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LOANS AND THE ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2022

LOANS AND THE ALLOWANCE FOR LOAN LOSSES

NOTE 4 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

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


	June 30,		December 31,
	2022		2021
Cash, Securities and Other⁽¹⁾	$	180,738	$	261,190
Consumer and Other⁽²⁾		47,855		34,758
Construction and Development		162,426		178,716
1-4 Family Residential		732,725		580,872
Non-Owner Occupied CRE		489,111		482,622
Owner Occupied CRE		224,597		212,426
Commercial and Industrial⁽³⁾		312,696		203,584
Total loans held for investment		2,150,148		1,954,168
Deferred fees and unamortized premiums/(unaccreted discounts), net⁽⁴⁾		(3,754)		(5,031)
Allowance for loan losses		(14,357)		(13,732)
Loans, net	$	2,132,037	$	1,935,405

______________________________________

⁽¹⁾ Includes PPP loans of $10.7 million and $46.8 million as of June 30, 2022 and December 31, 2021, respectively.

⁽²⁾ Includes $21.1 million of unsecured consumer loans held for investment measured at fair value as of June 30, 2022.

⁽³⁾ Includes MSLP loans of $6.8 million as of June 30, 2022 and December 31, 2021.

⁽⁴⁾ Includes fair value adjustments on loans held for investment accounted for under the fair value option.

As of June 30, 2022 and December 31, 2021, total loans held for investment included $287.6 million and $356.7 million, respectively, of performing loans purchased through mergers or acquisitions. As of June 30, 2022 and December 31, 2021, Consumer and Other included $21.1 million and $0.0 million, respectively, of loans held for investment measured at fair value. See Note 14 – Fair Value Option.

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 June 30, 2022, the Cash, Securities and Other portion of the loan portfolio included $10.7 million of PPP loans, or 5.9% of the total category. As of December 31, 2021, the Cash, Securities and Other portion of the loan portfolio included $46.8 million of PPP loans, or 17.9% 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 June 30, 2022, the Company’s Commercial and Industrial loans included five MSLP loans with the net carrying amount of $6.8 million, or 2.2% of the total category. 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.

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.

In 2021, the deferral period ended for all non-acquired loans previously modified and payments resumed under the original terms. As of June 30, 2022, the Company’s loan portfolio included 55 non-acquired loans which were previously modified under the loan modification program, totaling $100.5 million. Through the Teton Acquisition, the Company acquired loans which were previously modified and are still in their deferral period. As of June 30, 2022, there were 15 of these loans, totaling $3.5 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 recognized 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 June 30, 2022. 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. 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 June 30, 2022, 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 fees, and unamortized premiums/(unaccreted discounts), which are not material) in loans past due as of the dates noted (dollars in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
June 30, 2022	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	3,803	$	149	$	4	$	3,956	$	176,782	$	180,738
Consumer and Other		36		35		8		79		47,776		47,855
Construction and Development		—		805		—		805		161,621		162,426
1-4 Family Residential		9,705		—		—		9,705		723,020		732,725
Non-Owner Occupied CRE		—		—		—		—		489,111		489,111
Owner Occupied CRE		—		278		—		278		224,319		224,597
Commercial and Industrial		19,021		47		1,893		20,961		291,735		312,696
Total	$	32,565	$	1,314	$	1,905	$	35,784	$	2,114,364	$	2,150,148

	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	$	745	$	—	$	6	$	751	$	260,439	$	261,190
Consumer and Other		454		—		2		456		34,302		34,758
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

As of June 30, 2022, the Company had nine loans, totaling an immaterial amount, in the Consumer and Other portfolio that were more than 90 days delinquent and accruing interest. 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.

Non-Accrual Loans and Troubled Debt Restructurings

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


	June 30,		December 31,
	2022		2021
Cash, Securities and Other	$	4	$	6
Consumer and Other		2		2
1-4 Family Residential		68		75
Owner Occupied CRE		1,200		1,241
Commercial and Industrial		2,603		2,938
Total	$	3,877	$	4,262

Non-accrual loans classified as TDRs accounted for $3.9 million of the recorded investment as of June 30, 2022 and $4.3 million as of December 31, 2021. 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 (dollars in thousands):


	June 30,		December 31,
	2022		2021
Accruing
Non-Owner Occupied CRE	$	46	$	55
Non-accrual
Cash, Securities, and Other		4		6
1-4 Family Residential		68		75
Owner Occupied CRE		1,200		1,241
Commercial and Industrial		2,603		2,938
Total		3,921		4,315
Allowance for loan losses associated with TDR		(261)		(1,751)
Net recorded investment	$	3,660	$	2,564

As of June 30, 2022 and December 31, 2021, the Company had not committed any additional funds to a borrower with a loan classified as a TDR.

The Company did not modify any loans resulting in TDR status during the six months ended June 30, 2022. 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 modified the loan at the maturity date with a one-year renewal to allow the borrower time to seek a refinance. As of June 30, 2022, the loan matured and has not been paid as agreed in the loan modification. The Company continues to work with the borrower on a successful resolution. 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 had 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.

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 during the periods presented (dollars in thousands):


	June 30, 2022						December 31, 2021
			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:
Consumer and Other	$	2	$	2	$	2	$	2	$	2	$	2
Commercial and Industrial		1,893		1,893		261		2,190		2,190		1,751
Total	$	1,895	$	1,895	$	263	$	2,192	$	2,192	$	1,753

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	4	$	4	$	—	$	6	$	6	$	—
1-4 Family Residential		68		68		—		75		75		—
Owner Occupied CRE		1,200		1,200		—		1,241		1,241		—
Commercial and Industrial		710		710		—		748		748		—
Total	$	1,982	$	1,982	$	—	$	2,070	$	2,070	$	—

Total impaired loans:
Cash, Securities, and Other	$	4	$	4	$	—	$	6	$	6	$	—
Consumer and Other		2		2		2		2		2		2
1-4 Family Residential		68		68		—		75		75		—
Owner Occupied CRE		1,200		1,200		—		1,241		1,241		—
Commercial and Industrial		2,603		2,603		261		2,938		2,938		1,751
Total	$	3,877	$	3,877	$	263	$	4,262	$	4,262	$	1,753

The recorded investment in loans in the previous tables excludes accrued interest, deferred 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 following presents the average balance of impaired loans and interest income recognized on impaired loans during the periods presented (dollars in thousands):


	Three Months Ended June 30,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	—	$	—	$	2	$	—
Consumer and Other		2		—		2		—
Commercial and Industrial		2,041		—		3,230		21
Total	$	2,043	$	—	$	3,234	$	21

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	4	$	—	$	15	$	—
Owner Occupied CRE		1,211		—		—		51
Commercial and Industrial		723		—		82		—
1-4 Family Residential		70		—		—		—
Total	$	2,008	$	—	$	97	$	51

Total impaired loans:
Cash, Securities, and Other	$	4	$	—	$	17	$	—
Consumer and Other		2		—		2		—
Owner Occupied CRE		1,211		—		—		51
Commercial and Industrial		2,764		—		3,312		21
1-4 Family Residential		70		—		—		—
Total	$	4,051	$	—	$	3,331	$	72


	Six Months Ended June 30,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	—	$	—	$	1	$	—
Consumer and Other		2		—		1		—
Commercial and Industrial		2,089		—		2,162		21
Total	$	2,091	$	—	$	2,164	$	21

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	4	$	—	$	20	$	—
Owner Occupied CRE		1,221		—		—		51
Commercial and Industrial		731		*		58		—
1-4 Family Residential		72		—		—		—
Total	$	2,028	$	—	$	78	$	51

Total impaired loans:
Cash, Securities, and Other	$	4	$	—	$	21	$	—
Consumer and Other		2		—		1		—
Owner Occupied CRE		1,221		—		—		51
Commercial and Industrial		2,820		*		2,220		21
1-4 Family Residential		72		—		—		—
Total	$	4,119	$	—	$	2,242	$	72

______________________________________

* The Company recognized an immaterial amount of interest income during the period.

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 during the periods presented (dollars in thousands):


	Cash,		Consumer		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		and		Family		Occupied		Occupied		and
	and Other		Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended June 30, 2022
Beginning balance	$	1,440	$	283	$	954	$	3,789	$	2,867	$	1,328	$	3,224	$	13,885
(Release)/provision for loan losses		(246)		(16)		120		1,056		368		149		(912)		519
Charge-offs		—		(95)		—		—		—		—		—		(95)
Recoveries		—		48		—		—		—		—		—		48
Ending balance	$	1,194	$	220	$	1,074	$	4,845	$	3,235	$	1,477	$	2,312	$	14,357

Changes in allowance for loan losses for the six months ended June 30, 2022
Beginning balance	$	1,598	$	266	$	1,092	$	3,553	$	2,952	$	1,292	$	2,979	$	13,732
(Release)/provision for loan losses		(404)		58		(18)		1,292		283		185		(667)		729
Charge-offs		—		(192)		—		—		—		—		—		(192)
Recoveries		—		88		—		—		—		—		—		88
Ending balance	$	1,194	$	220	$	1,074	$	4,845	$	3,235	$	1,477	$	2,312	$	14,357

Allowance for loan losses as of June 30, 2022 allocated to loans evaluated for impairment:
Individually	$	—	$	2	$	—	$	—	$	—	$	—	$	261	$	263
Collectively		1,194		218		1,074		4,845		3,235		1,477		2,051		14,094
Ending balance	$	1,194	$	220	$	1,074	$	4,845	$	3,235	$	1,477	$	2,312	$	14,357

Loans as of June 30, 2022:
Individually evaluated for impairment	$	4	$	2	$	—	$	68	$	—	$	1,200	$	2,603	$	3,877
Collectively evaluated for impairment		180,734		26,704		162,426		732,657		489,111		223,397		310,093		2,125,122
Measured at fair value		—		21,149		—		—		—		—		—		21,149
Ending balance	$	180,738	$	47,855	$	162,426	$	732,725	$	489,111	$	224,597	$	312,696	$	2,150,148


	Cash,		Consumer		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		and		Family		Occupied		Occupied		and
	and Other		Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended June 30, 2021
Beginning balance	$	2,380	$	193	$	766	$	3,152	$	2,211	$	1,123	$	2,714	$	12,539
(Release)/provision for loan losses		(537)		2		105		247		12		102		81		12
Charge-offs		—		—		—		—		—		—		—		—
Recoveries		—		1		—		—		—		—		—		1
Ending balance	$	1,843	$	196	$	871	$	3,399	$	2,223	$	1,225	$	2,795	$	12,552

Changes in allowance for loan losses for the six months ended June 30, 2021
Beginning balance	$	2,439	$	140	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539
(Release)/provision for loan losses		(596)		55		(61)		166		219		66		163		12
Charge-offs		—		—		—		—		—		—		—		—
Recoveries		—		1		—		—		—		—		—		1
Ending balance	$	1,843	$	196	$	871	$	3,399	$	2,223	$	1,225	$	2,795	$	12,552

Allowance for loan losses as of December 31, 2021 allocated to loans evaluated for impairment:
Individually	$	—	$	2	$	—	$	—	$	—	$	—	$	1,751	$	1,753
Collectively		1,598		264		1,092		3,553		2,952		1,292		1,228		11,979
Ending balance	$	1,598	$	266	$	1,092	$	3,553	$	2,952	$	1,292	$	2,979	$	13,732

Loans as of December 31, 2021:
Individually evaluated for impairment	$	6	$	2	$	—	$	75	$	—	$	1,241	$	2,938	$	4,262
Collectively evaluated for impairment		261,184		34,756		178,716		580,797		482,622		211,185		200,646		1,949,906
Ending balance	$	261,190	$	34,758	$	178,716	$	580,872	$	482,622	$	212,426	$	203,584	$	1,954,168

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 accounted for under the fair value option are not rated.

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 the dates noted (dollars in thousands):


			Special
June 30, 2022	Pass		Mention		Substandard		Not Rated			Total
Cash, Securities and Other	$	180,734	$	—	$	4	$	—	$	180,738
Consumer and Other		26,704		—		2		21,149		47,855
Construction and Development		162,426		—		—		—		162,426
1-4 Family Residential		732,657		—		68		—		732,725
Non-Owner Occupied CRE		483,848		5,263		—		—		489,111
Owner Occupied CRE		222,714		—		1,883		—		224,597
Commercial and Industrial		305,765		2,693		4,238		—		312,696
Total	$	2,114,848	$	7,956	$	6,195	$	21,149	$	2,150,148


			Special
December 31, 2021	Pass		Mention		Substandard		Not Rated			Total
Cash, Securities and Other	$	261,184	$	—	$	6	$	—	$	261,190
Consumer and Other		34,756		—		2		—		34,758
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

The Company had no loans graded doubtful as of June 30, 2022 and December 31, 2021.