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LOANS AND ALLOWANCE FOR CREDIT LOSSES

3 Months Ended

Mar. 31, 2024

LOANS AND ALLOWANCE FOR CREDIT LOSSES

4.	LOANS AND ALLOWANCE FOR CREDIT LOSSES

A summary of the balances of loans follows:


	March 31,		December 31,
	2024		2023

	(in thousands)

Residential real estate:
One- to four-family	$	1,507,959	$	1,513,554
Second mortgages and equity lines of credit		173,613		177,135
Residential real estate construction		14,650		18,132
Total residential real estate loans		1,696,222		1,708,821

Commercial:
Commercial real estate		2,355,672		2,343,675
Commercial construction		234,811		208,443
Commercial and industrial		471,215		466,443
Total commercial loans		3,061,698		3,018,561

Consumer loans:
Auto		11,888		13,603
Personal		7,413		8,433
Total consumer loans		19,301		22,036

Total loans before basis adjustment		4,777,221		4,749,418
Basis adjustment associated with fair value hedge ⁽¹⁾		(536)		893
Total loans		4,776,685		4,750,311
Allowance for credit losses on loans		(48,185)		(47,972)
Loans, net	$	4,728,500	$	4,702,339

⁽¹⁾ Represents the basis adjustment associated with the application of hedge accounting on certain loans. Refer to Note 10 - Derivatives.

The net unamortized deferred loan origination costs included in total loans and leases were $8.7 million and $8.5 million as of March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024 and December 31, 2023, the commercial and industrial loans includes $278,000 and $321,000, respectively, of SBA PPP loans and $32,000 and $36,000, respectively, of deferred fees on the PPP loans. PPP loans are fully guaranteed by the U.S. government.

The Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying unaudited interim Consolidated Balance Sheets. The Company and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders, and disburses required escrow funds to relevant parties. At March 31, 2024 and December 31, 2023, the Company was servicing commercial loans for participants in the aggregate amount of $416.1 million and $413.0 million, respectively.

The following table presents the activity in the ACL on loans for the three months ended March 31, 2024 and 2023:


			Second Mortgages		Residential
	One- to Four-		and Equity		Real Estate		Commercial		Commercial		Commercial
	Family		Lines of Credit		Construction		Real Estate		Construction		and Industrial		Consumer		Total

	(in thousands)

Balance at December 31, 2023	$	12,101	$	964	$	418	$	21,288	$	4,824	$	8,107	$	270	$	47,972

Charge-offs		—		—		—		—		—		(228)		(49)		(277)
Recoveries		—		3		—		100		—		46		3		152
Provision		(66)		(25)		(87)		(125)		498		138		5		338
Balance at March 31, 2024	$	12,035	$	942	$	331	$	21,263	$	5,322	$	8,063	$	229	$	48,185


			Second Mortgages		Residential
	One- to Four-		and Equity		Real Estate		Commercial		Commercial		Commercial
	Family		Lines of Credit		Construction		Real Estate		Construction		and Industrial		Consumer		Total

	(in thousands)

Balance at December 31, 2022	$	11,532	$	924	$	280	$	20,357	$	4,645	$	7,236	$	262	$	45,236

Charge-offs		—		—		—		—		—		(7)		(7)		(14)
Recoveries		1		7		—		1		—		—		16		25
Provision		(25)		36		475		584		412		255		10		1,747
Balance at March 31, 2023	$	11,508	$	967	$	755	$	20,942	$	5,057	$	7,484	$	281	$	46,994

As of March 31, 2024, the carrying value of individually analyzed loans amounted to $12.2 million, with a related allowance of $72,000, and $12.1 million of individually analyzed loans were considered collateral-dependent. As of December 31, 2023, the carrying value of individually analyzed loans amounted to $17.5 million, with a related allowance of $108,000, and $17.3 million were considered collateral-dependent.

For collateral-dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

The following table presents the carrying value of collateral-dependent individually analyzed loans as of March 31, 2024 and December 31, 2023:


	March 31, 2024				December 31, 2023
			Related				Related
	Carrying Value		Allowance		Carrying Value		Allowance

	(in thousands)

Commercial:
Commercial real estate	$	1,496	$	5	$	7,416	$	5
Commercial and industrial		1,744		67		1,793		101
Commercial construction		—		—		—		—
Total Commercial		3,240		72		9,209		106
Residential real estate		8,866		—		8,054		—
Total	$	12,106	$	72	$	17,263	$	106

The following is a summary of past due and non-accrual loans at March 31, 2024 and December 31, 2023:


					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans on
	Past Due		Past Due		Past Due		Past Due		Non-accrual

	(in thousands)

March 31, 2024
Residential real estate:
One- to four-family	$	2,596	$	682	$	5,209	$	8,487	$	8,158
Second mortgages and equity lines of credit		10		608		316		934		708
Commercial real estate		850		641		5		1,496		1,496
Commercial construction		—		—		—		—		—
Commercial and industrial		66		603		1,301		1,970		1,744
Consumer:
Auto		66		—		2		68		27
Personal		53		25		18		96		27
Total	$	3,641	$	2,559	$	6,851	$	13,051	$	12,160

December 31, 2023
Residential real estate:
One- to four-family	$	4,704	$	2,413	$	4,418	$	11,535	$	7,785
Second mortgages and equity lines of credit		164		130		57		351		473
Commercial real estate		—		—		5,751		5,751		7,416
Commercial construction		—		—		—		—		—
Commercial and industrial		247		166		1,332		1,745		1,791
Consumer:
Auto		96		69		4		169		4
Personal		16		5		31		52		44
Total	$	5,227	$	2,783	$	11,593	$	19,603	$	17,513

At March 31, 2024 and December 31, 2023, there were no loans past due 90 days or more and still accruing.

Loan Modifications to Borrowers Experiencing Financial Difficulty

The Bank will modify the contractual terms of loans to a borrower experiencing financial difficulties as a way to mitigate loss and comply with regulations regarding bankruptcy and discharge situations. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

There were no material loan modifications based on borrower financial difficulty during the three months ended March 31, 2024 and 2023. There were no loans to borrowers experiencing financial difficulty that had a payment default during the three months ended March 31, 2024 and 2023 and were modified in the twelve months prior to that default. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure. Modified loans in default are individually evaluated for the allowance for credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off, and the allowance for credit losses is adjusted accordingly.

Credit Quality Indicators

Commercial

The Company uses a ten-grade internal loan rating system for commercial real estate, commercial construction and commercial loans, as follows:

Loans rated 1 – 6 are considered “pass”-rated loans with low to average risk.

Loans rated 7 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 8 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 9 are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in 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 rated 10 are considered “uncollectible” (loss), and of such little value that their continuance as loans is not warranted.

Loans not rated consist primarily of certain smaller balance commercial real estate and commercial loans that are managed by exception.

On an annual basis, or more often if needed, the Company formally reviews on a risk-adjusted basis, the ratings on substantially all commercial real estate, construction and commercial loans. Semi-annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

Residential and Consumer

On a monthly basis, the Company reviews the residential construction, residential real estate, and consumer installment portfolios for credit quality primarily through the use of delinquency reports.

The following table summarizes the Company’s loan portfolio by credit quality indicator and loan portfolio segment as of March 31, 2024:


															Revolving
													Revolving		Loans
													Loans		Converted
	Term Loans at Amortized Cost by Origination Year												Amortized		to Term
	2024		2023		2022		2021		2020		Prior		Cost		Loans		Total

	(in thousands)

As of March 31, 2024

Commercial real estate
Pass	$	24,559	$	147,200	$	826,882	$	455,253	$	233,191	$	614,772	$	—	$	—	$	2,301,857
Special mention		—		1,600		18,839		—		4,293		27,587		—		—		52,319
Substandard		—		—		—		—		—		1,496		—		—		1,496
Doubtful		—		—		—		—		—				—		—		—
Total commercial real estate		24,559		148,800		845,721		455,253		237,484		643,855		—		—		2,355,672
YTD gross charge-offs		—		—		—		—		—		—		—		—		—

Commercial and industrial
Pass		11,690		73,215		50,703		92,676		68,905		94,486		76,180		—		467,855
Special mention		—		—		427		184		22		883		100		—		1,616
Substandard		—		—		2		—		50		390		—		—		442
Doubtful		—		—		—		—		—		1,253		49		—		1,302
Total commercial and industrial		11,690		73,215		51,132		92,860		68,977		97,012		76,329		—		471,215
YTD gross charge-offs		—		—		153		65		3		7		—		—		228

Commercial construction
Pass		—		45,676		110,181		64,268		—		—		721		—		220,846
Special mention		—		4,240		9,725		—		—		—		—		—		13,965
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial construction		—		49,916		119,906		64,268		—		—		721		—		234,811
YTD gross charge-offs		—		—		—		—		—		—		—		—		—

Residential real estate
Accrual		12,179		135,862		431,542		471,589		199,720		271,197		163,938		1,329		1,687,356
Non-accrual		—		—		467		294		322		7,363		412		8		8,866
Total residential real estate		12,179		135,862		432,009		471,883		200,042		278,560		164,350		1,337		1,696,222
YTD gross charge-offs		—		—		—		—		—		—		—		—		—

Consumer
Accrual		2,349		5,510		4,791		1,912		803		2,928		954		—		19,247
Non-accrual		—		4		12		—		4		28		6		—		54
Total Consumer		2,349		5,514		4,803		1,912		807		2,956		960		—		19,301
YTD gross charge-offs		—		14		5		19		—		11		—		—		49

Total loans before basis adjustment	$	50,777	$	413,307	$	1,453,571	$	1,086,176	$	507,310	$	1,022,383	$	242,360	$	1,337	$	4,777,221
Total YTD gross charge-offs	$	—	$	14	$	158	$	84	$	3	$	18	$	—	$	—	$	277

The following table summarizes the Company’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2023:


															Revolving
													Revolving		Loans
													Loans		Converted
	Term Loans at Amortized Cost by Origination Year												Amortized		to Term
	2023		2022		2021		2020		2019		Prior		Cost		Loans		Total

	(in thousands)

As of December 31, 2023

Commercial real estate
Pass	$	152,047	$	828,335	$	455,996	$	234,585	$	233,713	$	405,103	$	—	$	—	$	2,309,779
Special mention		—		10,971		—		4,300		8,977		2,232		—		—		26,480
Substandard		—		—		—		—		—		1,670		—		—		1,670
Doubtful		—		—		—		—		—		5,746		—		—		5,746
Total commercial real estate		152,047		839,306		455,996		238,885		242,690		414,751		—		—		2,343,675
YTD gross charge-offs		—		—		—		—		—		4,171		—		—		4,171

Commercial and industrial
Pass		73,240		52,190		94,570		70,565		22,988		75,493		74,125		—		463,171
Special mention		—		454		4		23		2		948		50		—		1,481
Substandard		—		52		8		—		—		367		18		—		445
Doubtful		—		—		—		—		—		1,297		49		—		1,346
Total commercial and industrial		73,240		52,696		94,582		70,588		22,990		78,105		74,242		—		466,443
YTD gross charge-offs		24		113		14		5		8		2		—		—		166

Commercial construction
Pass		35,181		109,291		60,113		843		—		—		425		—		205,853
Special mention		—		2,590		—		—		—		—		—		—		2,590
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial construction		35,181		111,881		60,113		843		—		—		425		—		208,443
YTD gross charge-offs		—		—		—		—		—		—		—		—		—

Residential real estate
Accrual		138,541		434,421		480,010		202,118		38,675		239,185		166,144		1,469		1,700,563
Non-accrual		—		—		—		127		956		6,959		216		—		8,258
Total residential real estate		138,541		434,421		480,010		202,245		39,631		246,144		166,360		1,469		1,708,821
YTD gross charge-offs		—		—		—		—		—		—		—		—		—

Consumer
Accrual		8,218		5,366		2,254		1,021		3,135		963		1,031		—		21,988
Non-accrual		14		18		5		—		2		4		5		—		48
Total Consumer		8,232		5,384		2,259		1,021		3,137		967		1,036		—		22,036
YTD gross charge-offs		7		16		4		15		18		29		—		—		89

Total loans before basis adjustment	$	407,241	$	1,443,688	$	1,092,960	$	513,582	$	308,448	$	739,967	$	242,063	$	1,469	$	4,749,418
Total YTD gross charge-offs	$	31	$	129	$	18	$	20	$	26	$	4,202	$	—	$	—	$	4,426