| 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 principal balance 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 September 30, 2023 and December 31, 2022 were as follows: September 30, December 31, 2023 2022 (In Thousands) One- to four-family residential construction $ 29,383 $ 33,849 Subdivision construction 26,412 32,067 Land development 54,633 41,613 Commercial construction 750,818 757,690 Owner occupied one- to four-family residential 773,082 778,533 Non-owner occupied one- to four-family residential 123,750 124,870 Commercial real estate 1,503,915 1,530,663 Other residential 845,373 781,761 Commercial business 343,648 293,228 Industrial revenue bonds 12,292 12,852 Consumer auto 29,329 37,281 Consumer other 32,941 33,732 Home equity lines of credit 111,665 123,242 4,637,241 4,581,381 Allowance for credit losses on loans (64,753) (63,480) Deferred loan fees and gains, net (7,921) (11,065) $ 4,564,567 $ 4,506,836 Weighted average interest rate 6.16 % 5.54 % The following tables present the classes of loans by aging as of the dates indicated. September 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 $ — $ 12 $ — $ 12 $ 29,371 $ 29,383 $ — Subdivision construction — — — — 26,412 26,412 — Land development — — 384 384 54,249 54,633 — Commercial construction — — — — 750,818 750,818 — Owner occupied one- to four-family residential 122 69 242 433 772,649 773,082 — Non-owner occupied one- to four-family residential — — — — 123,750 123,750 — Commercial real estate — 191 10,131 10,322 1,493,593 1,503,915 — Other residential — — — — 845,373 845,373 — Commercial business — — — — 343,648 343,648 — Industrial revenue bonds — — — — 12,292 12,292 — Consumer auto 45 3 9 57 29,272 29,329 — Consumer other 206 11 33 250 32,691 32,941 — Home equity lines of credit 123 54 32 209 111,456 111,665 — Total $ 496 $ 340 $ 10,831 $ 11,667 $ 4,625,574 $ 4,637,241 $ — 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: September 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 242 722 Non-owner occupied one- to four-family residential — — Commercial real estate 10,131 1,579 Other residential — — Commercial business — 586 Industrial revenue bonds — — Consumer auto 9 14 Consumer other 33 111 Home equity lines of credit 32 274 Total non-accruing loans $ 10,831 $ 3,670 No interest income was recorded on these loans for the three and nine months ended September 30, 2023 and 2022, respectively. Nonaccrual loans for which there is no related allowance for credit losses as of September 30, 2023 totaled $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 nine months ended September 30, 2023 and 2022. During the three months ended September 30, 2023, the Company did not record a provision expense on its portfolio of outstanding loans. During the nine months ended September 30, 2023, the Company recorded provision expense of $1.5 million on its portfolio of outstanding loans. During both the three and nine months ended September 30, 2022, the Company recorded provision expense of $2.0 million 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, June 30, 2023 $ 11,818 $ 13,189 $ 25,508 $ 2,502 $ 7,827 $ 4,008 $ 64,852 Provision (credit) charged to expense — — — — — — — Losses charged off — — — — — (498) (498) Recoveries 41 — — — 28 330 399 Balance, September 30, 2023 $ 11,859 $ 13,189 $ 25,508 $ 2,502 $ 7,855 $ 3,840 $ 64,753 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, 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) — — — — (1,409) (1,440) Recoveries 72 — 2 — 182 957 1,213 Balance, September 30, 2023 $ 11,859 $ 13,189 $ 25,508 $ 2,502 $ 7,855 $ 3,840 $ 64,753 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 table presents the activity in the allowance for unfunded commitments by portfolio segment for the three and nine months ended September 30, 2023 and 2022. The provision for losses on unfunded commitments for the three months ended September 30, 2023 was a credit (negative expense) of $1.2 million, compared to a provision expense of $1.3 million for the three months ended September 30, 2022. The provision for losses on unfunded commitments for the nine months ended September 30, 2023 was a credit (negative expense) of $3.6 million, compared to a provision expense of $3.3 million for the nine months ended September 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 nine 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, June 30, 2023 $ 758 $ 6,791 $ 464 $ 871 $ 987 $ 500 $ 10,371 Provision (credit) charged to expense 146 (1,412) 33 108 (34) (36) (1,195) Balance, September 30, 2023 $ 904 $ 5,379 $ 497 $ 979 $ 953 $ 464 $ 9,176 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, January 1, 2023 $ 736 $ 8,624 $ 416 $ 802 $ 1,734 $ 504 $ 12,816 Provision (credit) charged to expense 168 (3,245) 81 177 (781) (40) (3,640) Balance, September 30, 2023 $ 904 $ 5,379 $ 497 $ 979 $ 953 $ 464 $ 9,176 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 (multi-family) 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 collateral-dependent loans by class of loans: September 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 151 — 1,637 40 Non-owner occupied one- to four-family residential — — — — Commercial real estate 10,126 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 $ 10,661 $ 1,392 $ 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 nine months ended September 30, 2023. Each of the types of concessions granted comprised 2% or less of their respective classes of loan portfolios at September 30, 2023. During the three and nine months ended September 30, 2023, principal forgiveness of $13,000 and $52,000, 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. Additionally, a one- to four-family residential loan of Three Months Ended September 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 — — — — Commercial business — — — — Consumer — 8 — 8 $ — $ 8 $ — $ 8 Nine Months Ended September 30, 2023 Interest Rate Term Total Reduction Extension Combination Modifications (In Thousands) Construction and land development $ — $ — $ 1,673 $ 1,673 One- to four-family residential — — — — Other residential — — — — Commercial real estate — 77 20,895 20,972 Commercial business — — — — Consumer 6 8 — 14 $ 6 $ 85 $ 22,568 $ 22,659 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 September 30, 2023 of loans that were modified during the nine months ended September 30, 2023: September 30, 2023 30-89 Days Over 90 Days Current Past Due Past Due Total (In Thousands) Construction and land development $ 1,673 $ — $ — $ 1,673 One- to four-family residential — — — — Other residential — — — — Commercial real estate 12,433 — 8,539 20,972 Commercial business — — — — Consumer 14 — — 14 $ 14,120 $ — $ 8,539 $ 22,659 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 nine months ended September 30, 2022, by type of modification: Three Months Ended September 30, 2022 Total Interest Only Term Combination Modifications (In Thousands) Commercial real estate $ — $ — $ — $ — Consumer — — — — $ — $ — $ — $ — Nine Months Ended September 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 nine months ended September 30, 2022, $66,000 and $578,000 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 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. The Loss category is used when loans are considered 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 September 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) $ 13,022 $ 10,877 $ 835 $ — $ — $ — $ 4,649 $ 29,383 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 13,022 10,877 835 — — — 4,649 29,383 Subdivision construction Satisfactory (1-4) 363 1,097 24,424 50 65 413 — 26,412 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 363 1,097 24,424 50 65 413 — 26,412 Construction and land development Satisfactory (1-4) 16,283 15,588 5,649 3,693 7,389 4,788 859 54,249 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — 384 384 Total 16,283 15,588 5,649 3,693 7,389 4,788 1,243 54,633 Other construction Satisfactory (1-4) 35,953 368,118 319,605 27,142 — — — 750,818 Watch (5) — — — — — — — — Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 35,953 368,118 319,605 27,142 — — — 750,818 One- to four-family residential Satisfactory (1-4) 55,875 335,152 208,093 110,425 62,448 122,613 476 895,082 Watch (5) — — — — 173 1,050 49 1,272 Special Mention (6) — — — — — — — — Classified (7-9) — — — 150 — 328 — 478 Total 55,875 335,152 208,093 110,575 62,621 123,991 525 896,832 Other residential Satisfactory (1-4) 13,533 72,663 276,593 218,514 109,017 141,056 3,574 834,950 Watch (5) — — — — — 10,423 — 10,423 Special Mention (6) — — — — — — — — Classified (7-9) — — — — — — — — Total 13,533 72,663 276,593 218,514 109,017 151,479 3,574 845,373 Commercial real estate Satisfactory (1-4) 27,510 253,867 226,811 106,019 162,782 669,086 37,931 1,484,006 Watch (5) — — — — — 5,377 — 5,377 Special Mention (6) — — — — — 4,400 — 4,400 Classified (7-9) — — — — — 10,132 — 10,132 Total 27,510 253,867 226,811 106,019 162,782 688,995 37,931 1,503,915 Commercial business Satisfactory (1-4) 54,327 85,991 41,400 30,971 10,636 61,420 52,548 337,293 Watch (5) — — — — — 1,376 — 1,376 Special Mention (6) — 1,230 4,841 — — — 11,200 17,271 Classified (7-9) — — — — — — — — Total 54,327 87,221 46,241 30,971 10,636 62,796 63,748 355,940 Consumer Satisfactory (1-4) 14,008 13,726 7,170 3,374 1,161 13,268 120,640 173,347 Watch (5) — — 23 — 4 160 227 414 Special Mention (6) — — — — — — — — Classified (7-9) — — 1 12 — 129 32 174 Total 14,008 13,726 7,194 3,386 1,165 13,557 120,899 173,935 Combined Satisfactory (1-4) 230,874 1,157,079 1,110,580 500,188 353,498 1,012,644 220,677 4,585,540 Watch (5) — — 23 — 177 18,386 276 18,862 Special Mention (6) — 1,230 4,841 — — 4,400 11,200 21,671 Classified (7-9) — — 1 162 — 10,589 416 11,168 Total $ 230,874 $ 1,158,309 $ 1,115,445 $ 500,350 $ 353,675 $ 1,046,019 $ 232,569 $ 4,637,241 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) — — — — |
