| Loans and Allowance for Credit Losses | NOTE 6: LOANS AND ALLOWANCE FOR CREDIT LOSSES The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $1.9 million to allowance for credit losses. The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral and repayment types and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily classified and/or TDR loans with a balance greater than or equal to $100,000, are evaluated on an individual basis. For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company’s historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period. Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life. In certain loan pools, if the Company’s own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given economic forecasts of key macroeconomic variables including, but not limited to, unemployment rate, GDP, disposable income and market volatility. The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates. The forecast is used for a reasonable and supportable period before reverting to historical averages using a straight-line method. The forecast-adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring (“TDR”) will be executed. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecasts such as changes in portfolio composition, underwriting practices, or significant unique events or conditions. ASU 2016-13 requires an allowance for off balance sheet credit exposures; unfunded lines of credit, undisbursed portions of loans, written residential and commercial commitments, and letters of credit. To determine the amount needed for allowance purposes, a utilization rate is determined either by the model or internally for each pool. Our loss model calculates the reserve on unfunded commitments based upon the utilization rate multiplied by the average loss rate factors in each pool with unfunded and committed balances. The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans; however, the liability for unfunded lending commitments incorporates assumptions for the portion of unfunded commitments that are expected to be funded. Classes of loans at March 31, 2022 and December 31, 2021 were as follows: March 31, December 31, 2022 2021 (In Thousands) One- to four-family residential construction $ 26,840 $ 28,302 Subdivision construction 27,187 26,694 Land development 46,789 47,827 Commercial construction 438,424 617,505 Owner occupied one- to four-family residential 608,560 561,958 Non-owner occupied one- to four-family residential 123,816 119,635 Commercial real estate 1,558,471 1,476,230 Other residential 849,720 697,903 Commercial business 290,381 280,513 Industrial revenue bonds 13,569 14,203 Consumer auto 45,069 48,915 Consumer other 37,964 37,902 Home equity lines of credit 114,484 119,965 4,181,274 4,077,552 Allowance for credit losses (60,797) (60,754) Deferred loan fees and gains, net (8,990) (9,298) $ 4,111,487 $ 4,007,500 Weighted average interest rate 4.13 % 4.26 % The following tables present the classes of loans by aging. March 31, 2022 Total Loans Over 90 Total > 90 Days Past 30-59 Days 60-89 Days Days Total Past Loans Due and Past Due Past Due Past Due Due Current Receivable Still Accruing (In Thousands) One- to four-family residential construction $ — $ — $ — $ — $ 26,840 $ 26,840 $ — Subdivision construction — — — — 27,187 27,187 — Land development — — 468 468 46,321 46,789 — Commercial construction — — — — 438,424 438,424 — Owner occupied one- to four-family residential 1,268 583 2,004 3,855 604,705 608,560 — Non-owner occupied one- to four-family residential — — — — 123,816 123,816 — Commercial real estate 38 — 1,773 1,811 1,556,660 1,558,471 — Other residential — — — — 849,720 849,720 — Commercial business 197 — — 197 290,184 290,381 — Industrial revenue bonds — — — — 13,569 13,569 — Consumer auto 125 11 49 185 44,884 45,069 — Consumer other 265 81 57 403 37,561 37,964 — Home equity lines of credit — — 618 618 113,866 114,484 — Total $ 1,893 $ 675 $ 4,969 $ 7,537 $ 4,173,737 $ 4,181,274 $ — December 31, 2021 Total Loans Over 90 Total > 90 Days Past 30-59 Days 60-89 Days Days Total Past Loans Due and Past Due Past Due Past Due Due Current Receivable Still Accruing (In Thousands) One- to four-family residential construction $ — $ — $ — $ — $ 28,302 $ 28,302 $ — Subdivision construction — — — — 26,694 26,694 — Land development 29 15 468 512 47,315 47,827 — Commercial construction — — — — 617,505 617,505 — Owner occupied one- to four-family residential 843 2 2,216 3,061 558,897 561,958 — Non-owner occupied one- to four-family residential — — — — 119,635 119,635 — Commercial real estate — — 2,006 2,006 1,474,224 1,476,230 — Other residential — — — — 697,903 697,903 — Commercial business 1,404 — — 1,404 279,109 280,513 — Industrial revenue bonds — — — — 14,203 14,203 — Consumer auto 229 31 34 294 48,621 48,915 — Consumer other 126 28 63 217 37,685 37,902 — Home equity lines of credit — — 636 636 119,329 119,965 — Total $ 2,631 $ 76 $ 5,423 $ 8,130 $ 4,069,422 $ 4,077,552 $ — Loans are placed on nonaccrual status at 90 days past due and interest is considered a loss unless the loan is well secured and in the process of collection. Payments received on nonaccrual loans are applied to principal until the loans are returned to accrual status. Loans are returned to accrual status when all payments contractually due are brought current, payment performance is sustained for a period of time, generally six months, and future payments are reasonably assured. With the exception of consumer loans, charge-offs on loans are recorded when available information indicates a loan is not fully collectible and the loss is reasonably quantifiable. Consumer loans are charged-off at specified delinquency dates consistent with regulatory guidelines. Non-accruing loans are summarized as follows: March 31, December 31, 2022 2021 (In Thousands) One- to four-family residential construction $ — $ — Subdivision construction — — Land development 468 468 Commercial construction — — Owner occupied one- to four-family residential 2,004 2,216 Non-owner occupied one- to four-family residential — — Commercial real estate 1,773 2,006 Other residential — — Commercial business — — Industrial revenue bonds — — Consumer auto 49 34 Consumer other 57 63 Home equity lines of credit 618 636 Total non-accruing loans $ 4,969 $ 5,423 No interest income was recorded on these loans for the three months ended March 31, 2022 and 2021, respectively. Nonaccrual loans for which there is no related allowance for credit losses as of March 31, 2022 had an amortized cost of $3.3 million. These loans are individually assessed and do not require an allowance due to being adequately collateralized under the collateral-dependent valuation method. A collateral-dependent loan is a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Company’s assessment as of the reporting date. Collateral-dependent loans are identified by either a classified risk rating or TDR status and a loan balance equal to or greater than $100,000, including, but not limited to, any loan in process of foreclosure or repossession. The following tables present the activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2022 and 2021. During the three months ended March 31, 2022, the Company did not record a provision expense on its portfolio of outstanding loans, compared to a $300,000 provision expense recorded for the quarter ended March 31, 2021. One- to Four- Family Residential and Other Commercial Commercial Commercial Construction Residential Real Estate Construction Business Consumer Total (In Thousands) Allowance for credit losses Balance, December 31, 2020 $ 4,536 $ 9,375 $ 33,707 $ 3,521 $ 2,390 $ 2,214 $ 55,743 CECL adoption 4,533 5,832 (2,531) (1,165) 1,499 3,427 11,595 Balance, January 1, 2021 9,069 15,207 31,176 2,356 3,889 5,641 67,338 Provision (credit) charged to expense — — 300 — — — 300 Losses charged off (6) — — — — (649) (655) Recoveries 38 92 24 10 47 508 719 Balance, March 31, 2021 $ 9,101 $ 15,299 $ 31,500 $ 2,366 $ 3,936 $ 5,500 $ 67,702 Allowance for credit losses Balance, January 1, 2022 $ 9,364 $ 10,502 $ 28,604 $ 2,797 $ 4,142 $ 5,345 $ 60,754 Provision (credit) charged to expense — — — — — — — Losses charged off (36) — — — — (401) (437) Recoveries 54 — — — 20 406 480 Balance, March 31, 2022 $ 9,382 $ 10,502 $ 28,604 $ 2,797 $ 4,162 $ 5,350 $ 60,797 The following table presents the activity in the allowance for unfunded commitments by portfolio segment for the three months ended March 31, 2022 and 2021. The provision for losses on unfunded commitments for the three months ended March 31, 2022 was a credit (negative expense) to provision expense of $193,000, compared to a credit (negative expense) of $673,000 for the three months ended March 31, 2021. The level and mix of unfunded commitments resulted in a decrease in the required reserve for such potential losses in each of the three month periods presented. One- to Four- Family Residential and Other Commercial Commercial Commercial Construction Residential Real Estate Construction Business Consumer Total (In Thousands) Allowance for unfunded commitments Balance, December 31, 2020 $ — $ — $ — $ — $ — $ — $ — CECL adoption 917 5,227 354 910 935 347 8,690 Balance, January 1, 2021 917 5,227 354 910 935 347 8,690 Provision (credit) charged to expense 40 (412) 103 (400) 21 (25) (673) Balance, March 31, 2021 $ 957 $ 4,815 $ 457 $ 510 $ 956 $ 322 $ 8,017 Allowance for unfunded commitments Balance, January 1, 2022 $ 687 $ 5,703 $ 367 $ 908 $ 1,582 $ 382 $ 9,629 Provision (credit) charged to expense 512 (1,003) 56 161 36 45 (193) Balance, March 31, 2022 $ 1,199 $ 4,700 $ 423 $ 1,069 $ 1,618 $ 427 $ 9,436 The portfolio segments used in the preceding tables correspond to the loan classes used in all other tables in Note 6 ● The one- to four-family residential and construction segment includes the one- to four-family residential construction, subdivision construction, owner occupied one- to four-family residential and non-owner occupied one- to four-family residential classes. ● The other residential segment corresponds to the other residential class. ● The commercial real estate segment includes the commercial real estate and industrial revenue bonds classes. ● The commercial construction segment includes the land development and commercial construction classes. ● The commercial business segment corresponds to the commercial business class. ● The consumer segment includes the consumer auto, consumer other and home equity lines of credit classes. The following table presents the amortized cost basis of collateral-dependent loans by class of loans: March 31, 2022 December 31, 2021 Principal Specific Principal Specific Balance Allowance Balance Allowance (In Thousands) One- to four-family residential construction $ — $ — $ — $ — Subdivision construction — — — — Land development 468 — 468 — Commercial construction — — — — Owner occupied one- to four- family residential 1,900 17 1,980 18 Non-owner occupied one- to four-family residential — — — — Commercial real estate 1,979 121 2,217 397 Other residential — — — — Commercial business — — — — Industrial revenue bonds — — — — Consumer auto — — — — Consumer other 160 80 160 80 Home equity lines of credit 371 — 377 — Total $ 4,878 $ 218 $ 5,202 $ 495 TDRs by class are presented below as of March 31, 2022 and December 31, 2021. March 31, 2022 Accruing TDR Loans Non-accruing TDR Loans Total TDR Loans Number Balance Number Balance Number Balance (In Thousands) Construction and land development 1 $ 12 — $ — 1 $ 12 One- to four-family residential 7 616 11 993 18 1,609 Other residential — — — — — — Commercial real estate — — 2 1,774 2 1,774 Commercial business — — — — — — Consumer 16 270 13 65 29 335 24 $ 898 26 $ 2,832 50 $ 3,730 December 31, 2021 Accruing TDR Loans Non-accruing TDR Loans Total TDR Loans Number Balance Number Balance Number Balance (In Thousands) Construction and land development 1 $ 15 — $ — 1 $ 15 One- to four-family residential 10 579 12 1,059 22 1,638 Other residential — — — — — — Commercial real estate 1 85 1 1,726 2 1,811 Commercial business — — — — — — Consumer 26 323 13 64 39 387 38 $ 1,002 26 $ 2,849 64 $ 3,851 The following tables present newly restructured loans, which were considered TDRs, during the three months ended March 31, 2022 and 2021, respectively, by type of modification: Three Months Ended March 31, 2022 Total Interest Only Term Combination Modification (In Thousands) Commercial real estate $ — $ — $ 247 $ 247 Consumer — 4 3 7 $ — $ 4 $ 250 $ 254 Three Months Ended March 31, 2021 Total Interest Only Term Combination Modification (In Thousands) Commercial real estate $ 1,768 $ — $ — $ 1,768 Consumer — 21 — 21 $ 1,768 $ 21 $ — $ 1,789 At March 31, 2022, of the $3.7 million in TDRs, $2.8 million were classified as substandard using the Company’s internal grading system, which is described below. The Company had one TDR that was modified in the previous 12 months and subsequently defaulted during the three months ended March 31, 2022. At December 31, 2021, of the $3.9 million in TDRs, $2.9 million were classified as substandard using the Company’s internal grading system. The Company had no TDRs that were modified in the previous 12 months and subsequently defaulted during the year ended December 31, 2021. During the three months ended March 31, 2022, $221,000 of loans met the criteria for placement back on accrual status. The criteria are generally a minimum of six months of consistent and timely payment performance under original or modified terms. During the three months ended March 31, 2021, four loans designated as TDRs, totaling $27,000, met the criteria for placement back on accrual status. The Company utilizes an internal risk rating system comprised of a series of grades to categorize loans according to perceived risk associated with the expectation of debt repayment. The analysis of the borrower’s ability to repay considers specific information, including but not limited to current financial information, historical payment experience, industry information, collateral levels and collateral types. A risk rating is assigned at loan origination and then monitored throughout the contractual term for possible risk rating changes. Satisfactory loans range from Excellent to Moderate Risk, but generally are loans supported by strong recent financial statements. Character and capacity of borrower are strong, including reasonable project performance, good industry experience, liquidity and/or net worth. Probability of financial deterioration seems unlikely. Repayment is expected from approved sources over a reasonable period of time. Watch loans are identified when the borrower has capacity to perform according to terms; however, elements of uncertainty exist. Margins of debt service coverage may be narrow, historical patterns of financial performance may be erratic, collateral margins may be diminished and the borrower may be a new and/or thinly capitalized company. Some management weakness may also exist, the borrower may have somewhat limited access to other financial institutions, and that ability may diminish in difficult economic times. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects or the Bank’s credit position at some future date. It is a transitional grade that is closely monitored for improvement or deterioration. The Substandard rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Doubtful loans have all the weaknesses inherent to those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Loans considered loss are uncollectable and no longer included as an asset. All loans are analyzed for risk rating updates regularly. For larger loans, rating assessments may be more frequent if relevant information is obtained earlier through debt covenant monitoring or overall relationship management. Smaller loans are monitored as identified by the loan officer based on the risk profile of the individual borrower or if the loan becomes past due related to credit issues. Loans rated Watch, Special Mention, Substandard or Doubtful are subject to quarterly review and monitoring processes. In addition to the regular monitoring performed by the lending personnel and credit committees, loans are subject to review by the credit review department, which verifies the appropriateness of the risk ratings for the loans chosen as part of its risk-based review plan. The following tables present a summary of loans by risk category and past due status separated by origination and loan class as of March 31, 2022. The remaining accretable discount of $204,000 has not been included in this table. See Note 7 Term Loans by Origination Year Revolving 2022 YTD 2021 2020 2019 2018 Prior Loans Total (In Thousands) One- to four-family residential construction Satisfactory (1-4) $ 3,214 $ 18,939 $ 3,816 $ 867 $ — $ 4 $ — $ 26,840 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 3,214 18,939 3,816 867 — 4 — 26,840 Subdivision construction Satisfactory (1-4) 727 24,125 943 209 144 1,027 — 27,175 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — 12 — 12 Total 727 24,125 943 209 144 1,039 — 27,187 Construction and land development Satisfactory (1-4) 4,393 10,180 12,754 11,102 789 6,607 498 46,323 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — 468 468 Total 4,393 10,180 12,754 11,102 789 6,607 966 46,791 Other construction Satisfactory (1-4) 10,124 146,013 219,022 63,265 — — — 438,424 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 10,124 146,013 219,022 63,265 — — — 438,424 One- to four-family residential Satisfactory (1-4) 83,091 239,052 152,349 86,237 46,444 122,234 1,385 730,792 Watch (5) — — — — 91 263 66 420 Special Mention (6) — — — — — — — — Classified (7-9) — — — 128 — 1,151 47 1,326 Total 83,091 239,052 152,349 86,365 46,535 123,648 1,498 732,538 Other residential Satisfactory (1-4) 16,003 124,361 202,360 169,732 170,735 150,466 12,690 846,347 Watch (5) — — — — — 3,396 — 3,396 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 16,003 124,361 202,360 169,732 170,735 153,862 12,690 849,743 Commercial real estate Satisfactory (1-4) 119,339 168,776 100,003 211,453 224,534 692,189 13,712 1,530,006 Watch (5) — — 410 582 — 25,699 — 26,691 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — 1,774 — 1,774 Total 119,339 168,776 100,413 212,035 224,534 719,662 13,712 1,558,471 Commercial business Satisfactory (1-4) 10,056 69,215 34,822 16,964 15,613 75,122 82,120 303,912 Watch (5) — — — — — 50 — 50 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 10,056 69,215 34,822 16,964 15,613 75,172 82,120 303,962 Consumer Satisfactory (1-4) 7,337 17,694 9,345 5,673 7,138 24,348 125,157 196,692 Watch (5) — — — — 19 168 28 215 Special Mention (6) — — — — — — — — Classified (7-9) — — 2 — 18 281 314 615 Total 7,337 17,694 9,347 5,673 7,175 24,797 125,499 197,522 Combined Satisfactory (1-4) 254,284 818,355 735,414 565,502 465,397 1,071,997 235,562 4,146,511 Watch (5) — — 410 582 110 29,576 94 30,772 Special Mention (6) — — — — — — — — Classified (7-9) — — 2 128 18 3,218 829 4,195 Total $ 254,284 $ 818,355 $ 735,826 $ 566,212 $ 465,525 $ 1,104,791 $ 236,485 $ 4,181,478 The following tables present a summary of loans by risk category and past due status separated by origination and loan class as of December 31, 2021. The remaining accretable discount of $429,000 has not been included in this table. Term Loans by Origination Year Revolving 2021 2020 2019 2018 2017 Prior Loans Total (In Thousands) One- to four-family residential construction Satisfactory (1-4) $ 23,081 $ 4,453 $ 763 $ — $ — $ 5 $ — $ 28,302 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 23,081 4,453 763 — — 5 — 28,302 Subdivision construction Satisfactory (1-4) 24,129 949 224 160 252 965 — 26,679 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — 15 — 15 Total 24,129 949 224 160 252 980 — 26,694 Construction and land development Satisfactory (1-4) 9,968 15,965 11,115 2,591 3,013 4,184 527 47,363 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — 468 468 Total 9,968 15,965 11,115 2,591 3,013 4,184 995 47,831 Other construction Satisfactory (1-4) 145,991 298,710 130,502 42,302 — — — 617,505 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 145,991 298,710 130,502 42,302 — — — 617,505 One- to four-family residential Satisfactory (1-4) 237,498 169,765 93,648 49,618 14,707 113,059 1,662 679,957 Watch (5) — — — 132 — 267 69 468 Special Mention (6) — — — — — — — — Classified (7-9) — — 144 — 50 1,223 83 1,500 Total 237,498 169,765 93,792 49,750 14,757 114,549 1,814 681,925 Other residential Satisfactory (1-4) 117,029 96,551 115,418 179,441 104,053 70,438 11,605 694,535 Watch (5) — — — — — 3,417 — 3,417 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 117,029 96,551 115,418 179,441 104,053 73,855 11,605 697,952 Commercial real estate Satisfactory (1-4) 141,868 113,226 220,580 231,321 196,166 521,545 22,785 1,447,491 Watch (5) — 410 582 — — 25,742 — 26,734 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — 2,006 — 2,006 Total 141,868 113,636 221,162 231,321 196,166 549,293 22,785 1,476,231 Commercial business Satisfactory (1-4) 67,049 28,743 23,947 16,513 24,126 58,116 76,187 294,681 Watch (5) — — — — — 58 — 58 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 67,049 28,743 23,947 16,513 24,126 58,174 76,187 294,739 Consumer Satisfactory (1-4) 20,140 11,138 7,154 9,065 4,175 24,280 130,111 206,063 Watch (5) — — — 20 4 10 29 63 Special Mention (6) — — — — — — — — Classified (7-9) — 2 — 16 32 280 347 677 Total 20,140 11,140 7,154 9,101 4,211 24,570 130,487 206,803 Combined Satisfactory (1-4) 786,753 739,500 603,351 531,011 346,492 792,592 242,877 4,042,576 Watch (5) — 410 582 152 4 29,494 98 30,740 Special Mention (6) — — — — — — — — Classified (7-9) — 2 144 16 82 3,524 898 4,666 Total $ 786,753 $ 739,912 $ 604,077 $ 531,179 $ 346,578 $ 825,610 $ 243,873 $ 4,077,982 |
