Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2021

(4) Loans and Allowance for Loan Losses

Major classifications of loans, by collateral code, at September 30, 2021 and December 31, 2020 are summarized as follows: (in thousands)


	September 30, 2021			December 31, 2020
Commercial (secured by real estate)	$	207,018		$	178,571
Commercial and industrial		170,123			155,554
Paycheck Protection Program loans		31,715			101,749
Construction, land and acquisition & development		21,713			23,571
Residential mortgage 1-4 family		73,532			91,777
Consumer installment		67,069			47,393
Total		571,170			598,615
Less allowance for loan losses		(7,631	)		(6,361	)
Total loans, net	$	563,539		$	592,254

The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in the Atlanta, Georgia MSA. A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market. With the acquisition of Affinity Bank, the Bank is a premier lender within professional markets, with a primary focus on the dental industry in Georgia and adjoining states. The majority of these loans are commercial and industrial credits for practice acquisitions and equipment financing with the remainder being owner-occupied real estate.

The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is an economic stimulus bill signed

into law on March 27, 2020, in response to the economic fallout of the COVID-19 pandemic in the United States. The

creation of the Paycheck Protection Program (PPP) enacted under the CARES Act provides forgivable loans to small

businesses for payroll obligations, emergency grants to cover immediate operating costs, and a mechanism for loan

forgiveness by the Small Business Administration should all criteria be met. The Bank received SBA authorization for 730 and 1,171 PPP loans totaling $66.1 million and $130.3 million for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively. These loans are fully guaranteed by the Small Business Administration.

Qualifying loans in the amount of $328.6 million and $309.9 million were pledged to secure the line of credit from the Federal Home Loan Bank of Atlanta (“FHLB”) at September 30, 2021 and December 31, 2020, respectively.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of and for the nine months ended September 30, 2021 and 2020: (in thousands)


September 30, 2021	Commercial (Secured by Real Estate)			Commercial and Industrial			Paycheck Protection Program (1)		Construction, Land and Acquisition & Development			Residential Mortgage			Consumer Installment			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	3,084		$	1,320		$	—	$	224		$	970		$	719		$	44		$	6,361
Provision		316			1,210			—		(42	)		(555	)		69			(23	)		975
Charge-offs		—			(54	)		—		—			—			(31	)		—			(85	)
Recoveries		265			37			—		—			73			5			—			380
Ending balance	$	3,665		$	2,513		$	—	$	182		$	488		$	762		$	21		$	7,631
Ending allowance attributable to loans:
Individually evaluated for impairment	$	—		$	45		$	—	$	—		$	8		$	—		$	—		$	53
Collectively evaluated for impairment		3,665			2,468			—		182			480			762			21			7,578
Total ending allowance	$	3,665			2,513		$	—		182			488			762			21			7,631
Loans:
Individually evaluated for impairment	$	3,553		$	933		$	—	$	—		$	3,221		$	2		$	—		$	7,709
Collectively evaluated for impairment		203,465			169,190			31,715		21,713			70,311			67,067			—			563,461
Total loans	$	207,018		$	170,123		$	31,715	$	21,713		$	73,532		$	67,069		$	—		$	571,170

December 31, 2020
Allowance for loan losses:
Beginning balance	$	1,661		$	1,478		$	—	$	153		$	369		$	466		$	7		$	4,134
Provision		1,207			(194	)		—		71			627			252			37			2,000
Charge-offs		(30	)		—			—		—			(126	)		(29	)		—			(185	)
Recoveries		246			36			—		—			100			30			—			412
Ending balance	$	3,084		$	1,320		$		$	224		$	970		$	719		$	44		$	6,361
Ending allowance attributable to loans:
Individually evaluated for impairment	$	2		$	35		$	—	$	—		$	14		$	—		$	—		$	51


Collectively evaluated for impairment		3,082		1,285		—		224		956		719		44		6,310
Total ending allowance	$	3,084	$	1,320	$	—	$	224	$	970	$	719	$	44	$	6,361
Loans:
Individually evaluated for impairment	$	2,584	$	1,085	$	—	$	—	$	3,597	$	8	$	—	$	7,274
Collectively evaluated for impairment		175,987		154,469		101,749		23,571		88,180		47,385		—		591,341
Total loans	$	178,571	$	155,554	$	101,749	$	23,571	$	91,777	$	47,393	$	—	$	598,615

(1)

Includes PPP loans that are fully guaranteed by the SBA; thus no allowance for loan losses has been allocated to these loans.

The Bank individually evaluates all loans for impairment that are on nonaccrual status or are rated substandard (as described below). Additionally, all troubled debt restructurings are evaluated for impairment. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the contractual terms of the loan will not be collected. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest payments received on impaired loans are applied as a reduction of the outstanding principal balance.

Impaired loans at September 30, 2021 and December 31, 2020 were as follows: (in thousands)


September 30, 2021	Recorded Investment		Unpaid Principal Balance		Allocated Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial (secured by real estate)	$	3,553	$	3,599	$	—	$	3,549	$	61
Commercial and industrial		315		315		—		315		—
Paycheck Protection Program		—		—		—		—		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		1,934		2,951		—		1,952		—
Consumer installment		2		2		—		2		—
		5,804		6,867		—		5,818		60
With an allowance recorded:
Commercial (secured by real estate)		—		—		—		—		—
Commercial and industrial		618		618		45		618		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		1,287		2,217		8		1,295		66
Consumer installment		—		—		—		—		—
		1,905		2,835		53		1,913		66
Total impaired loans	$	7,709	$	9,702	$	53	$	7,731	$	126

December 31, 2020
With no related allowance recorded:
Commercial (secured by real estate)	$	1,136	$	2,232	$	—	$	1,138	$	42
Commercial and industrial		395		395		—		395		—
Paycheck Protection Program		—		—		—		—		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		1,986		1,987		—		2,041		9
Consumer installment		8		8		—		9		1
		3,525		4,622		—		3,583		52
With an allowance recorded:
Commercial (secured by real estate)		1,448		1,449		2		—		91
Commercial and industrial		690		690		35		1,481		6
Construction, land and acquisition & development		—		—		—		727		—
Residential mortgage		1,611		1,613		14		—		73
Consumer installment		—		—		—		1,634		—
		3,749		3,752		51		3,842		170
Total impaired loans	$	7,274	$	8,374	$	51	$	7,425	$	222

The following table presents the aging of the recorded investment in past due loans, as well as the recorded investment in nonaccrual loans, as of September 30, 2021 and December 31, 2020 by class of loans: (in thousands)


September 30, 2021	30 -59 Days Past Due		60- 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total		Nonaccrual
Commercial (secured by real estate)	$	—	$	—	$	470	$	470	$	206,548	$	207,018	$	2,181
Commercial and industrial		—		317		959		1,276		168,847		170,123		1,001
Paycheck Protection Program		—		—		—		—		31,715		31,715		—
Construction, land and acquisition & development		—		—		—		—		21,713		21,713		—
Residential mortgage		349		1,114		214		1,677		71,855		73,532		2,985
Consumer installment		340		14		4		358		66,711		67,069		49
Total	$	689	$	1,445	$	1,647	$	3,781	$	567,389	$	571,170	$	6,216

December 31, 2020
Commercial (secured by real estate)	$	3,386	$	—	$	1,136	$	4,522	$	174,049	$	178,571	$	1,157
Commercial and industrial		29		—		1,085		1,114		154,440		155,554		1,085
Paycheck Protection Program		—		—		—		—		101,749		101,749		—
Construction, land and acquisition & development		1,392		—		—		1,392		22,179		23,571		—
Residential mortgage		4,308		1,094		1,444		6,846		84,931		91,777		2,587
Consumer installment		78		—		73		151		47,242		47,393		73
Total	$	9,193	$	1,094	$	3,738	$	14,025	$	584,590	$	598,615	$	4,902

There were no loans past due 90 days or greater and still accruing interest as of September 30, 2021 and December 31, 2020.

There was one new troubled debt restructuring during the nine months ended September 30, 2021 and no new troubled debt restructurings during the nine months ended September 30, 2020. No troubled debt restructurings subsequently defaulted during the nine months ended September 30, 2021 or 2020.

The Bank has allocated an allowance for loan losses of approximately $8,000 and $17,000 to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2021 and December 31, 2020, respectively.

The Bank 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 Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Bank uses the following definitions for its risk ratings:

Special Mention. Loans have potential weaknesses that may, if not corrected, weaken or inadequately protect the Bank's credit position at some future date. Weaknesses are generally the result of deviation from prudent lending practices, such as over advances on collateral. Credits in this category should, within a 12-month period, move to Pass if improved or drop to Substandard if poor trends continue.

Substandard. Inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans have a well-defined weakness or weaknesses such as primary source of repayment is gone or severely impaired or cash flow is insufficient to reduce debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans have the same weaknesses as those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable. The likelihood of a loss on an asset or portion of an asset classified Doubtful is high.

Loss. Loans considered uncollectible and of such little value that the continuance as a Bank asset is not warranted. This does not mean that the loan has no recovery or salvage value, but rather the asset should be charged off even though partial recovery may be possible in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. As of September 30, 2021 and December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (in thousands)


September 30, 2021	Pass		Special Mention		Substandard		Doubtful/ Loss		Total
Commercial (secured by real estate)	$	202,171	$	1,161	$	3,686	$	—	$	207,018
Commercial and industrial		168,805		317		1,001		—		170,123
Paycheck Protection Program		31,715		—		—		—		31,715
Construction, land and acquisition & development		21,713		—		—		—		21,713
Residential mortgage		69,025		—		4,507		—		73,532
Consumer installment		67,049		—		20		—		67,069
Total	$	560,478	$	1,478	$	9,214	$	—	$	571,170


December 31, 2020	Pass		Special Mention		Substandard		Doubtful/ Loss		Total
Commercial (secured by real estate)	$	176,629	$	785	$	1,157	$	—	$	178,571
Commercial and industrial		154,469		—		1,085		—		155,554
Paycheck Protection Program		101,749		—		—		—		101,749
Construction, land and acquisition & development		23,571		—		—		—		23,571
Residential mortgage		87,738		62		3,977		—		91,777
Consumer installment		47,332		—		61		—		47,393
Total	$	591,488	$	847	$	6,280	$	—	$	598,615