Allowance for Credit Losses and Reserve for Unfunded Loan Commitments

12 Months Ended

Dec. 31, 2024

Allowance for Credit Losses and Reserve for Unfunded Loan Commitments

Allowance for Credit Losses and Reserve for Unfunded Loan Commitments

4.    Allowance for Credit Losses and Reserve for Unfunded Loan Commitments

Allowance for Credit Losses

The Company has an established methodology to determine the adequacy of the allowance for credit losses that assesses the risks and losses inherent in the loan portfolio. At a minimum, the adequacy of the allowance for credit losses is reviewed by Management on a quarterly basis. The allowance is increased by provisions charged to expense and is reduced by net charge-offs. For purposes of determining the allowance for credit losses, the Company has segmented the loans in its portfolio by loan type. Loans are segmented into the following pools: SBA, commercial, residential mortgages, consumer and residential construction loans. Certain portfolio segments are further broken down into classes based on the associated risks within those segments and the type of collateral underlying each loan. Commercial loans are divided into the following four classes: commercial mortgage, commercial real estate construction, commercial & industrial and SBA 504. Consumer loans are divided into two classes as follows: home equity and other.

The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The same standard methodology is used, regardless of loan type. Specific reserves are evaluated for individually evaluated loans. The general reserve is set based upon a representative average historical net charge-off rate adjusted for the following environmental factors: delinquency and impairment trends, charge-off and recovery trends, volume and loan term trends, changes in risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes. These environmental factors include reasonable and supportable forecasts. Within the historical net charge-off rate, the Company weights the data dating back to 2015 on a straight line basis and projects the losses on a weighted average remaining maturity basis for each segment. All of the environmental factors are ranked and assigned a basis points value based on the following scale: low, low moderate, moderate, high moderate and high risk. Each environmental factor is evaluated separately for each class of loans and risk weighted based on its individual characteristics.

● For SBA 7(a), commercial and residential construction loans, the estimate of loss based on pools of loans with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis. The loan grading system incorporates reviews of the financial performance of the borrower, including cash flow, debt-service coverage ratio, earnings power, debt level and equity position, in conjunction with an assessment of the borrower’s industry and future prospects. It also incorporates analysis of the type of collateral and the relative loan to value ratio.

● For residential mortgage and consumer loans, the estimate of loss is based on pools of loans with similar characteristics. Factors such as delinquency status and type of collateral are evaluated. Factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as needed.

According to the Company’s policy, a loss (“charge-off”) is to be recognized and charged to the allowance for credit losses as soon as a loan is recognized as uncollectable. All credits which are 90 days past due must be analyzed for the Company’s ability to collect on the credit. Once a loss is known to exist, the charge-off approval process is immediately expedited. This charge-off policy is followed for all loan types.

The allocated allowance is the total of identified specific and general reserves by loan category. The allocation is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of the portfolio.

The following tables detail the activity in the allowance for credit losses by portfolio segment for the past two years:

	For the year ended December 31, 2024
										Residential
(In thousands)	SBA		Commercial		Residential		Consumer		Construction		Total
Balance, beginning of period	$	1,221	$	15,876	$	6,529	$	1,022	$	1,206	$	25,854
Charge-offs		(370)		(633)		(150)		(361)		(277)		(1,791)
Recoveries		47		204		—		67		—		318
Net charge-offs		(323)		(429)		(150)		(294)		(277)		(1,473)
Provision for (credit to) credit losses charged to expense		637		1,914		(125)		47		(66)		2,407
Balance, end of period	$	1,535	$	17,361	$	6,254	$	775	$	863	$	26,788

	For the year ended December 31, 2023
										Residential
(In thousands)	SBA		Commercial		Residential		Consumer		Construction		Total
Balance, beginning of period	$	875	$	15,254	$	5,450	$	990	$	2,627	$	25,196
Impact of adoption of ASU 2016-13 ("CECL")		163		171		376		101		36		847
Charge-offs		(213)		(752)		(93)		(578)		(1,000)		(2,636)
Recoveries		20		400		—		84		111		615
Net charge-offs		(193)		(352)		(93)		(494)		(889)		(2,021)
Provision for (credit to) credit losses charged to expense		376		803		796		425		(568)		1,832
Balance, end of period	$	1,221	$	15,876	$	6,529	$	1,022	$	1,206	$	25,854

The following tables present loans and related allowance for credit losses, by portfolio segment, as of December 31^st for the past two years:

	December 31, 2024
	SBA, Held									Residential
(In thousands)	for Investment		Commercial		Residential		Consumer			Construction	Total
Allowance for credit losses ending balance:
Individually evaluated for impairment	$	755	$	62	$	52	$	—	$	102	$	971
Collectively evaluated for impairment		780		17,299		6,202		775		761		25,817
Total	$	1,535	$	17,361	$	6,254	$	775	$	863	$	26,788
Loan ending balances:
Individually evaluated for impairment	$	3,850	$	2,974	$	6,471	$	—	$	547	$	13,842
Collectively evaluated for impairment		34,459		1,408,655		624,456		76,711		90,371		2,234,652
Total loans held for investment	$	38,309	$	1,411,629	$	630,927	$	76,711	$	90,918	$	2,248,494

	December 31, 2023
	SBA, Held									Residential
(In thousands)	for Investment		Commercial		Residential		Consumer			Construction	Total
Allowance for credit losses ending balance:
Individually evaluated for impairment	$	348	$	341	$	306	$	—	$	—	$	995
Collectively evaluated for impairment		873		15,535		6,223		1,022		1,206		24,859
Total	$	1,221	$	15,876	$	6,529	$	1,022	$	1,206	$	25,854
Loan ending balances:
Individually evaluated for impairment	$	3,444	$	1,948	$	11,272	$	381	$	2,141	$	19,186
Collectively evaluated for impairment		37,458		1,275,512		620,234		72,295		129,136		2,134,635
Total loans held for investment	$	40,902	$	1,277,460	$	631,506	$	72,676	$	131,277	$	2,153,821

The Company allocated an additional reserve for loans with a substandard rating, not otherwise considered for specific reserves. The change in the allowance for credit losses for the year-ended December 31, 2024 was mainly due to loan growth, partially offset by charge-offs.

Reserve for Unfunded Loan Commitments

The Company is required to include unfunded commitments that are expected to be funded in the future within the allowance calculation, other than those that are unconditionally cancelable. To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate. To determine the expected funding rate, the Company uses a historical utilization rate for each segment. As noted above, the allowance for credit losses on unfunded loan commitments is included in Other liabilities on the Consolidated Balance Sheet. At December 31, 2024 and 2023, a $0.6 million commitment reserve was reported.

Valuation Allowance: Debt Security Available for Sale

The Company maintains a valuation allowance on AFS debt securities. Adjustments to the reserve are made through provision for credit losses and applied to the reserve which is classified in “Debt securities available for sale” on the Consolidated Balance Sheet. At December 31, 2024, a $2.8 million reserve was reported, compared to $1.3 million at December 31, 2023.

The Company maintains a valuation allowance on HTM debt securities at a level that Management believes is adequate to absorb estimated probable losses. At December 31, 2024 and December 31, 2023, no reserve was reported on the Consolidated Balance Sheet as these securities are either explicitly or implicitly guaranteed by the U.S. Government, are highly rated by major agencies and have a long history of no credit losses.