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ALLOWANCE FOR LOAN LOSSES
 6 Months Ended
Jun. 30, 2022
Receivables [Abstract]  
ALLOWANCE FOR LOAN LOSSES

NOTE 4. ALLOWANCE FOR LOAN LOSSES

 

The changes in the allowance for loan losses by portfolio segment are presented in the following tables for the periods indicated (in thousands):

   Three Months Ended June 30, 2022 
   One-to-four
Family
Residential		   Commercial
Real Estate		   Home Equity
and Lines of
Credit		   Residential
Construction		   Other
Construction
and Land		   Commercial   Consumer   Total 
Beginning balance  $1,343   $4,570   $227   $404   $857   $6,375   $173   $13,949 
Provision   (18)   18    16    (3)   21    82    3    119 
Charge-offs   —    —    —    —    —    (182)   (10)   (192)
Recoveries   106    —    —    —    —    118    —    224 
Ending balance  $1,431   $4,588   $243   $401   $878   $6,393   $166   $14,100 
   Three Months Ended June 30, 2021 
   One-to-four
Family
Residential		   Commercial
Real Estate		   Home Equity
and Lines of
Credit		   Residential
Construction		   Other
Construction
and Land		   Commercial   Consumer   Total 
Beginning balance  $1,270   $4,411   $207   $320   $918   $5,615   $218   $12,959 
Provision   (47)   303    19    52    (158)   99    41    309 
Charge-offs   1    —    —    —    —    (98)   —    (97)
Recoveries   3    —    —    —    17    134    —    154 
Ending balance  $1,227   $4,714   $226   $372   $777   $5,750   $259   $13,325 
                                         
   Six Months Ended June 30, 2022 
   One-to-four
Family
Residential		   Commercial
Real Estate		   Home Equity
and Lines of
Credit		   Residential
Construction		   Other
Construction
and Land		   Commercial   Consumer   Total 
Beginning balance  $1,363   $4,688   $246   $430   $824   $5,985   $187   $13,723 
Provision   (40)   (152)   (3)   (29)   35    627    (11)   427 
Charge-offs   —    —    —    —    —    (529)   (10)   (539)
Recoveries   108    52    —    —    19    310    —    489 
Ending balance  $1,431   $4,588   $243   $401   $878   $6,393   $166   $14,100 
                                         
   Six Months Ended June 30, 2021 
  

One-to-four

Family

Residential

  

Commercial

Real Estate

  

Home Equity

and Lines of

Credit

  

Residential

Construction

  

Other

Construction

and Land

   Commercial   Consumer   Total 
Beginning balance  $1,297   $4,559   $231   $389   $843   $5,118   $135   $12,572 
Provision   (60)   155    (5)   (17)   (83)   437    124    551 
Charge-offs   (29)   —    —    —    —    (204)   —    (233)
Recoveries   19    —    —    —    17    399    —    435 
Ending balance  $1,227   $4,714   $226   $372   $777   $5,750   $259   $13,325 

 

The allocation of the allowance for loan losses and the recorded investment in loans is presented in the following tables by portfolio segment and reserving methodology as of the dates indicated (in thousands):

   June 30, 2022 
   One-to-four
Family
Residential		   Commercial
Real Estate		   Home Equity
and Lines of
Credit		   Residential
Construction		   Other
Construction
and Land		   Commercial   Consumer   Total 
Allowance for loan losses                                        
Individually evaluated for impairment  $17   $—   $—   $—   $—   $—   $—   $17 
Collectively evaluated for impairment   1,414    4,588    243    401    878    6,393    166    14,083 
Ending Balance  $1,431   $4,588   $243   $401   $878   $6,393   $166   $14,100 
                                         
Loans receivable                                        
Individually evaluated for impairment  $618   $1,825   $—   $—   $—   $—   $—   $2,443 
Collectively evaluated for impairment   144,347    408,666    21,419    36,300    81,973    251,289    6,376    950,370 
Loans and Leases Receivable, Gross  $144,965   $410,491   $21,419   $36,300   $81,973   $251,289   $6,376   $952,813 
   December 31, 2021 
   One-to-four
Family
Residential		   Commercial
Real Estate		   Home Equity
and Lines of
Credit		   Residential
Construction		   Other
Construction
and Land		   Commercial   Consumer   Total 
Allowance for loan losses                                        
Individually evaluated for impairment  $20   $—   $—   $—   $—   $—   $—   $20 
Collectively evaluated for impairment   1,343    4,688    246    430    824    5,985    187    13,703 
Ending Balance  $1,363   $4,688   $246   $430   $824   $5,985   $187   $13,723 
                                         
Loans receivable                                        
Individually evaluated for impairment  $735   $2,080   $—   $—   $—   $28   $—   $2,843 
Collectively evaluated for impairment   131,870    420,797    21,601    38,750    75,349    235,028    7,237    930,632 
Loans and Leases Receivable, Gross  $132,605   $422,877   $21,601   $38,750   $75,349   $235,056   $7,237   $933,475 

 

Portfolio Quality Indicators

The Company’s loan portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. The Company’s internal credit risk grading system is based on experiences with similarly graded loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter, at which time management analyzes the resulting information, as well as other external statistics and factors, to track loan performance.

The Company’s internally assigned grades pursuant to the Board-approved lending policy are as follows:

·Pass (1-5) – Acceptable loans with any identifiable weaknesses appropriately mitigated. 
·Special Mention (6) – Potential weakness or identifiable weakness present without appropriate mitigating factors; however, loan continues to perform satisfactorily with no material delinquency noted.  This may include some deterioration in repayment capacity and/or loan-to-value of securing collateral.
·Substandard (7) – Significant weakness that remains unmitigated, most likely due to diminished repayment capacity, serious delinquency, and/or marginal performance based upon restructured loan terms.  
·Doubtful (8) – Significant weakness that remains unmitigated and collection in full is highly questionable or improbable.
·Loss (9) – Collectability is unlikely resulting in immediate charge-off.

 

Description of Segment and Class Risks

Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list is not exhaustive, it provides a description of the risks that management has determined are the most significant.

 

One-to-four family residential

 

We centrally underwrite each of our one-to-four family residential loans using credit scoring and analytical tools consistent with the Board-approved lending policy and internal procedures based upon industry best practices and regulatory directives. We also evaluate the value and marketability of the collateral. Common risks to each class of non-commercial loans, including one-to-four family residential, include risks that are not specific to individual transactions such as general economic conditions within our markets, particularly unemployment and potential declines in real estate values. Personal events such as death, disability or change in marital status also add risk to non-commercial loans.

Commercial real estate

 

Commercial mortgage loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans are secured by real property and possibly other business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Other commercial real estate loans consist primarily of loans secured by multifamily housing. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates.

 

Home equity and lines of credit

 

Home equity loans are often secured by first or second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render our second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken our collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines of credit in excess of the collateral value if there have been significant declines since origination.

 

Residential construction and other construction and land

 

Residential mortgage construction loans are typically secured by undeveloped or partially developed land with funds to be disbursed as home construction is completed contingent upon receipt and satisfactory review of invoices and inspections. Declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the collateral’s current market value. Non-commercial construction and land development loans can experience delays in completion and/or cost overruns that exceed the borrower’s financial ability to complete the project. Cost overruns can result in foreclosure of partially completed collateral with unrealized value and diminished marketability. Commercial construction and land development loans are dependent on the supply and demand for commercial real estate in the markets we serve as well as the demand for newly constructed residential homes and building lots. Deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers.

 

Commercial

 

We centrally underwrite each of our commercial loans, which includes agricultural loans and specialty floor-plan lending, based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We strive to gain a complete understanding of our borrower’s businesses, including the experience and background of the principals of such businesses. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, or other assets including accounts receivable and inventory, we gain an understanding of the likely value of the collateral and what level of strength it brings to the loan transaction. To the extent that the principals or other parties are obligated under the note or guaranty agreements, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including volatility or seasonality of cash flows, changing demand for products and services, personal events such as death, disability or change in marital status, and reductions in the value of our collateral. Common risks to specialty floor-plan lending includes adverse conditions in the automobile market and risks associated with declining values. The performance of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.

 

Consumer

 

The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, purchased student loans for which there is a 98% guarantee, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since the date of loan origination in excess of principal repayment. Following the sale of $24.6 million of the purchased student loans during the fourth quarter of 2021, as of December 31, 2021, the balance of purchased student loans was $0.7 million, which decreased to zero as of June 30, 2022.

The recorded investment in loans by portfolio segment and loan grade is presented in the following tables as of the dates indicated (in thousands):

   June 30, 2022 
Loan Grade  One-to-Four
Family
Residential		   Commercial
Real Estate		   Home Equity
and Lines of
Credit		   Residential
Construction		   Other
Construction
and Land		   Commercial   Consumer   Total 
1  $—   $—   $—   $—   $—   $308   $157   $465 
2   —    232    —    —    —    249    —    481 
3   6,345    36,032    3,409    —    3,306    12,102    50    61,244 
4   117,287    304,414    15,776    30,096    64,310    103,174    5,062    640,119 
5   18,971    65,004    1,942    6,204    14,357    132,274    1,064    239,816 
6   1,677    2,881    292    —    —    2,854    16    7,720 
7   685    1,928    —    —    —    328    27    2,968 
Total  $144,965   $410,491   $21,419   $36,300   $81,973   $251,289   $6,376   $952,813 
     
   December 31, 2021 
Loan Grade  One-to-Four
Family
Residential		   Commercial
Real Estate		   Home Equity
and Lines of
Credit		   Residential
Construction		   Other
Construction
and Land		   Commercial   Consumer   Total 
1  $—   $—   $—   $—   $—   $306   $191   $497 
2   —    245    —    —    —    247    —    492 
3   8,719    39,770    3,477    —    3,959    11,071    53    67,049 
4   103,893    313,071    16,013    35,707    57,750    102,246    5,461    634,141 
5   17,482    60,576    1,715    3,043    13,640    119,455    1,434    217,345 
6   1,433    6,729    318    —    —    1,123    44    9,647 
7   1,078    2,486    78    —    —    608    54    4,304 
Total  $132,605   $422,877   $21,601   $38,750   $75,349   $235,056   $7,237   $933,475 

Delinquency Analysis of Loans by Class

 

An aging analysis of the recorded investment of loans by portfolio segment, including loans on nonaccrual status as well as accruing TDRs and purchased student loans for which there is a 98% guarantee, is presented in the following tables as of the dates indicated (in thousands).

Schedule of Aging Analysis of Recorded Investment

   June 30, 2022 
   30-59 Days Past
Due		   60-89 Days Past
Due		   90 Days and Over
Past Due		   Total Past
Due		   Current   Total Loans
Receivable		 
One-to-four family residential  $—   $39   $—   $39   $144,926   $144,965 
Commercial real estate   —    —    —    —    410,491    410,491 
Home equity and lines of credit   —    —    —    —    21,419    21,419 
Residential construction   —    —    —    —    36,300    36,300 
Other construction and land   —    —    —    —    81,973    81,973 
Commercial   —    —    54    54    251,235    251,289 
Consumer   —    —    —    —    6,376    6,376 
Total  $—   $39   $54   $93   $952,720   $952,813 
                               
   December 31, 2021 
   30-59 Days Past
Due		   60-89 Days Past
Due		   90 Days and Over
Past Due		   Total Past
Due		   Current   Total Loans
Receivable		 
One-to-four family residential  $—   $—   $50   $50   $132,555   $132,605 
Commercial real estate   —    —    —    —    422,877    422,877 
Home equity and lines of credit   —    —    —    —    21,601    21,601 
Residential construction   —    —    —    —    38,750    38,750 
Other construction and land   —    —    —    —    75,349    75,349 
Commercial   54    —    —    54    235,002    235,056 
Consumer   —    —    590    590    6,647    7,237 
Total  $54   $—   $640   $694   $932,781   $933,475 

The decrease in past due consumer loans is primarily attributable to the sale of the purchased student loan portfolio, the balance of which, as of December 31, 2021, was $0.7 million, and decreased to zero as of June 30, 2022.

 

Impaired Loans

 

The following table presents recorded investments in loans considered to be impaired and related information on those impaired loans as of June 30, 2022 and December 31, 2021 (in thousands).

   June 30, 2022   December 31, 2021 
   Recorded
Balance		   Unpaid
Principal
Balance		   Specific
Allowance		   Recorded
Balance		   Unpaid
Principal
Balance		   Specific
Allowance		 
Loans without a valuation allowance                              
One-to-four family residential  $276   $276   $—   $387   $387   $— 
Commercial real estate   1,825    1,825    —    2,080    2,132    — 
Commercial   —    —    —    28    28    — 
    2,101    2,101    —    2,495    2,547    — 
                               
Loans with a valuation allowance                              
One-to-four family residential   342    342    17    348    348    20 
    342    342    17    348    348    20 
                               
Total                              
One-to-four family residential   618    618    17    735    735    20 
Commercial real estate   1,825    1,825    —    2,080    2,132    — 
Commercial   —    —    —    28    28    — 
   $2,443   $2,443   $17   $2,843   $2,895   $20 

The average recorded investment in impaired loans by portfolio segment and interest income recognized on those impaired loans is presented in the following table for the periods indicated (in thousands):

   Three Months Ended June 30, 
   2022   2021 
   Average
Investment in
Impaired
Loans		   Interest
Income
Recognized		   Average
Investment in
Impaired
Loans		   Interest
Income
Recognized		 
Loans without a valuation allowance                    
One-to-four family residential  $277   $3   $282   $3 
Commercial real estate   1,857    24    1,542    18 
    2,134    27    1,824    21 
                     
Loans with a valuation allowance                    
One-to-four family residential   343    3    356    3 
    343    3    356    3 
                     
Total                    
One-to-four family residential   620    6    638    6 
Commercial real estate   1,857    24    1,542    18 
   $2,477   $30   $2,180   $24 
   Six Months Ended June 30, 
   2022   2021 
   Average
Investment in
Impaired
Loans		   Interest
Income
Recognized		   Average
Investment in
Impaired
Loans		   Interest
Income
Recognized		 
Loans without a valuation allowance                    
One-to-four family residential  $278   $6   $283   $6 
Commercial real estate   1,885    47    1,562    40 
    2,163    53    1,845    46 
                     
Loans with a valuation allowance                    
One-to-four family residential   344    6    357    6 
    344    6    357    6 
                     
Total                    
One-to-four family residential   622    12    640    12 
Commercial real estate   1,885    47    1,562    40 
   $2,507   $59   $2,202   $52 

 

Nonperforming Loans

 

The recorded investment of nonperforming loans by portfolio segment is presented in the table below as of the dates indicated (in thousands):

   June 30,   December 31, 
   2022   2021 
One-to-four family residential  $24   $107 
Commercial real estate   —    767 
Commercial   289    473 
Consumer   —    2 
Nonperforming loans  $313   $1,349 

TDRs

 

The recorded investment in performing and nonperforming TDRs by portfolio segment is presented in the tables below as of the dates indicated (in thousands):

   June 30, 2022 
   Performing   Nonperforming   Total 
   TDRs   TDRs   TDRs 
One-to-four family residential  $563   $—   $563 
Commercial real estate   911    —    911 
Commercial   198    101    299 
Consumer   10    —    10 
Total  $1,682   $101   $1,783 
                
   December 31, 2021 
   Performing   Nonperforming   Total 
   TDRs   TDRs   TDRs 
One-to-four family residential  $577   $—   $577 
Commercial real estate   961    —    961 
Commercial   205    110    315 
Consumer   37    2    39 
Total  $1,780   $112   $1,892 

Loan modifications that were deemed TDRs at the time of the modification are presented in the table below for the periods indicated (in thousands):

There were no new TDR modifications during the three months ended June 30, 2022 and 2021. There were no new TDR modifications during the six months ended June 30, 2022.

   Modification Type   Number of TDR
Loans		   Pre-Modification
Recorded
Investment		   Post-Modification
Recorded
Investment		 
Six months ended June 30, 2021                
  Interest rate concession   1   $357   $357 

During the three and six month period ending June 30, 2022 or 2021, no loans previously modified as TDRs within the previous 12 months defaulted.