439 19

Mortgage-commercial 3,135 5,795 6 3,316 193

Consumer:

Home Equity 70 73 — 76 2

Other — — — — —

$ 3,997 $ 6,728 $ 6 $ 4,431 $ 263

(Dollars in thousands)

December 31, 2018 Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized

With no allowance recorded:

Commercial $ — $ — $ — $ — $ —

Real estate:

Construction — — — — —

Mortgage-residential 322 371 — 483 9

Mortgage-commercial 3,577 6,173 — 3,232 128

Consumer:

Home Equity 29 30 — 33 2

Other — — — — —

With an allowance recorded:

Commercial — — — — —

Real estate:

Construction — — — — —

Mortgage-residential — — — — —

Mortgage-commercial 453 453 14 380 21

Consumer:

Home Equity — — — — —

Other — — — — —

Total:

Commercial — — — — —

Real estate:

Construction — — — — —

Mortgage-residential 322 371 — 483 9

Mortgage-commercial 4,030 6,626 14 3,612 149

Consumer:

Home Equity 29 30 — 33 2

Other — — — — —

$ 4,381 $ 7,027 $ 14 $ 4,128 $ 160

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of December 31, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below. As of December 31, 2020 and December 31, 2019, no loans were classified as doubtful.

(Dollars in thousands)
December 31, 2020	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, financial & agricultural	$	96,507	$	181	$	—	$	—	$	96,688
Real estate:
Construction		95,282		—		—		—		95,282
Mortgage – residential		43,240		190		498		—		43,928
Mortgage – commercial		559,982		7,270		6,006		—		573,258
Consumer:
Home Equity		25,041		95		1,306		—		26,442
Other		8,538		21		—		—		8,559
Total	$	828,590	$	7,757	$	7,810	$	—	$	844,157

(Dollars in thousands)
			Special
December 31, 2019	Pass		Mention		Substandard		Doubtful		Total
Commercial, financial & agricultural	$	51,166	$	239	$	400	$	—	$	51,805
Real estate:
Construction		73,512		—		—		—		73,512
Mortgage – residential		44,221		509		627		—		45,357
Mortgage – commercial		521,072		2,996		3,379		—		527,447
Consumer:
Home Equity		27,450		1,157		284		—		28,891
Other		9,981		35		—		—		10,016
Total	$	727,402	$	4,936	$	4,690	$	—	$	737,028

At December 31, 2020 and 2019, non-accrual loans totaled $4.6 million and $2.3 million, respectively. The gross interest income which would have been recorded under the original terms of the non-accrual loans amounted to $150.5 thousand and $148 thousand in 2020 and 2019, respectively. Interest recorded on non-accrual loans in 2020 and 2019 amounted to $447.5 thousand and $66 thousand, respectively.

Troubled debt restructurings (“TDRs”) that are still accruing are included in impaired loans at December 31, 2020 and 2019 amounted to $1.6 million and $1.7 million, respectively. Interest earned during 2020 and 2019 on these loans amounted to $130.1 thousand and $144 thousand, respectively.

There were loans of $1.3 million and $0.3 thousand that were greater than 90 days delinquent and still accruing interest as of December 31, 2020 and December 31, 2019, respectively.

The following tables are by loan category and present loans past due and on non-accrual status as of December 31, 2020 and December 31, 2019:

(Dollars in thousands) December 31, 2020	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Commercial	$	165	$	27	$	—	$	4,080	$	4,272	$	92,416	$	96,688
Real estate:
Construction		424		—		1,260		—		1,684		93,598		95,282
Mortgage-residential		7		—		—		440		447		43,481		43,928
Mortgage-commercial		—		—		—		—		—		573,258		573,258
Consumer:
Home equity		—		—		—		42		42		26,400		26,442
Other		21		21		—		—		42		8,517		8,559
Total	$	617	$	48	$	1,260	$	4,562	$	6,487	$	837,670	$	844,157

(Dollars in thousands) December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Commercial	$	—	$	99	$	—	$	400	$	499	$	51,306	$	51,805
Real estate:
Construction		113		—		—		—		113		73,399		73,512
Mortgage-residential		151		—		—		392		543		44,814		45,357
Mortgage-commercial		39		—		—		1,467		1,506		525,941		527,447
Consumer:
Home equity		2		9		—		70		81		28,810		28,891
Other		40		23		—		—		63		9,953		10,016
	$	345	$	131	$	—	$	2,329	$	2,805	$	734,223	$	737,028

The CARES Act and Initiatives Related to COVID-19

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of financial institutions like the Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, life cycle, and eligibility requirements for the various CARES Act programs, as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. We continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.

We are focused on servicing the financial needs of our commercial and consumer customers with flexible loan payment arrangements, including short-term loan modifications or forbearance payments and reducing or waiving certain fees on deposit accounts. Future governmental actions may require these and other types of customer-related responses. Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers. We continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. At its peak, which occurred during the second quarter of 2020, we granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments have been deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 5, 2021. We had no loans on which payments were deferred related to the COVID-19 pandemic at December 31, 2019. We had no loans remaining on initial deferral status in which both principal and interest were deferred at December 31, 2020 and March 5, 2021. The $16.1 million in deferrals at December 31, 2020 consist of seven loans on which only principal is being deferred. We had three loans totaling $8.7 million in continuing deferral status in which only principal is being deferred at March 5, 2021. Two of the continuing deferrals at March 5, 2021 totaling $4.5 million are in the retail industry segment identified by us as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that we do not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. We proactively offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances.

There were no loans determined to be TDR’s during the twelve month period ended December 31, 2020 and December 31, 2019. Additionally, there were no loans determined to be TDRs in the twelve months ended December 31, 2020 and December 31, 2019 that had subsequent payment defaults. Defaulted loans are those loans that are greater than 90 days past due.

In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All non-accrual loans are written down to its corresponding collateral value. All TDR accruing loans where the loan balance exceeds the present value of cash flow will have a specific allocation. All nonaccrual loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the Bank will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, (Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

A summary of changes in the accretable yield for PCI loans for the years ended December 31, 2020, 2019, and 2018 follows:

(Dollars in thousands)	Year Ended December 31, 2020			Year Ended December 31, 2019			Year Ended December 31, 2018
Accretable yield, beginning of period	$	123		$	153		$	21
Additions		—			—			—
Accretion		(30	)		(30	)		(256	)
Reclassification of non-accretable difference due to improvement in expected cash flows		—			—			284
Other changes, net		—			—			104
Accretable yield, end of period	$	93		$	123		$	153

At December 31, 2020 and December 31, 2019, the recorded investment in purchased impaired loans was $110 thousand and $112 thousand, respectively. The unpaid principal balance was $171 thousand and $190 thousand at December 31, 2020 and December 31, 2019, respectively. At December 31, 2020 and December 31, 2019, these loans were all secured by commercial real estate.

Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability. The following table presents related party loan transactions for the years ended December 31, 2020 and December 31, 2019.


(Dollars in thousands)	For the years ended December 31,
	2020		2019
Balance, beginning of year	$	4,108	$	5,937
New Loans		188		129
Less loan repayments		999		1,958
Balance, end of year	$	3,297	$	4,108