LOANS | NOTE 5 – LOANS The Company’s loan portfolio at the dates indicated is summarized below: March 31, December 31, 2022 2021 Commercial and industrial $ 313,556 $ 230,177 Construction and land 20,854 13,371 Commercial real estate 1,564,305 1,299,684 Residential 102,079 118,423 Consumer 3,675 5,138 Total loans 2,004,469 1,666,793 Net deferred loan fees (541) (1,903) Allowance for loan losses (17,700) (17,700) Net loans $ 1,986,228 $ 1,647,190 During the first quarter of 2022, the Bank continued its participation in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), by processing applications for PPP loan forgiveness. The Company’s total impaired loans, including nonaccrual loans 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 March 31, 2022 Recorded investment in impaired loans: With no specific allowance recorded $ 184 $ 36 $ 5,451 $ 1,632 $ — $ 7,303 With a specific allowance recorded 5,538 — 259 128 — 5,925 Total recorded investment in impaired loans $ 5,722 $ 36 $ 5,710 $ 1,760 $ — $ 13,228 Specific allowance on impaired loans $ 1,277 $ — $ 259 $ 10 $ — 1,546 December 31, 2021 Recorded investment in impaired loans: With no specific allowance recorded $ 112 $ 36 $ 5,015 $ 1,441 $ — $ 6,604 With a specific allowance recorded 681 — 262 146 — 1,089 Total recorded investment in impaired loans $ 793 $ 36 $ 5,277 $ 1,587 $ — $ 7,693 Specific allowance on impaired loans $ 681 $ — $ 224 $ 25 $ — $ 930 Three months ended March 31, 2022 Average recorded investment in impaired loans $ 3,237 $ 812 $ 5,493 $ 898 $ — $ 10,440 Interest recognized 1 — 6 8 — 15 Three months ended March 31, 2021 Average recorded investment in impaired loans 915 36 6,073 2,628 — 9,652 Interest recognized 1 — 58 4 — 63 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 months ended March 31, 2022 and 2021, the Company recorded no charge-offs related to TDR loans. During the three months ended March 31, 2022 and 2021, there were no TDR loans for which there was a payment default within the first 12 months of the modification. As of March 31, 2022 and December 31, 2021, TDR loans had a related allowance of $878,000 and $31,000, respectively. As of March 31, 2022 and December 31, 2021, $794,000 and $805,000, 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 March 31, 2022. 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 March 31, 2022 Commercial and industrial 3 $ — $ 4,881 $ — $ 4,881 Construction and land — — — — — Commercial real estate 4 — 2,191 — 2,191 Residential 1 — 128 — 128 Consumer — — — — — Total 8 $ — $ 7,200 $ — $ 7,200 Number of Rate Term Rate & term loans modification modification modification Total March 31, 2021 Commercial and industrial 2 $ — $ 29 $ — $ 29 Construction and land — — — — — Commercial real estate 3 — 1,422 — 1,422 Residential 1 — 150 — 150 Consumer — — — — — Total 6 $ — $ 1,601 $ — $ 1,601 There was one loan modified as a TDR during the three months ended March 31, 2022. There were two loans modified as TDRs during the three months ended March 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. 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 March 31, 2022 Commercial and industrial $ 300,516 $ 3,740 $ 9,300 $ — $ 313,556 Construction and land 17,830 2,988 36 — 20,854 Commercial real estate 1,505,699 53,433 5,173 — 1,564,305 Residential 98,742 1,527 1,810 — 102,079 Consumer 3,653 — 22 — 3,675 Total $ 1,926,440 $ 61,688 $ 16,341 $ — $ 2,004,469 Special Pass Mention Substandard Doubtful Total December 31, 2021 Commercial and industrial $ 216,611 $ 9,178 $ 4,388 $ — $ 230,177 Construction and land 13,264 71 36 — 13,371 Commercial real estate 1,264,269 28,438 6,977 — 1,299,684 Residential 115,534 1,250 1,639 — 118,423 Consumer 5,116 — 22 — 5,138 Total $ 1,614,794 $ 38,937 $ 13,062 $ — $ 1,666,793 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 March 31, 2022 Commercial and industrial $ 5,828 $ 236 $ 653 $ 6,717 $ 302,380 $ 4,459 $ 313,556 $ — Construction and land 337 — 36 373 19,034 1,447 20,854 — Commercial real estate 109 697 3,119 3,925 1,536,959 23,421 1,564,305 — Residential 729 321 1,002 2,052 98,457 1,570 102,079 117 Consumer — 221 — 221 3,454 — 3,675 — Total $ 7,003 $ 1,475 $ 4,810 $ 13,288 $ 1,960,284 $ 30,897 $ 2,004,469 $ 117 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, 2021 Commercial and industrial $ 275 $ 10 $ 606 $ 891 $ 228,980 $ 306 $ 230,177 $ — Construction and land — 338 36 374 12,997 — 13,371 — Commercial real estate 196 410 2,621 3,227 1,286,311 10,146 1,299,684 — Residential 1,442 21 1,031 2,494 114,162 1,767 118,423 — Consumer 3 — — 3 5,135 — 5,138 — Total $ 1,916 $ 779 $ 4,294 $ 6,989 $ 1,647,585 $ 12,219 $ 1,666,793 $ — The balance of nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, was $822,000 at March 31, 2022 compared to $841,000 at December 31, 2021. At March 31, 2022 and December 31, 2021, nonaccrual loans included $5.6 million and $6.9 million, respectively, of loans 30-89 days past due and $2.2 million and $2.5 million of loans less than 30 days past due, respectively. At March 31, 2022, nonaccrual loans 30-89 days past due of $5.6 million was primarily comprised of one $4.9 million commercial and industrial loan restructured as a TDR during the three months ended March 31, 2022 and seven smaller loans, and the $2.2 million of loans less than 30 days past due are comprised of 11 loans. All of these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers. There was one loan totaling $117,000 that was 90 days or more past due and still accruing at March 31, 2022, compared to no loans at December 31, 2021. Interest foregone on nonaccrual loans was approximately $84,600 for the three months ended March 31, 2022 compared to $88,300 for the three months ended March 31, 2021. 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: March 31, 2022 December 31, 2021 Unpaid Unpaid principal Carrying principal Carrying balance value balance value Commercial and industrial $ 5,587 $ 4,459 $ 546 $ 306 Construction and land 1,667 1,447 — — Commercial real estate 25,751 23,421 11,519 10,146 Residential 1,943 1,570 2,202 1,767 Total $ 34,948 $ 30,897 $ 14,267 $ 12,219 The following table reflects the changes in the accretable yield of PCI loans Three months ended March 31, 2022 2021 Balance at beginning of period $ 508 $ 383 Additions 1,277 — Removals (48) (65) Accretion (50) (230) Balance at end of period $ 1,687 $ 88 |