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LOANS AND THE ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2021

LOANS AND THE ALLOWANCE FOR LOAN LOSSES

NOTE 3 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The following presents a summary of the Company’s loans as of the dates noted (in thousands):


	March 31,		December 31,
	2021		2020
Cash, Securities, and Other⁽¹⁾	$	363,155	$	357,020
Construction and Development		110,024		131,111
1-4 Family Residential		452,591		455,038
Non-Owner Occupied CRE		317,457		281,943
Owner Occupied CRE		161,787		163,042
Commercial and Industrial⁽²⁾		141,770		146,031
Total loans held for investment		1,546,784		1,534,185
Deferred fees and unamortized premiums/(unaccreted discounts), net		(2,858)		(1,352)
Allowance for loan losses		(12,539)		(12,539)
Loans, net	$	1,531,387	$	1,520,294

______________________________________

⁽¹⁾ Includes PPP loans of $190.5 million and $142.9 million as of March 31, 2021 and December 31, 2020, respectively.

⁽²⁾ Includes MSLP loans of $6.7 million and $6.6 million as of March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021, total loans held for investment include $120.8 million of performing loans purchased as part of the Branch Acquisition.

The CARES Act created the PPP, which is administered by the SBA. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and as of March 31, 2021, the Cash, Securities, and Other portion of the loan portfolio included $190.5 million of PPP loans, or 52.5% of the total category. As of December 31, 2020, the Cash, Securities, and Other portion of the loan portfolio included $142.9 million of PPP loans, or 40.0% of the total category

The Company is a participant in the Federal Reserve’s MSLP to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of March 31, 2021, the Company’s Commercial and Industrial loans included six MSLP loans with the net carrying amount of $6.7 million.

Loan Modifications

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years.

As of March 31, 2021, the Company’s loan portfolio included 81 loans which were modified under the loan modification program, totaling $148.5 million. None of these loans were still in their deferral period as of March 31, 2021.

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR. The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition. In accordance with that guidance, the Company is recognizing interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.

All loans modified in response to COVID-19 are classified as performing and pass rated as of March 31, 2021. These loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has increased our loan level reviews and portfolio monitoring to address the changing environment. The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic. These are borrowers

in accommodations, transportation and restaurant industries, which we believe may be more impacted by the pandemic, and those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. The portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation and restaurants, is less than 3.0% of our loan portfolio. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of March 31, 2021, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

The following presents, by class, an aging analysis of the recorded investments (excluding accrued interest receivable, deferred (fees) costs, and unamortized premiums/ (unaccreted discounts) which are not material) in loans past due as of March 31, 2021 and December 31, 2020 (in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
March 31, 2021	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	—	$	—	$	21	$	21	$	363,134	$	363,155
Construction and Development		—		—		—		—		110,024		110,024
1-4 Family Residential		—		—		—		—		452,591		452,591
Non-Owner Occupied CRE		—		—		—		—		317,457		317,457
Owner Occupied CRE		—		—		479		479		161,308		161,787
Commercial and Industrial		200		47		3,519		3,766		138,004		141,770
Total	$	200	$	47	$	4,019	$	4,266	$	1,542,518	$	1,546,784


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
December 31, 2020	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	752	$	—	$	48	$	800	$	356,220	$	357,020
Construction and Development		—		—		—		—		131,111		131,111
1-4 Family Residential		1,283		—		—		1,283		453,755		455,038
Non-Owner Occupied CRE		—		—		—		—		281,943		281,943
Owner Occupied CRE		479		—		—		479		162,563		163,042
Commercial and Industrial		271		—		3,529		3,800		142,231		146,031
Total	$	2,785	$	—	$	3,577	$	6,362	$	1,527,823	$	1,534,185

As of March 31, 2021 and December 31, 2020, the Company did not have any loans which were more than 90 days delinquent and accruing interest.

Non-Accrual Loans and Troubled Debt Restructurings

The following presents the recorded investment in non-accrual loans by class as of the dates noted (in thousands):


	March 31,		December 31,
	2021		2020
Cash, Securities and Other	$	23	$	50
Owner Occupied CRE		479		479
Commercial and Industrial		3,519		3,529
Total	$	4,021	$	4,058

Non-accrual loans classified as TDR accounted for $3.5 million of the recorded investment as of March 31, 2021 and $3.6 million as of December 31, 2020. Non-accrual loans are classified as impaired loans and individually evaluated for impairment.

The following presents a summary of the unpaid principal balance of loans classified as TDRs as of the dates noted (in thousands):


	March 31,		December 31,
	2021		2020
Non-accrual
Cash, Securities, and Other	$	19	$	48
Commercial and Industrial		3,519		3,529
Total		3,538		3,577
Allowance for loan losses associated with TDR		(1,751)		(1,619)
Net recorded investment	$	1,787	$	1,958

As of March 31, 2021 and December 31, 2020, the Company had not committed any additional funds to a borrower with a loan classified as a TDR.

The Company did not modify any loans resulting in TDR status during the three months ended March 31, 2020. The Company modified one loan resulting in TDR status during the year ended December 31, 2020. The Borrower was having difficulty making payments in accordance with the original contract terms. The Company restructured the loan including receiving a large paydown and extended the maturity and lowered the interest rate as a result of the Borrower’s financial difficulties. The loan was paid off in full as of December 31, 2020.

TDRs are reviewed individually for impairment and are included in the Company’s specific reserves in the allowance for loan losses. If charged off, the amount of the charge-off is included in the Company’s charge-off factors, which impact the Company’s reserves on non-impaired loans.

The following table presents impaired loans by portfolio and related valuation allowance as of the periods presented (in thousands):


	March 31, 2021						December 31, 2020
			Unpaid		Allowance				Unpaid		Allowance
	Total		Contractual		for		Total		Contractual		for
	Recorded		Principal		Loan		Recorded		Principal		Loan
	Investment		Balance		Losses		Investment		Balance		Losses
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	4	$	4	$	4	$	2	$	2	$	2
Commercial and Industrial		3,419		3,419		1,751		3,419		3,419		1,619
Total	$	3,423	$	3,423	$	1,755	$	3,421	$	3,421	$	1,621

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	19	$	19	$	—	$	48	$	48	$	—
Owner Occupied CRE		479		479		—		479		479		—
Commercial and Industrial		100		100		—		110		110		—
Total	$	598	$	598	$	—	$	637	$	637	$	—

Total impaired loans:
Cash, Securities, and Other	$	23	$	23	$	4	$	50	$	50	$	2
Owner Occupied CRE		479		479		—		479		479		—
Commercial and Industrial		3,519		3,519		1,751		3,529		3,529		1,619
Total	$	4,021	$	4,021	$	1,755	$	4,058	$	4,058	$	1,621

The recorded investment in loans in the previous tables excludes accrued interest, deferred (fees) costs and unamortized premiums/ (unaccreted discounts) which are not material. Interest income, if any, was recognized on the cash basis on non-accrual loans.

The average balance of impaired loans and interest income recognized on impaired loans during the three months ended March 31, 2021 and 2020 are included in the table below (in thousands):


	Three Months Ended March 31,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	3	$	—	$	—	$	—
Commercial and Industrial		3,419		—		4,275		—
Total	$	3,422	$	—	$	4,275	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	34	$	—	$	2,148	$	—
Owner Occupied CRE		479		—		—		—
Commercial and Industrial		105		—		4,937		81
Total	$	618	$	—	$	7,085	$	81

Total impaired loans:
Cash, Securities, and Other	$	37	$	—	$	2,148	$	—
Owner Occupied CRE		479		—		—		—
Commercial and Industrial		3,524		—		9,212		81
Total	$	4,040	$	—	$	11,360	$	81

Allowance for Loan Losses

Allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories. The following presents the activity in the Company’s allowance for loan losses by portfolio class for the periods presented (in thousands):


	Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended March 31, 2021
Beginning balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539
(Recovery of) provision for loan losses		(6)		(166)		(81)		207		(36)		82		—
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	2,573	$	766	$	3,152	$	2,211	$	1,123	$	2,714	$	12,539

Allowance for loan losses as of March 31, 2021 allocated to loans evaluated for impairment:
Individually	$	4	$	—	$	—	$	—	$	—	$	1,751	$	1,755
Collectively		2,569		766		3,152		2,211		1,123		963		10,784
Ending balance	$	2,573	$	766	$	3,152	$	2,211	$	1,123	$	2,714	$	12,539

Loans as of March 31, 2021, evaluated for impairment:
Individually	$	23	$	—	$	—	$	—	$	479	$	3,519	$	4,021
Collectively		363,132		110,024		452,591		317,457		161,308		138,251		1,542,763
Ending balance	$	363,155	$	110,024	$	452,591	$	317,457	$	161,787	$	141,770	$	1,546,784


	Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended March 31, 2020
Beginning balance	$	1,058	$	200	$	2,850	$	1,176	$	911	$	1,680	$	7,875
Provision for (recovery of) loan losses		34		(14)		158		227		(27)		(11)		367
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	1,092	$	186	$	3,008	$	1,403	$	884	$	1,669	$	8,242

Allowance for loan losses as of December 31, 2020 allocated to loans evaluated for impairment:
Individually	$	2	$	—	$	—	$	—	$	—	$	1,619	$	1,621
Collectively		2,577		932		3,233		2,004		1,159		1,013		10,918
Ending balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539

Loans as of December 31, 2020, evaluated for impairment:
Individually	$	50	$	—	$	—	$	—	$	479	$	3,529	$	4,058
Collectively		356,970		131,111		455,038		281,943		162,563		142,502		1,530,127
Ending balance	$	357,020	$	131,111	$	455,038	$	281,943	$	163,042	$	146,031	$	1,534,185

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans by credit risk on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention—Loans classified as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.

Substandard—Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated for impairment if indicators of impairment exist.

Doubtful—Loans graded Doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, the amount of certainty of eventual loss is not known because of specific pending factors.

Loans not meeting any of the three criteria above are considered to be pass-rated loans. The following presents, by class and by credit quality indicator, the recorded investment in the Company’s loans as of March 31, 2021 and December 31, 2020 (in thousands):


			Special
March 31, 2021	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	363,132	$	—	$	23	$	363,155
Construction and Development		110,024		—		—		110,024
1-4 Family Residential		449,483		—		3,108		452,591
Non-Owner Occupied CRE		312,098		5,359		—		317,457
Owner Occupied CRE		160,600		—		1,187		161,787
Commercial and Industrial		136,181		—		5,589		141,770
Total	$	1,531,518	$	5,359	$	9,907	$	1,546,784


			Special
December 31, 2020	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	356,970	$	—	$	50	$	357,020
Construction and Development		131,111		—		—		131,111
1-4 Family Residential		451,918		—		3,120		455,038
Non-Owner Occupied CRE		275,627		6,316		—		281,943
Owner Occupied CRE		161,850		—		1,192		163,042
Commercial and Industrial		140,432		—		5,599		146,031
Total	$	1,517,908	$	6,316	$	9,961	$	1,534,185

The Company had no loans graded doubtful as of March 31, 2021 and December 31, 2020.