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LOANS AND THE ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Dec. 31, 2021

LOANS AND THE ALLOWANCE FOR LOAN LOSSES

NOTE 5 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The following presents a summary of the Company’s loans as of the dates noted (in thousands):


	December 31,		December 31,
	2021		2020
Cash, Securities and Other⁽¹⁾	$	295,948	$	357,020
Construction and Development		178,716		131,111
1-4 Family Residential		580,872		455,038
Non-Owner Occupied CRE		482,622		281,943
Owner Occupied CRE		212,426		163,042
Commercial and Industrial⁽²⁾		203,584		146,031
Total loans held for investment		1,954,168		1,534,185
Deferred fees and unamortized premiums/(unaccreted discounts), net		(5,031)		(1,352)
Allowance for loan losses		(13,732)		(12,539)
Loans, net	$	1,935,405	$	1,520,294

______________________________________

⁽¹⁾ Includes PPP loans of $46.8 million and $142.9 million as of December 31, 2021 and 2020, respectively.

⁽²⁾ Includes MSLP loans of $6.8 million and $6.6 million as of December 31, 2021 and 2020, respectively.

As of December 31, 2021, total loans held for investment included $356.7 million and $127.2 million, respectively, of performing loans purchased through mergers or acquisitions.

The CARES Act created the PPP, which is administered by the SBA. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and as of December 31, 2021, the Cash, Securities and Other portion of the loan portfolio included $46.8 million of PPP loans, or 15.8% of the total category. As of December 31, 2020, the Cash, Securities, and Other portion of the loan portfolio included $142.9 million of PPP loans, or 40.0% of the total category.

The Company is a participant in the Federal Reserve’s MSLP to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of December 31, 2021, the Company’s Commercial and Industrial loans included five MSLP loans with the net carrying amount of $6.8 million, or 3.3% of the total category. As of December 31, 2020, the Company’s Commercial and Industrial loans included six MSLP loans with the net carrying amount of $6.6 million, or 4.5% of the total category.

Loan Modifications

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years.

As of December 31, 2021, the deferral period has ended for all loans previously modified and payments have resumed under the original terms. As of December 31, 2021, the Company’s loan portfolio included 69 loans which were previously modified under the loan modification program, totaling $130.4 million.

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR. The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition. In accordance with that guidance, the Company is recognizing interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.

All loans modified in response to COVID-19 are classified as performing and pass rated as of December 31, 2021 and 2020. These loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has increased our loan level reviews and portfolio monitoring to address the changing environment. The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic. These are borrowers in accommodations, transportation and restaurant industries, which we believe may be more impacted by the pandemic, and those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. Excluding loans acquired through the Teton Acquisition, the portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation, and restaurants, is less than 4.3% of our loan portfolio. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of December 31, 2021 and 2020, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

The following presents, by class, an aging analysis of the recorded investments (excluding accrued interest receivable, deferred costs (fees), and unamortized premiums/(unaccreted discounts) which are not material) in loans past due as of December 31, 2021 and December 31, 2020 (in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
December 31, 2021	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	1,199	$	—	$	8	$	1,207	$	294,741	$	295,948
Construction and Development		2,758		—		—		2,758		175,958		178,716
1-4 Family Residential		1,449		—		—		1,449		579,423		580,872
Non-Owner Occupied CRE		—		2,548		—		2,548		480,074		482,622
Owner Occupied CRE		1,419		—		—		1,419		211,007		212,426
Commercial and Industrial		748		—		2,200		2,948		200,636		203,584
Total	$	7,573	$	2,548	$	2,208	$	12,329	$	1,941,839	$	1,954,168


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
December 31, 2020	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	752	$	—	$	48	$	800	$	356,220	$	357,020
Construction and Development		—		—		—		—		131,111		131,111
1-4 Family Residential		1,283		—		—		1,283		453,755		455,038
Non-Owner Occupied CRE		—		—		—		—		281,943		281,943
Owner Occupied CRE		479		—		—		479		162,563		163,042
Commercial and Industrial		271		—		3,529		3,800		142,231		146,031
Total	$	2,785	$	—	$	3,577	$	6,362	$	1,527,823	$	1,534,185

As of December 31, 2021 the Company had one loan, totaling an immaterial amount, in the Commercial and Industrial portfolio that was more than 90 days delinquent and accruing interest. As of December 31, 2020, the Company did not have any loans which were more than 90 days delinquent and accruing interest.

Non-Accrual Loans and Troubled Debt Restructurings

The following presents the recorded investment in non-accrual loans by class as of the dates noted (in thousands):


	December 31,		December 31,
	2021		2020
Cash, Securities and Other	$	8	$	50
1-4 Family Residential		75		—
Owner Occupied CRE		1,241		479
Commercial and Industrial		2,938		3,529
Total	$	4,262	$	4,058

Non-accrual loans classified as TDR accounted for $4.3 million of the recorded investment as of December 31, 2021 and $3.6 million as of December 31, 2020. Non-accrual loans are classified as impaired loans and individually evaluated for impairment.

The following presents a summary of the unpaid principal balance of loans classified as TDRs as of the dates noted (in thousands):


	December 31,		December 31,
	2021		2020
Accruing
Non-Owner Occupied CRE	$	55	$	—
Non-accrual
Cash, Securities, and Other		6		48
1-4 Family Residential		75		—
Owner Occupied CRE		1,241		—
Commercial and Industrial		2,938		3,529
Total		4,315		3,577
Allowance for loan losses associated with TDR		(1,751)		(1,619)
Net recorded investment	$	2,564	$	1,958

As of December 31, 2021 and December 31, 2020, the Company had not committed any additional funds to a borrower with a loan classified as a TDR.

The Company modified three loans resulting in TDR status during the year ended December 31, 2021. The first loan was a small mortgage with a remaining balance of $0.1 million where the borrower was unable to make payments or obtain additional financing to pay off the mortgage. As a result, we have modified the loan at the maturity date with a one year renewal to allow the borrower time to seek a refinance. As of December 31, 2021, this loan remains current under the terms of the modification. The second and third loans modified are in relation to one borrower who has two loans, one Commercial Real Estate Loan in the amount of $1.2 million, which is the space where the related business operates, and a Commercial loan with a balance of $0.7 million. The borrower has experienced a reduction in cash flow through ongoing impact from the pandemic and related shut downs and hiring shortages. As a result, the Company modified both loans allowing for a six month interest only period to provide cash flow relief. The Company obtained a reduced term on the business loan as well as additional collateral from the Borrower. All three of the loans modified during 2021 were sufficiently collateralized and therefore did not require any specific reserve.

The Company modified one loan into a TDR during the year ended December 31, 2020. The Borrower was having difficulty making payments in accordance with the original contract terms. The Company restructured the loan including receiving a large paydown and extended the maturity and lowered the interest rate as a result of the Borrower’s financial difficulties. The loan paid off in full as of December 31, 2020.

TDRs are reviewed individually for impairment and are included in the Company’s specific reserves in the allowance for loan losses. If charged off, the amount of the charge off is included in the Company’s charge off factors, which impact the Company’s reserves on non-impaired loans.

The following presents impaired loans by portfolio and related valuation allowance as of the periods presented (in thousands):


	December 31, 2021						December 31, 2020
			Unpaid		Allowance				Unpaid		Allowance
	Total		Contractual		for		Total		Contractual		for
	Recorded		Principal		Loan		Recorded		Principal		Loan
	Investment		Balance		Losses		Investment		Balance		Losses
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	2	$	2	$	2	$	2	$	2	$	2
Commercial and Industrial		2,190		2,190		1,751		3,419		3,419		1,619
Total	$	2,192	$	2,192	$	1,753	$	3,421	$	3,421	$	1,621

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	6	$	6	$	—	$	48	$	48	$	—
1-4 Family Residential		75		75		—		—		—		—
Owner Occupied CRE		1,241		1,241		—		479		479		—
Commercial and Industrial		748		748		—		110		110		—
Total	$	2,070	$	2,070	$	—	$	637	$	637	$	—

Total impaired loans:
Cash, Securities, and Other	$	8	$	8	$	2	$	50	$	50	$	2
1-4 Family Residential		75		75		—		—		—		—
Owner Occupied CRE		1,241		1,241		—		479		479		—
Commercial and Industrial		2,938		2,938		1,751		3,529		3,529		1,619
Total	$	4,262	$	4,262	$	1,753	$	4,058	$	4,058	$	1,621

The recorded investment in loans in the previous tables excludes accrued interest, deferred costs (fees), and unamortized premiums/(unaccreted discounts), which are not material. Interest income, if any, was recognized on the cash basis on non-accrual loans.

The average balance of impaired loans and interest income recognized on impaired loans during the years ended December 31, 2021 and 2020 are included in the table below (in thousands):


	December 31,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	2	$	—	$	1	$	—
Commercial and Industrial		2,413		21		3,453		—
Total	$	2,415	$	21	$	3,454	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	17	$	—	$	1,180	$	—
Owner Occupied CRE		248		51		96		—
Commercial and Industrial		205		262		4,893		336
1-4 Family Residential		15		—		—		—
Total	$	485	$	313	$	6,169	$	336

Total impaired loans:
Cash, Securities, and Other	$	19	$	—	$	1,181	$	—
Owner Occupied CRE		248		51		96		—
Commercial and Industrial		2,618		283		8,346		336
1-4 Family Residential		15		—		—		—
Total	$	2,900	$	334	$	9,623	$	336

Allowance for Loan Losses

Allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories. The following presents the activity in the Company’s allowance for loan losses by portfolio class for the periods presented (in thousands):


	Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the year ended December 31, 2021
Beginning balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539
(Recovery of)/provision for loan losses		(678)		160		320		948		133		347		1,230
Charge-offs		(44)		—		—		—		—		—		(44)
Recoveries		7		—		—		—		—		—		7
Ending balance	$	1,864	$	1,092	$	3,553	$	2,952	$	1,292	$	2,979	$	13,732

Allowance for loan losses as of December 31, 2021 allocated to loans evaluated for impairment:
Individually	$	2	$	—	$	—	$	—	$	—	$	1,751	$	1,753
Collectively		1,862		1,092		3,553		2,952		1,292		1,228		11,979
Ending balance	$	1,864	$	1,092	$	3,553	$	2,952	$	1,292	$	2,979	$	13,732

Loans as of December 31, 2021, evaluated for impairment:
Individually	$	8	$	—	$	75	$	—	$	1,241	$	2,938	$	4,262
Collectively		295,940		178,716		580,797		482,622		211,185		200,646		1,949,906
Ending balance	$	295,948	$	178,716	$	580,872	$	482,622	$	212,426	$	203,584	$	1,954,168


	Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the year ended December 31, 2020
Beginning balance	$	1,058	$	200	$	2,850	$	1,176	$	911	$	1,680	$	7,875
Provision for/(recovery of) loan losses		1,539		732		383		828		248		952		4,682
Charge-offs		(31)		—		—		—		—		—		(31)
Recoveries		13		—		—		—		—		—		13
Ending balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539

Allowance for loan losses as of December 31, 2020 allocated to loans evaluated for impairment:
Individually	$	2	$	—	$	—	$	—	$	—	$	1,619	$	1,621
Collectively		2,577		932		3,233		2,004		1,159		1,013		10,918
Ending balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539

Loans as of December 31, 2020, evaluated for impairment:
Individually	$	50	$	—	$	—	$	479	$	—	$	3,529	$	4,058
Collectively		356,970		131,111		455,038		281,464		163,042		142,502		1,530,127
Ending balance	$	357,020	$	131,111	$	455,038	$	281,943	$	163,042	$	146,031	$	1,534,185

The Company categorizes loans into risk categories based on relevant information about the ability of the 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 Company analyzes loans individually by classifying the loans by credit risk on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention—Loans classified as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.

Substandard—Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated for impairment if indicators of impairment exist.

Doubtful—Loans graded Doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, the amount of certainty of eventual loss is not known because of specific pending factors.

Loans not meeting any of the three criteria above are considered to be pass-rated loans. The following presents, by class and by credit quality indicator, the recorded investment in the Company’s loans as of December 31, 2021 and December 31, 2020 (in thousands):


			Special
December 31, 2021	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	295,940	$	—	$	8	$	295,948
Construction and Development		176,194		2,522		—		178,716
1-4 Family Residential		580,797		—		75		580,872
Non-Owner Occupied CRE		476,670		5,952		—		482,622
Owner Occupied CRE		210,493		—		1,933		212,426
Commercial and Industrial		198,368		401		4,815		203,584
Total	$	1,938,462	$	8,875	$	6,831	$	1,954,168


			Special
December 31, 2020	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	356,970	$	—	$	50	$	357,020
Construction and Development		131,111		—		—		131,111
1-4 Family Residential		451,918		—		3,120		455,038
Non-Owner Occupied CRE		275,627		6,316		—		281,943
Owner Occupied CRE		161,850		—		1,192		163,042
Commercial and Industrial		140,432		—		5,599		146,031
Total	$	1,517,908	$	6,316	$	9,961	$	1,534,185

The Company had no loans graded doubtful as of the years ended December 31, 2021 and 2020.