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Note 7 - Loans Receivable and Allowance for Credit Losses
 9 Months Ended
Sep. 30, 2022
Notes to Financial Statements  
Allowance for Credit Losses [Text Block]

Note 7: Loans Receivable and Allowance for Credit Losses

 

The following table sets forth the Company’s gross loans by major category as of September 30, 2022 and December 31, 2021:

 

(dollars in thousands)

 

September 30,

2022

  

December 31,

2021

 
         

Commercial real estate

 $915,494  $780,311 

Construction and land development

  226,627   216,008 

Commercial and industrial

  303,518   252,376 

Owner occupied real estate

  557,496   526,570 

Consumer and other

  95,618   83,487 

Residential mortgage

  954,679   536,332 

Paycheck protection program

  10,787   119,039 

Total loans receivable

  3,064,219   2,514,123 

Deferred costs (fees)

  (3,367)  (6,758)

Allowance for credit losses

  (25,255)  (18,964)

Net loans receivable

 $3,035,597  $2,488,401 

 

The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for credit losses. The Company’s loan groups include commercial real estate, construction and land development, commercial and industrial, owner-occupied real estate, consumer, residential mortgages and Paycheck Protection Program (“PPP”) loans, which are fully guaranteed by the U.S. Government and as such have no allowance associated with them. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2022 and December 31, 2021.

 

(dollars in thousands)

 

30-59

Days Past

Due

  

60-89

Days Past

Due

  

Greater

than 90

Days

  

Total

Past Due

  

Current

  

Total

Loans

Receivable

  

Loans

Receivable >

90 Days and

Accruing

 

At September 30, 2022

                            

Commercial real estate

 $76  $777  $600  $1,453  $914,041  $915,494  $- 

Construction and land development

  -   -   9,052   9,052   217,575   226,627   - 

Commercial and industrial

  5,729   248   304   6,281   297,237   303,518   - 

Owner occupied real estate

  5,008   -   2,759   7,767   549,729   557,496   - 

Consumer and other

  594   261   815   1,670   93,948   95,618   15 

Residential mortgage

  -   334   -   334   954,345   954,679   - 

Paycheck protection program

  388   1,687   1,920   3,995   6,792   10,787   1,920 

Total

 $11,795  $3,307  $15,450  $30,552  $3,033,667  $3,064,219  $1,935 

 

(dollars in thousands)

 

 

30-59

Days Past

Due

 

  

60-89

Days Past

Due

  

Greater

than 90

Days

  

Total

Past Due

  

Current

  

Total

Loans

Receivable

  

Loans

Receivable >

90 Days and

Accruing

 

At December 31, 2021

                            

Commercial real estate

 $-  $-  $4,493  $4,493  $775,818  $780,311  $- 

Construction and land development

  -   -   -   -   216,008   216,008   - 

Commercial and industrial

  -   -   2,558   2,558   249,818   252,376   - 

Owner occupied real estate

  -   4,139   3,714   7,853   518,717   526,570   - 

Consumer and other

  92   20   1,080   1,192   82,295   83,487   5 

Residential mortgage

  3,165   -   701   3,866   532,466   536,332   - 

Paycheck protection program

  1,594   547   318   2,459   116,580   119,039   318 

Total

 $4,851  $4,706  $12,864  $22,421  $2,491,702  $2,514,123  $323 

 

Credit Quality Indicators:

 

The Company places all commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information, and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy. The Company uses the following regulatory definitions for criticized and classified risk ratings:

 

Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

 

Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions, and values.

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans.

 

The following table presents the classes of the loan portfolio summarized by the amortized cost basis by origination year and the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2022:

 

Loans Amortized Cost Basis by Origination Year

 

(dollar in thousands)

September 30, 2022

 

2022

  

2021

  

2020

  

2019

  

2018

  

2017 and

Prior

  

Revolving

  

Total

 
                                 

Commercial Real Estate

                                

Pass

 $190,987  $206,253  $131,546  $111,402  $74,899  $191,218  $8,593  $914,898 

Special Mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   470   -   -   126   -   596 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial Real Estate

 $190,987  $206,253  $132,016  $111,402  $74,899  $191,344  $8,593  $915,494 
                                 

Construction & Land Development

                                

Pass

 $23,633  $104,483  $62,342  $18,849  $55  $5,340  $2,874  $217,576 

Special Mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   9,051   -   -   -   -   9,051 

Doubtful

  -   -   -   -   -   -   -   - 

Total Construction

 $23,633  $104,483  $71,394  $18,849  $55  $5,340  $2,874  $226,627 
                                 

Commercial & Industrial

                                

Pass

 $82,914  $34,435  $15,145  $11,650  $10,407  $18,336  $130,227  $303,114 

Special Mention

  -   -   -   -   -   -   100   100 

Substandard

  -   -   -   -   -   304   -   304 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial & Industrial

 $82,914  $34,435  $15,145  $11,650  $10,407  $18,640  $130,327  $303,518 
                                 

Owner Occupied Real Estate

                                

Pass

 $79,930  $96,545  $86,586  $42,541  $70,982  $152,707  $18,823  $548,114 

Special Mention

  -   -   -   555   -   232   -   787 

Substandard

  -   -   -   4,125   116   4,354   -   8,595 

Doubtful

  -   -   -   -   -   -   -   - 

Total Owner Occupied

 $79,930  $96,545  $86,586  $47,221  $71,098  $157,293  $18,823  $557,496 
                                 

Consumer & Other

                                

Pass

 $5,730  $1,892  $1,625  $1,659  $1,240  $2,418  $80,253  $94,817 

Special Mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   109   23   669   801 

Doubtful

  -   -   -   -   -   -   -   - 

Total Consumer & Other

 $5,730  $1,892  $1,625  $1,659  $1,349  $2,441  $80,922  $95,618 
                                 

Residential Mortgage

                                

Pass

 $458,724  $14,950  $82,611  $146,293  $222,535  $29,566  $-  $954,679 

Special Mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   - 

Total Residential Mortgage

 $458,724  $14,950  $82,611  $146,293  $222,535  $29,566  $-  $954,679 
                                 

Paycheck Protection Program

                                

Pass

 $-  $9,480  $1,307  $-  $-  $-  $-  $10,787 

Special Mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   - 

Total Paycheck Protection

 $-  $9,480  $1,307  $-  $-  $-  $-  $10,787 
                                 

Total

                                

Pass

 $841,918  $468,038  $381,162  $332,394  $380,118  $399,585  $240,770  $3,043,985 

Special Mention

  -   -   -   555   -   232   100   887 

Substandard

  -   -   9,521   4,125   225   4,807   669   19,347 

Doubtful

  -   -   -   -   -   -   -   - 

Total Loans

 $841,918  $468,038  $390,683  $337,074  $380,343  $404,624  $241,539  $3,064,219 

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2021:

 

 

(dollars in thousands)

 

Pass

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 

December 31, 2021:

                    

Commercial real estate

 $775,818  $-  $4,493  $-  $780,311 

Construction and land development

  216,008   -   -   -   216,008 

Commercial and industrial

  249,818   -   2,558   -   252,376 

Owner occupied real estate

  516,741   236   9,593   -   526,570 

Consumer and other

  82,412   -   1,075   -   83,487 

Residential mortgage

  535,631   -   701   -   536,332 

Paycheck protection program

  119,039   -   -   -   119,039 

Total

 $2,495,467  $236  $18,420  $-  $2,514,123 

 

The following table shows non-accrual loans by class as of September 30, 2022 and December 31, 2021:

 

(dollars in thousands)

 

September 30,

2022

  

December 31,

2021

 
         

Commercial real estate

 $600  $4,493 

Construction and land development

  9,052   - 

Commercial and industrial

  304   2,558 

Owner occupied real estate

  2,759   3,714 

Consumer and other

  800   1,075 

Residential mortgage

  -   701 

Paycheck protection program

  -   - 

Total

 $13,515  $12,541 

 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $289,000 and $546,451 for the nine months ended September 30, 2022 and 2021, respectively.

 

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2022:

 

(dollars in thousands)

 

Real

Estate

  

Business

Asset

  

Total

 

Commercial real estate

 $600  $-  $600 

Construction and land development

  9,052   -   9,052 

Commercial and industrial

  304   -   304 

Owner occupied real estate

  8,596   -   8,596 

Consumer and other

  800   -   800 

Residential mortgage

  -   -   - 

Paycheck protection program

  -   -   - 

Total

 $19,352  $-  $19,352 

 

Impaired loans – Impaired loans disclosures presented below as of December 31, 2021 and for the three and nine months ended September 30, 2021, represent requirements prior to the adoption of CECL on January 1, 2022.

 

The following table summarizes information regarding impaired loans by loan portfolio class as of December 31, 2021:

 

   December 31, 2021 
(dollars in thousands)  Recorded Investment   Unpaid Principal Balance   Related Allowance  

With no related allowance recorded:

            

Commercial real estate

 $479  $691  $- 

Construction and land development

  -   -   - 

Commercial and industrial

  80   81   - 

Owner occupied real estate

  2,080   2,080   - 

Consumer and other

  1,075   1,422   - 

Residential mortgage

  701   768   - 

Paycheck protection program

  -   -   - 

Total

 $4,415  $5,042  $- 

 

With an allowance recorded:

            

Commercial real estate

 $4,014  $4,536  $992 

Construction and land development

  -   -   - 

Commercial and industrial

  2,478   2,616   1,169 

Owner occupied real estate

  7,513   7,532   582 

Consumer and other

  -   -   - 

Residential mortgage

  -   -   - 

Paycheck protection program

  -   -   - 

Total

 $14,005  $14,684  $2,743 

 

Total:

            

Commercial real estate

 $4,493  $5,227  $992 

Construction and land development

  -   -   - 

Commercial and industrial

  2,558   2,697   1,169 

Owner occupied real estate

  9,593   9,612   582 

Consumer and other

  1,075   1,422   - 

Residential mortgage

  701   768   - 

Paycheck protection program

  -   -   - 

Total

 $18,420  $19,726  $2,743 

 

The following table presents additional information regarding the Company’s impaired loans for the three and nine months ended September 30, 2021:

  

Three Months Ended

September 30, 2021

    

Nine Months Ended

September 30, 2021

 

(dollars in thousands)

 

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 

With no related allowance recorded:

                

Commercial real estate

 $440  $2  $385  $2 

Construction and land development

  -   -   -   - 

Commercial and industrial

  2,298   -   2,297   - 

Owner occupied real estate

  3,387   52   3,892   73 

Consumer and other

  1,204   14   1,227   14 

Residential mortgage

  830   -   946   - 

Paycheck protection program

  2   -   3   - 

Total

 $8,161  $68  $8,750  $89 

 

With an allowance recorded:

                

Commercial real estate

 $4,086  $3  $4,158  $6 

Construction and land development

  -   -   -   - 

Commercial and industrial

  265   -   263   - 

Owner occupied real estate

  1,105   10   1,140   20 

Consumer and other

  -   -   -   - 

Residential mortgage

  -   -   -   - 

Paycheck protection program

  -   -   -   - 

Total

 $5,456  $13  $5,561  $26 

 

Total:

                

Commercial real estate

 $4,526  $5  $4,543  $8 

Construction and land development

  -   -   -   - 

Commercial and industrial

  2,563   -   2,560   - 

Owner occupied real estate

  4,492   62   5,032   93 

Consumer and other

  1,204   14   1,227   14 

Residential mortgage

  830   -   946   - 

Paycheck protection program

  2   -   3   - 

Total

 $13,617  $81  $14,311  $115 

 

The following tables detail activity in the allowance for credit losses for the three and nine months ended September 30, 2022 and the allowance for loan losses for the three and nine months ended September 30, 2021. The Company adopted ASU 2016-13 on January 1, 2022 using the modified retrospective approach. Results for the periods beginning after January 1, 2022 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The transition adjustment includes an increase in the allowance of $4.2 million. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

(dollars in thousands)

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied

Real Estate

  

Consumer

and Other

  

Residential

Mortgage

  

Paycheck

Protection

Program

  

Unallocated

  

Total

 
                                     

Allowance for Credit Losses:

                                 

Beginning balance

June 30, 2022:

 $3,541  $1,522  $2,323  $5,963  $691  $6,957  $-  $-  $20,997 

Charge-offs

  -   -   -   -   (27)  -   -   -   (27)

Recoveries

  215   -   149   -   22   -   -   -   386 

Provisions (credits)(1)

  82   388   465   298   54   2,612   -   -   3,899 

Ending balance

September 30, 2022:

 $3,838  $1,910  $2,937  $6,261  $740  $9,569  $-  $-  $25,255 

(1) 

Provision to roll forward the allowance for credit losses excludes a provision of $99,000 for off-balance sheet commitments. The ACL on off-balance sheet commitments as of September 30, 2022 was $604,000.

 

(dollars in thousands)

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied

Real Estate

  

Consumer

and Other

  

Residential

Mortgage

  

Paycheck

Protection

Program

  

Unallocated

  

Total

 
                                     

Allowance for Credit Losses:

                                 

Beginning balance

December 31, 2021:

 $5,802  $1,544  $2,856  $3,158  $629  $4,922  $-  $53  $18,964 

Day 1 effect of CECL

  (1,465)  1,103   562   3,756   38   299       (53)  4,240 

Charge-offs

  (621)  -   (2,161)  (787)  (209)  -   -   -   (3,778)

Recoveries

  215   -   166   597   102   -   -   -   1,080 

Provisions (credits)(1)

  (93)  (737)  1,514   (463)  180   4,348   -   -   4,749 

Ending balance

September 30, 2022:

 $3,838  $1,910  $2,937  $6,261  $740  $9,569  $-  $-  $25,255 

(1) 

Provision to roll forward the allowance for credit losses excludes a provision of $7,000 for off-balance sheet commitments. The ACL on off-balance sheet commitments as of September 30, 2022 was $604,000.

 

(dollars in thousands)

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied

Real Estate

  

Consumer

and Other

  

Residential

Mortgage

  

Paycheck

Protection

Program

  

Unallocated

  

Total

 
                                     

Allowance for Loan Losses:

                                 

Beginning balance

June 30, 2021:

 $5,919  $1,133  $1,503  $2,440  $717  $4,270  $-  $128  $16,110 

Charge-offs

  -   -   -   -   (1)  -   -   -   (1)

Recoveries

  -   -   12   48   149   -   -   -   209 

Provisions (credits)

  265   (43)  181   420   (213)  282   -   8   900 

Ending balance

September 30, 2021:

 $6,184  $1,090  $1,696  $2,908  $652  $4,552  $-  $136  $17,218 

 

(dollars in thousands)

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied

Real Estate

  

Consumer

and Other

  

Residential

Mortgage

  

Paycheck

Protection

Program

  

Unallocated

  

Total

 
                                     

Allowance for Loan Losses:

                                 

Beginning balance

December 31, 2020:

 $4,394  $948  $1,367  $2,374  $723  $3,025  $-  $144  $12,975 

Charge-offs

  -   -   (60)  -   (48)  -   -   -   (108)

Recoveries

  -   -   162   88   201   -   -   -   451 

Provisions (credits)

  1,790   142   227   446   (224)  1,527   -   (8)  3,900 

Ending balance

September 30, 2021:

 $6,184  $1,090  $1,696  $2,908  $652  $4,552  $-  $136  $17,218 

 

Allowance for Credit Losses on Off Balance Sheet Commitments

 

The following table presets the activity in the allowance for credit losses for off balance sheet commitments for the nine months ended September 30, 2022:

 

Allowance for Credit Losses on Off Balance Sheet Commitments

                
  December 31, 2021             
  

Pre-ASC 326

  

Impact of

  

Provision

  

September 30, 2022

 

(dollars in thousands)

 Adoption  

adopting ASC 326

  

(Credit)

  

Ending ACL

 

ACL on off-balance sheet commitments

 $-  $597  $7  $604 

Total ACL

 $-  $597  $7  $604 

 

Troubled Debt Restructurings

 

A modification to the contractual terms of a loan that results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in the interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.

 

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency were not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law, which extended the period to suspend the requirements under TDR accounting guidance to the earlier of i) January 1, 2022 or ii) 60 days after the President declared a termination of the national emergency related to the COVID-19 pandemic. As of September 30, 2022 and December 31, 2021, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the COVID pandemic have resumed contractual payments. All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for credit losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into the Company’s estimate of the allowance for credit losses. The level of any subsequent defaults will likely be affected by future economic conditions.

 

There were no loan modifications made during the three and nine months ended September 30, 2022 or September 30, 2021 that met the criteria of a TDR.

 

After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three and nine months ended September 30, 2022. There were no TDRs that subsequently defaulted during the year ended December 31, 2021. The last remaining TDR on the Company’s books was paid off in full during 2021.

 

There were no residential mortgages in the process of foreclosure as of September 30, 2022. There was one residential mortgage in the process of foreclosure at December 31, 2021. There was no other real estate owned relating to residential real estate as of September 30, 2022 and December 31, 2021.