LOANS | NOTE 6 - LOANS The Company’s loan portfolio at the dates indicated is summarized below: June 30, December 31, 2020 2019 Commercial and industrial $ 312,870 $ 169,291 Construction and land 45,833 36,321 Commercial real estate 1,167,712 1,093,142 Residential 197,270 156,764 Consumer 5,561 2,562 Total loans 1,729,246 1,458,080 Net deferred loan fees (4,571) (451) Allowance for loan losses (13,500) (7,400) Net loans $ 1,711,175 $ 1,450,229 The Company’s total impaired loans, including nonaccrual loans, loans modified as troubled debt restructurings (“TDR loans”), and accreting purchase credit impaired (“PCI”) loans that have experienced post-acquisition declines in cash flows expected to be collected are summarized as follows: Commercial Construction Commercial and industrial and land real estate Residential Consumer Total June 30, 2020 Recorded investment in impaired loans: With no specific allowance recorded $ 348 $ 2,726 $ 3,634 $ 1,574 $ — $ 8,282 With a specific allowance recorded 212 80 270 159 — 721 Total recorded investment in impaired loans $ 560 $ 2,806 $ 3,904 $ 1,733 $ — $ 9,003 Specific allowance on impaired loans 146 14 84 25 — 269 December 31, 2019 Recorded investment in impaired loans: With no specific allowance recorded $ 436 $ 2,737 $ 2,505 $ 1,488 $ 1 $ 7,167 With a specific allowance recorded 182 — 270 — 12 464 Total recorded investment in impaired loans $ 618 $ 2,737 $ 2,775 $ 1,488 $ 13 $ 7,631 Specific allowance on impaired loans 95 — 64 — 12 171 Three months ended June 30, 2020 Average recorded investment in impaired loans $ 546 $ 2,838 $ 3,150 $ 1,741 $ — $ 8,275 Interest recognized 4 9 — — — 13 Six months ended June 30, 2020 Average recorded investment in impaired loans 585 2,800 2,763 1,679 4 7,831 Interest recognized 4 151 30 — — 185 Three months ended June 30, 2019 Average recorded investment in impaired loans 2,326 — 1,386 282 — 3,994 Interest recognized 1 — — — — 1 Six months ended June 30, 2019 Average recorded investment in impaired loans 2,347 — 1,162 441 — 3,950 Interest recognized 34 — 20 1 — 55 Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans on accrual are comprised solely of TDRs performing under modified loan agreements, whose principal and interest is determined to be collectible. Nonaccrual loans are loans where principal and interest have been determined to not be fully collectible. In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR loan. TDR loans are generally placed on nonaccrual status at the time of restructuring and included in impaired loans. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt. At June 30, 2020, TDR loans totaled $4.1 million, compared to $4.4 million at December 31, 2019. At June 30, 2020 and at December 31, 2019, $780,000 and $789,000, respectively, of TDR loans were accruing and performing in accordance with their modified terms. There are no commitments to lend additional amounts to borrowers with outstanding loans that are classified as TDR loans at June 30, 2020. All TDR loans are also included in the loans individually evaluated for impairment as part of the calculation of the allowance for loan losses. The following tables present loans by class, modified as TDR loans, for the periods indicated: Number of Rate Term Interest only Rate & term loans modification modification modification modification Total Three months ended June 30, 2020 Commercial and industrial 1 $ — $ 24 $ — $ — $ 24 Construction and land — — — — — — Commercial real estate — — — — — — Residential — — — — — — Consumer — — — — — — Total 1 $ — $ 24 $ — $ — $ 24 Number of Rate Term Interest only Rate & term loans modification modification modification modification Total Six months ended June 30, 2020 Commercial and industrial 1 $ — $ 24 $ — $ — $ 24 Construction and land — — — — — — Commercial real estate — — — — — — Residential — — — — — — Consumer — — — — — — Total 1 $ — $ 24 $ — $ — $ 24 Number of Rate Term Interest only Rate & term loans modification modification modification modification Total Three months ended June 30, 2019 Commercial and industrial — $ — $ — $ — $ — $ — Construction and land — — — — — — Commercial real estate — — — — — — Residential — — — — — — Consumer — — — — — — Total — $ — $ — $ — $ — $ — Number of Rate Term Interest only Rate & term loans modification modification modification modification Total Six months ended June 30, 2019 Commercial and industrial — $ — $ 176 $ — $ 321 $ 497 Construction and land — — — — — — Commercial real estate — — — — — — Residential — — — — — — Consumer — — — — — — Total — $ — $ 176 $ — $ 321 $ 497 For the three and six months ended June 30, 2020 and 2019, the Company recorded no charge-offs related to TDR loans. During the three and six months ended June 30, 2020, there were no TDR loans for which there was a payment default within the first 12 months of the modification. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”), signed into law on March 27, 2020, provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be (1) related to COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency by the President, or (B) December 31, 2020. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. See Note 2 – Accounting Guidance Not Yet Effective and Adopted Accounting Guidance. Risk Rating System The Company evaluates and assigns a risk grade to each loan based on certain criteria to assess the credit quality of each loan. The assignment of a risk rating is done for each individual loan. Loans are graded from inception and on a continuing basis until the debt is repaid. Any adverse or beneficial trends will trigger a review of the loan risk rating. Each loan is assigned a risk grade based on its characteristics. Loans with low to average credit risk are assigned a lower risk grade than those with higher credit risk as determined by the individual loan characteristics. The Company’s Pass loans includes loans with acceptable business or individual credit risk where the borrower’s operations, cash flow or financial condition provides evidence of low to average levels of risk. Loans that are assigned higher risk grades are loans that exhibit the following characteristics: Special Mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. A Special Mention rating is a temporary rating, pending the occurrence of an event that would cause the risk rating either to improve or to be downgraded. Loans in this category would be characterized by any of the following situations: ● Credit that is currently protected but is potentially a weak asset; ● Credit that is difficult to manage because of an inadequate loan agreement, the condition of and/or control over collateral, failure to obtain proper documentation, or any other deviation from product lending practices; and ● Adverse financial trends. Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans classified substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. The potential loss does not have to be recognizable in an individual credit for that credit to be risk rated Substandard. A loan can be fully and adequately secured and still be considered Substandard. Some characteristics of Substandard loans are: ● Inability to service debt from ordinary and recurring cash flow; ● Chronic delinquency; ● Reliance upon alternative sources of repayment; ● Term loans that are granted on liberal terms because the borrower cannot service normal payments for that type of debt; ● Repayment dependent upon the liquidation of collateral; ● Inability to perform as agreed, but adequately protected by collateral; ● Necessity to renegotiate payments to a non-standard level to ensure performance; and ● The borrower is bankrupt, or for any other reason, future repayment is dependent on court action. Doubtful loans have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and value, highly questionable and improbable. Doubtful loans have a high probability of loss, yet certain important and reasonably specific pending factors may work toward the strengthening of the credit. Losses are recognized as charges to the allowance when the loan or portion of the loan is considered uncollectible or at the time of foreclosure. Recoveries on loans previously charged off are credited to the allowance for loan losses. The following tables present the internally assigned risk grade by class of loans at the dates indicated: Special Pass mention Substandard Doubtful Total June 30, 2020 Commercial and industrial $ 305,598 $ 5,595 $ 1,677 $ — $ 312,870 Construction and land 42,942 85 2,806 — 45,833 Commercial real estate 1,146,709 14,820 6,183 — 1,167,712 Residential 194,256 816 2,198 — 197,270 Consumer 5,556 — 5 — 5,561 Total $ 1,695,061 $ 21,316 $ 12,869 $ — $ 1,729,246 Special Pass mention Substandard Doubtful Total December 31, 2019 Commercial and industrial $ 166,613 $ 1,166 $ 1,512 $ — $ 169,291 Construction and land 32,879 93 3,349 — 36,321 Commercial real estate 1,071,771 16,021 5,350 — 1,093,142 Residential 153,484 1,215 2,065 — 156,764 Consumer 2,541 — 21 — 2,562 Total $ 1,427,288 $ 18,495 $ 12,297 $ — $ 1,458,080 The following tables provide an aging of the Company’s loans receivable as of the dates indicated: Recorded 90 Days investment > 30–59 Days 60–89 Days or more Total Total loans 90 days and past due past due past due past due Current PCI loans receivable accruing June 30, 2020 Commercial and industrial $ 684 $ — $ 527 $ 1,211 $ 310,950 $ 709 $ 312,870 $ — Construction and land — — 2,806 2,806 42,835 192 45,833 — Commercial real estate 271 778 2,192 3,241 1,150,859 13,612 1,167,712 — Residential 77 — 1,157 1,234 192,896 3,140 197,270 — Consumer 1 — — 1 5,560 — 5,561 — Total $ 1,033 $ 778 $ 6,682 $ 8,493 $ 1,703,100 $ 17,653 $ 1,729,246 $ — Recorded 90 Days investment > 30–59 Days 60–89 Days or more Total Total loans 90 days and past due past due past due past due Current PCI loans receivable accruing December 31, 2019 Commercial and industrial $ 923 $ 1,480 $ 207 $ 2,610 $ 166,137 $ 544 $ 169,291 $ 26 Construction and land 325 88 2,961 3,374 32,724 223 36,321 224 Commercial real estate 4,668 4,698 1,460 10,826 1,068,211 14,105 1,093,142 — Residential 531 122 1,392 2,045 152,261 2,458 156,764 — Consumer 14 — 13 27 2,533 2 2,562 — Total $ 6,461 $ 6,388 $ 6,033 $ 18,882 $ 1,421,866 $ 17,332 $ 1,458,080 $ 250 At June 30, 2020, there were no loans greater than 90 days past due and still accruing interest, compared to $250,000 at December 31, 2019. The balance of nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, was $1.2 million at both June 30, 2020 and December 31, 2019. Interest foregone on nonaccrual loans was approximately $119,500 and $221,000 for the three and six months ended June 30, 2020 compared to $46,000 and $88,000 for the three and six months ended June 30, 2019, respectively. At June 30, 2020, there were two loans totaling $350,000 in the process of foreclosure compared to none at December 31, 2019. Purchase Credit Impaired Loans As part of acquisitions, the Company has purchased loans, some of which have shown evidence of credit deterioration since origination and it is probable at the acquisition that all contractually requirement payments would not be collected. The unpaid principal balance and carrying value of the Company’s PCI loans at the dates indicated are as follows: June 30, 2020 December 31, 2019 Unpaid Unpaid principal Carrying principal Carrying balance value balance value Commercial and industrial $ 1,097 $ 709 $ 1,225 $ 544 Construction and land 273 192 338 223 Commercial real estate 15,487 13,612 15,930 14,105 Residential 3,925 3,140 3,238 2,458 Consumer — — 8 2 Total $ 20,782 $ 17,653 $ 20,739 $ 17,332 The following table summarized the accretable yield on the purchased credit impaired loans for the periods indicated: Three months ended Six months ended June 30, June 30, 2020 2019 2020 2019 Balance at beginning of period $ 594 $ 231 $ 554 $ 256 Additions 223 350 531 350 Removals (229) — (356) (3) Accretion (17) (24) (158) (46) Balance at end of period $ 571 $ 557 $ 571 $ 557 |