| 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 that 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, gross domestic product (“GDP”), commercial real estate price index, consumer sentiment and construction spending. 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. 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 September 30, 2022 and December 31, 2021 were as follows: September 30, December 31, 2022 2021 (In Thousands) One- to four-family residential construction $ 31,982 $ 28,302 Subdivision construction 32,977 26,694 Land development 42,871 47,827 Commercial construction 583,074 617,505 Owner occupied one- to four-family residential 765,511 561,958 Non-owner occupied one- to four-family residential 117,713 119,635 Commercial real estate 1,576,529 1,476,230 Other residential 914,693 697,903 Commercial business 295,476 280,513 Industrial revenue bonds 13,036 14,203 Consumer auto 39,912 48,915 Consumer other 35,542 37,902 Home equity lines of credit 121,783 119,965 4,571,099 4,077,552 Allowance for credit losses (62,761) (60,754) Deferred loan fees and gains, net (11,229) (9,298) $ 4,497,109 $ 4,007,500 Weighted average interest rate 4.92 % 4.26 % The following tables present the classes of loans by aging. September 30, 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 $ — $ — $ — $ — $ 31,982 $ 31,982 $ — Subdivision construction — — — — 32,977 32,977 — Land development — — 468 468 42,403 42,871 — Commercial construction — — — — 583,074 583,074 — Owner occupied one- to four-family residential 281 292 821 1,394 764,117 765,511 — Non-owner occupied one- to four-family residential — — — — 117,713 117,713 — Commercial real estate — — 1,618 1,618 1,574,911 1,576,529 — Other residential — — — — 914,693 914,693 — Commercial business 52 — — 52 295,424 295,476 — Industrial revenue bonds — — — — 13,036 13,036 — Consumer auto 96 17 13 126 39,786 39,912 — Consumer other 278 12 65 355 35,187 35,542 — Home equity lines of credit — — 308 308 121,475 121,783 — Total $ 707 $ 321 $ 3,293 $ 4,321 $ 4,566,778 $ 4,571,099 $ — 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: September 30, 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 821 2,216 Non-owner occupied one- to four-family residential — — Commercial real estate 1,618 2,006 Other residential — — Commercial business — — Industrial revenue bonds — — Consumer auto 13 34 Consumer other 65 63 Home equity lines of credit 308 636 Total non-accruing loans $ 3,293 $ 5,423 No interest income was recorded on these loans for the three and nine months ended September 30, 2022 and 2021, respectively. Nonaccrual loans for which there is no related allowance for credit losses as of September 30, 2022 had an amortized cost of $2.4 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 and nine months ended September 30, 2022 and 2021. During the three months ended September 30, 2022, the Company recorded provision expense of $2.0 million on its portfolio of outstanding loans, compared to a negative provision expense of $3.0 million during the three months ended September 30, 2021. During the nine months ended September 30, 2022, the Company recorded provision expense of $2.0 million on its portfolio of outstanding loans, compared to a negative provision expense of $3.7 million during the nine months ended September 30, 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, June 30, 2021 $ 9,209 $ 15,299 $ 30,507 $ 2,215 $ 3,932 $ 5,440 $ 66,602 Provision (credit) charged to expense — — (3,000) — — — (3,000) Losses charged off (37) — — — (3) (446) (486) Recoveries 45 — 6 6 52 404 513 Balance, September 30, 2021 $ 9,217 $ 15,299 $ 27,513 $ 2,221 $ 3,981 $ 5,398 $ 63,629 Allowance for credit losses Balance, June 30, 2022 $ 9,434 $ 10,612 $ 28,604 $ 2,797 $ 4,365 $ 5,246 $ 61,058 Provision (credit) charged to expense 1,076 881 (1,105) 265 1,302 (419) 2,000 Losses charged off — — — — (50) (571) (621) Recoveries 20 — 1 — 15 288 324 Balance, September 30, 2022 $ 10,530 $ 11,493 $ 27,500 $ 3,062 $ 5,632 $ 4,544 $ 62,761 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 — — (3,700) — — — (3,700) Losses charged off (179) — — (154) (60) (1,647) (2,040) Recoveries 327 92 37 19 152 1,404 2,031 Balance, September 30, 2021 $ 9,217 $ 15,299 $ 27,513 $ 2,221 $ 3,981 $ 5,398 $ 63,629 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 1,076 881 (1,105) 265 1,302 (419) 2,000 Losses charged off (38) — — — (50) (1,403) (1,491) Recoveries 128 110 1 — 238 1,021 1,498 Balance, September 30, 2022 $ 10,530 $ 11,493 $ 27,500 $ 3,062 $ 5,632 $ 4,544 $ 62,761 The following tables present the activity in the allowance for unfunded commitments by portfolio segment for the three and nine months ended September 30, 2022 and 2021. The provision for losses on unfunded commitments for the three months ended September 30, 2022 was $1.3 million, compared to $643,000 for the three months ended September 30, 2021. The provision for losses on unfunded commitments for the nine months ended September 30, 2022 was $3.3 million, compared to a credit (negative expense) of $338,000 for the nine months ended September 30, 2021. In the 2022 periods, the Company experienced increases in its unfunded commitments, resulting in an increase in its required reserves for such potential losses. The level and mix of unfunded commitments resulted in a decrease in the required reserve for such potential losses in the 2021 nine month period 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, June 30, 2021 $ 760 $ 4,972 $ 417 $ 354 $ 821 $ 385 $ 7,709 Provision (credit) charged to expense 5 188 (79) — 534 (5) 643 Balance, September 30, 2021 $ 765 $ 5,160 $ 338 $ 354 $ 1,355 $ 380 $ 8,352 Allowance for unfunded commitments Balance, June 30, 2022 $ 1,138 $ 7,419 $ 501 $ 695 $ 1,406 $ 500 $ 11,659 Provision (credit) charged to expense (401) 967 17 553 146 33 1,315 Balance, September 30, 2022 $ 737 $ 8,386 $ 518 $ 1,248 $ 1,552 $ 533 $ 12,974 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 (152) (67) (16) (556) 420 33 (338) Balance, September 30, 2021 $ 765 $ 5,160 $ 338 $ 354 $ 1,355 $ 380 $ 8,352 Allowance for unfunded commitments Balance, January 1, 2022 $ 687 $ 5,703 $ 367 $ 908 $ 1,582 $ 382 $ 9,629 Provision (credit) charged to expense 50 2,683 151 340 (30) 151 3,345 Balance, September 30, 2022 $ 737 $ 8,386 $ 518 $ 1,248 $ 1,552 $ 533 $ 12,974 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: September 30, 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 1,695 35 1,980 18 Non-owner occupied one- to four-family residential — — — — Commercial real estate 1,805 112 2,217 397 Other residential — — — — Commercial business — — — — Industrial revenue bonds — — — — Consumer auto — — — — Consumer other 159 80 160 80 Home equity lines of credit 138 — 377 — Total $ 4,265 $ 227 $ 5,202 $ 495 TDRs by class are presented below as of September 30, 2022 and December 31, 2021. September 30, 2022 Accruing TDR Loans Non-accruing TDR Loans Total TDR Loans Number Balance Number Balance Number Balance (In Thousands) Construction and land development — $ — — $ — — $ — One- to four-family residential 12 1,005 3 103 15 1,108 Other residential — — — — — — Commercial real estate — — 2 1,609 2 1,609 Commercial business — — — — — — Consumer 14 220 7 49 21 269 26 $ 1,225 12 $ 1,761 38 $ 2,986 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 and nine months ended September 30, 2022 and 2021, respectively, by type of modification: Three Months Ended September 30, 2022 Total Interest Only Term Combination Modification (In Thousands) Commercial real estate $ — $ — $ — $ — Consumer — — — — $ — $ — $ — $ — Three Months Ended September 30, 2021 Total Interest Only Term Combination Modification (In Thousands) One- to four-family residential $ — $ — $ 134 $ 134 Consumer — — 10 10 $ — $ — $ 144 $ 144 Nine Months Ended September 30, 2022 Total Interest Only Term Combination Modification (In Thousands) Commercial real estate $ — $ — $ 247 $ 247 Consumer — 4 3 7 $ — $ 4 $ 250 $ 254 Nine Months Ended September 30, 2021 Total Interest Only Term Combination Modification (In Thousands) Commercial real estate $ 1,768 $ — $ — $ 1,768 One- to four-family residential — 157 134 291 Consumer — 100 10 110 $ 1,768 $ 257 $ 144 $ 2,169 At September 30, 2022, of the $3.0 million in TDRs, $1.8 million were classified as substandard using the Company’s internal grading system, which is described below. The Company had no TDRs that were modified in the previous 12 months and subsequently defaulted during the three months ended September 30, 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 and nine months ended September 30, 2022, $66,000 and $578,000 of loans, respectively, met the criteria for placement back on accrual status. During the three and nine months ended September 30, 2021, $96,000 and $433,000 of loans, respectively, met the criteria for placement back on accrual status. The criteria is generally a minimum of six months of consistent and timely payment performance under original or modified terms. 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. The character and capacity of the borrower are strong, including reasonable project performance, good industry experience, liquidity and/or net worth. The 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 access 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 table present a summary of loans by category and risk rating separated by origination and loan class as of September 30, 2022. 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) $ 18,381 $ 10,834 $ 2,551 $ — $ — $ 216 $ — $ 31,982 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 18,381 10,834 2,551 — — 216 — 31,982 Subdivision construction Satisfactory (1-4) 4,240 26,362 757 204 142 608 664 32,977 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 4,240 26,362 757 204 142 608 664 32,977 Construction and land development Satisfactory (1-4) 15,441 6,579 5,451 8,280 771 5,285 596 42,403 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — 468 468 Total 15,441 6,579 5,451 8,280 771 5,285 1,064 42,871 Other construction Satisfactory (1-4) 83,318 318,197 161,223 20,336 — — — 583,074 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 83,318 318,197 161,223 20,336 — — — 583,074 One- to four-family residential Satisfactory (1-4) 309,787 220,044 131,304 74,776 41,077 101,610 803 879,401 Watch (5) — — — 181 89 1,301 60 1,631 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — 2,108 84 2,192 Total 309,787 220,044 131,304 74,957 41,166 105,019 947 883,224 Other residential Satisfactory (1-4) 77,919 137,890 236,600 171,455 134,426 127,677 25,366 911,333 Watch (5) — — — — — 3,360 — 3,360 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 77,919 137,890 236,600 171,455 134,426 131,037 25,366 914,693 Commercial real estate Satisfactory (1-4) 204,359 174,769 112,680 214,892 201,908 610,957 31,602 1,551,167 Watch (5) — — — — — 23,548 — 23,548 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — 1,814 — 1,814 Total 204,359 174,769 112,680 214,892 201,908 636,319 31,602 1,576,529 Commercial business Satisfactory (1-4) 30,491 66,722 40,232 15,906 9,853 65,411 79,849 308,464 Watch (5) — — — — — 48 — 48 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 30,491 66,722 40,232 15,906 9,853 65,459 79,849 308,512 Consumer Satisfactory (1-4) 18,712 12,761 6,700 3,526 4,146 18,424 132,025 196,294 Watch (5) — 30 — 8 — 161 100 299 Special Mention (6) — — — — — — — — Classified (7-9) — 5 13 — 5 233 388 644 Total 18,712 12,796 6,713 3,534 4,151 18,818 132,513 197,237 Combined Satisfactory (1-4) 762,648 974,158 697,498 509,375 392,323 930,188 270,905 4,537,095 Watch (5) — 30 — 189 89 28,418 160 28,886 Special Mention (6) — — — — — — — — Classified (7-9) — 5 13 — 5 4,155 940 5,118 Total $ 762,648 $ 974,193 $ 697,511 $ 509,564 $ 392,417 $ 962,761 $ 272,005 $ 4,571,099 The following table presents a summary of loans by category and risk rating 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) — — — |
