Allowance for Loan and Lease Losses | NOTE 5. ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The methodology is based on historical loss experience by type of credit and internal risk grade, changes in the composition and volume of the portfolio, and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan and lease losses is designated to account for credit deterioration as it occurs. At June 30, 2021, purchased credit impaired loans totalled $547 thousand and the Company believes that all contractual principal and interest will be received. Purchased credit impaired loans are not included in the impaired loans disclosure within this Note. At June 30, 2021 no provision for loan losses has been recorded for PPP loans. PPP loans are fully guaranteed by the SBA and therefore carry a zero percent reserve. PPP loans also carry a put-back provision in the event that a PPP loan is fraudulently originated and the Bank is at fault. Management does not deem a put-back reserve necessary at this time. The following tables present information related to allowance for loan and lease losses for the periods presented: Allowance Rollforward Three Months Ended June 30, 2021 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 9,682 $ (1,136 ) $ 17 $ 1,183 $ 9,746 Real estate: 1-4 single family residential loans 84 (12 ) 1 66 139 Construction, land and development loans 1,886 — — (589 ) 1,297 Commercial real estate loans (including multifamily) 4,456 — — 683 5,139 Consumer loans and leases 113 (14 ) 6 (11 ) 94 Municipal and other loans 93 — 2 17 112 Ending allowance balance $ 16,314 $ (1,162 ) $ 26 $ 1,349 $ 16,527 Allowance Rollforward Three Months Ended June 30, 2020 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 4,484 $ (455 ) $ 5 $ 2,279 $ 6,313 Real estate: 1-4 single family residential loans 35 — — 72 107 Construction, land and development loans 1,293 — — (35 ) 1,258 Commercial real estate loans (including multifamily) 1,749 — — 414 2,163 Consumer loans and leases 51 (107 ) 2 103 49 Municipal and other loans 8 — 2 5 15 Ending allowance balance $ 7,620 $ (562 ) $ 9 $ 2,838 $ 9,905 Allowance Rollforward Six Months Ended June 30, 2021 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 9,086 $ (1,946 ) $ 34 $ 2,572 $ 9,746 Real estate: 1-4 single family residential loans 147 (13 ) 1 4 139 Construction, land and development loans 1,744 — — (447 ) 1,297 Commercial real estate loans (including multifamily) 4,843 — — 296 5,139 Consumer loans and leases 145 (33 ) 20 (38 ) 94 Municipal and other loans 61 — 3 48 112 Ending allowance balance $ 16,026 $ (1,992 ) $ 58 $ 2,435 $ 16,527 Allowance Rollforward Six Months Ended June 30, 2020 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 4,078 $ (709 ) $ 9 $ 2,935 $ 6,313 Real estate: 1-4 single family residential loans 31 — — 76 107 Construction, land and development loans 1,055 — — 203 1,258 Commercial real estate loans (including multifamily) 1,451 — — 712 2,163 Consumer loans and leases 68 (159 ) 14 126 49 Municipal and other loans 54 — 4 (43 ) 15 Ending allowance balance $ 6,737 $ (868 ) $ 27 $ 4,009 $ 9,905 Credit Quality Indicators In evaluating credit risk, the Company looks at multiple factors; however, management considers delinquency status to be the most meaningful indicator of the credit quality of 1-4 single family residential, home equity loans and lines of credit and consumer loans. Delinquency statistics are updated at least monthly. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial, construction, land and development and commercial real estate loans. Internal risk ratings are updated on a continuous basis. The following tables present an aging analysis of the recorded investment for delinquent loans by portfolio and segment for the periods presented: Accruing June 30, 2021 Current 30 to 59 Days Past Due 60 to 89 Days Past Due 90 Days or More Past Due Non- Accrual Total (Dollars in thousands) Commercial and industrial loans $ 530,361 $ 70 $ 278 $ — $ 4,899 $ 535,608 Real estate: 1-4 single family residential loans 355,733 411 112 — 247 356,503 Construction, land and development 342,852 2,568 — — — 345,420 Commercial real estate loans (including multifamily) 961,510 761 — — 2,294 964,565 Consumer loans and leases 8,357 21 — — 66 8,444 Municipal and other loans 61,509 24 — — 16 61,549 Total loans $ 2,260,322 $ 3,855 $ 390 $ — $ 7,522 $ 2,272,089 Accruing December 31, 2020 Current 30 to 59 Days Past Due 60 to 89 Days Past Due 90 Days or More Past Due Non- Accrual Total (Dollars in thousands) Commercial and industrial loans $ 567,491 $ 2,295 $ 271 $ - $ 4,929 $ 574,986 Real estate: 1-4 single family residential loans 362,505 99 28 — 1,507 364,139 Construction, land and development 415,135 136 — — 217 415,488 Commercial real estate loans (including multifamily) 953,823 1,084 — — 1,836 956,743 Consumer loans and leases 11,618 8 4 — 108 11,738 Municipal and other loans 65,416 — 22 — — 65,438 Total loans $ 2,375,988 $ 3,622 $ 325 $ - $ 8,597 $ 2,388,532 There were no loans 90 days or more past due and still accruing at June 30, 2021. There were no loans 90 days or more past due and still accruing at December 31, 2020. All loans with active deferral periods related to the COVID-19 pandemic are excluded from non-accrual and days past due reporting. At June 30, 2021, non-accrual loans that were 30 to 59 days past due equaled $1.3 million, non-accrual loans that were 60 to 89 days past due equaled $871 thousand and non-accrual loans that were 90 days or more past due equaled $2.3 million. At December 31, 2020, non-accrual loans that were 30 to 59 days past due were $930 thousand, non-accrual loans that were 60 to 89 days past due equaled $545 thousand, and non-accrual loans that were 90 days or more past due equaled $2.2 million. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. Loans with well-defined credit weaknesses including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves are assigned an internal risk rating of substandard. Loans classified as substandard can be on an accrual or non-accrual basis, as determined by its unique characteristics. A loan with a weakness so severe that collection in full is highly questionable or improbable will be assigned an internal risk rating of doubtful. The following tables summarize the Company’s loans by key indicators of credit quality for the periods presented: June 30, 2021 Pass Special Mention Substandard Doubtful (Dollars in thousands) Commercial and industrial loans $ 517,304 $ 1,985 $ 16,303 $ 16 Real estate: 1-4 single family residential loans 355,789 — 714 — Construction, land and development 342,851 2,569 — — Commercial real estate loans (including multifamily) 908,374 42,672 13,519 — Consumer loans and leases 8,378 — 61 5 Municipal and other loans 57,445 4,012 92 — Total loans $ 2,190,141 $ 51,238 $ 30,689 $ 21 December 31, 2020 Pass Special Mention Substandard Doubtful (Dollars in thousands) Commercial and industrial loans $ 554,685 $ 1,332 $ 18,723 $ 246 Real estate: 1-4 single family residential loans 360,337 — 3,802 — Construction, land and development 411,151 4,120 217 — Commercial real estate loans (including multifamily) 935,865 10,913 9,965 — Consumer loans and leases 11,626 — 112 — Municipal and other loans 62,273 3,085 80 — Total loans $ 2,335,937 $ 19,450 $ 32,899 $ 246 Internal risk ratings and other credit metrics are key factors in identifying loans to be individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the allowance for loan and lease losses. The following tables show the Company’s investment in loans disaggregated based on the method of evaluating impairment for the periods presented: Loans - Recorded Investment Allowance for Credit Loss June 30, 2021 Individually Evaluated for Impairment Collectively Evaluated for Impairment Individually Evaluated for Impairment Collectively Evaluated for Impairment (Dollars in thousands) Commercial and industrial loans $ 4,942 $ 530,666 $ 3,376 $ 6,370 Real estate: 1-4 single family residential loans 372 356,131 1 138 Construction, land and development — 345,420 — 1,297 Commercial real estate loans (including multifamily) 2,294 962,271 508 4,631 Consumer loans and leases 66 8,378 66 28 Municipal and other loans 69 61,480 53 59 Total loans $ 7,743 $ 2,264,346 $ 4,004 $ 12,523 Loans - Recorded Investment Allowance for Credit Loss December 31, 2020 Individually Evaluated for Impairment Collectively Evaluated for Impairment Individually Evaluated for Impairment Collectively Evaluated for Impairment (Dollars in thousands) Commercial and industrial loans $ 4,978 $ 570,008 $ 3,488 $ 5,598 Real estate: 1-4 single family residential loans 1,637 362,502 1 146 Construction, land and development 217 415,271 — 1,744 Commercial real estate loans (including multifamily) 1,837 954,906 500 4,343 Consumer loans and leases 108 11,630 90 55 Municipal and other loans 52 65,386 — 61 Total loans $ 8,829 $ 2,379,703 $ 4,079 $ 11,947 The following tables set forth certain information regarding the Company’s impaired loans that were evaluated for specific reserves for the periods presented: Impaired Loans - With Allowance Impaired Loans - With no Allowance June 30, 2021 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance (Dollars in thousands) Commercial and industrial loans $ 3,781 $ 3,825 $ 3,376 $ 1,161 $ 1,164 Real estate: 1-4 single family residential loans 4 3 1 368 369 Construction, land and development — — — — — Commercial real estate loans (including multifamily) 847 853 508 1,447 1,446 Consumer loans and leases 66 66 66 — — Municipal and other loans 69 70 53 — — Total loans $ 4,767 $ 4,817 $ 4,004 $ 2,976 $ 2,979 Impaired Loans - With Allowance Impaired Loans - With no Allowance December 31, 2020 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance (Dollars in thousands) Commercial and industrial loans $ 4,407 $ 4,453 $ 3,488 $ 566 $ 571 Real estate: 1-4 single family residential loans 5 5 1 1,632 1,612 Construction, land and development — — — 217 215 Commercial real estate loans (including multifamily) 1,308 1,281 500 528 528 Consumer loans and leases 90 90 90 24 28 Municipal and other loans — — — 52 52 Total loans $ 5,810 $ 5,829 $ 4,079 $ 3,019 $ 3,006 Three Months Ended June 30, 2021 2020 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (Dollars in thousands) Commercial and industrial loans $ 5,497 $ 3,590 $ — Real estate: 1-4 single family residential loans 671 — 1,547 — Construction, land and development — — 216 — Commercial real estate loans (including multifamily) 1,375 — 2,232 — Consumer loans and leases 57 — 11 — Municipal and other loans 66 — — — Total loans $ 7,666 $ — $ 7,596 $ — Troubled Debt Restructurings: The following table provides a summary of troubled debt restructurings (“TDRs”) based upon delinquency status, all of which are considered impaired, for the periods presented: June 30, 2021 December 31, 2020 Number of contracts Recorded Investment Number of contracts Recorded Investment (Dollars in thousands) Performing TDRs: Commercial and industrial loans 2 $ 43 2 $ 49 Real estate: 1-4 single family residential loans 2 124 3 130 Construction, land and development — — — — Commercial real estate loans (including multifamily) — — — — Consumer loans and leases — — — — Municipal and other loans 1 53 1 52 Total performing TDRs 5 220 6 231 Nonperforming TDRs 14 870 14 652 Total TDRs 19 $ 1,090 20 $ 883 Allowance attributable to TDRs $ 408 $ 421 The following table summarizes TDRs, and includes newly designated TDRs as well as modifications made to existing TDRs, for the periods presented. Modifications may include, but are not limited to, granting a material extension of time, entering into a forbearance agreement, adjusting the interest rate, accepting interest only payments for an extended period of time, a change in the amortization period or a combination of any of these. Post-modification balances represent the recorded investment at the end of Day 2 in which the modification was made. The CARES Act includes a provision for the Company to opt out of applying the TDR accounting guidance in ASC 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. Loans with an unpaid principal balance of $2.6 million remained in active deferral periods at June 30,2021. Three Months Ended June 30, 2021 2020 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Commercial and industrial loans — $ — $ — $ — 1 $ 276 $ 276 $ 276 Real estate: 1-4 single family residential loans — — — — — — — — Construction, land and development — — — — — — — — Commercial real estate loans (including multifamily) — — — — — Consumer loans and leases — — — — — — — — Municipal and other loans — — — — — — — — For the Six Months Ended June 30, 2021 2020 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Commercial and industrial loans — $ — $ — $ — 5 $ 444 $ 444 $ 332 Real estate: 1-4 single family residential loans — — — — — — — — Construction, land and development — — — — — — — — Commercial real estate loans (including multifamily) 2 321 321 — — — — — Consumer loans and leases — — — — — — — — Municipal and other loans — — — — — — — — There have been no defaults of TDRs that took place within the three or six months ended June 30, 2021 and 2020. |