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LOANS AND THE ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 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):


	September 30,		December 31,
	2021		2020
Cash, Securities and Other⁽¹⁾	$	293,837	$	357,020
Construction and Development		132,141		131,111
1-4 Family Residential		502,439		455,038
Non-Owner Occupied CRE		358,369		281,943
Owner Occupied CRE		167,638		163,042
Commercial and Industrial⁽²⁾		148,959		146,031
Total loans held for investment		1,603,383		1,534,185
Deferred fees and unamortized premiums/(unaccreted discounts), net		(333)		(1,352)
Allowance for loan losses		(12,964)		(12,539)
Loans, net	$	1,590,086	$	1,520,294

______________________________________

⁽¹⁾ Includes PPP loans of $61.9 million and $142.9 million as of September 30, 2021 and December 31, 2020, respectively.

⁽²⁾ Includes MSLP loans of $6.8 million and $6.6 million as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021 and December 31, 2020, total loans held for investment included $117.4 million and $127.2 million, respectively, 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 September 30, 2021, the Cash, Securities, and Other portion of the loan portfolio included $61.9 million of PPP loans, or 21.1% 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 September 30, 2021, the Company’s Commercial and Industrial loans included six MSLP loans with the net carrying amount of $6.8 million, or 4.6% of the total category. As of December 31, 2020, the Company’s Commercial and Industrial loans included six MSLP loans with the net carrying amount of $6.6 million, or 4.5% of the total category.

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 September 30, 2021, the deferral period has ended for all loans previously modified and payments have resumed under the original terms. As of September 30, 2021, the Company’s loan portfolio included 72 loans which were previously modified under the loan modification program, totaling $135.0 million.

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 recognized 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 as of September 30, 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 4.1% 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 September 30, 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 September 30, 2021 and December 31, 2020 (in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
September 30, 2021	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	727	$	14	$	40	$	781	$	293,056	$	293,837
Construction and Development		—		2,522		—		2,522		129,619		132,141
1-4 Family Residential		483		—		83		566		501,873		502,439
Non-Owner Occupied CRE		—		—		—		—		358,369		358,369
Owner Occupied CRE		—		—		—		—		167,638		167,638
Commercial and Industrial		—		—		2,230		2,230		146,729		148,959
Total	$	1,210	$	2,536	$	2,353	$	6,099	$	1,597,284	$	1,603,383


	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 September 30, 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):


	September 30,		December 31,
	2021		2020
Cash, Securities and Other	$	41	$	50
1-4 Family Residential		83		—
Owner Occupied CRE		1,250		479
Commercial and Industrial		2,984		3,529
Total	$	4,358	$	4,058

Non-accrual loans classified as TDRs accounted for $2.2 million of the recorded investment as of September 30, 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):


	September 30,		December 31,
	2021		2020
Non-accrual
Cash, Securities, and Other	$	9	$	48
Commercial and Industrial		2,230		3,529
Total		2,239		3,577
Allowance for loan losses associated with TDR		(1,751)		(1,619)
Net recorded investment	$	488	$	1,958

As of September 30, 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 nine months ended September 30, 2021. 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):


	September 30, 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	$	32	$	32	$	32	$	2	$	2	$	2
Commercial and Industrial		2,230		2,230		1,751		3,419		3,419		1,619
Total	$	2,262	$	2,262	$	1,783	$	3,421	$	3,421	$	1,621

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	9	$	9	$	—	$	48	$	48	$	—
1-4 Family Residential		83		83		—		—		—		—
Owner Occupied CRE		1,250		1,250		—		479		479		—
Commercial and Industrial		754		754		—		110		110		—
Total	$	2,096	$	2,096	$	—	$	637	$	637	$	—

Total impaired loans:
Cash, Securities, and Other	$	41	$	41	$	32	$	50	$	50	$	2
1-4 Family Residential		83		83		—		—		—		—
Owner Occupied CRE		1,250		1,250		—		479		479		—
Commercial and Industrial		2,984		2,984		1,751		3,529		3,529		1,619
Total	$	4,358	$	4,358	$	1,783	$	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 September 30, 2021 and 2020 are included in the table below (in thousands):


	Three Months Ended September 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	18	$	—	$	1	$	—
Commercial and Industrial		2,635		—		3,427		—
Total	$	2,653	$	—	$	3,428	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	10	$	—	$	779	$	—
Owner Occupied CRE		625		—		—		—
Commercial and Industrial		410		220		6,462		85
1-4 Family Residential		41		—		—		—
Total	$	1,086	$	220	$	7,241	$	85

Total impaired loans:
Cash, Securities, and Other	$	28	$	—	$	780	$	—
Owner Occupied CRE		625		—		—		—
Commercial and Industrial		3,045		220		9,889		85
1-4 Family Residential		41		—		—		—
Total	$	3,739	$	220	$	10,669	$	85

The average balance of impaired loans and interest income recognized on impaired loans during the nine months ended September 30, 2021 and 2020 are included in the table below (in thousands):


	Nine Months Ended September 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	10	$	—	$	1	$	—
Commercial and Industrial		3,027		21		3,462		—
Total	$	3,037	$	21	$	3,463	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	22	$	—	$	1,463	$	—
Owner Occupied CRE		313		51		—		—
Commercial and Industrial		257		220		6,088		250
1-4 Family Residential		21		—		—		—
Total	$	613	$	271	$	7,551	$	250

Total impaired loans:
Cash, Securities, and Other	$	32	$	—	$	1,464	$	—
Owner Occupied CRE		313		51		—		—
Commercial and Industrial		3,284		241		9,550		250
1-4 Family Residential		21		—		—		—
Total	$	3,650	$	292	$	11,014	$	250

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 September 30, 2021
Beginning balance	$	2,039	$	871	$	3,399	$	2,223	$	1,225	$	2,795	$	12,552
(Recovery of)/provision for loan losses		85		48		97		271		(67)		(28)		406
Charge-offs		—		—		—		—		—		—		—
Recoveries		6		—		—		—		—		—		6
Ending balance	$	2,130	$	919	$	3,496	$	2,494	$	1,158	$	2,767	$	12,964

Changes in allowance for loan losses for the nine months ended September 30, 2021
Beginning balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539
(Recovery of)/provision for loan losses		(456)		(13)		263		490		(1)		135		418
Charge-offs		—		—		—		—		—		—		—
Recoveries		7		—		—		—		—		—		7
Ending balance	$	2,130	$	919	$	3,496	$	2,494	$	1,158	$	2,767	$	12,964

Allowance for loan losses as of September 30, 2021 allocated to loans evaluated for impairment:
Individually	$	32	$	—	$	—	$	—	$	—	$	1,751	$	1,783
Collectively		2,098		919		3,496		2,494		1,158		1,016		11,181
Ending balance	$	2,130	$	919	$	3,496	$	2,494	$	1,158	$	2,767	$	12,964

Loans as of September 30, 2021, evaluated for impairment:
Individually	$	41	$	—	$	83	$	—	$	1,250	$	2,984	$	4,358
Collectively		293,796		132,141		502,356		358,369		166,388		145,975		1,599,025
Ending balance	$	293,837	$	132,141	$	502,439	$	358,369	$	167,638	$	148,959	$	1,603,383


	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 September 30, 2020
Beginning balance	$	2,425	$	484	$	2,708	$	1,483	$	760	$	2,494	$	10,354
Provision for/(recovery of) loan losses		192		249		392		207		309		147		1,496
Charge-offs		(6)		—		—		—		—		—		(6)
Recoveries		1		—		—		—		—		—		1
Ending balance	$	2,612	$	733	$	3,100	$	1,690	$	1,069	$	2,641	$	11,845

Changes in allowance for loan losses for the nine months ended September 30, 2020
Beginning balance	$	1,058	$	200	$	2,850	$	1,176	$	911	$	1,680	$	7,875
Provision for/(recovery of) loan losses		1,571		533		250		514		158		961		3,987
Charge-offs		(30)		—		—		—		—		—		(30)
Recoveries		13		—		—		—		—		—		13
Ending balance	$	2,612	$	733	$	3,100	$	1,690	$	1,069	$	2,641	$	11,845

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 September 30, 2021 and December 31, 2020 (in thousands):


			Special
September 30, 2021	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	293,796	$	—	$	41	$	293,837
Construction and Development		129,618		2,523		—		132,141
1-4 Family Residential		502,356		—		83		502,439
Non-Owner Occupied CRE		352,429		5,940		—		358,369
Owner Occupied CRE		165,690		—		1,948		167,638
Commercial and Industrial		144,093		—		4,866		148,959
Total	$	1,587,982	$	8,463	$	6,938	$	1,603,383


			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 September 30, 2021 and December 31, 2020.