| LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY | NOTE 5 – LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY The following table presents total loans by portfolio segment and class of loan as of June 30, 2021 and December 31, 2020: June 30, December 31, 2021 2020 Commercial/industrial $ 408,341 $ 447,344 Commercial real estate - owner occupied 559,886 549,619 Commercial real estate - non-owner occupied 482,850 443,144 Construction and development 140,694 140,042 Residential 1‑4 family 572,233 545,818 Consumer 33,399 30,359 Other 32,402 38,054 Subtotals 2,229,805 2,194,380 ALL (19,547) (17,658) Loans, net of ALL 2,210,258 2,176,722 Deferred loan fees and costs (4,588) (2,920) Loans, net $ 2,205,670 $ 2,173,802 The ALL by loan type as of June 30, 2021 and 2020 is summarized as follows: Commercial Commercial Real Estate - Real Estate - Construction Commercial / Owner Non - Owner and Residential Industrial Occupied Occupied Development 1-4 Family Consumer Other Total ALL - January 1, 2021 $ 2,049 $ 6,108 $ 3,904 $ 1,027 $ 3,960 $ 201 $ 409 $ 17,658 Charge-offs — (24) — — — — (13) (37) Recoveries 27 — 5 33 8 1 2 76 Provision 734 609 213 4 370 33 (113) 1,850 ALL - June 30, 2021 2,810 6,693 4,122 1,064 4,338 235 285 19,547 ALL ending balance individually evaluated for impairment 2 — 452 — — — — 454 ALL ending balance collectively evaluated for impairment $ 2,808 $ 6,693 $ 3,670 $ 1,064 $ 4,338 $ 235 $ 285 $ 19,093 Loans outstanding - June 30, 2021 $ 408,341 $ 559,886 $ 482,850 $ 140,694 $ 572,233 $ 33,399 $ 32,402 $ 2,229,805 Loans ending balance individually evaluated for impairment 1,172 1,077 6,819 — — — — 9,068 Loans ending balance collectively evaluated for impairment $ 407,169 $ 558,809 $ 476,031 $ 140,694 $ 572,233 $ 33,399 $ 32,402 $ 2,220,737 Commercial Commercial Real Estate - Real Estate - Construction Commercial / Owner Non - Owner and Residential Industrial Occupied Occupied Development 1-4 Family Consumer Other Total ALL - January 1, 2020 $ 2,320 $ 4,587 $ 1,578 $ 548 $ 2,169 $ 141 $ 53 $ 11,396 Charge-offs (8) (101) — — (59) — (9) (177) Recoveries 1 640 40 — 37 — 9 727 Provision 235 905 2,180 224 558 19 4 4,125 ALL - June 30, 2020 2,548 6,031 3,798 772 2,705 160 57 16,071 ALL ending balance individually evaluated for impairment 702 525 1,469 — — — — 2,696 ALL ending balance collectively evaluated for impairment $ 1,846 $ 5,506 $ 2,329 $ 772 $ 2,705 $ 160 $ 57 $ 13,375 Loans outstanding - June 30, 2020 $ 574,052 $ 525,908 $ 410,931 $ 126,653 $ 451,070 $ 28,532 $ 5,365 $ 2,122,511 Loans ending balance individually evaluated for impairment 1,973 10,860 7,987 — — — — 20,820 Loans ending balance collectively evaluated for impairment $ 572,079 $ 515,048 $ 402,944 $ 126,653 $ 451,070 $ 28,532 $ 5,365 $ 2,101,691 The Company’s past due loans as of June 30, 2021 is summarized as follows: 90 Days 30-89 Days or more Past Due Past Due Accruing and Accruing Non-Accrual Total Commercial/industrial $ — $ — $ 1,032 $ 1,032 Commercial real estate - owner occupied 76 — 20 96 Commercial real estate - non-owner occupied — — 9,487 9,487 Construction and development — 22 — 22 Residential 1‑4 family 213 325 1,464 2,002 Consumer 3 3 5 11 Other — — — — $ 292 $ 350 $ 12,008 $ 12,650 The Company’s past due loans as of December 31, 2020 is summarized as follows: 90 Days 30-89 Days or more Past Due Past Due Accruing and Accruing Non-Accrual Total Commercial/industrial $ 116 $ — $ 433 $ 549 Commercial real estate - owner occupied — 1,582 1,078 2,660 Commercial real estate - non-owner occupied — — 8,087 8,087 Construction and development — — 281 281 Residential 1‑4 family 1,415 142 912 2,469 Consumer 4 14 5 23 Other — — — — $ 1,535 $ 1,738 $ 10,796 $ 14,069 The Company utilizes a numerical risk rating system for commercial relationships. All other types of relationships (ex: residential, consumer, other) are assigned a “Pass” rating, unless they have fallen 90 days past due or more, at which time they receive a rating of 7. The Company uses split ratings for government guaranties on loans. The portion of a loan that is supported by a government guaranty is included with other Pass credits. The determination of a commercial loan risk rating begins with completion of a matrix, which assigns scores based on the strength of the borrower’s debt service coverage, collateral coverage, balance sheet leverage, industry outlook, and customer concentration. A weighted average is taken of these individual scores to arrive at the overall rating. This rating is subject to adjustment by the loan officer based on facts and circumstances pertaining to the borrower. Risk ratings are subject to independent review. Commercial borrowers with ratings between 1 and 5 are considered Pass credits, with 1 being most acceptable and 5 being just above the minimum level of acceptance. Commercial borrowers rated 6 have potential weaknesses which may jeopardize repayment ability. Borrowers rated 7 have a well-defined weakness or weaknesses such as the inability to demonstrate significant cash flow for debt service based on analysis of the company’s financial information. These loans remain on accrual status provided full collection of principal and interest is reasonably expected. Otherwise they are deemed impaired and placed on nonaccrual status. Borrowers rated 8 are the same as 7 rated credits with one exception: collection or liquidation in full is not probable. The breakdown of loans by risk rating as of June 30, 2021 is as follows: Pass (1-5) 6 7 8 Total Commercial/industrial $ 389,823 $ 9,579 $ 8,939 $ — $ 408,341 Commercial real estate - owner occupied 522,933 11,398 25,555 — 559,886 Commercial real estate - non-owner occupied 468,885 3,956 10,009 — 482,850 Construction and development 140,242 — 452 — 140,694 Residential 1‑4 family 570,120 132 1,981 — 572,233 Consumer 33,392 — 7 — 33,399 Other 32,402 — — — 32,402 $ 2,157,797 $ 25,065 $ 46,943 $ — $ 2,229,805 The breakdown of loans by risk rating as of December 31, 2020 is as follows: Pass (1-5) 6 7 8 Total Commercial/industrial $ 440,461 $ 2,479 $ 4,404 $ — $ 447,344 Commercial real estate - owner occupied 520,075 5,844 23,700 — 549,619 Commercial real estate - non-owner occupied 432,444 — 10,700 — 443,144 Construction and development 139,693 21 328 — 140,042 Residential 1‑4 family 543,163 456 2,199 — 545,818 Consumer 30,359 — — — 30,359 Other 38,054 — — — 38,054 $ 2,144,249 $ 8,800 $ 41,331 $ — $ 2,194,380 The ALL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on the consolidated balance sheets. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. The ALL consists of specific reserves for certain individually evaluated impaired loans and general reserves for collectively evaluated non-impaired loans. Specific reserves reflect estimated losses on impaired loans from management’s analyses developed through specific credit allocations. The specific reserves are based on regular analyses of impaired, non-homogenous loans greater than $250,000. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general reserve is based in part on the Bank’s historical loss experience which is updated quarterly. The general reserve portion of the ALL also includes consideration of certain qualitative factors such as 1) changes in lending policies and/or underwriting practices, 2) national and local economic conditions, 3) changes in portfolio volume and nature, 4) experience, ability and depth of lending management and other relevant staff, 5) levels of and trends in past-due and nonaccrual loans and quality, 6) changes in loan review and oversight, 7) impact and effects of concentrations and 8) other issues deemed relevant. There are many factors affecting ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged off or for which an actual loss is realized. As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of management based on information available to the regulators at the time of their examinations. A summary of impaired loans individually evaluated as of June 30, 2021 is as follows: Commercial Commercial Real Estate - Real Estate - Construction Commercial/ Owner Non-Owner and Residential Industrial Occupied Occupied Development 1-4 Family Consumer Other Unallocated Total With an allowance recorded: Recorded investment $ 466 $ — $ 6,819 $ — $ — $ — $ — $ — $ 7,285 Unpaid principal balance 466 — 6,819 — — — — — 7,285 Related allowance 2 — 452 — — — — — 454 With no related allowance recorded: Recorded investment $ 706 $ 1,077 $ — $ — $ — $ — $ — $ — $ 1,783 Unpaid principal balance 706 1,077 — — — — — — 1,783 Related allowance — — — — — — — — — Total: Recorded investment $ 1,172 $ 1,077 $ 6,819 $ — $ — $ — $ — $ — $ 9,068 Unpaid principal balance 1,172 1,077 6,819 — — — — — 9,068 Related allowance 2 — 452 — — — — — 454 Average recorded investment $ 825 $ 1,124 $ 7,748 $ — $ 130 $ — $ — $ — $ 9,828 A summary of impaired loans individually evaluated as of December 31, 2020 is as follows: Commercial Commercial Real Estate - Real Estate - Construction Commercial/ Owner Non-Owner and Residential Industrial Occupied Occupied Development 1‑4 Family Consumer Other Total With an allowance recorded: Recorded investment $ 478 $ — $ 7,684 $ — $ — $ — $ — $ 8,162 Unpaid principal balance 478 — 7,684 — — — — 8,162 Related allowance 10 — 890 — — — — 900 With no related allowance recorded: Recorded investment $ — $ 1,171 $ 992 $ — $ 260 $ — $ — $ 2,423 Unpaid principal balance — 1,171 992 — 260 — — 2,423 Related allowance — — — — — — — — Total: Recorded investment $ 478 $ 1,171 $ 8,676 $ — $ 260 $ — $ — $ 10,585 Unpaid principal balance 478 1,171 8,676 — 260 — — 10,585 Related allowance 10 — 890 — — — — 900 Average recorded investment $ 1,178 $ 2,535 $ 4,338 $ — $ 130 $ — $ — $ 8,181 Interest recognized while these loans were impaired is considered immaterial to the consolidated financial statements for the six months ended June 30, 2021 and 2020. The following table presents loans acquired with deteriorated credit quality as of June 30, 2021 and December 31, 2020. No loans in this table had a related allowance at either date, and therefore, the below disclosures were not expanded to include loans with and without a related allowance. June 30, 2021 December 31, 2020 Recorded Unpaid Principal Recorded Unpaid Principal Investment Balance Investment Balance Commercial & Industrial $ 710 $ 807 $ 805 $ 907 Commercial real estate - owner occupied 3,823 4,678 3,860 4,718 Commercial real estate - non-owner occupied 1,200 1,358 1,245 1,410 Construction and development 60 67 81 90 Residential 1‑4 family 860 1,135 870 1,162 Consumer — — — — Other — — — — $ 6,653 $ 8,045 $ 6,861 $ 8,287 Due to the nature of these loan relationships, prepayment expectations have not been considered in the determination of future cash flows. Management regularly monitors these loan relationships, and if information becomes available that indicates expected cash flows will differ from initial expectations, it may necessitate reclassification between accretable and non-accretable components of the original discount calculation. The following table represents the change in the accretable and non-accretable components of discounts on loans acquired with deteriorated credit quality for the six months ended June 30, 2021, and year ended December 31, 2020: June 30, 2021 December 31, 2020 Accretable Non-accretable Accretable Non-accretable discount discount discount discount Balance at beginning of period $ 1,250 $ 176 $ 222 $ 220 Acquired balance, net — — 1,064 727 Reclassifications between accretable and non-accretable 14 (14) 771 (771) Accretion to loan interest income (34) — (807) — Balance at end of period $ 1,230 $ 162 $ 1,250 $ 176 A troubled debt restructuring (“TDR”) includes a loan modification where a borrower is experiencing financial difficulty and we grant a concession to that borrower that we would not otherwise consider except for the borrower’s financial difficulties. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, which could occur based on the same criteria as non-TDR loans, it remains there until a sufficient period of performance under the restructured terms has occurred at which it returned to accrual status, generally 6 months. As of June 30, 2021 and December 31, 2020 the Company had no specific reserves for TDRs. As a result of the COVID-19 pandemic, the Bank experienced an increase in customer requests for loan modifications and payment deferrals. Certain provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) act, as extended, signed into law on March 27, 2020, allowed financial institutions the option to exempt loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR from consideration for TDR treatment. Modifications in the scope of the exemption include forbearance agreements, interest-rate modifications, repayment plan changes and any other similar arrangements that would delay payments of principal or interest. This relief is allowable on modifications on loans which were not more than 30 days past due as of December 31, 2019, and that occur after March 1, 2020, and before the earlier of 60 days after the date on which the national emergency related to the COVID-19 outbreak is terminated. The following table presents the TDRs during the six months ended June 30, 2021: Pre-Modification Post-Modification Number of Outstanding Recorded Outstanding Recorded Contracts Investment Investment Commercial/ industrial 1 $ 12 $ 12 Commercial Real Estate 1 111 111 $ 123 $ 123 The following table presents the TDRs during the six months June 30, 2020: Pre-Modification Post-Modification Number of Outstanding Recorded Outstanding Recorded Contracts Investment Investment Commercial Real Estate 1 $ 115 $ 115 |
