Note 6 – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio at March 31, 2020 and December 31, 2019:



(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Total
March 31, 2020
Individually evaluated for impairment	$	3,351	$	8,661	$	—	$	3,259	$	3	$	15,274
Collectively evaluated for impairment	$	334,337	$	112,672	$	123,509	$	431,710	$	36,230	$	1,038,458
Total loans	$	337,688	$	121,333	$	123,509	$	434,969	$	36,233	$	1,053,732
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	$	436,782	$	36,195	$	1,036,944
Total loans	$	335,504	$	117,890	$	122,352	$	440,173	$	36,199	$	1,052,118

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 March 31, 2020 and December 31, 2019:



(in thousands)	Pass		Special Mention		Substandard		Total
March 31, 2020
Commercial real estate
Non owner-occupied	$	163,935	$	2,729	$	1,819	$	168,483
All other CRE		160,695		2,725		5,785		169,205
Acquisition and development
1-4 family residential construction		14,407		—		—		14,407
All other A&D		98,549		18		8,359		106,926
Commercial and industrial		115,774		1,454		6,281		123,509
Residential mortgage
Residential mortgage - term		363,076		54		5,900		369,030
Residential mortgage - home equity		64,528		137		1,274		65,939
Consumer		36,142		3		88		36,233
Total	$	1,017,106	$	7,120	$	29,506	$	1,053,732
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		365,899		59		5,597		371,555
Residential mortgage - home equity		67,143		139		1,336		68,618
Consumer		36,047		4		148		36,199
Total	$	1,016,905	$	12,437	$	22,776	$	1,052,118

The increase of $6.7 million in the substandard category from December 31, 2019 to March 31, 2020 was primarily due to one large relationship in the “ALL other CRE” and “Commercial and Industrial” categories. This loan is current and well collateralized and is not considered impaired. It was classified as substandard due to a reduction in cash flows and a slight deterioration in the borrower’s balance sheet.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at March 31, 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
March 31, 2020
Commercial real estate
Non owner-occupied	$	168,465	$	—	$	—	$	—	$	—	$	18	$	168,483
All other CRE		167,826		385		114		13		512		867		169,205
Acquisition and development
1-4 family residential construction		14,407		—		—		—		—		—		14,407
All other A&D		98,518		116		—		134		250		8,158		106,926
Commercial and industrial		123,414		95		—		—		95		—		123,509
Residential mortgage
Residential mortgage - term		366,018		1,306		62		476		1,844		1,168		369,030
Residential mortgage - home equity		64,492		349		300		—		649		798		65,939
Consumer		35,927		245		58		—		303		3		36,233
Total	$	1,039,067	$	2,496	$	534	$	623	$	3,653	$	11,012	$	1,053,732
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		368,631		267		967		471		1,705		1,219		371,555
Residential mortgage - home equity		67,121		288		286		65		639		858		68,618
Consumer		35,834		261		46		54		361		4		36,199
Total	$	1,037,802	$	1,088	$	1,654	$	725	$	3,467	$	10,849	$	1,052,118

Non-accrual loans totaled $11.0 million at March 31, 2020, compared to $10.8 million at December 31, 2019. The increase in non-accrual balances at March 31, 2020 was primarily related to one new CRE loan of $0.2 million. Management continues to monitor the $8.0 million A&D 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 under a forbearance agreement. Management established a specific allocation at the time the loan was placed into non-accrual and believes that the $2.1 million at March 31, 2020 is adequate based upon an appraisal obtained in the second quarter of 2019. Discussions are currently underway for the sale of the property or notes. The Request for Proposal process was delayed by COVID-19.

Non-accrual loans that have been subject to partial charge-offs totaled $0.1 million both at March 31, 2020 and 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 March 31, 2020 and December 31, 2019, respectively. All foreclosure and repossession activity have been temporarily suspended as a result of the COVID-19 pandemic and the federal and state guidance issued in response thereto. As a percentage of the loan portfolio, accruing loans past due 30 days or more increased to 0.35%, compared to 0.33% at December 31, 2019 which offset the decrease in the 60-89 days past due.

The following table summarizes the primary segments of the ALL at March 31, 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
March 31, 2020
Individually evaluated for impairment	$	7	$	2,211	$	—	$	15	$	—	$	—	$	2,233
Collectively evaluated for impairment	$	3,809	$	1,852	$	1,682	$	4,571	$	365	$	500	$	12,779
Total ALL	$	3,816	$	4,063	$	1,682	$	4,586	$	365	$	500	$	15,012
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 March 31, 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
March 31, 2020
Commercial real estate
Non owner-occupied	$	115	$	7	$	18	$	133	$	8,142
All other CRE		—		—		3,218		3,218		3,218
Acquisition and development
1-4 family residential construction		—		—		285		285		285
All other A&D		8,287		2,211		89		8,376		8,449
Commercial and industrial		—		—		—		—		2,213
Residential mortgage
Residential mortgage – term		737		15		1,724		2,461		2,644
Residential mortgage – home equity		—		—		798		798		811
Consumer		—		—		3		3		16
Total impaired loans	$	9,139	$	2,233	$	6,135	$	15,274	$	25,778
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 three-month periods ended March 31, 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		—		(15)		(101)		(98)		(132)		—		(346)
Recoveries		66		14		15		26		46		—		167
Provision		868		390		427		830		139		—		2,654
ALL balance at March 31, 2020	$	3,816	$	4,063	$	1,682	$	4,586	$	365	$	500	$	15,012
ALL balance at January 1, 2019	$	2,780	$	1,721	$	1,187	$	4,544	$	315	$	500	$	11,047
Charge-offs		—		(29)		—		(12)		(68)		—		(109)
Recoveries		29		12		51		108		61		—		261
Provision		(34)		634		(113)		(143)		5		—		349
ALL balance at March 31, 2019	$	2,775	$	2,338	$	1,125	$	4,497	$	313	$	500	$	11,548

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:



	Three months ended						Three months ended
	March 31, 2020						March 31, 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	$	141	$	2	$	—	$	280	$	3	$	—
All other CRE		3,124		37		—		4,516		38		—
Acquisition and development
1-4 family residential construction		288		3		—		313		5		—
All other A&D		8,328		3		1		4,040		3		—
Commercial and industrial		15		—		—		22		—		—
Residential mortgage
Residential mortgage – term		2,497		22		—		3,462		28		8
Residential mortgage – home equity		828		—		—		818		—		—
Consumer		4		—		—		17		—		—
Total	$	15,225	$	67	$	1	$	13,468	$	77	$	8

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 troubled debt restructuring (“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 15 loans totaling $4.1 million and $4.2 million that were classified as TDRs at March 31, 2020 and December 31, 2019, respectively. The following tables present the volume and recorded investment in TDR’s at the times they were modified, by class and type of modification that occurred during the periods indicated:

During the three months ended March 31, 2020, there were no new TDRs and no modifications on existing TDRs. There were no payment defaults under TDRs.

During the three months ended March 31, 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 three months ended March 31, 2019, there were no payment defaults under TDRs.


	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 March 31, 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