| LOANS | NOTE 5 – LOANS The Company’s loan portfolio at the dates indicated is summarized below: September 30, December 31, 2021 2020 Commercial and industrial $ 283,631 $ 309,961 Construction and land 16,424 22,696 Commercial real estate 1,215,611 1,144,560 Residential 125,075 164,724 Consumer 4,060 5,218 Total loans 1,644,801 1,647,159 Net deferred loan fees (3,965) (3,847) Allowance for loan losses (17,300) (17,500) Net loans $ 1,623,536 $ 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 September 30, 2021 Recorded investment in impaired loans: With no specific allowance recorded $ 96 $ 36 $ 5,420 $ 1,542 $ — $ 7,094 With a specific allowance recorded 595 — 262 146 — 1,003 Total recorded investment in impaired loans $ 691 $ 36 $ 5,682 $ 1,688 $ — $ 8,097 Specific allowance on impaired loans $ 580 $ — $ 98 $ 22 $ — 700 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 September 30, 2021 Average recorded investment in impaired loans $ 683 $ 36 $ 5,338 $ 2,363 $ — $ 8,420 Interest recognized 17 — 15 27 — 59 Nine months ended September 30, 2021 Average recorded investment in impaired loans 796 36 5,711 2,609 — 9,152 Interest recognized 53 — 92 43 — 188 Three months ended September 30, 2020 Average recorded investment in impaired loans 1,136 2,692 2,814 1,710 — 8,352 Interest recognized — — 7 — — 7 Nine months ended September 30, 2020 Average recorded investment in impaired loans 769 2,763 3,304 1,689 3 8,528 Interest recognized 4 151 37 — — 192 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 nine months ended September 30, 2021 and 2020, the Company recorded no charge-offs related to TDR loans. During the three and nine months ended September 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 September 30, 2021 and December 31, 2020, TDR loans had a related allowance of $130,000 and $35,000, respectively. As of September 30, 2021 and December 31, 2020, $765,000 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 September 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 September 30, 2021 Commercial and industrial 2 $ — $ 26 $ — $ 26 Construction and land — — — — — Commercial real estate 4 — 2,267 — 2,267 Residential 1 — 146 — 146 Consumer — — — — — Total 7 $ — $ 2,439 $ — $ 2,439 Number of Rate Term Rate & term loans modification modification modification Total September 30, 2020 Commercial and industrial 1 $ — $ 24 $ — $ 24 Construction and land — — — — — Commercial real estate — — — — — Residential 1 — 156 — 156 Consumer — — — — — Total 2 $ — $ 180 $ — $ 180 There were no loans and one loan modified as a TDR during the three and nine months ended September 30, 2021, respectively. There was one loan and two loans modified as a TDR during the three and nine months ended September 30, 2020, respectively. During the third quarter of 2021, the Bank continued its participation in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), by processing applications for PPP loan forgiveness. 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 September 30, 2021 Commercial and industrial $ 269,068 $ 10,326 $ 4,237 $ — $ 283,631 Construction and land 15,262 1,126 36 — 16,424 Commercial real estate 1,181,790 26,173 7,648 — 1,215,611 Residential 122,074 1,260 1,741 — 125,075 Consumer 4,037 — 23 — 4,060 Total $ 1,592,231 $ 38,885 $ 13,685 $ — $ 1,644,801 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 September 30, 2021 Commercial and industrial $ 34 $ 465 $ 1,620 $ 2,119 $ 281,208 $ 304 $ 283,631 $ 1,000 Construction and land 1,067 — 36 1,103 15,281 40 16,424 — Commercial real estate 8,425 2,463 513 11,401 1,193,881 10,329 1,215,611 — Residential 27 — 1,119 1,146 122,029 1,900 125,075 — Consumer 4 — — 4 4,056 — 4,060 — Total $ 9,557 $ 2,928 $ 3,288 $ 15,773 $ 1,616,455 $ 12,573 $ 1,644,801 $ 1,000 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 $841,000 at September 30, 2021 compared to $850,000 at December 31, 2020. At September 30, 2021 and December 31, 2020, nonaccrual loans included $2.5 million and $620,000 of loans 30-89 days past due and $2.5 million and $4.1 million of loans less than 30 days past due, respectively. At September 30, 2021, nonaccrual loans 30-89 days past due of $2.5 million primarily was comprised of two loans and the $2.5 million of loans less than 30 days past due was comprised of 13 small balance loans. At December 31, 2020, nonaccrual loans 30-89 days past due of $620,000 primarily was comprised of four loans and the $4.1 million of loans less than 30 days past due are comprised of 12 small balance loans. All of these loans were placed on nonaccrual due to concerns over the client’s financial condition. Interest foregone on nonaccrual loans was approximately $61,000 and $157,500 for the three and nine months ended September 30, 2021 compared to $117,500 and $338,500 for the three and nine months ended September 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: September 30, 2021 December 31, 2020 Unpaid Unpaid principal Carrying principal Carrying balance value balance value Commercial and industrial $ 641 $ 304 $ 1,000 $ 622 Construction and land 87 40 100 51 Commercial real estate 11,710 10,329 14,096 12,416 Residential 2,361 1,900 3,127 2,521 Total $ 14,799 $ 12,573 $ 18,323 $ 15,610 The following table reflects the changes in the accretable yield of PCI loans Three months ended Nine months ended September 30, September 30, 2021 2020 2021 2020 Balance at beginning of period $ 316 $ 571 $ 383 $ 554 Additions — 25 — 247 Removals (4) — (153) (51) Accretion (139) (62) (57) (216) Balance at end of period $ 173 $ 534 $ 173 $ 534 |
