LOANS | NOTE 5 – LOANS The Company’s loan portfolio at the dates indicated is summarized below: June 30, December 31, 2021 2020 Commercial and industrial $ 327,656 $ 309,961 Construction and land 13,672 22,696 Commercial real estate 1,119,724 1,144,560 Residential 132,026 164,724 Consumer 4,164 5,218 Total loans 1,597,242 1,647,159 Net deferred loan fees (4,621) (3,847) Allowance for loan losses (17,000) (17,500) Net loans $ 1,575,621 $ 1,625,812 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, 2021 Recorded investment in impaired loans: With no specific allowance recorded $ 116 $ 36 $ 5,509 $ 3,016 $ — $ 8,677 With a specific allowance recorded 739 — 300 26 — 1,065 Total recorded investment in impaired loans $ 855 $ 36 $ 5,809 $ 3,042 $ — $ 9,742 Specific allowance on impaired loans 481 — 98 21 — 600 December 31, 2020 Recorded investment in impaired loans: With no specific allowance recorded $ 120 $ 36 $ 5,689 $ 2,040 $ — $ 7,885 With a specific allowance recorded 728 — 451 155 — 1,334 Total recorded investment in impaired loans $ 848 $ 36 $ 6,140 $ 2,195 $ — $ 9,219 Specific allowance on impaired loans 420 — 77 24 — 521 Three months ended June 30, 2021 Average recorded investment in impaired loans $ 909 $ 36 $ 6,084 $ 2,854 $ — $ 9,883 Interest recognized 36 — 18 12 — 66 Six months ended June 30, 2021 Average recorded investment in impaired loans $ 830 $ 36 $ 5,721 $ 2,915 $ — $ 9,502 Interest recognized 37 — 67 25 — 129 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 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 TDR loans 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. For the three and six months ended June 30, 2021 and 2020, the Company recorded no charge-offs related to TDR loans. During the three and six months ended June 30, 2021 and 2020, there were no TDR loans for which there was a payment default within the first 12 months of the modification. As of June 30, 2021 and December 31, 2020, TDR loans had a related allowance of $31,000 and $35,000, respectively. As of June 30, 2021 and December 31, 2020, $776,000 and $798,000, respectively, of TDR loans were performing in accordance with their modified terms. All TDR loans are also included in the loans individually evaluated for impairment as part of the calculation of the allowance for loan losses. There were no commitments to lend additional amounts to borrowers with outstanding loans that are classified as TDR loans at June 30, 2021. A summary of TDR loans by type of concession and type of loan, as of the periods indicated: Number of Rate Term Rate & term loans modification modification modification Total June 30, 2021 Commercial and industrial 2 $ — $ 28 $ — $ 28 Construction and land — — — — — Commercial real estate 4 — 2,277 — 2,277 Residential 1 — 147 — 147 Consumer — — — — — Total 7 $ — $ 2,452 $ — $ 2,452 Number of Rate Term Rate & term loans modification modification modification Total June 30, 2020 Commercial and industrial 1 $ — $ 24 $ — $ 24 Construction and land — — — — — Commercial real estate — — — — — Residential — — — — — Consumer — — — — — Total 1 $ — $ 24 $ — $ 24 There were no loans and one loan modified as a TDR during the three and six months ended June 30, 2021, respectively. There was one loan modified as a TDR during the three and six months ended June 30, 2020, respectively. The Bank continues to offer payment and financial relief programs for borrowers impacted by COVID-19 under the Coronavirus Aid, Relief and Economic Security Act of 2020, or CARES Act, and related regulatory guidance. The primary relief for these borrowers is to allow interest only payments for up to 450 days. In accordance with regulatory guidelines related to COVID-19, these modifications are not considered troubled debt restructurings through the earlier of January 1, 2022, or 60 days after the national emergency terminates. Modified loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. During the second quarter of 2021, the Bank continued its participation in the initial U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), which ended in August 2020, by processing applications for PPP loan forgiveness. During the second quarter of 2021, the Bank continued to accept and process loan applications under the second PPP program enacted in December 2020, which ended on May 31, 2021. 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. All loans modified due to COVID-19 are separately monitored and any request for continuation of relief beyond the initial modification is reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. 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, 2021 Commercial and industrial $ 312,802 $ 10,347 $ 4,507 $ — $ 327,656 Construction and land 13,495 141 36 — 13,672 Commercial real estate 1,086,439 24,938 8,347 — 1,119,724 Residential 128,354 597 3,075 — 132,026 Consumer 4,141 — 23 — 4,164 Total $ 1,545,231 $ 36,023 $ 15,988 $ — $ 1,597,242 Special Pass Mention Substandard Doubtful Total December 31, 2020 Commercial and industrial $ 295,245 $ 10,466 $ 4,250 $ — $ 309,961 Construction and land 22,346 313 37 — 22,696 Commercial real estate 1,112,085 26,329 6,146 — 1,144,560 Residential 161,161 1,333 2,230 — 164,724 Consumer 5,216 — 2 — 5,218 Total $ 1,596,053 $ 38,441 $ 12,665 $ — $ 1,647,159 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, 2021 Commercial and industrial $ — $ — $ 653 $ 653 $ 326,425 $ 578 $ 327,656 $ — Construction and land — 64 36 100 13,529 43 13,672 — Commercial real estate 467 — 752 1,219 1,107,909 10,596 1,119,724 — Residential 1 170 1,398 1,569 128,432 2,025 132,026 — Consumer 1 — — 1 4,163 — 4,164 — Total $ 469 $ 234 $ 2,839 $ 3,542 $ 1,580,458 $ 13,242 $ 1,597,242 $ — 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, 2020 Commercial and industrial $ 265 $ 128 $ 707 $ 1,100 $ 308,239 $ 622 $ 309,961 $ — Construction and land 65 — 269 334 22,311 51 22,696 233 Commercial real estate 254 406 1,518 2,178 1,129,966 12,416 1,144,560 — Residential 80 155 1,412 1,647 160,556 2,521 164,724 — Consumer 1 — — 1 5,217 — 5,218 — Total $ 665 $ 689 $ 3,906 $ 5,260 $ 1,626,289 $ 15,610 $ 1,647,159 $ 233 The balance of nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, was $920,000 at June 30, 2021 compared to $850,000 at December 31, 2020. At June 30, 2021 and December 31, 2020, nonaccrual loans included $637,000 and $620,000 of loans 30-89 days past due and $5.3 million and $4.1 million of loans less than 30 days past due, respectively. Interest foregone on nonaccrual loans was approximately $69,000 and $157,300 for the three and six months ended June 30, 2021 compared to $119,500 and $221,000 for the three and six months ended June 30, 2020, respectively. Purchased Credit Impaired Loans In connection with the Company's acquisitions, the contractual amount and timing of undiscounted principal and interest payments and the estimated amount and timing of undiscounted expected principal and interest payments were used to estimate the fair value of PCI loans at the acquisition date. The difference between these two amounts represented the nonaccretable difference. On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represented the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. For PCI loans the accretable yield is accreted into interest income over the life of the estimated remaining cash flows. At each financial reporting date, the carrying value of each PCI loan is compared to an updated estimate of expected principal payment or recovery on each loan. To the extent that the loan carrying amount exceeds the updated expected principal payment or recovery, a provision of loan loss would be recorded as a charge to income and an allowance for loan loss established. The unpaid principal balance and carrying value of the Company’s PCI loans at the dates indicated are as follows: June 30, 2021 December 31, 2020 Unpaid Unpaid principal Carrying principal Carrying balance value balance value Commercial and industrial $ 915 $ 578 $ 1,000 $ 622 Construction and land 89 43 100 51 Commercial real estate 11,983 10,596 14,096 12,416 Residential 2,513 2,025 3,127 2,521 Consumer — — — — Total $ 15,500 $ 13,242 $ 18,323 $ 15,610 The following table reflects the changes in the accretable yield of PCI loans Three months ended Six months ended June 30, June 30, 2021 2020 2021 2020 Balance at beginning of period $ 88 $ 594 $ 383 $ 554 Additions — 223 — 531 Removals (84) (229) (149) (356) Accretion 312 (17) 82 (158) Balance at end of period $ 316 $ 571 $ 316 $ 571 |