LOANS HELD FOR INVESTMENT

9 Months Ended

Sep. 30, 2022

LOANS HELD FOR INVESTMENT [Abstract]

LOANS HELD FOR INVESTMENT

3.  LOANS HELD FOR INVESTMENT

Loans held for investment are summarized by category as of the periods presented below (dollars in thousands):

	September 30, 2022			December 31, 2021
Commercial real estate	$	869,231		$	755,444
Commercial - specialized		368,204			378,725
Commercial - general		477,209			460,024
Consumer:
1-4 family residential		424,802			387,690
Auto loans		309,110			240,719
Other consumer		80,524			68,113
Construction		161,286			146,862
		2,690,366			2,437,577
Allowance for loan losses		(39,657	)		(42,098	)
Loans, net	$	2,650,709		$	2,395,479

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 $39.7 million at September 30, 2022, compared to $42.1 million at December 31, 2021. The ratio of allowance for loan losses to loans held for investment was 1.47% at September 30, 2022 and 1.73% at December 31, 2021.

The following table details the activity in the allowance for loan losses for the periods indicated (dollars in thousands). 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
For the three months ended September 30, 2022
Commercial real estate	$	13,903	$	(1,292	)	$	—		$	—	$	12,611
Commercial - specialized		3,355		(481	)		(43	)		874		3,705
Commercial - general		9,918		372			—			135		10,425
Consumer:
1-4 family residential		5,329		247			(52	)		37		5,561
Auto loans		3,958		(39	)		(77	)		50		3,892
Other consumer		1,443		282			(374	)		104		1,455
Construction		1,879		129			—			—		2,008
	$	39,785	$	(782	)	$	(546	)	$	1,200	$	39,657
For the three months ended September 30, 2021
Commercial real estate	$	17,288	$	960		$	—		$	—	$	18,248
Commercial - specialized		4,823		(596	)		(16	)		20		4,231
Commercial - general		8,948		(838	)		(2	)		63		8,171
Consumer:
1-4 family residential		5,064		135			—			2		5,201
Auto loans		3,815		79			(111	)		20		3,803
Other consumer		1,434		139			(213	)		42		1,402
Construction		1,591		121			—			—		1,712
	$	42,963	$	—		$	(342	)	$	147	$	42,768

	Beginning Balance		Provision for Loan Losses			Charge-offs			Recoveries		Ending Balance
For the nine months ended September 30, 2022
Commercial real estate	$	17,245	$	(5,052	)	$	—		$	418	$	12,611
Commercial - specialized		4,363		(1,494	)		(149	)		985		3,705
Commercial - general		8,466		1,883			(315	)		391		10,425
Consumer:
1-4 family residential		5,268		346			(92	)		39		5,561
Auto loans		3,653		344			(233	)		128		3,892
Other consumer		1,357		678			(801	)		221		1,455
Construction		1,746		428			(166	)		—		2,008
	$	42,098	$	(2,867	)	$	(1,756	)	$	2,182	$	39,657
For the nine months ended September 30, 2021
Commercial real estate	$	18,962	$	(714	)	$	—		$	—	$	18,248
Commercial - specialized		5,760		(1,627	)		(21	)		119		4,231
Commercial - general		9,227		(870	)		(379	)		193		8,171
Consumer:
1-4 family residential		4,646		602			(52	)		5		5,201
Auto loans		4,226		(88	)		(438	)		103		3,803
Other consumer		1,671		132			(590	)		189		1,402
Construction		1,061		647			—			4		1,712
	$	45,553	$	(1,918	)	$	(1,480	)	$	613	$	42,768

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment at the dates indicated (dollars in thousands):

	Recorded Investment				Allowance for Loan Losses
	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
September 30, 2022
Commercial real estate	$	—	$	869,231	$	—	$	12,611
Commercial - specialized		—		368,204		—		3,705
Commercial - general		3,469		473,740		108		10,317
Consumer:
1-4 family residential		750		424,052		9		5,552
Auto loans		—		309,110		—		3,892
Other consumer		—		80,524		—		1,455
Construction		—		161,286		—		2,008
	$	4,219	$	2,686,147	$	117	$	39,540
December 31, 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
	$	7,771	$	2,429,806	$	1,344	$	40,754

Impaired loan information at the dates indicated follows (dollars in thousands):

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
September 30, 2022
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	551
Commercial - specialized		—		—		—		—		—		—
Commercial - general		3,469		833		2,636		3,469		108		4,274
Consumer:
1-4 family residential		750		486		264		750		9		1,171
Auto loans		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—
Construction		—		—		—		—		—		—
	$	4,219	$	1,319	$	2,900	$	4,219	$	117	$	5,996
December 31, 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 residential		1,592		880		712		1,592		175		1,857
Auto loans		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—
Construction		—		—		—		—		—		—
	$	7,771	$	2,023	$	5,748	$	7,771	$	1,344	$	10,396

All impaired loans $250 thousand and greater were specifically evaluated for impairment. Interest income recognized using a cash-basis method on impaired loans for the nine months ended September 30, 2022 and the year ended December 31, 2021 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 the dates indicated (dollars in thousands):

	30-89 Days Past Due		90 Days or More Past Due		Nonaccrual
September 30, 2022
Commercial real estate	$	573	$	819	$	—
Commercial - specialized		139		30		40
Commercial - general		2,342		2		3,482
Consumer:
1-4 family residential		1,366		1,763		1,384
Auto loans		499		150		—
Other consumer		1,415		125		39
Construction		382		—		—
	$	6,716	$	2,889	$	4,945
December 31, 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
	$	8,993	$	1,080	$	9,518

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 the Company's on-going monitoring of the credit quality of the 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 the dates indicated (dollars in thousands):

	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2022
Commercial real estate	$	841,324	$	—	$	27,907	$	—	$	869,231
Commercial - specialized		367,346		—		858		—		368,204
Commercial - general		448,397		—		28,812		—		477,209
Consumer:
1-4 family residential		415,392		—		9,410		—		424,802
Auto loans		308,730		—		380		—		309,110
Other consumer		80,323		—		201		—		80,524
Construction		160,309		—		977		—		161,286
	$	2,621,821	$	—	$	68,545	$	—	$	2,690,366
December 31, 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
	$	2,371,284	$	1,676	$	64,617	$	—	$	2,437,577

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 to extend the period for loan modifications 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 and 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 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 310-40 and the Joint Interagency Regulatory Guidance. As of September 30, 2022 and December 31, 2021, the Company had no loans under an active modification that comply with ASC 310-40 and the Joint Interagency Regulatory Guidance.

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 September 30, 2022, the Company had no remaining loans subject to these deferral and modification agreements. 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.

There were no loans modified as a TDR during the nine months ended September 30, 2022 and the year ended December 31, 2021.

Management continues to closely monitor for credit changes resulting from the ongoing COVID-19 pandemic (or any current or future variants thereof), the rising interest rate environment, and the persistent high inflation levels in the United States and our market areas.