Loans and Asset Quality

9 Months Ended

Sep. 30, 2020

Receivables [Abstract]

Loans and Asset Quality

Loans and Asset Quality

Loans

Loans HFI by category and loans HFS are summarized below:

(in thousands)	September 30, 2020		December 31, 2019
Real estate:
Commercial real estate	$	567,037	$	531,990
One-to-four family residential	426,758		420,020
Construction and development	129,879		132,461
Commercial and industrial	249,313		267,940
SBA PPP, net of deferred income	193,532		—
Tax-exempt	59,418		56,494
Consumer	23,335		30,019
Total loans HFI	$	1,649,272	$	1,438,924
Total loans HFS	$	23,358	$	5,089

Allowance for Loan Losses

The following table summarizes the activity in the allowance for loan losses by category for the nine months ended September 30, 2020:

(in thousands)	Beginning Balance December 31, 2019		Provision for Loan Losses		Loans Charged-off		Recoveries		Ending Balance September 30, 2020
Real estate:
Commercial real estate	$	3,454	$	1,135	$	—	$	—	$	4,589
One-to-four family residential	3,323		705		—		8		4,036
Construction and development	1,211		188		(14)		1		1,386
Commercial and industrial	5,175		896		(1,316)		83		4,838
SBA PPP, net of deferred income	—		480		—		—		480
Tax-exempt	334		114		—		—		448
Consumer	440		100		(254)		129		415
Total allowance for loan losses	$	13,937	$	3,618	$	(1,584)	$	221	$	16,192

The following table summarizes the activity in the allowance for loan losses by category for the twelve months ended December 31, 2019:

(in thousands)	Beginning Balance December 31, 2018		Provision for Loan Losses		Loans Charged-off		Recoveries		Ending Balance December 31, 2019
Real estate:
Commercial real estate	$	3,081	$	373	$	—	$	—	$	3,454
One-to-four family residential	3,146		216		(44)		5		3,323
Construction and development	951		172		—		88		1,211
Commercial and industrial	4,604		850		(864)		585		5,175
SBA PPP, net of deferred income	—		—		—		—		—
Tax-exempt	372		(38)		—		—		334
Consumer	370		237		(311)		144		440
Total allowance for loan losses	$	12,524	$	1,810	$	(1,219)	$	822	$	13,937

The balance in the allowance for loan losses and the related recorded investment in loans by category as of September 30, 2020, are as follows:

(in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total
Allowance for loan losses:
Real estate:
Commercial real estate	$	279	$	4,310	$	—	$	4,589
One-to-four family residential	41		3,995		—		4,036
Construction and development	—		1,386		—		1,386
Commercial and industrial	2,432		2,406		—		4,838
SBA PPP, net of deferred income	—		480		—		480
Tax-exempt	—		448		—		448
Consumer	112		303		—		415
Total allowance for loan losses	$	2,864	$	13,328	$	—	$	16,192
Loans:
Real estate:
Commercial real estate	$	3,639	$	563,398	$	—	$	567,037
One-to-four family residential	1,333		425,425		—		426,758
Construction and development	—		129,879		—		129,879
Commercial and industrial	10,034		239,279		—		249,313
SBA PPP, net of deferred income	—		193,532		—		193,532
Tax-exempt	—		59,418		—		59,418
Consumer	114		23,221		—		23,335
Total loans HFI	$	15,120	$	1,634,152	$	—	$	1,649,272

The balance in the allowance for loan losses and the related recorded investment in loans by category as of December 31, 2019, are as follows:

(in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total
Allowance for loan losses:
Real estate:
Commercial real estate	$	260	$	3,194	$	—	$	3,454
One-to-four family residential	31		3,292		—		3,323
Construction and development	10		1,201		—		1,211
Commercial and industrial	2,916		2,259		—		5,175
SBA PPP, net of deferred income	—		—		—		—
Tax-exempt	—		334		—		334
Consumer	71		369		—		440
Total allowance for loan losses	$	3,288	$	10,649	$	—	$	13,937
Loans:
Real estate:
Commercial real estate	$	2,639	$	529,351	$	—	$	531,990
One-to-four family residential	1,193		418,827		—		420,020
Construction and development	38		132,423		—		132,461
Commercial and industrial	8,797		259,143		—		267,940
SBA PPP, net of deferred income	—		—		—		—
Tax-exempt	—		56,494		—		56,494
Consumer	75		29,944		—		30,019
Total loans HFI	$	12,742	$	1,426,182	$	—	$	1,438,924

Past Due and Nonaccrual Loans

A summary of current, past due, and nonaccrual loans as of September 30, 2020, is as follows:

	Accruing
(in thousands)	Current		30-89 Days Past Due		90 Days or More Past Due		Nonaccrual		Total Loans
Real estate:
Commercial real estate	$	564,989	$	191	$	—	$	1,857	$	567,037
One-to-four family residential	425,959		70		—		729		426,758
Construction and development	129,879		—		—		—		129,879
Commercial and industrial	247,463		56		80		1,714		249,313
SBA PPP, net of deferred income	193,532		—		—		—		193,532
Tax-exempt	59,418		—		—		—		59,418
Consumer	23,324		4		2		5		23,335
Total loans HFI	$	1,644,564	$	321	$	82	$	4,305	$	1,649,272

A summary of current, past due, and nonaccrual loans as of December 31, 2019, is as follows:

	Accruing
(in thousands)	Current		30-89 Days Past Due		90 Days or More Past Due		Nonaccrual		Total Loans
Real estate:
Commercial real estate	$	530,712	$	—	$	—	$	1,278	$	531,990
One-to-four family residential	419,229		184		—		607		420,020
Construction and development	132,423		—		—		38		132,461
Commercial and industrial	264,427		143		—		3,370		267,940
SBA PPP, net of deferred income	—		—		—		—		—
Tax-exempt	56,494		—		—		—		56,494
Consumer	29,973		20		—		26		30,019
Total loans HFI	$	1,433,258	$	347	$	—	$	5,319	$	1,438,924

Impaired Loans

Impaired loans include TDRs and performing and nonperforming loans. Information pertaining to impaired loans as of September 30, 2020, is as follows:

(in thousands)	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Real estate:
Commercial real estate	$	1,469	$	1,438	$	—	$	1,414
One-to-four family residential	1,120		1,060		—		1,027
Construction and development	—		—		—		—
Commercial and industrial	1,831		1,463		—		1,444
SBA PPP, net of deferred income	—		—		—		—
Tax-exempt	—		—		—		—
Consumer	2		2		—		2
Total with no related allowance	4,422		3,963		—		3,887
With allowance recorded:
Real estate:
Commercial real estate	2,399		2,201		279		1,368
One-to-four family residential	280		273		41		218
Construction and development	—		—		—		10
Commercial and industrial	8,594		8,571		2,432		7,179
SBA PPP, net of deferred income	—		—		—		—
Tax-exempt	—		—		—		—
Consumer	114		112		112		102
Total with related allowance	11,387		11,157		2,864		8,877
Total impaired loans	$	15,809	$	15,120	$	2,864	$	12,764

Information pertaining to impaired loans as of December 31, 2019, is as follows:

(in thousands)	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Real estate:
Commercial real estate	$	1,560	$	1,537	$	—	$	2,647
One-to-four family residential	1,040		984		—		1,194
Construction and development	—		—		—		76
Commercial and industrial	1,805		1,474		—		3,685
SBA PPP, net of deferred income	—		—		—		—
Tax-exempt	—		—		—		—
Consumer	2		2		—		9
Total with no related allowance	4,407		3,997		—		7,611
With allowance recorded:
Real estate:
Commercial real estate	1,263		1,102		260		1,076
One-to-four family residential	216		209		31		339
Construction and development	51		38		10		89
Commercial and industrial	8,544		7,323		2,916		7,746
SBA PPP, net of deferred income	—		—		—		—
Tax-exempt	—		—		—		—
Consumer	76		73		71		76
Total with related allowance	10,150		8,745		3,288		9,326
Total impaired loans	$	14,557	$	12,742	$	3,288	$	16,937

The interest income recognized on impaired loans for the three months ended September 30, 2020 and September 30, 2019, was $199,000 and $111,000, respectively. The interest income recognized on impaired loans for the nine months ended September 30, 2020 and September 30, 2019, was $361,000 and $336,000, respectively.

Troubled Debt Restructurings

The restructuring of a loan is considered a TDR if the borrower is experiencing financial difficulties and the bank has granted a concession. Concessions grant terms to the borrower that would not be offered for new debt with similar risk characteristics. Concessions typically include interest rate reductions or below market interest rates, revising amortization schedules to defer principal and interest payments, and other changes necessary to provide payment relief to the borrower and minimize the risk of loss. There were no unfunded commitments to extend credit related to these loans as of September 30, 2020 or December 31, 2019.

A summary of current, past due, and nonaccrual TDR loans as of September 30, 2020, is as follows:

(dollars in thousands)	Current		30-89 Days Past Due		90 Days or More Past Due		Nonaccrual		Total TDRs
Real estate:
Commercial real estate	$	1,162	$	—	$	—	$	1,230	$	2,392
One-to-four family residential	215		—		—		—		215
Construction and development	—		—		—		—		—
Commercial and industrial	—		—		—		9		9
SBA PPP, net of deferred income	—		—		—		—		—
Tax-exempt	—		—		—		—		—
Consumer	—		—		—		—		—
Total	$	1,377	$	—	$	—	$	1,239	$	2,616
Number of TDR loans	7		—		—		4		11

A summary of current, past due, and nonaccrual TDR loans as of December 31, 2019, is as follows:

(dollars in thousands)	Current		30-89 Days Past Due		90 Days or More Past Due		Nonaccrual		Total TDRs
Real estate:
Commercial real estate	$	1,361	$	—	$	—	$	1,278	$	2,639
One-to-four family residential	252		—		—		—		252
Construction and development	—		—		—		38		38
Commercial and industrial	36		—		—		1,869		1,905
SBA PPP, net of deferred income	—		—		—		—		—
Tax-exempt	—		—		—		—		—
Consumer	46		—		—		—		46
Total	$	1,695	$	—	$	—	$	3,185	$	4,880
Number of TDR loans	12		—		—		6		18

A summary of loans modified as TDRs that occurred during the nine months ended September 30, 2020 and September 30, 2019, is as follows:

	September 30, 2020					September 30, 2019
		Recorded Investment					Recorded Investment
(dollars in thousands)	Loan Count	Pre Modification		Post Modification		Loan Count	Pre Modification		Post Modification
Real estate:
Commercial real estate	—	$	—	$	—	1	$	166	$	166
One-to-four family residential	—	—		—		—	—		—
Construction and development	—	—		—		—	—		—
Commercial and industrial	—	—		—		1	4		4
SBA PPP, net of deferred income	—	—		—		—	—		—
Tax-exempt	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	—	$	—	$	—	2	$	170	$	170

The TDRs described above increased the allowance for loan losses by $4,000 as of September 30, 2019. Additionally, there were no defaults on loans during the nine months ended September 30, 2020 or September 30, 2019, that had been modified as a TDR during the prior twelve months.

Short-term loan modifications on loans HFI were made to provide temporary relief to borrowers that have been adversely affected by the outbreak of COVID-19. In accordance with interagency regulatory guidance issued in March 2020, these short-term deferrals are not deemed to be TDRs to the extent they meet the terms of such guidance.

Credit Quality Indicators

Loans are categorized based on the degree of risk inherent in the credit and the ability of the borrower to service the debt. A description of the general characteristics of the Bank’s risk rating grades follows:

Pass - These loans are of satisfactory quality and do not require a more severe classification.

Special Mention - This category includes loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan.

Substandard - Loans in this category have well defined weaknesses which jeopardize normal repayment of principal and interest.

Doubtful - Loans in this category have well defined weaknesses that make full collection improbable.

Loss - Loans classified in this category are considered uncollectible and charged-off to the allowance for loan losses.

The following table summarizes loans by risk rating as of September 30, 2020:

(in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Real estate:
Commercial real estate	$	562,169	$	582	$	4,286	$	—	$	—	$	567,037
One-to-four family residential	424,921		492		1,345		—		—		426,758
Construction and development	129,100		—		779		—		—		129,879
Commercial and industrial	238,616		212		10,485		—		—		249,313
SBA PPP, net of deferred income	193,532		—		—		—		—		193,532
Tax-exempt	59,418		—		—		—		—		59,418
Consumer	23,221		—		114		—		—		23,335
Total loans HFI	$	1,630,977	$	1,286	$	17,009	$	—	$	—	$	1,649,272

The following table summarizes loans by risk rating as of December 31, 2019:

(in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Real estate:
Commercial real estate	$	515,926	$	14,118	$	1,946	$	—	$	—	$	531,990
One-to-four family residential	416,884		2,021		1,115		—		—		420,020
Construction and development	131,185		565		711		—		—		132,461
Commercial and industrial	247,382		11,473		9,085		—		—		267,940
SBA PPP, net of deferred income	—		—		—		—		—		—
Tax-exempt	56,494		—		—		—		—		56,494
Consumer	29,876		5		138		—		—		30,019
Total loans HFI	$	1,397,747	$	28,182	$	12,995	$	—	$	—	$	1,438,924

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer if all conditions of the commitment have been met. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s evaluation of the customer’s ability to repay. As of September 30, 2020, unfunded loan commitments totaled approximately $293.1 million. As of December 31, 2019, unfunded loan commitments totaled approximately $257.0 million.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. As of September 30, 2020, commitments under standby letters of credit totaled approximately $9.9 million. As of December 31, 2019, commitments under standby letters of credit totaled approximately $11.1 million. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.