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LOANS

9 Months Ended

Sep. 30, 2022

NOTE 6 – LOANS

The Company’s loan portfolio at the dates indicated is summarized below:


	September 30,		December 31,
	2022		2021
Commercial and industrial (1)	$	219,514	$	230,177
Construction and land		12,231		13,371
Commercial real estate		1,670,283		1,299,684
Residential		88,902		118,423
Consumer		4,294		5,138
Total loans		1,995,224		1,666,793
Net deferred loan fees		(258)		(1,903)
Allowance for loan losses		(18,050)		(17,700)
Net loans	$	1,976,916	$	1,647,190

(1)

During the third quarter of 2022, the Bank continued its participation in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), by processing applications for PPP loan forgiveness. Total loans include $35.4 million and $69.6 million of PPP loans as of September 30, 2022 and December 31, 2021, respectively.

The Company’s total impaired loans, including nonaccrual loans TDR loans, and accreting purchase credit impaired (“PCI”) loans that have experienced post-acquisition declines in cash flows expected to be collected are summarized as follows:


	Commercial		Construction		Commercial
	and industrial		and land		real estate		Residential		Consumer		Total
September 30, 2022
Recorded investment in impaired loans:
With no specific allowance recorded	$	1,780	$	—	$	12,123	$	2,001	$	—	$	15,904
With a specific allowance recorded		840		—		259		125		—		1,224
Total recorded investment in impaired loans	$	2,620	$	—	$	12,382	$	2,126	$	—	$	17,128
Specific allowance on impaired loans	$	725	$	—	$	259	$	14	$	—	$	998

December 31, 2021
Recorded investment in impaired loans:
With no specific allowance recorded	$	112	$	36	$	5,015	$	1,441	$	—	$	6,604
With a specific allowance recorded		681		—		262		146		—		1,089
Total recorded investment in impaired loans	$	793	$	36	$	5,277	$	1,587	$	—	$	7,693
Specific allowance on impaired loans	$	681	$	—	$	224	$	25	$	—	$	930

Three months ended September 30, 2022
Average recorded investment in impaired loans	$	2,899	$	—	$	8,490	$	1,998	$	—	$	13,387
Interest recognized		17		—		17		18		—		52
Nine months ended September 30, 2022
Average recorded investment in impaired loans	$	3,068	$	406	$	6,992	$	1,448	$	—	$	11,914
Interest recognized		18		5		34		27		—		84

Three months ended September 30, 2021
Average recorded investment in impaired loans	$	683	$	36	$	5,338	$	2,363	$	—	$	8,420
Interest recognized		17		—		15		27		—		59
Nine months ended September 30, 2021
Average recorded investment in impaired loans	$	796	$	36	$	5,711	$	2,609	$	—	$	9,152
Interest recognized		53		—		92		43		—		188

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans on accrual are comprised solely of TDR loans performing under modified loan agreements, whose principal and interest is determined to be collectible. Nonaccrual loans are loans where principal and interest have been determined to not be fully collectible.

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR loan. TDR loans are generally placed on nonaccrual status at the time of restructuring and included in impaired loans. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt.

For the three and nine months ended September 30, 2022, the Company recorded TDR loan charge-offs of $750,000 and $3.2 million, respectively, related to a participation interest in a national shared credit. For additional information see “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021-Provision for Loan Losses” included in “Item 2. Management’s Discussion and Analysis of Financial Condition” of Part I this report. For the three and nine months ended September 30, 2021, the Company recorded no charge-offs

related to TDR loans. During the three and nine months ended September 30, 2022 and 2021, there were no TDR loans for which there was a payment default within the first 12 months of the modification. As of September 30, 2022 and December 31, 2021, TDR loans had a related allowance of $282,000 and $259,000, respectively. As of September 30, 2022 and December 31, 2021, $759,000 and $765,000, respectively, of TDR loans were performing in accordance with their modified terms. All TDR loans are also included in the loans individually evaluated for impairment as part of the calculation of the allowance for loan losses. There were no commitments to lend additional amounts to borrowers with outstanding loans that are classified as TDR loans at September 30, 2022.

A summary of TDR loans by type of concession and type of loan, as of the periods indicated:


	Number of	Rate		Term		Rate & term
	loans	modification		modification		modification		Total
September 30, 2022
Commercial and industrial	3	$	—	$	1,699	$	—	$	1,699
Construction and land	—		—		—		—		—
Commercial real estate	6		—		5,345		—		5,345
Residential	2		—		974		—		974
Consumer	—		—		—		—		—
Total	11	$	—	$	8,018	$	—	$	8,018


	Number of	Rate		Term		Rate & term
	loans	modification		modification		modification		Total
September 30, 2021
Commercial and industrial	2	$	—	$	26	$	—	$	26
Construction and land	—		—		—		—		—
Commercial real estate	4		—		2,267		—		2,267
Residential	1		—		146		—		146
Consumer	—		—		—		—		—
Total	7	$	—	$	2,439	$	—	$	2,439

There were three loans and four loans modified as a TDR during the three and nine months ended September 30, 2022, respectively. There were no loans and one loan modified as TDRs during the three and nine months ended September 30, 2021, respectively.

Risk Rating System

The Company evaluates and assigns a risk grade to each loan based on certain criteria to assess the credit quality of each loan. The assignment of a risk rating is done for each individual loan. Loans are graded from inception and on a continuing basis until the debt is repaid. Any adverse or beneficial trends will trigger a review of the loan risk rating. Each loan is assigned a risk grade based on its characteristics. Loans with low to average credit risk are assigned a lower risk grade than those with higher credit risk as determined by the individual loan characteristics.

The Company’s Pass loans includes loans with acceptable business or individual credit risk where the borrower’s operations, cash flow or financial condition provides evidence of low to average levels of risk.

Loans that are assigned higher risk grades are loans that exhibit the following characteristics:

Special Mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. A Special Mention rating is a temporary rating, pending the occurrence of an event that would cause the risk rating either to improve or to be downgraded.

Loans in this category would be characterized by any of the following situations:

●

Credit that is currently protected but is potentially a weak asset;

●

Credit that is difficult to manage because of an inadequate loan agreement, the condition of and/or control over collateral, failure to obtain proper documentation, or any other deviation from product lending practices; and

●

Adverse financial trends.

Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans classified substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. The potential loss does not have to be recognizable in an individual credit for that credit to be risk rated Substandard. A loan can be fully and adequately secured and still be considered Substandard.

Some characteristics of Substandard loans are:

●

Inability to service debt from ordinary and recurring cash flow;

●

Chronic delinquency;

●

Reliance upon alternative sources of repayment;

●

Term loans that are granted on liberal terms because the borrower cannot service normal payments for that type of debt;

●

Repayment dependent upon the liquidation of collateral;

●

Inability to perform as agreed, but adequately protected by collateral;

●

Necessity to renegotiate payments to a non-standard level to ensure performance; and

●

The borrower is bankrupt, or for any other reason, future repayment is dependent on court action.

Doubtful loans have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and value, highly questionable and improbable. Doubtful loans have a high probability of loss, yet certain important and reasonably specific pending factors may work toward the strengthening of the credit.

Losses are recognized as charges to the allowance when the loan or portion of the loan is considered uncollectible or at the time of foreclosure. Recoveries on loans previously charged off are credited to the allowance for loan losses.

The following tables present the internally assigned risk grade by class of loans at the dates indicated:


			Special
	Pass		Mention		Substandard		Doubtful		Total
September 30, 2022
Commercial and industrial	$	208,422	$	4,846	$	6,246	$	—	$	219,514
Construction and land		12,165		66		—		—		12,231
Commercial real estate		1,602,109		52,693		15,481		—		1,670,283
Residential		86,490		258		2,154		—		88,902
Consumer		4,273		—		21		—		4,294
Total	$	1,913,459	$	57,863	$	23,902	$	—	$	1,995,224


			Special
	Pass		Mention		Substandard		Doubtful		Total
December 31, 2021
Commercial and industrial	$	216,611	$	9,178	$	4,388	$	—	$	230,177
Construction and land		13,264		71		36		—		13,371
Commercial real estate		1,264,269		28,438		6,977		—		1,299,684
Residential		115,534		1,250		1,639		—		118,423
Consumer		5,116		—		22		—		5,138
Total	$	1,614,794	$	38,937	$	13,062	$	—	$	1,666,793

The following tables provide an aging of the Company’s loans receivable as of the dates indicated:


															Recorded
					90 Days										investment >
	30–59 Days		60–89 Days		or more		Total						Total loans		90 days and
	past due		past due		past due		past due		Current		PCI loans		receivable		accruing
September 30, 2022
Commercial and industrial	$	759	$	3,717	$	5,862	$	10,338	$	205,013	$	4,163	$	219,514	$	3,315
Construction and land		391		—		—		391		7,780		4,060		12,231		—
Commercial real estate		293		—		6,071		6,364		1,643,105		20,814		1,670,283		—
Residential		188		—		758		946		86,849		1,107		88,902		—
Consumer		—		—		—		—		4,294		—		4,294		—
Total	$	1,631	$	3,717	$	12,691	$	18,039	$	1,947,041	$	30,144	$	1,995,224	$	3,315


															Recorded
					90 Days										investment >
	30–59 Days		60–89 Days		or more		Total						Total loans		90 days and
	past due		past due		past due		past due		Current		PCI loans		receivable		accruing
December 31, 2021
Commercial and industrial	$	275	$	10	$	606	$	891	$	228,980	$	306	$	230,177	$	—
Construction and land		—		338		36		374		12,997		—		13,371		—
Commercial real estate		196		410		2,621		3,227		1,286,311		10,146		1,299,684		—
Residential		1,442		21		1,031		2,494		114,162		1,767		118,423		—
Consumer		3		—		—		3		5,135		—		5,138		—
Total	$	1,916	$	779	$	4,294	$	6,989	$	1,647,585	$	12,219	$	1,666,793	$	—

The balance of nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, was $862,000 at September 30, 2022 compared to $822,000 at December 31, 2021. At September 30, 2022, nonaccrual loans included $19,000 of loans 30-89 days past due and $7.0 million of loans less than 30 days past due. At December 31, 2021, nonaccrual loans included $113,000 of loans 30-89 days past due and $2.5 million of loans less than 30 days past due. At September 30, 2022, nonaccrual loans 30-89 days past due of $19,000 was comprised of one loan and the $7.0 million of loans less than 30 days past due was comprised of 20 loans. All of these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers. There were 21 loans totaling $3.3 million in accruing SBA guaranteed PPP loans which matured, are 90 days or more past due, and are in the process of forgiveness at September 30, 2022. There were no other loans that were 90 days or more past due and still accruing at December 31, 2021. Interest foregone on nonaccrual loans was approximately $230,000 and $388,000 for the three and nine months ended September 30, 2022 compared to $61,000 and $157,500 for the three and nine months ended September 30, 2021, respectively.

Purchased Credit Impaired Loans

In connection with the Company's acquisitions, the contractual amount and timing of undiscounted principal and interest payments and the estimated amount and timing of undiscounted expected principal and interest payments were

used to estimate the fair value of PCI loans at the acquisition date. The difference between these two amounts represented the nonaccretable difference. On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represented the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. For PCI loans the accretable yield is accreted into interest income over the life of the estimated remaining cash flows. At each financial reporting date, the carrying value of each PCI loan is compared to an updated estimate of expected principal payment or recovery on each loan. To the extent that the loan carrying amount exceeds the updated expected principal payment or recovery, a provision of loan loss would be recorded as a charge to income and an allowance for loan loss established.

The unpaid principal balance and carrying value of the Company’s PCI loans at the dates indicated are as follows:


	September 30, 2022				December 31, 2021
	Unpaid				Unpaid
	principal		Carrying		principal		Carrying
	balance		value		balance		value
Commercial and industrial	$	5,145	$	4,163	$	546	$	306
Construction and land		4,309		4,060		—		—
Commercial real estate		22,472		20,814		11,519		10,146
Residential		1,265		1,107		2,202		1,767
Total	$	33,191	$	30,144	$	14,267	$	12,219

The following table reflects the changes in the accretable yield of PCI loans for the periods indicated:


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Balance at beginning of period	$	1,572	$	316	$	508	$	383
Additions		—		—		1,277		—
Removals		(71)		(4)		(133)		(153)
Accretion		(133)		(139)		(284)		(57)
Balance at end of period	$	1,368	$	173	$	1,368	$	173