The recorded investment in TDRs was $10.1 million and $11.0 million at March 31, 2022 and December 31, 2021, respectively. Commercial TDRs totaled $381,000 and $408,000 at March 31, 2022 and December 31, 2021, respectively. The remainder of the TDRs outstanding at the end of these periods were residential loans. Non-accrual TDRs totaled $1.0 million at both March 31, 2022 and December 31, 2021. Of these loans, $180,000 and $190,000 were non-accrual commercial TDRs at March 31, 2022 and December 31, 2021, respectively.
All TDR loans are considered impaired and management performs a DCF calculation to determine the amount of impairment reserve required on each loan. TDR loans which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In either case, any reserve required is recorded as part of the allowance for loan losses.
During the three months ended March 31, 2022 and 2021, there were no payment defaults on TDRs.
Credit Quality Indicators
Commercial
The Company uses a ten-grade internal loan rating system for commercial real estate, commercial construction and commercial loans, as follows:
Loans rated 1 – 6 are considered “pass”-rated loans with low to average risk.
Loans rated 7 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 8 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 9 are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 10 are considered “uncollectible” (loss), and of such little value that their continuance as loans is not warranted.
Loans not rated consist primarily of certain smaller balance commercial real estate and commercial loans that are managed by exception.
On an annual basis, or more often if needed, the Company formally reviews on a risk adjusted basis, the ratings on all commercial real estate, construction and commercial loans. Semi-annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.
Residential and Consumer
On a monthly basis, the Company reviews the residential construction, residential real estate and consumer installment portfolios for credit quality primarily through the use of delinquency reports.