Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2022

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

A summary of the loans held for investment portfolio as of March 31, 2022 and December 31, 2021 follows (in thousands):


	March 31, 2022			December 31, 2021
Commercial real estate	$	884,869		$	825,284
Consumer real estate		327,416			326,412
Construction and land development		208,513			214,310
Commercial and industrial		499,719			497,615
Consumer		48,790			46,811
Other		78,248			55,337
Total		2,047,555			1,965,769
Allowance for loan losses		(20,857	)		(21,698	)
Total loans, net	$	2,026,698		$	1,944,071

Payroll Protection Program Loans

In 2020, the CARES Act created a new guaranteed, unsecured loan program under the SBA called the Payroll Protection Program (“PPP”), which the Company participated in, to fund operational costs of eligible businesses, organizations and self-employed persons during the pandemic period. The SBA has guaranteed 100% of the amounts loaned under the PPP by lenders to eligible small businesses. One of the notable features of the PPP is that borrowers are eligible for loan forgiveness if certain conditions are met related to retaining staff and if loan amounts are used to cover eligible expenses, such as payroll, mortgage interest, rents and utilities payments. These loans have a two to five year term and will earn interest at a rate of 1%. As of March 31, 2022, the outstanding balance of loans originated under the PPP totaled $6.5 million compared with $26.5 million as of December 31, 2021 and was included in commercial and industrial loans.

Additionally, PPP borrowers are not required to pay any fees to the government or the lender and the loans may be repaid by the borrower at any time. The SBA, however, will pay lenders a processing fee based on the size of the PPP loan, ranging from 1% to 5% of the loan. Unamortized fees associated with PPP loans included in total loans were $0.2 million as of March 31, 2022 compared to $0.6 million as of December 31, 2021. These fees are deferred and amortized over the life of the loan. PPP fees recognized as income totaled $0.5 million for the three months ended March 31, 2022, compared to $1.8 million for the same period in 2021.

Allowance for Loan Losses

The adequacy of the allowance for loan losses (“ALL”) is assessed at the end of each quarter. The ALL includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogenous pools and collectively evaluated for impairment. The ALL factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors. The Company’s evaluation of other external factors included consideration of continuing developments regarding the novel coronavirus (“COVID-19”) global pandemic (including the effects of COVID-19 variants) and the resulting impact on the Company’s loan portfolio as of March 31, 2022, which is uncertain due to evolving conditions and unforeseen new variants.

The Company categorizes loans into risk categories based on relevant information about the ability of 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 all commercial loans individually and assigns each loan a risk rating. This analysis is performed at origination by the relationship manager and credit department personnel. On at least an annual basis, an independent party performs a formal credit risk review of a sample of the loan portfolio. Among other things, this review assesses the appropriateness of the loan’s risk rating. The Company uses the following definitions for risk ratings:

Special Mention – A special mention asset possesses deficiencies or potential weaknesses deserving of management’s attention. If uncorrected, such weaknesses or deficiencies may expose the Company to an increased risk of loss in the future.

Substandard – A substandard asset is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard.

Doubtful – A doubtful asset has all weaknesses inherent in one classified substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset exist, therefore, its classification as an estimated loss is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

Loans not falling into the criteria above are considered to be pass-rated loans. The Company utilizes six loan grades within the pass risk rating.

The following tables provides the risk category of loans by applicable class of loans as of March 31, 2022 and December 31, 2021 (in thousands):


March 31, 2022	Pass		Special Mention		Substandard		Doubtful		Total Impaired Loans		Total
Commercial real estate	$	862,430	$	12,835	$	4,683	$	—	$	1,144	$	881,092
Consumer real estate		314,983		626		536		—		856		317,001
Construction and land development		208,413		—		—		—		10		208,423
Commercial and industrial		471,407		4,642		21,149		70		248		497,516
Consumer		47,806		—		67		26		10		47,909
Other		77,877		—		79		—		—		77,956
Purchased credit impaired		13,675		1,026		2,648		309		—		17,658
Total	$	1,996,591	$	19,129	$	29,162	$	405	$	2,268	$	2,047,555

December 31, 2021
Commercial real estate	$	802,562	$	12,921	$	4,721	$	—	$	1,151	$	821,355
Consumer real estate		312,662		475		712		—		909		314,758
Construction and land development		214,209		—		—		—		10		214,219
Commercial and industrial		468,278		9,811		16,952		73		250		495,364
Consumer		45,695		—		56		3		23		45,777
Other		54,959		—		76		—		—		55,035
Purchased credit impaired		15,416		—		3,585		260		—		19,261
Total	$	1,913,781	$	23,207	$	26,102	$	336	$	2,343	$	1,965,769

The following table details the changes in the ALL for the three month periods ended March 31, 2022 and 2021 (in thousands):


	Commercial real estate			Consumer real estate			Construction and land development			Commercial and industrial			Consumer			Other			Total
Three Months Ended March 31, 2022
Balance, beginning of period	$	7,124		$	2,412		$	3,769		$	7,441		$	397		$	555		$	21,698
Charged-off loans		—			—			—			—			(81	)		(38	)		(119	)
Recoveries		—			—			—			—			57			5			62
Provision for loan losses		(137	)		(198	)		(461	)		(235	)		8			239			(784	)
Balance, end of period	$	6,987		$	2,214		$	3,308		$	7,206		$	381		$	761		$	20,857

Three Months Ended March 31, 2021
Balance, beginning of period	$	7,349		$	1,831		$	3,476		$	9,708		$	305		$	576		$	23,245
Charged-off loans		—			—			—			—			(26	)		(36	)		(62	)
Recoveries		10			3			—			1			19			11			44
Provision for loan losses		329			(155	)		(113	)		503			35			51			650
Balance, end of period	$	7,688		$	1,679		$	3,363		$	10,212		$	333		$	602		$	23,877

A breakdown of the ALL and the loan portfolio by loan category at March 31, 2022 and December 31, 2021 follows (in thousands):


	Commercial real estate		Consumer real estate		Construction and land development		Commercial and industrial		Consumer		Other		Total
March 31, 2022
Allowance for Loan Losses:
Collectively evaluated for impairment	$	6,938	$	2,213	$	3,308	$	7,141	$	304	$	761	$	20,665
Individually evaluated for impairment		—		—		—		—		—		—		—
Purchased credit impaired		49		1		—		65		77		—		192
Balances, end of period	$	6,987	$	2,214	$	3,308	$	7,206	$	381	$	761	$	20,857
Loans:
Collectively evaluated for impairment	$	879,948	$	316,145	$	208,413	$	497,268	$	47,899	$	77,956	$	2,027,629
Individually evaluated for impairment		1,144		856		10		248		10		—		2,268
Purchased credit impaired		3,777		10,415		90		2,203		881		292		17,658
Balances, end of period	$	884,869	$	327,416	$	208,513	$	499,719	$	48,790	$	78,248	$	2,047,555

December 31, 2021
Allowance for Loan Losses:
Collectively evaluated for impairment	$	7,075	$	2,211	$	3,769	$	7,376	$	321	$	555	$	21,307
Individually evaluated for impairment		—		200		—		—		—		—		200
Purchased credit impaired		49		1		—		65		76		—		191
Balances, end of period	$	7,124	$	2,412	$	3,769	$	7,441	$	397	$	555	$	21,698
Loans:
Collectively evaluated for impairment	$	820,204	$	313,849	$	214,209	$	495,114	$	45,754	$	55,035	$	1,944,165
Individually evaluated for impairment		1,151		909		10		250		23		—		2,343
Purchased credit impaired		3,929		11,654		91		2,251		1,034		302		19,261
Balances, end of period	$	825,284	$	326,412	$	214,310	$	497,615	$	46,811	$	55,337	$	1,965,769

The following table presents the allocation of the ALL for each respective loan category with the corresponding percentage of the ALL in each category to total loans, net of deferred fees as of March 31, 2022 and December 31, 2021 (in thousands). PPP loans included in commercial and industrial loans in the below table do not have a corresponding ALL as they are fully guaranteed by the SBA:


	March 31, 2022					December 31, 2021
	Amount		Percent of total loans			Amount		Percent of total loans
Commercial real estate	$	6,987		0.34	%	$	7,124		0.36	%
Consumer real estate		2,214		0.11			2,412		0.12
Construction and land development		3,308		0.16			3,769		0.19
Commercial and industrial		7,206		0.35			7,441		0.38
Consumer		381		0.02			397		0.02
Other		761		0.04			555		0.03
Total allowance for loan losses	$	20,857		1.02	%	$	21,698		1.10	%

The following table presents the Company’s impaired loans that were evaluated for specific loss allowance, excluding purchased credit impaired (“PCI”) loans, as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31, 2022						December 31, 2021
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded:
Commercial real estate	$	1,144	$	1,138	$	—	$	1,151	$	1,115	$	—
Consumer real estate		856		882		—		255		281		—
Construction and land development		10		10		—		10		11		—
Commercial and industrial		248		293		—		250		298		—
Consumer		10		10		—		23		23		—
Other		—		—		—		—		—		—
Subtotal		2,268		2,333		—		1,689		1,728		—
With an allowance recorded:
Commercial real estate		—		—		—		—		—		—
Consumer real estate		—		—		—		654		654		200
Construction and land development		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		—		—		—		654		654		200
Total	$	2,268	$	2,333	$	—	$	2,343	$	2,382	$	200

The following table presents information related to the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the three month periods ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended				Three Months Ended
	March 31, 2022				March 31, 2021
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
With no related allowance recorded:
Commercial real estate	$	1,148	$	16	$	1,185	$	16
Consumer real estate		861		—		1,946		1
Construction and land development		10		—		—		—
Commercial and industrial		249		—		65		—
Consumer		11		—		7		—
Other		—		—		—		—
Subtotal		2,279		16		3,203		17
With an allowance recorded:
Commercial real estate		—		—		—		—
Consumer real estate		—		—		—		—
Construction and land development		—		—		100		—
Commercial and industrial		—		—		101		—
Consumer		—		—		—		—
Other		—		—		—		—
Subtotal		—		—		201		—
Total	$	2,279	$	16	$	3,404	$	17

There was no interest income recognized on a cash basis for impaired loans during the three month periods ended March 31, 2022 or 2021.

The following table presents the aging of the recorded investment in past due loans as of March 31, 2022 and December 31, 2021 by class of loans (in thousands):


	30 - 59		60 - 89		Greater Than
	Days		Days		89 Days		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
March 31, 2022
Commercial real estate	$	24	$	—	$	—	$	24	$	881,068	$	881,092
Consumer real estate		532		16		110		658		316,343		317,001
Construction and land development		334		—		10		344		208,079		208,423
Commercial and industrial		604		74		301		979		496,537		497,516
Consumer		195		31		84		310		47,599		47,909
Other		50		—		—		50		77,906		77,956
Purchased credit impaired		585		30		571		1,186		16,472		17,658
Total	$	2,324	$	151	$	1,076	$	3,551	$	2,044,004	$	2,047,555

December 31, 2021
Commercial real estate	$	—	$	—	$	1,115	$	1,115	$	820,240	$	821,355
Consumer real estate		1,806		—		241		2,047		312,711		314,758
Construction and land development		—		—		11		11		214,208		214,219
Commercial and industrial		57		48		268		373		494,991		495,364
Consumer		164		170		26		360		45,417		45,777
Other		—		—		—		—		55,035		55,035
Purchased credit impaired		302		153		459		914		18,347		19,261
Total	$	2,329	$	371	$	2,120	$	4,820	$	1,960,949	$	1,965,769

The following table presents the recorded investment in non-accrual loans, past due loans over 90 days and accruing and troubled debt restructurings (“TDR”) by class of loans as of March 31, 2022 and December 31, 2021 (in thousands):


	Non-Accrual		Past Due Over 90 Days and Accruing		Troubled Debt Restructurings
March 31, 2022
Commercial real estate	$	—	$	—	$	1,138
Consumer real estate		1,033		47		647
Construction and land development		10		—		—
Commercial and industrial		463		—		62
Consumer		39		56		—
Other		—		—		—
Purchased credit impaired		1,957		133		—
Total	$	3,502	$	236	$	1,847

December 31, 2021
Commercial real estate	$	—	$	1,115	$	1,115
Consumer real estate		1,086		54		654
Construction and land development		11		—		—
Commercial and industrial		324		112		63
Consumer		31		10		—
Other		—		—		—
Purchased credit impaired		1,806		89		—
Total	$	3,258	$	1,380	$	1,832

As of March 31, 2022 and December 31, 2021, all loans classified as nonperforming were deemed to be impaired.

As of March 31, 2022 and December 31, 2021, the Company had a recorded investment in TDR of $1.8 million. The Company had no specific allowance for those loans at March 31, 2022 or December 31, 2021 and there were no commitments to lend additional amounts. Loans accounted for as TDR include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s loan policy. Loans accounted for as TDR are individually evaluated for impairment. In accordance with interagency guidance, short term deferrals granted due to the COVID-19 pandemic are not considered TDR unless the borrower was experiencing financial difficulty prior to the pandemic.

There were no new TDR identified during the three months ended March 31, 2022 or 2021. There were no TDR for which there was a payment default within twelve months following the modification during the three months ended March 31, 2022 or 2021.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

Purchased Credit Impaired Loans

The following table presents changes in the carrying value of PCI loans (in thousands) for the periods indicated:


	Three Months Ended			Three Months Ended
	March 31, 2022			March 31, 2021
Balance at beginning of period	$	19,261		$	28,392
Change due to payments received and accretion		(1,411	)		(1,317	)
Reclassification of discount to allowance for loan losses		(192	)		—
Balance at end of period	$	17,658		$	27,075

The following table presents changes in the accretable yield for PCI loans (in thousands) for the periods indicated:


	Three Months Ended			Three Months Ended
	March 31, 2022			March 31, 2021
Balance at beginning of period	$	5,763		$	4,068
Accretion		(437	)		(392	)
Balance at end of period	$	5,326		$	3,676

PCI loans had no impact on the ALL for the three months ended March 31, 2022.