Loans and Allowance for Loan Losses | Note 5. Loans and Allowance for Loan Losses Portfolio Segmentation: Major categories of loans are summarized as follows (in thousands) December 31, 2020 December 31, 2019 PCI All Other PCI All Other Loans Loans Total Loans Loans Total Commercial real estate $ 16,123 $ 996,853 $ 1,012,976 $ 15,255 $ 890,051 $ 905,306 Consumer real estate 10,258 433,672 443,930 6,541 410,941 417,482 Construction and land development 5,348 272,727 278,075 4,458 223,168 227,626 Commercial and industrial 308 634,138 634,446 407 336,668 337,075 Consumer and other 27 12,789 12,816 326 9,577 9,903 Total loans 32,064 2,350,179 2,382,243 26,987 1,870,405 1,897,392 Less: Allowance for loan losses (309) (18,037) (18,346) (156) (10,087) (10,243) Loans, net $ 31,755 $ 2,332,142 $ 2,363,897 $ 26,831 $ 1,860,318 $ 1,887,149 For purposes of the disclosures required pursuant to the adoption of ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are five loan portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, and consumer and other. The following describe risk characteristics relevant to each of the portfolio segments: Commercial Real Estate: estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate. Consumer Real Estate: Construction and Land Development: Commercial and Industrial: Consumer and Other: Credit Risk Management: The Company employs a credit risk management process with defined policies, accountability and routine reporting to manage credit risk in the loan portfolio segments. Credit risk management is guided by credit policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within the Credit Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans are individually underwritten, risk-rated, approved, and monitored. Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer real estate and consumer and other portfolio segments, the risk management process focuses on managing customers who become delinquent in their payments. For the other portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios, including a third party review of the largest credits on an annual basis or more frequently, as needed. To ensure problem credits are identified on a timely basis, several specific portfolio reviews occur periodically to assess the larger adversely rated credits for proper risk rating and accrual status. Credit quality and trends in the loan portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by Director and Loan Committees. The allowance for loan losses is a valuation reserve established through provisions for loan losses charged against income. The allowance for loan losses, which is evaluated quarterly, is maintained at a level that management deems sufficient to absorb probable losses inherent in the loan portfolio. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses. The allowance for loan losses is comprised of specific valuation allowances for loans evaluated individually for impairment and general allocations for pools of homogeneous loans with similar risk characteristics and trends. The allowance for loan losses related to specific loans is based on management’s estimate of potential losses on impaired loans as determined by (1) the present value of expected future cash flows; (2) the fair value of collateral if the loan is determined to be collateral dependent or (3) the loan’s observable market price. The Company’s homogeneous loan pools include commercial real estate loans, consumer real estate loans, construction and land development loans, commercial and industrial loans, and consumer and other loans. The general allocations to these loan pools are based on the historical loss rates for specific loan types and the internal risk grade, if applicable, adjusted for both internal and external qualitative risk factors. The qualitative factors considered by management include, among other factors, (1) changes in local and national economic conditions; (2) changes in asset quality; (3) changes in loan portfolio volume; (4) the composition and concentrations of credit; (5) the impact of competition on loan structuring and pricing; (6) the impact of interest rate changes on portfolio risk; (7) effectiveness of the Company’s loan policies, procedures and internal controls; (8) COVID-19 loan modification factor and (9) COVID-19 Q factor, which is based upon active COVID cases within the Company’s footprint. The total allowance established for each homogeneous loan pool represents the product of the historical loss ratio adjusted for qualitative factors and the total dollar amount of the loans in the pool. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. The Company’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. As previously mentioned in Note 1 – Presentation of Financial Information The composition of loans by loan classification for impaired and performing loan status is summarized in the tables below (in thousands) Construction Commercial Commercial Consumer and Land and Consumer Real Estate Real Estate Development Industrial and Other Total December 31, 2020: Performing loans $ 992,982 $ 432,356 $ 272,727 $ 633,992 $ 12,789 $ 2,344,846 Impaired loans 3,871 1,316 — 146 — 5,333 996,853 433,672 272,727 634,138 12,789 2,350,179 PCI loans 16,123 10,258 5,348 308 27 32,064 Total loans $ 1,012,976 $ 443,930 $ 278,075 $ 634,446 $ 12,816 $ 2,382,243 December 31, 2019: Performing loans $ 889,795 $ 409,394 $ 222,621 $ 336,508 $ 9,577 $ 1,867,895 Impaired loans 256 1,547 547 160 — 2,510 890,051 410,941 223,168 336,668 9,577 1,870,405 PCI loans 15,255 6,541 4,458 407 326 26,987 Total loans $ 905,306 $ 417,482 $ 227,626 $ 337,075 $ 9,903 $ 1,897,392 The following tables show the allowance for loan losses allocation by loan classification for impaired, PCI, and performing loans (in thousands) Construction Commercial Consumer Commercial Consumer and Land and and Real Estate Real Estate Development Industrial Other Total December 31, 2020: Performing loans $ 7,579 $ 3,267 $ 2,076 $ 4,768 $ 110 $ 17,800 Impaired loans — 116 — 121 — 237 7,579 3,383 2,076 4,889 110 18,037 PCI loans — 88 — 218 3 309 Total loans $ 7,579 $ 3,471 $ 2,076 $ 5,107 $ 113 $ 18,346 December 31, 2019: Performing loans $ 4,491 $ 2,159 $ 1,127 $ 1,766 $ 69 $ 9,612 Impaired loans — 343 — 132 — 475 4,491 2,502 1,127 1,898 69 10,087 PCI loans 17 74 — 59 6 156 Total loans $ 4,508 $ 2,576 $ 1,127 $ 1,957 $ 75 $ 10,243 The following tables detail the changes in the allowance for loan losses by loan classification (in thousands) Year Ended December 31, 2020 Consumer Construction Commercial Commercial Real and Land and Consumer Real Estate Estate Development Industrial and Other Total Beginning balance $ 4,508 $ 2,576 $ 1,127 $ 1,957 $ 75 $ 10,243 Loans charged-off — (23) — (420) (398) (841) Recoveries of loans charged-off 19 39 2 114 87 261 Provision charged to expense 3,052 879 947 3,456 349 8,683 Ending balance $ 7,579 $ 3,471 $ 2,076 $ 5,107 $ 113 $ 18,346 Year Ended December 31, 2019 Consumer Construction Commercial Commercial Real and Land and Consumer Real Estate Estate Development Industrial and Other Total Beginning balance $ 3,639 $ 1,789 $ 795 $ 1,746 $ 306 $ 8,275 Loans charged-off (36) (4) — (659) (344) (1,043) Recoveries of loans charged-off 65 164 8 77 98 412 Provision charged to expense 840 627 324 793 15 2,599 Ending balance $ 4,508 $ 2,576 $ 1,127 $ 1,957 $ 75 $ 10,243 We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan portfolio. Our provision for loan losses for the year ended December 31, 2020, is $8.7 million compared to $2.6 million in the same period of 2019, an increase of $6.1 million. As of December 31, 2020, and 2019, our allowance for loan losses was $18.3 million and $10.2 million, respectively, which we deemed to be adequate at each of the respective dates. The increase in the allowance for loan losses at December 31, 2020, as compared to December 31, 2019, is primarily attributable to the ongoing economic uncertainties related to the COVID-19 pandemic. Also, during 2020, the Company updated the Allowance for Loan Loss policy to increase the additional basis points allowed for the unallocated risk portion from 100 basis points to 125 basis points. In addition, the Company added two new qualitative factors; 1.) based on the percentage of COVID modified loans to total loans and 2.) the average number of COVID cases within our footprint. The qualitative factors were also expanded to provide additional granularity related to the hospitality and restaurant industries which are most impacted by the pandemic within our footprint. The changes in our economic factors and the addition of the COVID modified factors equated to an additional $8.3 million in reserve. Our allowance for loan loss as a percentage of total loans was 0.77% at December 31, 2020 and 0.54% at December 31, 2019. A description of the general characteristics of the risk grades used by the Company is as follows: Pass: Watch: Special Mention: Substandard: Doubtful: Uncollectible: The following tables outline the amount of each loan classification and the amount categorized into each risk rating (in thousands) December 31, 2020 Construction Commercial Commercial Consumer and Land and Consumer Non PCI Loans: Real Estate Real Estate Development Industrial and Other Total Pass $ 922,153 $ 417,302 $ 269,350 $ 625,836 $ 12,622 $ 2,247,263 Watch 66,287 14,218 3,296 7,673 137 91,611 Special mention 4,446 46 — 320 — 4,812 Substandard 3,967 2,020 81 261 30 6,359 Doubtful — 86 — 48 — 134 Total 996,853 433,672 272,727 634,138 12,789 2,350,179 PCI Loans: Pass 11,072 8,382 1,008 262 25 20,749 Watch 3,381 224 3,820 — 2 7,427 Special mention 19 57 — — — 76 Substandard 1,651 1,595 520 46 — 3,812 Doubtful — — — — — — Total 16,123 10,258 5,348 308 27 32,064 Total loans $ 1,012,976 $ 443,930 $ 278,075 $ 634,446 $ 12,816 $ 2,382,243 December 31, 2019 Construction Commercial Commercial Consumer and Land and Consumer Non PCI Loans: Real Estate Real Estate Development Industrial and Other Total Pass $ 860,447 $ 407,336 $ 216,459 $ 328,564 $ 9,462 $ 1,822,268 Watch 25,180 989 6,089 6,786 40 39,084 Special mention 4,057 738 — 1,033 — 5,828 Substandard 367 1,713 620 228 51 2,979 Doubtful — 165 — 57 24 246 Total 890,051 410,941 223,168 336,668 9,577 1,870,405 PCI Loans: Pass 12,473 5,258 902 41 300 18,974 Watch 2,234 38 3,556 — 13 5,841 Special mention 139 60 — — — 199 Substandard 409 1,185 — 366 13 1,973 Doubtful — — — — — — Total 15,255 6,541 4,458 407 326 26,987 Total loans $ 905,306 $ 417,482 $ 227,626 $ 337,075 $ 9,903 $ 1,897,392 Past Due Loans: A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. Generally, management places a loan on nonaccrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. The following tables present an aging analysis of our loan portfolio (in thousands) December 31, 2020 30-60 Days 61-89 Days Past Due 90 Total Past Due and Past Due and Days or More Past Due and PCI Current Total Accruing Accruing and Accruing Nonaccrual Nonaccrual Loans Loans Loans Commercial real estate $ 134 $ — $ 67 $ 3,740 $ 3,941 $ 16,123 $ 992,912 $ 1,012,976 Consumer real estate 1,916 51 82 1,823 3,872 10,258 429,800 443,930 Construction and land development 245 — — 12 257 5,348 272,470 278,075 Commercial and industrial 12 76 — 36 124 308 634,014 634,446 Consumer and other 14 5 — 22 41 27 12,748 12,816 Total $ 2,321 $ 132 $ 149 $ 5,633 $ 8,235 $ 32,064 $ 2,341,944 $ 2,382,243 December 31, 2019 30-60 Days 61-89 Days Past Due 90 Total Past Due and Past Due and Days or More Past Due and PCI Current Total Accruing Accruing and Accruing Nonaccrual Nonaccrual Loans Loans Loans Commercial real estate $ 466 $ 22 $ — $ 124 $ 612 $ 15,255 $ 889,439 $ 905,306 Consumer real estate 1,564 30 — 1,872 3,466 6,541 407,475 417,482 Construction and land development 507 — 607 620 1,734 4,458 221,434 227,626 Commercial and industrial 559 53 — 57 669 407 335,999 337,075 Consumer and other 86 14 — 70 170 326 9,407 9,903 Total $ 3,182 $ 119 $ 607 $ 2,743 $ 6,651 $ 26,987 $ 1,863,754 $ 1,897,392 Impaired Loans: A loan held for investment is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. The following is an analysis of the impaired loan portfolio, including PCI loans, detailing the related allowance recorded (in thousands) December 31, 2020 December 31, 2019 Unpaid Unpaid Recorded Principal Related Recorded Principal Related Investment Balance Allowance Investment Balance Allowance Impaired loans without a valuation allowance: Commercial real estate $ 3,871 $ 3,872 $ — $ 256 $ 261 $ — Consumer real estate 888 888 — 553 553 — Construction and land development — — — 547 547 — Commercial and industrial — — — — — — Consumer and other — — — — — — 4,759 4,760 — 1,356 1,361 — Impaired loans with a valuation allowance: Commercial real estate — — — — — — Consumer real estate 428 428 116 994 994 343 Construction and land development — — — — — — Commercial and industrial 146 146 121 160 160 132 Consumer and other — — — — — — 574 574 237 1,154 1,154 475 PCI loans: Commercial real estate — — — 17 99 17 Consumer real estate 1,827 2,086 88 1,205 1,371 74 Construction and land development — — — — — — Commercial and industrial 270 234 218 396 534 59 Consumer and other 21 20 3 45 51 6 2,118 2,340 309 1,663 2,055 156 Total impaired loans $ 7,451 $ 7,674 $ 546 $ 4,173 $ 4,570 $ 631 December 31, 2020 December 31, 2019 Average Interest Average Interest Recorded Income Recorded Income Investment Recognized Investment Recognized Impaired loans without a valuation allowance: Commercial real estate $ 1,073 $ 12 $ 399 $ 30 Consumer real estate 701 33 725 15 Construction and land development 231 — 619 5 Commercial and industrial — — 20 1 Consumer and other — — 11 1 2,005 45 1,774 52 Impaired loans with a valuation allowance: Commercial real estate 158 2 9 1 Consumer real estate 656 24 397 17 Construction and land development — — 11 — Commercial and industrial 244 8 430 16 Consumer and other — — 23 — 1,058 34 870 34 PCI loans: Commercial real estate 200 1 1,518 (25) Consumer real estate 1,461 117 922 42 Construction and land development 46 — — — Commercial and industrial 321 7 79 9 Consumer and other 27 — 9 1 2,055 125 2,528 27 Total impaired loans $ 5,118 $ 204 $ 5,172 $ 113 Troubled Debt Restructurings: At December 31, 2020 and 2019, impaired loans included loans that were classified as TDRs. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. In assessing whether or not a borrower is experiencing financial difficulties, the Company considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy; and (iv) the debtor’s projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification. The Company considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Company include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Company generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt; (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk; (iii) a temporary period of interest-only payments; and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan. As of December 31, 2020, and 2019, management had approximately $257 thousand and $61 thousand, respectively, in loans that met the criteria for TDR restructured loans, none of which were on nonaccrual. A loan is placed back on accrual status when both principal and interest are current and it is probable that management will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. The following table presents a summary of loans that were modified as troubled debt restructurings during the year ended December 31, 2020 (dollars in thousands) Pre-Modification Post-Modification Outstanding Outstanding Recorded Recorded December 31, 2020 Number of Contracts Investment Investment Consumer real estate 1 $ 108 $ 108 Commercial and industrial 3 141 141 Consumer other 1 8 8 There were no loans that were modified as troubled debt restructurings during the past twelve months and for which there was a subsequent payment default. The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The Coronavirus Aid Relief and Economic Security (“CARES”) Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 does not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 Presentation of Financial Information Foreclosure Proceedings and Balances : As of December 31, 2020, the amount of residential real estate where physical possession had been obtained and included with in other real estate owned assets was one property for $26 thousand and one property for $215 thousand at December 31, 2019. There were five residential real estate loans totaling $384 thousand in process of foreclosure at December 31, 2020 and none at December 31, 2019. Purchased Credit Impaired Loans: The Company has acquired loans which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans for the years ended December 31, are as follows (in thousands) 2020 2019 Commercial real estate $ 23,787 $ 21,570 Consumer real estate 12,692 8,411 Construction and land development 1,812 5,394 Commercial and industrial 6,521 2,540 Consumer and other 161 504 Total loans 44,973 38,419 Less: Remaining purchase discount (12,909) (11,432) Total loans, net of purchase discount 32,064 26,987 Less: Allowance for loan losses (309) (156) Carrying amount, net of allowance $ 31,755 $ 26,831 The following is a summary of the accretable yield on acquired loans for the years ended December 31, (in thousands) 2020 2019 Accretable yield, beginning of period $ 8,454 $ 7,052 Additions 2,515 — Accretion income (5,347) (4,627) Reclassification 2,792 3,555 Other changes, net 8,475 2,474 Accretable yield, end of period $ 16,889 $ 8,454 There was an allowance for loan losses on purchase credit impaired loans at the years ended December 31, 2020 and 2019 of $309 thousand and $156 thousand, respectively. Related Party Loans: In the ordinary course of business, the Company has granted loans to certain related interests, including directors, executive officers, and their affiliates (collectively referred to as "related parties"). Such loans are made in the ordinary course of business and on substantially the same terms as those for comparable transactions prevailing at the time and do not present other unfavorable features. A summary of activity in loans to related parties is as follows (in thousands) 2020 2019 Balance, beginning of year $ 24,091 $ 31,246 Disbursements 7,108 16,297 Repayments (16,740) (23,452) Balance, end of year $ 14,459 $ 24,091 At December 31, 2020, the Company had pre-approved but unused lines of credit totaling approximately $6.2 million to related parties. |