| 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 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. 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. In addition, 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 June 30, 2023 and December 31, 2022 were as follows: June 30, December 31, 2023 2022 (In Thousands) One- to four-family residential construction $ 31,531 $ 33,849 Subdivision construction 26,513 32,067 Land development 53,203 41,613 Commercial construction 705,457 757,690 Owner occupied one- to four-family residential 777,978 778,533 Non-owner occupied one- to four-family residential 123,238 124,870 Commercial real estate 1,497,659 1,530,663 Other residential 885,394 781,761 Commercial business 294,600 293,228 Industrial revenue bonds 12,355 12,852 Consumer auto 33,008 37,281 Consumer other 34,663 33,732 Home equity lines of credit 114,901 123,242 4,590,500 4,581,381 Allowance for credit losses (64,852) (63,480) Deferred loan fees and gains, net (9,035) (11,065) $ 4,516,613 $ 4,506,836 Weighted average interest rate 6.02 % 5.54 % The following tables present the classes of loans by aging as of the dates indicated. June 30, 2023 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 $ — $ — $ — $ — $ 31,531 $ 31,531 $ — Subdivision construction — — — — 26,513 26,513 — Land development — — 384 384 52,819 53,203 — Commercial construction — — — — 705,457 705,457 — Owner occupied one- to four-family residential 568 — 359 927 777,051 777,978 — Non-owner occupied one- to four-family residential 23 — — 23 123,215 123,238 — Commercial real estate 165 — 10,192 10,357 1,487,302 1,497,659 — Other residential — — — — 885,394 885,394 — Commercial business — — 16 16 294,584 294,600 — Industrial revenue bonds — — — — 12,355 12,355 — Consumer auto 39 4 35 78 32,930 33,008 — Consumer other 359 5 136 500 34,163 34,663 — Home equity lines of credit 44 32 27 103 114,798 114,901 — Total $ 1,198 $ 41 $ 11,149 $ 12,388 $ 4,578,112 $ 4,590,500 $ — December 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 $ — $ — $ — $ — $ 33,849 $ 33,849 $ — Subdivision construction — — — — 32,067 32,067 — Land development — — 384 384 41,229 41,613 — Commercial construction — — — — 757,690 757,690 — Owner occupied one- to four-family residential 2,568 462 722 3,752 774,781 778,533 — Non-owner occupied one- to four-family residential — 63 — 63 124,807 124,870 — Commercial real estate 196 — 1,579 1,775 1,528,888 1,530,663 — Other residential — — — — 781,761 781,761 — Commercial business 8 — 586 594 292,634 293,228 — Industrial revenue bonds — — — — 12,852 12,852 — Consumer auto 100 34 14 148 37,133 37,281 — Consumer other 288 114 111 513 33,219 33,732 — Home equity lines of credit 234 38 274 546 122,696 123,242 — Total $ 3,394 $ 711 $ 3,670 $ 7,775 $ 4,573,606 $ 4,581,381 $ — 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: June 30, December 31, 2023 2022 (In Thousands) One- to four-family residential construction $ — $ — Subdivision construction — — Land development 384 384 Commercial construction — — Owner occupied one- to four-family residential 359 722 Non-owner occupied one- to four-family residential — — Commercial real estate 10,192 1,579 Other residential — — Commercial business 16 586 Industrial revenue bonds — — Consumer auto 35 14 Consumer other 136 111 Home equity lines of credit 27 274 Total non-accruing loans $ 11,149 $ 3,670 No interest income was recorded on these loans for the three and six months ended June 30, 2023 and 2022, respectively. Nonaccrual loans for which there is no related allowance for credit losses as of June 30, 2023 had an amortized cost of $1.7 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 primarily by a classified risk rating with 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 table presents the activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2023 and 2022. During the three months ended June 30, 2023, the Company did not record a provision expense on its portfolio of outstanding loans. During the six months ended June 30, 2023, the Company recorded provision expense of $1.5 million on its portfolio of outstanding loans. During the three and six months ended June 30, 2022, the Company did not record a provision expense on its portfolio of outstanding loans. 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, March 31, 2022 $ 9,382 $ 10,502 $ 28,604 $ 2,797 $ 4,162 $ 5,350 $ 60,797 Provision (credit) charged to expense — — — — — — — Losses charged off (2) — — — — (431) (433) Recoveries 54 110 — — 203 327 694 Balance, June 30, 2022 $ 9,434 $ 10,612 $ 28,604 $ 2,797 $ 4,365 $ 5,246 $ 61,058 Allowance for credit losses Balance, March 31, 2023 $ 11,797 $ 13,189 $ 25,506 $ 2,502 $ 7,821 $ 4,172 $ 64,987 Provision (credit) charged to expense — — — — — — — Losses charged off — — — — — (477) (477) Recoveries 21 — 2 — 6 313 342 Balance, June 30, 2023 $ 11,818 $ 13,189 $ 25,508 $ 2,502 $ 7,827 $ 4,008 $ 64,852 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, 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 (38) — — — — (832) (870) Recoveries 108 110 — — 223 733 1,174 Balance, June 30, 2022 $ 9,434 $ 10,612 $ 28,604 $ 2,797 $ 4,365 $ 5,246 $ 61,058 Allowance for credit losses Balance, January 1, 2023 $ 11,171 $ 12,110 $ 27,096 $ 2,865 $ 5,822 $ 4,416 $ 63,480 Provision (credit) charged to expense 647 1,079 (1,590) (363) 1,851 (124) 1,500 Losses charged off (31) — — — — (911) (942) Recoveries 31 — 2 — 154 627 814 Balance, June 30, 2023 $ 11,818 $ 13,189 $ 25,508 $ 2,502 $ 7,827 $ 4,008 $ 64,852 The following table presents the activity in the allowance for unfunded commitments by portfolio segment for the three and six months ended June 30, 2023 and 2022. The provision for losses on unfunded commitments for the three months ended June 30, 2023 was a credit (negative expense) of $1.6 million, compared to a provision expense of $2.2 million for the three months ended June 30, 2022. The provision for losses on unfunded commitments for the six months ended June 30, 2023 was a credit (negative expense) of $2.4 million, compared to a provision expense of $2.0 million for the six months ended June 30, 2022. The analysis of the level and mix of unfunded commitments resulted in a decrease in the required reserve for such potential losses in the three and six month periods of 2023 presented below. 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, March 31, 2022 $ 1,199 $ 4,700 $ 423 $ 1,069 $ 1,618 $ 427 $ 9,436 Provision (credit) charged to expense (61) 2,719 78 (374) (212) 73 2,223 Balance, June 30, 2022 $ 1,138 $ 7,419 $ 501 $ 695 $ 1,406 $ 500 $ 11,659 Allowance for unfunded commitments Balance, March 31, 2023 $ 832 $ 8,058 $ 445 $ 891 $ 1,263 $ 501 $ 11,990 Provision (credit) charged to expense (74) (1,267) 19 (20) (276) (1) (1,619) Balance, June 30, 2023 $ 758 $ 6,791 $ 464 $ 871 $ 987 $ 500 $ 10,371 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, January 1, 2022 $ 687 $ 5,703 $ 367 $ 908 $ 1,582 $ 382 $ 9,629 Provision (credit) charged to expense 451 1,716 134 (213) (176) 118 2,030 Balance, June 30, 2022 $ 1,138 $ 7,419 $ 501 $ 695 $ 1,406 $ 500 $ 11,659 Allowance for unfunded commitments Balance, January 1, 2023 $ 736 $ 8,624 $ 416 $ 802 $ 1,734 $ 504 $ 12,816 Provision (credit) charged to expense 22 (1,833) 48 69 (747) (4) (2,445) Balance, June 30, 2023 $ 758 $ 6,791 $ 464 $ 871 $ 987 $ 500 $ 10,371 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: June 30, 2023 December 31, 2022 Principal Specific Principal Specific Balance Allowance Balance Allowance (In Thousands) One- to four-family residential construction $ — $ — $ — $ — Subdivision construction — — — — Land development 384 192 384 — Commercial construction — — — — Owner occupied one- to four- family residential 402 1 1,637 40 Non-owner occupied one- to four-family residential — — — — Commercial real estate 10,186 1,200 1,571 — Other residential — — — — Commercial business — — 586 125 Industrial revenue bonds — — — — Consumer auto — — — — Consumer other — — 160 80 Home equity lines of credit — — 135 — Total $ 10,972 $ 1,393 $ 4,473 $ 245 Modified Loans. Note 3 Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures Adoption of this ASU did not have a material impact on the Company’s results of operations, financial position or liquidity, but resulted in additional disclosure requirements related to gross charge offs by vintage year and the removal of troubled debt restructuring (“TDR”) disclosures, replaced by additional disclosures on the types of modifications of loans to borrowers experiencing financial difficulties. The Corporation has adopted this update prospectively. Under ASU 2022-02, loan modifications are reported if concessions have been granted to borrowers that are experiencing financial difficulty. Information on these loan modifications originated after the effective date is presented according to the new accounting guidance. Reporting periods prior to the adoption of ASU 2022-02 present information on TDRs under the previous disclosure requirements. The estimate of lifetime expected losses utilized in the allowance for credit losses model is developed using average historical loss on loans with similar risk characteristics, which includes losses from modifications of loans to borrowers experiencing financial difficulty. As a result, a change to the allowance for credit losses is generally not recorded upon modification. For modifications to loans made to borrowers experiencing financial difficulty that are adversely classified, the Company determines the allowance for credit losses on an individual basis, using the same process that it utilizes for other adversely classified loans. If collection efforts have begun and the modified loan is subsequently deemed collateral-dependent, the loan is placed on non-accrual status and the allowance for credit losses is determined based on an individual evaluation. If necessary, the loan is charged down to fair market value less sales costs. The following tables show the composition of loan modifications made to borrowers experiencing financial difficulty by the loan portfolio and type of concessions granted during the three and six months ended June 30, 2023. Each of the types of concessions granted comprised 2% or less of their respective classes of loan portfolios at June 30, 2023. During the three and six months ended June 30, 2023, principal forgiveness of $6,000 and $39,000, respectively, was completed on consumer loans. A commercial real estate loan modified in the three months ended March 31, 2023, which totaled $21.6 million, was paid in full during the three months ended June 30, 2023. Three Months Ended June 30, 2023 Interest Rate Term Total Reduction Extension Combination Modifications (In Thousands) Construction and land development $ — $ — $ — $ — One- to four-family residential — — — — Other residential — — — — Commercial real estate — 77 — 77 Commercial business — 16 — 16 Consumer — — — — $ — $ 93 $ — $ 93 Six Months Ended June 30, 2023 Interest Rate Term Total Reduction Extension Combination Modifications (In Thousands) Construction and land development $ — $ — $ 1,208 $ 1,208 One- to four-family residential — 143 — 143 Other residential — — — — Commercial real estate — 77 21,030 21,107 Commercial business — 16 — 16 Consumer 6 — — 6 $ 6 $ 236 $ 22,238 $ 22,480 The Company closely monitors the performance of loans to borrowers experiencing financial difficulty that are modified to understand the effectiveness of its modification efforts. The following table depicts the performance (under modified terms) at June 30, 2023 of loans that were modified during the six months ended June 30, 2023: June 30, 2023 30-89 Days Over 90 Days Current Past Due Past Due Total (In Thousands) Construction and land development $ 1,208 $ — $ — $ 1,208 One- to four-family residential 143 — — 143 Other residential — — — — Commercial real estate 21,107 — — 21,107 Commercial business 16 — — 16 Consumer 6 — — 6 $ 22,480 $ — $ — $ 22,480 TDRs by class are presented below as of December 31, 2022. December 31, 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 13 1,028 3 98 16 1,126 Other residential — — — — — — Commercial real estate — — 2 1,571 2 1,571 Commercial business — — — — — — Consumer 13 210 5 42 18 252 26 $ 1,238 10 $ 1,711 36 $ 2,949 The following table presents newly restructured loans, which were considered TDRs, during the three and six months ended June 30, 2022, by type of modification: Three Months Ended June 30, 2022 Total Interest Only Term Combination Modifications (In Thousands) Commercial real estate $ — $ — $ — $ — Consumer — — — — $ — $ — $ — $ — Six Months Ended June 30, 2022 Total Interest Only Term Combination Modifications (In Thousands) Commercial real estate $ — $ — $ 247 $ 247 Consumer — 4 3 7 $ — $ 4 $ 250 $ 254 At December 31, 2022, of the $2.9 million in TDRs, $1.7 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, 2022. During the three and six months ended June 30, 2022, $290,000 and $511,000 of loans, respectively, 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. Loan Risk Ratings 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 presents a summary of loans by category and risk rating separated by origination and loan class as of June 30, 2023. Term Loans by Origination Year Revolving 2023 YTD 2022 2021 2020 2019 Prior Loans Total (In Thousands) One- to four-family residential construction Satisfactory (1-4) $ 6,411 $ 17,787 $ 1,390 $ — $ — $ — $ 5,943 $ 31,531 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 6,411 17,787 1,390 — — — 5,943 31,531 Subdivision construction Satisfactory (1-4) 115 1,066 24,457 101 199 555 20 26,513 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 115 1,066 24,457 101 199 555 20 26,513 Construction and land development Satisfactory (1-4) 12,644 15,581 5,638 5,190 7,381 5,628 757 52,819 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — 384 384 Total 12,644 15,581 5,638 5,190 7,381 5,628 1,141 53,203 Other construction Satisfactory (1-4) 23,349 256,939 398,835 23,248 3,086 — — 705,457 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 23,349 256,939 398,835 23,248 3,086 — — 705,457 One- to four-family residential Satisfactory (1-4) 37,116 337,293 212,612 115,931 67,085 128,615 519 899,171 Watch (5) — — — — 176 1,076 51 1,303 Special Mention (6) — — — — — — — — Classified (7-9) — — — 154 — 588 — 742 Total 37,116 337,293 212,612 116,085 67,261 130,279 570 901,216 Other residential Satisfactory (1-4) 13,077 90,893 203,313 278,920 141,891 150,278 3,746 882,118 Watch (5) — — — — — 3,276 — 3,276 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 13,077 90,893 203,313 278,920 141,891 153,554 3,746 885,394 Commercial real estate Satisfactory (1-4) 18,547 265,927 189,508 106,759 171,934 700,933 28,636 1,482,244 Watch (5) — — — — — 5,223 — 5,223 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — 10,192 — 10,192 Total 18,547 265,927 189,508 106,759 171,934 716,348 28,636 1,497,659 Commercial business Satisfactory (1-4) 10,056 72,163 51,025 32,683 11,011 64,957 65,026 306,921 Watch (5) — — — — — 18 — 18 Special Mention (6) — — — — — — — — Classified (7-9) — 16 — — — — — 16 Total 10,056 72,179 51,025 32,683 11,011 64,975 65,026 306,955 Consumer Satisfactory (1-4) 9,881 15,808 8,350 4,117 1,551 17,678 124,617 182,002 Watch (5) — — 25 — 5 160 74 264 Special Mention (6) — — — — — — — — Classified (7-9) — 21 4 6 — 242 33 306 Total 9,881 15,829 8,379 4,123 1,556 18,080 124,724 182,572 Combined Satisfactory (1-4) 131,196 1,073,457 1,095,128 566,949 404,138 1,068,644 229,264 4,568,776 Watch (5) — — 25 — 181 9,753 125 10,084 Special Mention (6) — — — — — — — — Classified (7-9) — 37 4 160 — 11,022 417 11,640 Total $ 131,196 $ 1,073,494 $ 1,095,157 $ 567,109 $ 404,319 $ 1,089,419 $ 229,806 $ 4,590,500 The following table presents a summary of loans by category and risk rating separated by origination and loan class as of December 31, 2022. Term Loans by Origination Year Revolving 2022 2021 2020 2019 2018 Prior Loans Total (In Thousands) One- to four-family residential construction Satisfactory (1-4) $ 21,885 $ 7,265 $ 1,391 $ — $ — $ — $ 3,308 $ 33,849 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 21,885 7,265 1,391 — — — 3,308 33,849 Subdivision construction Satisfactory (1-4) 4,478 25,864 800 203 134 588 — 32,067 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 4,478 25,864 800 203 134 588 — 32,067 Construction and land development |
