Loans Held for Sale, Loans and Allowance for Loan Losses | Note 5 – Loans Held for Sale, Loans and Allowance for Loan Losses Loans Held for Sale In its normal course of business, the Bank originates mortgage loans held for sale to the FHLMC. The Bank has elected to measure its residential mortgage loans held for sale at lower of cost or market. Origination fees and costs are recognized in earnings at the time of origination. Loans are sold to FHLMC at par. During the nine months ended September 30, 2022, the Bank originated and sold $6.4 million in FHLMC mortgage loans. During the nine months endedSeptember 30, 2021, the Bank originated and sold $22.4 million in FHLMC loans. Mortgage loans serviced for others are not included in the accompanying condensed consolidated statements of financial condition. The unpaid principal balances of mortgage loans serviced for others were $172.3 million at September 30, 2022, and $181.1 million at December 31, 2021. The decrease of $8.8 million (5.09%) during the nine months ended September 30, 2022, was due to principal paydowns and payoffs during the period, which offset new loans. We retain mortgage servicing rights on mortgage loans that we sell. Such rights represent the net positive cash flows generated from the servicing of such mortgage loans and we recognize such rights as assets on our statements of financial condition based on their estimated fair values. We receive servicing fees, less any subservicing costs, on the unpaid principal balances of such mortgage loans. Those fees are collected from the monthly payments made by the mortgagors or from the proceeds of the sale or foreclosure and liquidation of the underlying real property collateralizing the loans. At September 30, 2022 and December 31, 2021, mortgage servicing rights totaled $1.6 million each, respectively, and are included in other assets in the accompanying condensed consolidated statements of financial condition. The Bank accounts for mortgage servicing rights at fair value with changes in fair value recorded as a part of service fees and charges in the condensed consolidated statements of income. Loans Outstanding loan balances are presented net of unearned income, deferred loan fees, and unamortized discount and premium totaling $2.9 million at September 30, 2022, and $3.2 million at December 31, 2021. As of September 30, 2022 and December 31, 2021, our 10 341.9 In October 2022, the Bank entered into three agreements to purchase a loan portfolio and mortgage servicing rights from another financial institution in Guam. The portfolio consists of commercial loans and consumer mortgages that will be purchased in three phases and will be fully executed in the first quarter of 2023. The first phase was completed in October 2022. The loan portfolio consisted of the following at: September 30, 2022 December 31, 2021 Amount Percent Amount Percent Commercial Commercial & industrial $ 247,011 18.4 % $ 295,835 22.4 % Commercial mortgage 772,433 57.4 % 699,269 52.9 % Commercial construction 8,443 0.6 % 23,588 1.8 % Commercial agriculture 562 0.0 % 592 0.0 % Total commercial 1,028,449 76.4 % 1,019,284 77.1 % Consumer Residential mortgage 145,380 10.8 % 135,377 10.2 % Home equity 2,546 0.2 % 2,232 0.2 % Automobile 18,189 1.4 % 18,220 1.4 % Other consumer loans 1 151,343 11.2 % 146,208 11.1 % Total consumer 317,458 23.6 % 302,037 22.9 % Gross loans 1,345,907 100.0 % 1,321,321 100.0 % Deferred loan (fees) costs, net (2,881 ) (3,223 ) Allowance for loan losses (36,137 ) (34,408 ) Loans, net $ 1,306,889 $ 1,283,690 1 Comprised of other revolving credit, installment loans, and overdrafts. Paycheck Protection Program With the passage of the Paycheck Protection Program, or PPP, administered by the Small Business Administration, the Bank actively participated in assisting its customers with applications for resources through the program. PPP loans have either a two-year five-year 1% On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was signed into law which changed key provisions of the PPP, including provisions relating to the maturity of PPP loans, the deferral of PPP loan payments, and the forgiveness of PPP loans. Under the Flexibility Act, as clarified by the SBA in an October 7, 2020 update, the maturity date for PPP loans funded before June 5, 2020 remained at two years from funding while the maturity date for PPP loans funded after June 5, 2020 was five years from funding. In addition, the Flexibility Act increased the period during which PPP loan proceeds are to be used for purposes that would qualify the loan for forgiveness (the “covered period”) from 8 weeks to 24 weeks, at the borrower’s election, for PPP loans made prior to June 5, 2020, and set the covered period for loans made after June 5, 2020 at 24 weeks from funding. Under the Flexibility Act, PPP borrowers are not required to make any payments of principal or interest before the date on which SBA remits the loan forgiveness amount to the Company (or notifies the Company that no loan forgiveness is allowed) and, although PPP borrowers may submit an application for loan forgiveness at any time prior to the maturity date, if PPP borrowers do not submit a loan forgiveness application within 10 months after the end of their covered period, such borrowers will be required to begin paying principal and interest after that period. For loans originated under the SBA's PPP loan program, interest and principal payment on these loans were originally deferred for six months following the funding date, during which time interest would continue to accrue. The Flexibility Act extended the deferral period for borrower payments of principal, interest, and fees on all PPP loans to the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period). The extension of the deferral period under the Flexibility Act automatically applied to all PPP loans. Allowance for Loan Losses The allowance for loan losses is evaluated on a quarterly basis by Bank management, and is based upon management’s periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or conditions change. The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. ASC 310-10 defines an impaired loan as one for which there is uncertainty concerning collection of all principal and interest per the original contractual terms of the loan. For those loans that are classified as impaired, an allowance is established when the discounted cash flow (or the collateral value or the observable market price) of the impaired loan is lower than the carrying value of the loan. The general component covers unimpaired loans, and is estimated using a loss migration analysis based on historical charge-off experience and expected loss, given the default probability derived from the Bank’s internal risk rating process. The loss migration analysis tracks twelve rolling quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans. These calculated loss factors are then applied to outstanding loan balances for all non-impaired loans. Additionally, the allowance consist of internally developed qualitative factors based on interagency guidance which are used to supplement the risks that are not captured by the historical loss migration analysis. These qualitative factors that are determined utilizing external economic factors and internal assessments is applied to each homogeneous loan pool. We also conduct individual loan review analyses, as part of the allowance for loan loss allocation process, applying specific monitoring policies and procedures in analyzing the existing loan portfolio. Beginning in 2020, management increased the loss attributes in a number of the qualitative factors to more appropriately capture the risks stemming from economic deterioration from COVID-19. The Company continually evaluates these factors and makes adjustments each quarter. During the three and nine months ended September 30, 2022, management adjusted the economic risk factors to incorporate the current economic implications, which include fluctuations in tourism, unemployment due to the COVID-19 pandemic and inflationary concerns. Set forth below is a summary of the Bank’s activity in the allowance for loan losses during the three and nine months ended September 30, 2022, and 2021, and the year ended December 31, 2021: Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 Year Ended December 31, 2021 Balance, beginning of period $ 35,732 $ 36,093 $ 34,408 $ 34,805 $ 34,805 Charged off loans (1,559 ) (968 ) (4,206 ) (3,723 ) (4,950 ) Recoveries on loans previously charged off 539 447 1,660 1,540 2,403 Provision for loan losses 1,425 2,475 4,275 5,425 2,150 Balance, end of period $ 36,137 $ 38,047 $ 36,137 $ 38,047 $ 34,408 Set forth below is information regarding loan balances and the related allowance for loan losses, by portfolio type, for the three and nine months ended September 30, 2022 and 2021, and the year ended December 31, 2021, respectively. Commercial Residential Mortgages Consumer Total (Dollars in thousands) Nine Months Ended September 30, 2022 Allowance for loan losses: Balance at beginning of period $ 22,860 $ 2,304 $ 9,244 $ 34,408 Charge-offs (716 ) - (3,490 ) (4,206 ) Recoveries 158 2 1,500 1,660 Provision 2,323 (26 ) 1,978 4,275 Ending balance $ 24,625 $ 2,280 $ 9,232 $ 36,137 Allowance balance at end of period related to: Loans individually evaluated for impairment $ 3,510 $ 34 $ 920 $ 4,464 Loans collectively evaluated for impairment 21,115 2,246 8,312 31,673 Ending balance $ 24,625 $ 2,280 $ 9,232 $ 36,137 Loan balances at end of period: Loans individually evaluated for impairment $ 11,854 $ 38,577 $ 1,122 $ 51,553 Loans collectively evaluated for impairment 1,016,595 109,349 168,410 1,294,354 Ending balance $ 1,028,449 $ 147,926 $ 169,532 $ 1,345,907 Nine Months Ended September 30, 2021 Allowance for loan losses: Balance at beginning of period $ 21,213 $ 1,990 $ 11,602 $ 34,805 Charge-offs (77 ) (98 ) (3,548 ) (3,723 ) Recoveries 173 - 1,367 1,540 Provision 1,992 453 2,980 5,425 Ending balance $ 23,301 $ 2,345 $ 12,401 $ 38,047 Allowance balance at end of period related to: Loans individually evaluated for impairment $ 3,504 $ 50 $ 1,048 $ 4,602 Loans collectively evaluated for impairment 19,797 2,295 11,353 33,445 Ending balance $ 23,301 $ 2,345 $ 12,401 $ 38,047 Loan balances at end of period: Loans individually evaluated for impairment $ 61,043 $ 2,922 $ 1,207 $ 65,172 Loans collectively evaluated for impairment 1,000,889 132,150 172,700 1,305,739 Ending balance $ 1,061,932 $ 135,072 $ 173,907 $ 1,370,911 Year Ended December 31, 2021 Allowance for loan losses: Balance at beginning of year $ 21,213 $ 1,990 $ 11,602 $ 34,805 Charge-offs (115 ) (99 ) (4,736 ) (4,950 ) Recoveries 578 1 1,824 2,403 Provision 1,184 412 554 2,150 Ending balance $ 22,860 $ 2,304 $ 9,244 $ 34,408 Allowance balance at end of year related to: Loans individually evaluated for impairment $ 3,510 $ 50 $ 941 $ 4,501 Loans collectively evaluated for impairment 19,350 2,254 8,303 29,907 Ending balance $ 22,860 $ 2,304 $ 9,244 $ 34,408 Loan balances at end of year: Loans individually evaluated for impairment $ 48,459 $ 2,265 $ 1,059 $ 51,783 Loans collectively evaluated for impairment 970,825 135,343 163,370 1,269,538 Ending balance $ 1,019,284 $ 137,608 $ 164,429 $ 1,321,321 Credit Quality The following table provides a summary of the delinquency status of the Bank’s loans by portfolio type: 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Non- Accrual 90 Days and Greater Still Accruing Total Past Due Current Total Loans Outstanding September 30, 2022 Commercial Commercial & industrial $ 2,610 $ 12,176 $ 6,549 $ - $ 21,335 $ 225,676 $ 247,011 Commercial mortgage 5,756 188 4,293 150 10,387 762,046 772,433 Commercial construction - - - - - 8,443 8,443 Commercial agriculture - - - - - 562 562 Total commercial 8,366 12,364 10,842 150 31,722 996,727 1,028,449 Consumer Residential mortgage 2,328 1,246 443 4 4,021 141,359 145,380 Home equity - - - - - 2,546 2,546 Automobile 198 92 - 73 363 17,826 18,189 Other consumer 1 1,421 964 106 828 3,319 148,024 151,343 Total consumer 3,947 2,302 549 905 7,703 309,755 317,458 Total $ 12,313 $ 14,666 $ 11,391 $ 1,055 $ 39,425 $ 1,306,482 $ 1,345,907 December 31, 2021 Commercial Commercial & industrial $ 56 $ 202 $ 7,338 $ 106 $ 7,702 $ 288,133 $ 295,835 Commercial mortgage 2,540 217 4,622 - 7,379 691,890 699,269 Commercial construction - - - - - 23,588 23,588 Commercial agriculture - - - - - 592 592 Total commercial 2,596 419 11,960 106 15,081 1,004,203 1,019,284 Consumer Residential mortgage 2,194 1,236 267 77 3,774 131,603 135,377 Home equity - - - - - 2,232 2,232 Automobile 407 162 - 41 610 17,610 18,220 Other consumer 1 2,037 1,024 69 866 3,996 142,212 146,208 Total consumer 4,638 2,422 336 984 8,380 293,657 302,037 Total $ 7,234 $ 2,841 $ 12,296 $ 1,090 $ 23,461 $ 1,297,860 $ 1,321,321 1 Comprised of other revolving credit, installment loans, and overdrafts. Generally, the accrual of interest on a loan is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and is in the process of collection, with the exception of automobile and other consumer loans which, rather than being placed on non-accrual status, are charged off once they become 120 days delinquent. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when in receipt of six consecutive payments, and principal and interest become current and full repayment is expected. The following table provides information as of September 30, 2022 and December 31, 2021, with respect to loans on non-accrual status, by portfolio type: September 30, 2022 December 31, 2021 (Dollars in thousands) Non-accrual loans: Commercial Commercial & industrial $ 7,101 $ 7,610 Commercial mortgage 5,956 8,148 Total commercial 13,057 15,758 Consumer Residential mortgage $ 2,814 $ 1,660 Other consumer 1 158 152 Total consumer 2,972 1,812 Total non-accrual loans $ 16,029 $ 17,570 1 Comprised of other revolving credit, installment loans, and overdrafts. Credit Quality Indicators The Bank uses several credit quality indicators to manage credit risk, including an internal credit risk rating system that categorizes loans into pass, special mention, substandard, formula classified, doubtful or loss categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics and that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment. The following are the definitions of the Bank’s credit quality indicators: Pass (A): Exceptional: Essentially risk-free credit. These are loans of the highest quality that pose virtually no risk of loss to the Bank. This includes loans fully collateralized by means of a savings account(s) and time certificate(s) of deposit, and by at least 110% of the loan amount. Borrowers should have strong financial statements, good liquidity and excellent credit. Pass (B): Standard: Multiple, strong sources of repayment. These are loans to borrowers with a demonstrated history of financial and managerial performance. The risk of loss is considered to be low. Loans are well-structured, with clearly identified primary and readily available secondary sources of repayment. These loans may be secured by an equal amount of funds in a savings account or time certificate of deposit. These loans may also be secured by marketable collateral whose value can be reasonably determined through outside appraisals. The borrower characteristically has well supported cash flows and low leverage. Pass (C): Acceptable: Good primary and secondary sources of repayment. These are loans to borrowers of average financial condition, stability and management expertise. The borrower should be a well-established individual or company with adequate financial resources to withstand short-term fluctuations in the marketplace. The borrower’s financial ratios and trends are favorable. The loans may be unsecured or supported by non-real estate collateral for which the value is more difficult to determine, represent a reasonable credit risk and require an average amount of account officer attention. The borrower’s ability to repay unsecured credit is to be of unquestionable strength. Pass (D): Monitor: Sufficient primary sources of repayment and an acceptable secondary source of repayment. Acceptable business or individual credit, but the borrower’s operations, cash flows or financial conditions carry average levels of risk. These loans are considered to be collectable in full, but may require a greater-than-average amount of loan officer monitoring. Borrowers are capable of absorbing normal setbacks without failing to meet the terms of the loan agreement. Special Mention: A Special Mention asset has potential weaknesses that deserve a heightened degree of monitoring. These potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The Special Mention classification should neither be a compromise between a pass grade and substandard, nor should it be a “catch all” grade to identify any loan that has a policy exception. Substandard: A Substandard asset is inadequately protected by the current sound worth and payment capacity of the obligor or the collateral pledged. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Assets classified as substandard are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Formula Classified: Formula Classified loans are all loans and credit cards delinquent 90 days and over which have yet to be formally classified Special Mention, Substandard or Doubtful by the Bank’s Loan Committee. In most instances, the monthly formula total is comprised primarily of residential real estate loans, consumer loans, credit cards and commercial loans under $250 thousand. However, commercial loans are typically formally classified by the Loan Committee no later than their 90-day delinquency, and those do not become part of the formula classification. Real estate loans 90-days delinquent that are in the foreclosure process, which is typically completed within another 60 days, are not formally classified during this period. Doubtful: A loan with weaknesses well enough defined that eventual repayment in full, on the basis of currently existing facts, conditions and values, is highly questionable, even though certain factors may be present which could improve the status of the loan. The probability of some loss is extremely high, but because of certain known factors that may work to the advantage of strengthening of the assets (i.e. capital injection, perfecting liens on additional collateral, refinancing plans, etc.), its classification as an estimated loss is deferred until its more exact status can be determined. Loss: Loans classified as “Loss” are considered uncollectible, and are either unsecured or are supported by collateral that is of little to no value. As such, their continuance as recorded assets is not warranted. While this classification does not mandate that a loan has no ultimate recovery value, losses should be taken in the period during which these loans are deemed to be uncollectible. Loans identified as loss are immediately approved for charge-off. The Bank may refer loans to outside collection agencies, attorneys, or its internal collection division to continue collection efforts. Any subsequent recoveries are credited to the Allowance for Loan Losses. The Bank classifies its loan portfolios using internal credit quality ratings, as discussed above under Allowance for Loan Losses . The following table provides a summary of loans by portfolio type and the Bank’s internal credit quality ratings as of September 30, 2022 , and December 31, 2021 : September 30, 2022 December 31, 2021 (Dollars in thousands) Pass: Commercial & industrial $ 213,369 $ 266,300 Commercial mortgage 717,216 642,835 Commercial construction 8,443 23,588 Commercial agriculture 562 592 Residential mortgage 142,103 133,176 Home equity 2,546 2,232 Automobile 18,116 18,179 Other consumer 150,357 145,190 Total pass loans 1,252,712 1,232,092 Special Mention: Commercial & industrial 1,081 9,760 Commercial mortgage 40,811 11,051 Total special mention loans 41,892 20,811 Substandard: Commercial & industrial 26,261 12,645 Commercial mortgage 13,764 44,661 Residential mortgage 2,515 613 Other consumer - 2 Total substandard loans 42,540 57,921 Formula Classified: Residential mortgage 762 1,588 Automobile 73 41 Other consumer 986 1,016 Total formula classified loans 1,821 2,645 Doubtful: Commercial & industrial 6,300 7,130 Commercial mortgage 642 722 Total doubtful loans 6,942 7,852 Total outstanding loans, gross $ 1,345,907 $ 1,321,321 Impaired Loans A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the original contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impaired loans include loans that are in non-accrual status and other loans that have been modified in Troubled Debt Restructurings (TDRs), where economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically result from the Bank’s loss mitigation actions, and could include reductions in the interest rate, payment extensions, forbearance, or other actions taken with the intention of maximizing collections. Impairment is measured on a loan-by-loan basis for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral (if the loan is collateral-dependent). Large groups of smaller-balance homogeneous loans, such as consumer loans, are collectively evaluated for impairment. Impairment reserves for these groups of consumer loans are determined using historical loss given default rates for similar loans. The following table sets forth information regarding non-accrual loans and restructured loans at September 30, 2022 and December 31, 2021: September 30, 2022 December 31, 2021 (Dollars in thousands) Impaired loans: Restructured loans: Non-accruing restructured loans $ 4,328 $ 6,083 Accruing restructured loans 33,584 32,595 Total restructured loans 37,912 38,678 Other impaired loans 13,641 13,105 Total impaired loans $ 51,553 $ 51,783 Impaired loans less than 90 days delinquent and included in total impaired loans $ 39,107 $ 38,398 The table below contains additional information with respect to impaired loans, by portfolio type, at September 30, 2022 and December 31, 2021: Recorded Investment Unpaid Principal Balance Average Recorded Investment Interest Income Recognized (Dollars in thousands) September 30, 2022, with no related allowance recorded: Commercial & industrial $ 11,820 $ 11,943 $ 11,529 $ 34 Commercial mortgage 35,074 35,641 35,656 149 Residential mortgage 2,515 2,515 1,601 10 Other consumer - - - - Total impaired loans with no related allowance $ 49,409 $ 50,099 $ 48,786 $ 193 September 30, 2022, with a related allowance recorded: Commercial & industrial $ 96 $ 96 $ 230 $ - Commercial mortgage 168 183 151 - Residential mortgage 821 831 964 - Automobile 73 73 72 1 Other consumer 986 986 1,053 11 Total impaired loans with a related allowance $ 2,144 $ 2,169 $ 2,470 $ 12 December 31, 2021, with no related allowance recorded: Commercial & industrial $ 11,150 $ 11,150 $ 75,812 $ 56 Commercial mortgage 36,935 37,182 38,456 149 Residential mortgage 612 612 221 - Other consumer 2 2 4 - Total impaired loans with no related allowance $ 48,699 $ 48,946 $ 114,493 $ 205 December 31, 2021, with a related allowance recorded: Commercial & industrial $ 262 $ 262 $ 116 $ 2 Commercial mortgage 112 127 75 - Residential mortgage 1,653 1,663 1,921 1 Automobile 41 41 29 1 Other consumer 1,016 1,016 1,253 8 Total impaired loans with a related allowance $ 3,084 $ 3,109 $ 3,394 $ 12 Troubled Debt Restructurings In accordance with FASB’s Accounting Standards Update No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring” Additional information regarding performing and nonperforming TDRs at September 30, 2022 and December 31, 2021 is set forth in the following table: Number of Pre- Modification Outstanding Recorded Principal Post- Modification Outstanding Recorded Outstanding Balance Loans Investment Modifications Investment September 30, 2022 December 31, 2021 Performing Residential mortgage - $ - $ - $ - $ - $ - Commercial & industrial 8 5,734 - 5,734 4,685 3,696 Commercial mortgage 1 28,899 - 28,899 28,899 28,899 Consumer - - - - - - Total performing 9 34,633 - 34,633 33,584 32,595 Nonperforming Commercial & industrial 1 176 - 176 67 142 Commercial mortgage 6 5,954 - 5,954 4,261 5,941 Consumer - - - - - - Total nonperforming 7 6,130 - 6,130 4,328 6,083 Total Troubled Debt Restructurings 16 $ 40,763 $ - $ 40,763 $ 37,912 $ 38,678 Principal modification includes principal forgiveness at the time of modification, contingent principal forgiveness granted over the life of the loan based on borrower performance. In an effort to constructively work with borrowers affected by the COVID-19 pandemic, the Bank initiated a temporary program in March 2020 to allow for 90-day deferrals for residential mortgage and commercial loans upon request from the borrower, and a 90-day deferral for all consumer and automobile loans. The Bank did not identify these loans that were deferred and were over 30 days delinquent as TDRs. The Bank identified a specific reserve for consumer loans totaling $3.0 million at September 30, 2022. The Bank also increased its environmental factors for the reserve to account for the effects of the COVID-19 pandemic. The Bank continues to process commercial and consumer deferral requests on a case-by-case basis. There was one default on troubled debt restructurings following the modification during the nine months ended September 30, 2022 and 2021. The Bank has one significant borrowing relationship in bankruptcy totaling $6.3 million at September 30, 2022. The Bank has calculated a specific reserve within the allowance for one of the borrowing relationships in bankruptcy in the amount of $3.5 million. In March 2022, a court ruling increased the availability of assets for one of the borrowing relationships in bankruptcy to satisfy its outstanding liabilities. The Bank believes it has sufficient collateral coverage to protect its current exposure in these matters, however due to the complexities of the bankruptcy cases and uncertainties surrounding ongoing negotiations, the ultimate outcomes may result in losses. |