Note 4 - Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Allowance for Credit Losses [Text Block]

Note 4 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

Changes in the allowance for loan losses and the reserve for unfunded lending commitments (included in other liabilities) at and for the indicated dates and periods are presented below (dollars in thousands):

	Nine Months Ended September 30, 2021			Year Ended December 31, 2020			Nine Months Ended September 30, 2020
Allowance for Loan Losses
Balance, beginning of period	$	21,403		$	13,152		$	13,152
Provision for (recovery of) loan losses		(870	)		8,916			8,331
Charge-offs		(70	)		(1,006	)		(675	)
Recoveries		167			341			280
Balance, end of period	$	20,630		$	21,403		$	21,088
Reserve for Unfunded Lending Commitments
Balance, beginning of period	$	304		$	329		$	329
Provision for (recovery of) unfunded commitments		23			(25	)		10
Balance, end of period	$	327		$	304		$	339

The reserve for unfunded loan commitments is included in other liabilities.

The following table presents changes in the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at and for the nine months ended September 30, 2021 (dollars in thousands):

	Commercial (1)			Construction and Land Development			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-owner Occupied		Residential Real Estate			Consumer			Total
Allowance for Loan Losses
Balance at December 31, 2020	$	3,373		$	1,927		$	4,340		$	7,626	$	4,067		$	70		$	21,403
Provision for (recovery of) loan losses		(440	)		(551	)		166			259		(281	)		(23	)		(870	)
Charge-offs		—			—			(3	)		—		(17	)		(50	)		(70	)
Recoveries		27			—			6			6		71			57			167
Balance at September 30, 2021	$	2,960		$	1,376		$	4,509		$	7,891	$	3,840		$	54		$	20,630
Balance at September 30, 2021:
Allowance for Loan Losses
Individually evaluated for impairment	$	9		$	—		$	—		$	—	$	1		$	—		$	10
Collectively evaluated for impairment		2,930			1,376			4,311			7,465		3,760			54			19,896
Purchased credit impaired loans		21			—			198			426		79			—			724
Total	$	2,960		$	1,376		$	4,509		$	7,891	$	3,840		$	54		$	20,630
Loans
Individually evaluated for impairment	$	16		$	—		$	14		$	1,027	$	1,160		$	—		$	2,217
Collectively evaluated for impairment		319,837			119,967			394,875			704,158		369,394			6,812			1,915,043
Purchased credit impaired loans		425			226			9,140			8,154		5,114			13			23,072
Total	$	320,278		$	120,193		$	404,029		$	713,339	$	375,668		$	6,825		$	1,940,332

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(1) Includes PPP loans, which are guaranteed by the SBA and have no related allowance.

The following table presents changes in the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at and for the year ended December 31, 2020 (dollars in thousands):

	Commercial (1)			Construction and Land Development		Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-owner Occupied			Residential Real Estate			Consumer			Total
Allowance for Loan Losses
Balance at December 31, 2019	$	2,657		$	1,161	$	2,474		$	3,781		$	3,023		$	56		$	13,152
Provision for loan losses		1,156			764		1,871			3,960			1,076			89			8,916
Charge-offs		(505	)		—		(17	)		(165	)		(117	)		(202	)		(1,006	)
Recoveries		65			2		12			50			85			127			341
Balance at December 31, 2020	$	3,373		$	1,927	$	4,340		$	7,626		$	4,067		$	70		$	21,403
Balance at December 31, 2020:
Allowance for Loan Losses
Individually evaluated for impairment	$	29		$	—	$	—		$	—		$	1		$	—		$	30
Collectively evaluated for impairment		3,318			1,927		4,138			7,185			3,896			70			20,534
Purchased credit impaired loans		26			—		202			441			170			—			839
Total	$	3,373		$	1,927	$	4,340		$	7,626		$	4,067		$	70		$	21,403
Loans
Individually evaluated for impairment	$	57		$	—	$	286		$	1,270		$	1,239		$	—		$	2,852
Collectively evaluated for impairment		490,736			139,833		360,579			616,498			365,967			8,390			1,982,003
Purchased credit impaired loans		463			238		12,815			9,801			6,812			72			30,201
Total	$	491,256		$	140,071	$	373,680		$	627,569		$	374,018		$	8,462		$	2,015,056

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(1) Includes PPP loans, which are guaranteed by the SBA and have no related allowance.

The allowance for loan losses is allocated to loan segments based upon historical loss factors, risk grades on individual loans, and qualitative factors. Qualitative factors include levels and trends in delinquencies, nonaccrual loans, and charge-offs and recoveries; trends in volume and terms of loans; effects of changes in risk selection, underwriting standards, and lending policies; experience of lending staff; national, regional, and local economic trends and conditions; portfolio concentrations; regulatory and legal factors; competition; quality of loan review system; and value of underlying collateral.

There was a provision expense of $482,000 in the third quarter of 2021 compared to a recovery of provision expense of $1.4 million in the second quarter of 2021 and an expense of $2.6 million for the third quarter of the previous year. The expense in the third quarter of 2021 was the net result of the required provision resulting from significant loan growth netted against a negative provision from the adjustment of qualitative factors around continued improvement in economic conditions.  Ongoing low charge-off and delinquency rates and overall strong asset quality metrics also contributed to the adjustments to the factors reducing the provision expense in the third quarter and also resulted in a negative provision in the second quarter of 2021. The expense in the third quarter of 2020 was the result of adjustments to the qualitative factors for the declining and uncertain economic landscape in the wake of the COVID-19 pandemic. Sharp declines in employment, GDP, housing starts and business activity in general indicated a higher risk of probable future losses in the Bank's portfolio at the time.