LOANS HELD FOR INVESTMENT

12 Months Ended

Dec. 31, 2021

LOANS HELD FOR INVESTMENT [Abstract]

LOANS HELD FOR INVESTMENT

3. LOANS HELD FOR INVESTMENT

Loans are summarized by category at year-end as follows:

	2021			2020
Commercial real estate	$	755,444		$	663,344
Commercial - specialized		378,725			311,686
Commercial - general		460,024			518,309
Consumer:
1-4 family residential		387,690			360,315
Auto loans		240,719			205,840
Other consumer		68,113			67,595
Construction		146,862			94,494
		2,437,577			2,221,583
Allowance for loan losses		(42,098	)		(45,553	)
Loans, net	$	2,395,479		$	2,176,030

The Company has certain lending policies, underwriting standards, and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies, underwriting standards, and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial – General and Specialized – Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations, as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and include personal guarantees. Owner-occupied real estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties. Commercial loans are grouped into two distinct sub-categories: specialized and general. Commercial related segments that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related segments that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries.

Commercial Real Estate – Commercial real estate loans are also subject to underwriting standards and processes similar to commercial loans. These loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Construction – Loans for residential construction are for single-family properties to developers, builders, or end-users. These loans are underwritten based on estimates of costs and completed value of the project. Funds are advanced based on estimated percentage of completion for the project. Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects.

Consumer – Loans to consumers include 1-4 family residential loans, auto loans, and other loans for recreational vehicles or other purposes. The Company utilizes a computer-based credit scoring analysis to supplement its policies and procedures in underwriting consumer loans. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes the Company’s risk. The Company generally requires mortgage title insurance and hazard insurance on 1-4 family residential loans.

The allowance for loan losses was $42.1 million at December 31, 2021, compared to $45.6 million at December 31, 2020. The ratio of allowance for loan losses to loans held for investment was 1.73% at December 31, 2021 and 2.05% at December 31, 2020. The decrease in the allowance for loan losses at December 31, 2021 compared to December 31, 2020 was primarily the result of the Company recording a negative provision for loan losses in the second quarter of 2021 of $2.0 million. The negative provision was primarily due to the general improvement in the economy, a decline in the amount of loans actively under a modification, and a decrease in nonperforming loans.

The following table details the activity in the allowance for loan losses during 2021 and 2020. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	Beginning Balance		Provision for Loan Losses			Charge-offs			Recoveries		Ending Balance
2021
Commercial real estate	$	18,962	$	(1,826	)	$	—		$	109	$	17,245
Commercial - specialized		5,760		(1,386	)		(172	)		161		4,363
Commercial - general		9,227		(302	)		(677	)		218		8,466
Consumer:
1-4 family residential		4,646		666			(52	)		8		5,268
Auto loans		4,226		(90	)		(598	)		115		3,653
Other consumer		1,671		339			(903	)		250		1,357
Construction		1,061		681			—			4		1,746
Total	$	45,553	$	(1,918	)	$	(2,402	)	$	865	$	42,098

2020
Commercial real estate	$	5,049	$	13,618	$	(7	)	$	302	$	18,962
Commercial - specialized		2,287		4,514		(1,162	)		121		5,760
Commercial - general		9,609		1,219		(1,811	)		210		9,227
Consumer:
1-4 family residential		2,093		2,478		(56	)		131		4,646
Auto loans		3,385		1,814		(1,165	)		192		4,226
Other consumer		1,341		1,300		(1,358	)		388		1,671
Construction		433		627		—			1		1,061
Total	$	24,197	$	25,570	$	(5,559	)	$	1,345	$	45,553

2019
Commercial real estate	$	5,579	$	(961	)	$	—		$	431	$	5,049
Commercial - specialized		2,516		2			(355	)		124		2,287
Commercial - general		8,173		1,209			(306	)		533		9,609
Consumer:
1-4 family residential		2,249		219			(436	)		61		2,093
Auto loans		2,994		1,276			(1,067	)		182		3,385
Other consumer		1,192		969			(1,034	)		214		1,341
Construction		423		85			(75	)		—		433
Total	$	23,126	$	2,799		$	(3,273	)	$	1,545	$	24,197

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment:

	Recorded Investment				Allowance for Loan Losses
	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
2021
Commercial real estate	$	1,101	$	754,343	$	584	$	16,661
Commercial - specialized		—		378,725		—		4,363
Commercial - general		5,078		454,946		585		7,881
Consumer:
1-4 family residential		1,592		386,098		175		5,093
Auto loans		—		240,719		—		3,653
Other consumer		—		68,113		—		1,357
Construction		—		146,862		—		1,746
Total	$	7,771	$	2,429,806	$	1,344	$	40,754

2020
Commercial -	$	6,273	$	657,071	$	580	$	18,382
Commercial - specialized		—		311,686		—		5,760
Commercial - general		4,626		513,683		515		8,712
Consumer:
1-4 family residential		2,122		358,193		—		4,646
Auto loans		—		205,840		—		4,226
Other consumer		—		67,595		—		1,671
Construction		—		94,494		—		1,061
Total	$	13,021	$	2,208,562	$	1,095	$	44,458

Impaired loan information at year-end follows:

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
2021
Commercial real estate	$	1,101	$	—	$	1,101	$	1,101	$	584	$	3,687
Commercial -specialized		—		—		—		—		—		—
Commercial - general		5,078		1,143		3,935		5,078		585		4,852
Consumer:
1-4 family		1,592		880		712		1,592		175		1,857
Auto loans		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Total	$	7,771	$	2,023	$	5,748	$	7,771	$	1,344	$	10,396

2020
Commercial real estate	$	6,273	$	3,673	$	2,600	$	6,273	$	580	$	3,666
Commercial specialized		—		—		—		—		—		673
Commercial general		4,626		3,364		1,262		4,626		515		3,400
Consumer:
1-4 family		2,541		2,122		—		2,122		—		2,155
Auto loans		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Total	$	13,440	$	9,159	$	3,862	$	13,021	$	1,095	$	9,894

All impaired loans $250 thousand and greater were specifically evaluated for impairment. Interest income recognized using a cash-basis method on impaired loans for 2021, 2020 and 2019 was not significant. Additional funds committed to be advanced on impaired loans are not significant.

The table below provides an age analysis on accruing past-due loans and nonaccrual loans at year-end:

	30-89 Days Past Due		90 Days or More Past Due		Nonaccrual
2021
Commercial real estate	$	393	$	45	$	1,101
Commercial - specialized		265		20		156
Commercial - general		4,032		97		5,236
Consumer:
1-4 Family residential		2,496		903		2,815
Auto loans		332		—		—
Other consumer		538		15		44
Construction		937		—		166
Total	$	8,993	$	1,080	$	9,518

2020
Commercial real estate	$	914	$	34	$	6,311
Commercial - specialized		241		—		272
Commercial - general		1,891		149		5,489
Consumer:
1-4 Family residential		2,089		906		1,595
Auto loans		738		38		—
Other consumer		481		119		51
Construction		206		—		—
Total	$	6,560	$	1,246	$	13,718

The Company grades its loans on a thirteen-point grading scale. These grades fit in one of the following categories: (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful, or (v) loss. Loans categorized as loss are charged-off immediately. The grading of loans reflect a judgment by the Company about the risks of default associated with the loan. The Company reviews the grades on loans as part of our on-going monitoring of the credit quality of our loan portfolio.

Pass loans have financial factors or nature of collateral that are considered reasonable credit risks in the normal course of lending and encompass several grades that are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loans at some future date.

Substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize collection and present the distinct possibility that some loss will be sustained if the deficiencies are not corrected. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Substandard loans can be accruing or can be nonaccrual depending on the circumstances of the individual loans.

Doubtful loans have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. All doubtful loans are on nonaccrual.

The following table summarizes the internal classifications of loans at year-end:

	Pass		Special Mention		Substandard		Doubtful		Total
2021
Commercial real estate	$	713,852	$	—	$	41,592	$	—	$	755,444
Commercial - specialized		372,797		—		5,928		—		378,725
Commercial - general		450,790		1,676		7,558		—		460,024
Consumer:
1-4 family residential		379,458		—		8,232		—		387,690
Auto loans		239,869		—		850		—		240,719
Other consumer		67,822		—		291		—		68,113
Construction		146,696		—		166		—		146,862
Total	$	2,371,284	$	1,676	$	64,617	$	—	$	2,437,577

2020
Commercial real estate	$	602,250	$	—	$	61,094	$	—	$	663,344
Commercial - specialized		303,831		—		7,855		—		311,686
Commercial - general		510,543		—		7,766		—		518,309
Consumer:
1-4 family residential		352,930		—		7,385		—		360,315
Auto loans		204,301		—		1,539		—		205,840
Other consumer		67,216		—		379		—		67,595
Construction		94,494		—		—		—		94,494
Total	$	2,135,565	$	—	$	86,018	$	—	$	2,221,583

Under section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), banks may elect to deem that loan modifications do not result in a classification as a TDR if they are (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency or (B) December 31, 2020. Under section 540 of the Consolidated Appropriations Act, 2021 (the “Act”), section 4013 of the CARES Act was amended and the period for loan modifications was extended to the earlier of (1) January 1, 2022, or (2) 60 days after the date of termination of the national emergency. The Company elected to adopt the provisions of the CARES Act, as amended by the Act.

Additionally, other short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40 and the interagency statement released by the federal banking regulators on April 7, 2020 in response to the COVID-19 pandemic (the “Joint Interagency Regulatory Guidance”). This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

In response to the COVID-19 pandemic, the Company implemented a short-term deferral modification program that complies with ASC Subtopic 310-40 and the Joint Interagency Regulatory Guidance. As of December 31, 2021, the Company had no loans under an active modification that comply with ASC Subtopic 310-40 and the Joint Interagency Regulatory Guidance. As of December 31, 2020, the Company had an outstanding principal balance of modified loans of $3.0 million in loans that complied with ASC Subtopic 310-40 and the Joint Interagency Regulatory Guidance. These modifications included: $1.0 million in six months of interest-only payments, $300 thousand in 90 day commercial payment deferrals, and $1.7 million in consumer one to four month payment deferrals. The total of all of these short-term modifications represented 0.14% of outstanding loans held for investment at December 31, 2020.

Beginning in April 2020, the Company began offering additional COVID-19 related deferral and modification of principal and/or interest payments to selected borrowers on a case-by-case basis that were outside the scope of the short-term deferral modification program. These additional modifications comply with the provisions of section 4013 of the CARES Act and section 501 of the Act. As of December 31, 2021 the Company had 3 loans totaling approximately $15.9 million subject to these deferral and modification agreements, representing 0.65% of outstanding loans held for investment. As of December 31, 2020 the Company had 25 loans totaling approximately $61.0 million subject to these deferral and modification agreements, representing 2.75% of outstanding loans held for investment.

There were no TDRs during 2021, 2020, and 2019.