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Note 9 - Allowance for Credit Losses and Credit Quality Information

3 Months Ended

Mar. 31, 2024

Allowance For Loan Losses And Credit Quality Information [Text Block]

(9) Allowance for Credit Losses and Credit Quality Information

The allowance for credit losses is summarized as follows:

(Dollars in thousands)	Single Family			Commercial Real Estate			Consumer			Commercial Business			Total
Balance, December 31, 2023	$	1,426			7,514			607			2,277			11,824
Provision for losses		(181	)		(94	)		(111	)		178			(208	)
Charge-offs		(30	)		0			0			0			(30	)
Recoveries		0			0			0			0			0
Balance, March 31, 2024	$	1,215			7,420			496			2,455			11,586

Balance, December 31, 2022	$	1,261			7,026			1,058			932			10,277
January 1, 2023 adoption of ASU 2016-13		(259	)		512			(485	)		1,302			1,070
Provision for losses		(44	)		23			46			(57	)		(32	)
Recoveries		1			0			1			25			27
Balance, March 31, 2023	$	959			7,561			620			2,202			11,342

Allocated to:
Individual reserves	$	28			0			103			297			428
Collective reserves		1,398			7,514			504			1,980			11,396
Balance, December 31, 2023	$	1,426			7,514			607			2,277			11,824

Allocated to:
Individual reserves	$	26			0			97			296			419
Collective reserves		1,189			7,420			399			2,159			11,167
Balance, March 31, 2024	$	1,215			7,420			496			2,455			11,586

Loans receivable at December 31, 2023:
Individually reviewed for impairment	$	979			668			425			2,212			4,284
Collectively reviewed for impairment		263,324			489,285			42,309			58,906			853,824
Ending balance	$	264,303			489,953			42,734			61,118			858,108

Loans receivable at March 31, 2024:
Individually reviewed for impairment	$	958			636			382			1,284			3,260
Collectively reviewed for impairment		259,644			502,703			40,728			62,395			865,470
Ending balance	$	260,602			503,339			41,110			63,679			868,730

The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2023, and uses a standardized process to determine the appropriateness of the allowance for credit losses (ACL) for the commercial real estate, commercial business, single family, and consumer loan portfolios. The determination of the ACL for each of these portfolios is calculated on a pooled basis when similar risk characteristics exist and on an individual basis when loans do not share risk characteristics, such as all non-performing loans. Qualitative reserves are also established and reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience.

Collateral dependent loans are those for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not typically share similar risk characteristics with other loans and expected credit losses are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. Estimates of expected credit losses for collateral dependent loans, whether or not foreclosure is probable, are based on the fair value of the collateral, adjusted for selling costs when repayment depends on the sale of the collateral. The estimates are reviewed periodically, and any adjustments are recorded in the provision for credit losses in the periods in which the adjustments become known and loans are charged off to the extent they are deemed to be uncollectible.

The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the consolidated balance sheet and totaled $3.2 million and $3.0 million at March 31, 2024 and December 31, 2023, respectively, and was excluded from the estimated credit losses.

In addition to the ACL on loans, the Company has established an ACL on unfunded commitments that is included in other liabilities on the consolidated balance sheets. This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments. This amount is determined quarterly based on an estimate of the outstanding commitments that are anticipated to be funded and multiplying those amounts by the loss rate for their loan category. The allowance for unfunded commitments was not material at March 31, 2024 and was $0.1 million at March 31, 2023.

The provision for credit losses is determined by the Company as the amount to be added to the ACL for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. No provision for credit losses was recorded on available-for-sale investment securities for the quarters ended March 31, 2024 or 2023.

The following table presents the components of the provision for credit losses for the first quarters of 2024 and 2023.

	Three months ended March 31,
(Dollars in thousands)	2024			2023
Provision for credit losses on:
Loans	$	(208	)		(32	)
Unfunded commitments		(1	)		24
Total	$	(209	)		(8	)

The following table presents total loans by risk categories and year of origination as of March 31, 2024:

(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving		Total
Single family
Pass	$	2,823		80,466		56,798		61,380		32,958		24,686		0		259,111
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		0		533		0		77		846		0		1,456
Doubtful		0		0		0		0		0		35		0		35
Loss		0		0		0		0		0		0		0		0
		2,823		80,466		57,331		61,380		33,035		25,567		0		260,602

Current period gross charge-offs		0		0		0		0		0		30		0		30

Commercial Real Estate
Pass		16,281		70,863		184,499		107,230		71,955		23,054		0		473,882
Special Mention		0		1,942		8,233		2,175		1,246		1,006		0		14,602
Substandard		0		462		347		910		10,948		2,188		0		14,855
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		16,281		73,267		193,079		110,315		84,149		26,248		0		503,339

Consumer
Pass		3,663		7,483		6,698		1,391		1,800		6,676		13,020		40,731
Special Mention		19		0		0		0		0		0		0		19
Substandard		0		7		29		109		0		97		28		270
Doubtful		0		14		0		0		0		0		19		33
Loss		0		7		0		13		0		0		37		57
		3,682		7,511		6,727		1,513		1,800		6,773		13,104		41,110

Commercial Business
Pass		1,776		12,060		6,376		3,198		2,960		407		33,475		60,252
Special Mention		60		0		0		0		0		0		171		231
Substandard		0		1,274		441		142		94		31		1,214		3,196
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		1,836		13,334		6,817		3,340		3,054		438		34,860		63,679

Total Loans	$	24,622		174,578		263,954		176,548		122,038		59,026		47,964		868,730

The following table presents total loans by risk categories and year of origination as of December 31, 2023:

(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving		Total
Single family
Unclassified	$	81,070		59,474		62,690		33,637		10,915		14,635		0		262,421
Special Mention		0		511		0		0		0		0		0		511
Substandard		64		546		0		79		182		462		0		1,333
Doubtful		0		0		0		0		24		14		0		38
Loss		0		0		0		0		0		0		0		0
		81,134		60,531		62,690		33,716		11,121		15,111		0		264,303

Commercial Real Estate
Unclassified		64,688		187,320		109,729		75,754		14,531		9,603		0		461,625
Special Mention		1,026		7,756		2,188		371		0		1,016		0		12,357
Substandard		2,225		388		292		10,867		637		1,562		0		15,971
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		67,939		195,464		112,209		86,992		15,168		12,181		0		489,953

Consumer
Unclassified		9,913		7,583		1,606		1,870		2,369		4,778		14,170		42,289
Special Mention		20		0		0		0		0		0		0		20
Substandard		8		26		52		0		3		113		30		232
Doubtful		15		0		0		0		0		0		19		34
Loss		3		0		116		0		0		0		40		159
		9,959		7,609		1,774		1,870		2,372		4,891		14,259		42,734
Current period gross charge-offs		0		1		0		0		0		49		0		50

Commercial Business
Unclassified		12,404		6,967		3,539		3,317		217		288		30,160		56,892
Special Mention		0		0		0		0		0		0		0		0
Substandard		1,703		483		152		104		11		31		1,742		4,226
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		14,107		7,450		3,691		3,421		228		319		31,902		61,118
Current period gross charge offs		174		0		0		0		0		0		160		334

Total Loans	$	173,139		271,054		180,364		125,999		28,889		32,502		46,161		858,108

Credit Quality Indicators

The Company categorized loans into risk categories based on relevant information about the ability of borrowers to service their debt. The information considered includes information, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company established a risk rating at origination for all commercial real estate and commercial business loans and management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the risk ratings for these loans on an annual basis.

Classified loans are categorized as special mention, substandard, doubtful, and loss. Loans classified as substandard, doubtful, or loss require the Bank to perform an analysis of the individual loan and charge off any loans, or portion thereof, that are deemed uncollectible. Loans not meeting the criteria on the following page to require an individual analysis that are not classified as special mention are considered to be unclassified or pass-rated loans.

The Company uses the following definitions for classifying loans:

Special Mention - Loans classified as special mention are loans that have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.

Substandard - Loans classified as substandard are loans that are generally inadequately protected by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have the weaknesses of those classified as substandard, with additional characteristics that make collection in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.

Loss - Loans classified as loss are essentially uncollateralized and/or considered uncollectible and of such little value that continuance as an asset on the balance sheet may not be warranted.

The aging of past due loans at March 31, 2024 and December 31, 2023 is summarized as follows:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due and Still Accruing
March 31, 2024
Single family	$	842		103		318		1,263		259,339		260,602		0
Commercial real estate:
Real estate rental and leasing		0		0		0		0		276,751		276,751		0
Other		0		619		0		619		225,969		226,588		0
Consumer		210		42		43		295		40,815		41,110		0
Commercial business		640		702		46		1,388		62,291		63,679		0
December 31, 2023	$	1,692		1,466		407		3,565		865,165		868,730		0
Single family	$	453		71		363		887		263,416		264,303		0
Commercial real estate:
Real estate rental and leasing		0		0		0		0		271,531		271,531		0
Other		0		0		399		399		218,023		218,422		0
Consumer		361		92		57		510		42,224		42,734		0
Commercial business		0		309		812		1,121		59,997		61,118		0
	$	814		472		1,631		2,917		855,191		858,108		0

The Company considers a loan to have defaulted when it becomes 90 or more days past due and the loan is classified as non-accruing. When a loan is classified as non-accruing, any accrued interest on the loan is reversed from interest income and any subsequent interest on the loan is recognized using the cash basis method of income recognition. A non-accruing loan may be reclassified as an accruing loan after the loan becomes current.

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

	March 31, 2024						December 31, 2023
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Loans with no related allowance recorded:
Single family	$	744		744		0		758		758		0
Commercial real estate:
Other		636		636		0		668		668		0
Consumer		269		269		0		306		306		0
Commercial business		22		22		0		0		0		0

Loans with an allowance recorded:
Single family		214		214		26		221		221		28
Consumer		113		113		97		119		119		103
Commercial business		1,262		1,596		296		2,212		2,546		297

Total:
Single family		958		958		26		979		979		28
Commercial real estate:
Other⁽¹⁾		636		636		0		668		668		0
Consumer⁽²⁾		382		382		97		425		425		103
Commercial business⁽³⁾		1,284		1,618		296		2,212		2,546		297
	$	3,260		3,594		419		4,284		4,618		428

(1) Secured by commercial land.

(2) Secured by second mortgages on single family housing and autos.

(3) Secured by business equipment.

At March 31, 2024 and December 31, 2023, non-accruing loans totaled $2.8 million and $3.8 million, respectively, for which the related allowance for credit losses was $0.4 million for both periods. All of the interest income recognized for non-accruing loans was recognized using the cash basis method of income recognition. Non-accruing loans for which no specific allowance has been recorded because management determined that the value of the collateral was sufficient to repay the loan totaled $1.2 million and $1.3 million at March 31, 2024 and December 31, 2023, respectively.

The non-accrual loans at March 31, 2024 and December 31, 2023 are summarized as follows:

(Dollars in thousands)	March 31, 2024		December 31, 2023
Single family	$	742	$	762
Commercial real estate:
Other		462		493
Consumer		334		376
Commercial business		1,262		2,187
	$	2,800	$	3,818

The reduction in non-performing assets during the first quarter of 2024 was primarily related to $0.8 million of principal payments received on a non-performing loan relationship in the agriculture industry. There were two loans secured by single family homes totaling less than $0.1 million in process of foreclosure at March 31, 2024 and no loans secured by single family homes in the process of foreclosure at December 31, 2023.

The Company accounts for loan modifications in accordance with the guidance in Accounting Standards Codification (ASC) Topic 326. Based on the guidance, a loan modification or refinancing results in a new loan if the terms of the new loan are at least as favorable to the lender as the terms with customers with similar collection risks that are not refinancing or restructuring their loans and the modification to the terms of the loan are more than minor. If a loan modification or refinancing does not result in a new loan, it is classified as a loan modification.

The Company had no loan modifications to borrowers experiencing financial difficulties in the first quarter of 2024 or 2023. At March 31, 2024, there were no commitments to lend additional funds to borrowers experiencing financial difficulty whose loan terms have been previously restructured. During the quarter ended March 31, 2024, there were no defaults on loans that had been modified during the 12 months ended March 31, 2024 for borrowers experiencing financial difficulty.