ALLOWANCE FOR CREDIT LOSSES | NOTE 6: ALLOWANCE FOR CREDIT LOSSES The Company primarily manages credit quality and credit risk associated with its loan portfolio based on the risk grading assigned to each individual loan within the loan class. Each loan class is a grouping of loan receivables within the portfolio based on risk characteristics and the method for monitoring and assessing the associated credit risks. Risk Grading The methodology used by the Company in the determination of its ACL, which is performed at least on a quarterly basis, is designed to be responsive to changes in the credit quality of the loan portfolio as well as forecasted economic conditions. The credit quality of the loan portfolio is assessed through different processes. At origination, a risk grade is assigned to each loan based on underwriting procedures and criteria. The risk grades used are described below. The Company monitors the credit quality of the loan portfolio on an on-going basis by performing loan reviews, both internally and through a third-party vendor, on loans meeting certain risk and exposure criteria. Through these reviews, loans that require risk grade changes are approved by executive management. In addition, executive management reviews classified and criticized loans to assess changes in credit quality of the underlying loan, and when determined appropriate, based on individual evaluation, approve specific reserves. Pass Special Mention Substandard estimated loss that is probable to be incurred. Loans deemed substandard and on nonaccrual status are individually evaluated for expected credit losses. Doubtful Loss The Company had no loans graded loss or doubtful at June 30, 2022 or December 31, 2021. At June 30, 2022 and December 31, 2021, the ratio of the ACL for loans to loans excluding loans held for sale was 1.06% and 1.09%, respectively. The ACL increased from $31.3 million at December 31, 2021 to $32.1 million at June 30, 2022, The total of the Company’s qualitative and quantitative factors ranged from 0.64% to 1.99% and 0.62% to 2.08% at June 30, 2022 and December 31, 2021, respectively. All factors are reassessed at the end of each quarter. The review of the appropriateness of the ACL, which includes evaluation of historical loss trends, qualitative adjustments and forecasted economic conditions applied to general reserves, is performed by executive management and presented to the Board of Directors for its review on a quarterly basis. The ACL at June 30, 2022, reflects the Company’s assessment based on the information available at that time. Loans by risk grades, loan class and vintage, at June 30, 2022 were as follows: (Dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Converted Revolving Loans Total Commercial and industrial: Pass $ 69,304 $ 153,044 $ 39,999 $ 44,432 $ 17,159 $ 9,174 $ 227,008 $ 5,346 $ 565,466 Substandard 45 — — 2,819 6,457 339 1,388 4,929 15,977 Total commercial and industrial 69,349 153,044 39,999 47,251 23,616 9,513 228,396 10,275 581,443 Commercial real estate: Pass 292,206 219,332 183,074 175,475 93,993 107,229 52,985 17,746 1,142,040 Substandard — 49 2,898 8,256 14,292 3,505 — 10,580 39,580 Total commercial real estate 292,206 219,381 185,972 183,731 108,285 110,734 52,985 28,326 1,181,620 Construction and development: Pass 112,617 216,604 93,293 36,256 6,154 15,237 72,219 87 552,467 Special mention — — 468 — — — — — 468 Substandard — — 292 — — 7,676 — — 7,968 Total construction and development 112,617 216,604 94,053 36,256 6,154 22,913 72,219 87 560,903 1-4 family residential: Pass 36,188 107,718 20,224 13,067 23,437 52,599 5,992 275 259,500 Substandard — — 1,548 494 894 490 — 1,502 4,928 Total 1-4 family residential 36,188 107,718 21,772 13,561 24,331 53,089 5,992 1,777 264,428 Multi-family residential: Pass 36,077 18,573 18,072 5,808 49,952 171,527 573 — 300,582 Total multi-family residential 36,077 18,573 18,072 5,808 49,952 171,527 573 — 300,582 Consumer: Pass 4,885 3,878 2,844 836 482 121 12,579 975 26,600 Substandard — — 35 — — — 75 100 210 Total consumer 4,885 3,878 2,879 836 482 121 12,654 1,075 26,810 Agriculture: Pass 2,684 1,032 366 29 37 28 3,662 138 7,976 Substandard — — — — — 16 44 — 60 Total agriculture 2,684 1,032 366 29 37 44 3,706 138 8,036 Other: Pass 18,830 34,386 1,382 613 1,361 1,184 57,458 2,894 118,108 Substandard 45 — — — — — — — 45 Total other 18,875 34,386 1,382 613 1,361 1,184 57,458 2,894 118,153 Total Pass 572,791 754,567 359,254 276,516 192,575 357,099 432,476 27,461 2,972,739 Special mention — — 468 — — — — — 468 Substandard 90 49 4,773 11,569 21,643 12,026 1,507 17,111 68,768 Total gross loans $ 572,881 $ 754,616 $ 364,495 $ 288,085 $ 214,218 $ 369,125 $ 433,983 $ 44,572 $ 3,041,975 Loans by risk grades, loan class and vintage, at December 31, 2021 were as follows: (Dollars in thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Converted Revolving Loans Total Commercial and industrial: Pass $ 230,432 $ 53,744 $ 60,514 $ 21,059 $ 8,117 $ 5,533 $ 228,247 $ 5,773 $ 613,419 Special mention — — 290 15 — — 3,177 — 3,482 Substandard — 1,014 1,852 7,075 4 391 1,647 5,500 17,483 Total commercial and industrial 230,432 54,758 62,656 28,149 8,121 5,924 233,071 11,273 634,384 Commercial real estate: Pass 243,666 197,625 232,074 141,591 69,995 84,398 55,253 13,799 1,038,401 Special mention — — 859 7,934 — 62 — — 8,855 Substandard — 2,953 12,967 14,556 334 3,046 — 10,857 44,713 Total commercial real estate 243,666 200,578 245,900 164,081 70,329 87,506 55,253 24,656 1,091,969 Construction and development: Pass 197,900 99,420 54,017 7,127 16,133 142 72,698 96 447,533 Special mention — 470 — — — — — — 470 Substandard — 292 — 1,500 10,207 717 — — 12,716 Total construction and development 197,900 100,182 54,017 8,627 26,340 859 72,698 96 460,719 1-4 family residential: Pass 115,451 23,298 20,210 31,416 21,607 53,253 6,516 466 272,217 Substandard — 1,548 514 902 126 464 1,502 — 5,056 Total 1-4 family residential 115,451 24,846 20,724 32,318 21,733 53,717 8,018 466 277,273 Multi-family residential: Pass 16,744 18,236 6,473 58,750 9,784 167,033 9,376 — 286,396 Total multi-family residential 16,744 18,236 6,473 58,750 9,784 167,033 9,376 — 286,396 Consumer: Pass 6,427 3,637 1,199 714 277 11 14,921 679 27,865 Substandard — 40 — — — — 85 100 225 Total consumer 6,427 3,677 1,199 714 277 11 15,006 779 28,090 Agriculture: Pass 2,954 423 42 57 35 — 4,198 190 7,899 Substandard — — — — — 18 24 — 42 Total agriculture 2,954 423 42 57 35 18 4,222 190 7,941 Other: Pass 27,656 3,744 630 1,509 10 2,157 53,906 43 89,655 Total other 27,656 3,744 630 1,509 10 2,157 53,906 43 89,655 Total Pass 841,230 400,127 375,159 262,223 125,958 312,527 445,115 21,046 2,783,385 Special mention — 470 1,149 7,949 — 62 3,177 — 12,807 Substandard — 5,847 15,333 24,033 10,671 4,636 3,258 16,457 80,235 Total gross loans $ 841,230 $ 406,444 $ 391,641 $ 294,205 $ 136,629 $ 317,225 $ 451,550 $ 37,503 $ 2,876,427 Loans by risk grades and loan class as of the dates indicated below were as follows: (Dollars in thousands) Pass Special Mention Substandard Total Loans June 30, 2022 Commercial and industrial $ 565,466 $ — $ 15,977 $ 581,443 Real estate: Commercial real estate 1,142,040 — 39,580 1,181,620 Construction and development 552,467 468 7,968 560,903 1-4 family residential 259,500 — 4,928 264,428 Multi-family residential 300,582 — — 300,582 Consumer 26,600 — 210 26,810 Agriculture 7,976 — 60 8,036 Other 118,108 — 45 118,153 Total gross loans $ 2,972,739 $ 468 $ 68,768 $ 3,041,975 December 31, 2021 Commercial and industrial $ 613,419 $ 3,482 $ 17,483 $ 634,384 Real estate: Commercial real estate 1,038,401 8,855 44,713 1,091,969 Construction and development 447,533 470 12,716 460,719 1-4 family residential 272,217 — 5,056 277,273 Multi-family residential 286,396 — — 286,396 Consumer 27,865 — 225 28,090 Agriculture 7,899 — 42 7,941 Other 89,655 — — 89,655 Total gross loans $ 2,783,385 $ 12,807 $ 80,235 $ 2,876,427 Loans individually evaluated and collectively evaluated as of the dates indicated below were as follows: June 30, 2022 December 31, 2021 Individually Collectively Individually Collectively Evaluated Evaluated Total Evaluated Evaluated Total (Dollars in thousands) Loans Loans Loans Loans Loans Loans Commercial and industrial $ 14,538 $ 566,905 $ 581,443 $ 16,579 $ 617,805 $ 634,384 Real estate: Commercial real estate 24,235 1,157,385 1,181,620 21,057 1,070,912 1,091,969 Construction and development 7,968 552,935 560,903 12,716 448,003 460,719 1-4 family residential 3,343 261,085 264,428 3,355 273,918 277,273 Multi-family residential — 300,582 300,582 — 286,396 286,396 Consumer 109 26,701 26,810 125 27,965 28,090 Agriculture — 8,036 8,036 — 7,941 7,941 Other 5,349 112,804 118,153 5,440 84,215 89,655 Total gross loans $ 55,542 $ 2,986,433 $ 3,041,975 $ 59,272 $ 2,817,155 $ 2,876,427 The Company had collateral dependent loans totaling $1.5 million pending foreclosure at both June 30, 2022 and December 31, 2021. Activity in the ACL for loans, segregated by loan class for the six months ended June 30, 2022 and 2021, was as follows: Real Estate Commercial Construction and Commercial and 1-4 Family Multi-family (Dollars in thousands) Industrial Real Estate Development Residential Residential Consumer Agriculture Other Total June 30, 2022 Beginning balance $ 11,214 $ 11,015 $ 3,310 $ 2,105 $ 1,781 $ 406 $ 88 $ 1,426 $ 31,345 Provision (recapture) (1,778) 693 933 (31) 144 43 (10) 505 499 Charge-offs (1) — — (8) — (63) — — (72) Recoveries 295 — — 5 — 5 10 — 315 Net recoveries 294 — — (3) — (58) 10 — 243 Ending balance $ 9,730 $ 11,708 $ 4,243 $ 2,071 $ 1,925 $ 391 $ 88 $ 1,931 $ 32,087 Period-end amount allocated to: Specific reserve $ 2,776 $ 55 $ — $ — $ — $ 109 $ — $ — $ 2,940 General reserve 6,954 11,653 4,243 2,071 1,925 282 88 1,931 29,147 Total $ 9,730 $ 11,708 $ 4,243 $ 2,071 $ 1,925 $ 391 $ 88 $ 1,931 $ 32,087 June 30, 2021 Beginning balance $ 13,035 $ 13,798 $ 6,089 $ 2,578 $ 2,513 $ 440 $ 137 $ 2,047 $ 40,637 Provision (recapture) (1,083) (538) (1,636) (406) (131) (46) (64) — (3,904) Charge-offs (495) — — — — (3) — — (498) Recoveries 803 — — — — 103 42 — 948 Net (charge-offs) recoveries 308 — — — — 100 42 — 450 Ending balance $ 12,260 $ 13,260 $ 4,453 $ 2,172 $ 2,382 $ 494 $ 115 $ 2,047 $ 37,183 Period-end amount allocated to: Specific reserve $ 4,803 $ 252 $ — $ — $ — $ 90 $ — $ 536 $ 5,681 General reserve 7,457 13,008 4,453 2,172 2,382 404 115 1,511 31,502 Total $ 12,260 $ 13,260 $ 4,453 $ 2,172 $ 2,382 $ 494 $ 115 $ 2,047 $ 37,183 The ACL for loans by loan class as of the dates indicated was as follows: June 30, 2022 December 31, 2021 (Dollars in thousands) Amount Percent Amount Percent Commercial and industrial $ 9,730 30.3 % $ 11,214 35.7 % Real estate: Commercial real estate 11,708 36.5 % 11,015 35.1 % Construction and development 4,243 13.2 % 3,310 10.6 % 1-4 family residential 2,071 6.5 % 2,105 6.7 % Multi-family residential 1,925 6.0 % 1,781 5.7 % Consumer 391 1.2 % 406 1.3 % Agriculture 88 0.3 % 88 0.3 % Other 1,931 6.0 % 1,426 4.6 % Total allowance for credit losses for loans $ 32,087 100.0 % $ 31,345 100.0 % Loans excluding loans held for sale 3,032,914 2,867,524 ACL for loans to loans excluding loans held for sale 1.06% 1.09% Allocation of a portion of the ACL to one class of loans above does not preclude its availability to absorb losses in other classes. Nonaccrual loans are included in individually evaluated loans and $23.0 million and $16.0 million of nonaccrual loans had no related ACL at June 30, 2022 and December 31, 2021, respectively. Charge-offs and recoveries by loan class and vintage for the six months ended June 30, 2022 were as follows: (Dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Converted Revolving Loans Total Commercial and industrial: Charge-off $ — $ — $ — $ — $ — $ (1) $ — $ — $ (1) Recovery — — — — 197 40 58 — 295 Total commercial and industrial — — — — 197 39 58 — 294 1-4 family residential: Charge-off — — — — (2) (6) — — (8) Recovery — — — — — 5 — — 5 Total 1-4 family residential — — — — (2) (1) — — (3) Consumer: Charge-off — — (12) — — — (1) (50) (63) Recovery 1 — — 3 — — — 1 5 Total consumer 1 — (12) 3 — — (1) (49) (58) Agriculture: Recovery — — — — — 10 — — 10 Total agriculture — — — — — 10 — — 10 Total: Charge-off — — (12) — (2) (7) (1) (50) (72) Recovery 1 — — 3 197 55 58 1 315 Total $ 1 $ — $ (12) $ 3 $ 195 $ 48 $ 57 $ (49) $ 243 Charge-offs and recoveries by loan class and vintage for the six months ended June 30, 2021 were as follows: (Dollars in thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Converted Revolving Loans Total Commercial and industrial: Charge-off $ — $ — $ (191) $ (260) $ — $ — $ — $ (44) $ (495) Recovery — — 3 29 40 703 28 803 Total commercial and industrial — — (188) (231) 40 703 — (16) 308 Consumer: Charge-off — — (3) — — — — — (3) Recovery 2 — — 2 — 99 — — 103 Total consumer 2 — (3) 2 — 99 — — 100 Agriculture: Recovery — — — — — 42 — — 42 Total agriculture — — — — — 42 — — 42 Total: Charge-off — — (194) (260) — — — (44) (498) Recovery 2 — 3 31 40 844 — 28 948 Total $ 2 $ — $ (191) $ (229) $ 40 $ 844 $ — $ (16) $ 450 The Company has unfunded commitments, comprised of letters of credit and commitments to extend credit that are not unconditionally cancellable by the Company. See Note 16: Commitments and Contingencies and Financial Instruments with Off-Balance-Sheet Risk. Unfunded commitments have similar characteristics as loans and their ACL was determined using the model and methodology for loans noted above as well as historical and expected utilization levels. Activity in the ACL for unfunded commitments for the six months ended June 30, 2022 and 2021, was as follows: Six Months Ended June 30, (Dollars in thousands) 2022 2021 Beginning balance $ 3,266 $ 4,177 Provision (recapture) 62 (767) Ending balance $ 3,328 $ 3,410 |