The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2021. The allowance for credit losses is measured using an average historical loss model that incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics, including borrower type, collateral and repayment types and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily classified loans with a balance greater than or equal to $100,000, are evaluated on an individual basis.

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 amortized cost of loans 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.

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.

The following tables present the classes of loans by aging as of the dates indicated.

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.

No interest income was recorded on these loans for the three months ended March 31, 2023 and 2022, respectively.

Nonaccrual loans for which there is no related allowance for credit losses as of March 31, 2023 had an amortized cost of $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 months ended March 31, 2023 and 2022. During the three months ended March 31, 2023, the Company recorded provision expense of $1.5 million on its portfolio of outstanding loans. During the three months ended March 31, 2022, the Company did not record a provision expense on its portfolio of outstanding loans

The following table presents the activity in the allowance for unfunded commitments by portfolio segment for the three months ended March 31, 2023 and 2022. The provision for losses on unfunded commitments for the three months ended March 31, 2023 was a credit (negative expense) of $826,000, compared to a credit (negative expense) of $193,000 for the three months ended March 31, 2022. The level and mix of unfunded commitments resulted in a decrease in the required reserve for such potential losses in the three month periods presented.

The portfolio segments used in the preceding tables correspond to the loan classes used in all other tables in Note 6 as follows:

The following table presents the amortized cost basis of collateral-dependent loans by class of loans:


	March 31, 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		504		2		1,637		40
Non-owner occupied one- to four-family residential		—		—		—		—
Commercial real estate		1,519		—		1,571		—
Other residential		—		—		—		—
Commercial business		—		—		586		125
Industrial revenue bonds		—		—		—		—
Consumer auto		—		—		—		—
Consumer other		—		—		160		80
Home equity lines of credit		135		—		135		—

Total	$	2,542	$	194	$	4,473	$	245

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the troubled debt restructuring recognition and measurement guidance and, instead, requires that an entity evaluate whether the loan modification represents a new loan or a continuation of an existing loan. It also enhances existing disclosure requirements and introduces new disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 was effective for the Company on January 1, 2023.

Adoption of this amendment 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, effective January 1, 2023, 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 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 months ended March 31, 2023. Each of the types of concessions granted comprised less than 2.5% of their respective classes of loan portfolios at March 31, 2023.


	Amortized Cost Basis at March 31, 2023
	Interest Rate		Term				Total
	Reduction		Extension		Combination		Modification

		(In Thousands)
Construction and land development	$	—	$	—	$	1,301	$	1,301
One- to four-family residential		—		145		—		145
Other residential		—		21,679		—		21,679
Commercial real estate		—		—		21,181		21,181
Commercial business		—		—		—		—
Consumer		7		—		—		7
	$	7	$	21,824	$	22,482	$	44,313

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 at March 31, 2023 of loans that were modified during the three months ended March 31, 2023:


	March 31, 2023
			30-89 Days		Over 90 Days
	Current		Past Due		Past Due		Total

		(In Thousands)
Construction and land development	$	1,301	$	—	$	—	$	1,301
One- to four-family residential		145		—		—		145
Other residential		21,679		—		—		21,679
Commercial real estate		21,181		—		—		21,181
Commercial business		—		—		—		—
Consumer		7		—		—		7
	$	44,313	$	—	$	—	$	44,313

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 months ended March 31, 2022, by type of modification:


	Three Months Ended March 31, 2022
							Total
	Interest Only		Term		Combination		Modification

		(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 months ended March 31, 2022, $221,000 of loans met the criteria for placement back on accrual status. The criteria was generally a minimum of six months of consistent and timely payment performance under original or modified terms.

The nature and extent of impairments of modified loans, including those which have experienced a subsequent payment default, are considered in the determination of an appropriate level of the allowance for credit losses. The Company utilizes an internal risk rating system comprised of a series of grades to categorize loans according to perceived risk associated with the expectation of debt repayment. The analysis of the borrower’s ability to repay considers specific information, including but not limited to current financial information, historical payment experience, industry information, collateral levels and collateral types. A risk rating is assigned at loan origination and then monitored throughout the contractual term for possible risk rating changes.

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. Loans considered loss are 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 March 31, 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)	$	4,125	$	20,949	$	4,457	$	585	$	—	$	—	$	4,392	$	34,508
Watch (5)		—		—		—		—		—		—		—		—
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		—		—		—
Total		4,125		20,949		4,457		585		—		—		4,392		34,508

Subdivision construction
Satisfactory (1-4)		116		4,304		25,820		285		201		698		—		31,424
Watch (5)		—		—		—		—		—		—		—		—
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		—		—		—
Total		116		4,304		25,820		285		201		698		—		31,424

Construction and land development
Satisfactory (1-4)		7,781		16,653		5,622		5,181		7,353		4,546		640		47,776
Watch (5)		—		—		—		—		—		—		—		—
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		—		384		384
Total		7,781		16,653		5,622		5,181		7,353		4,546		1,024		48,160

Other construction
Satisfactory (1-4)		15,105		182,060		380,792		98,086		20,692		—		—		696,735
Watch (5)		—		—		—		—		—		—		—		—
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		—		—		—
Total		15,105		182,060		380,792		98,086		20,692		—		—		696,735

One- to four-family residential
Satisfactory (1-4)		15,054		340,941		217,309		124,132		71,252		133,381		683		902,752
Watch (5)		—		—		—		—		178		1,216		54		1,448
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		155		—		960		—		1,115
Total		15,054		340,941		217,309		124,287		71,430		135,557		737		905,315

Other residential
Satisfactory (1-4)		11,844		84,799		194,701		232,307		141,040		211,284		6,197		882,172
Watch (5)		—		—		—		—		—		3,300		—		3,300
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		—		—		—
Total		11,844		84,799		194,701		232,307		141,040		214,584		6,197		885,472

Commercial real estate
Satisfactory (1-4)		12,161		236,837		229,792		108,522		191,067		739,662		27,532		1,545,573
Watch (5)		—		—		—		—		—		13,328		—		13,328
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		1,526		—		1,526
Total		12,161		236,837		229,792		108,522		191,067		754,516		27,532		1,560,427

Commercial business
Satisfactory (1-4)		6,830		59,972		50,760		38,277		14,874		67,547		61,272		299,532
Watch (5)		—		—		—		—		—		19		—		19
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		16		—		—		—		—		—		16
Total		6,830		59,988		50,760		38,277		14,874		67,566		61,272		299,567

Consumer
Satisfactory (1-4)		4,647		18,556		9,767		4,869		2,075		17,045		125,257		182,216
Watch (5)		—		—		26		—		6		160		76		268
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		8		8		5		228		309		558
Total		4,647		18,556		9,801		4,877		2,086		17,433		125,642		183,042

Combined
Satisfactory (1-4)		77,663		965,071		1,119,020		612,244		448,554		1,174,163		225,973		4,622,688
Watch (5)		—		—		26		—		184		18,023		130		18,363
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		16		8		163		5		2,714		693		3,599
Total	$	77,663	$	965,087	$	1,119,054	$	612,407	$	448,743	$	1,194,900	$	226,796	$	4,644,650

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)		—		—		—		—		—		—		—		—
Total		21,885		7,265		1,391		—		—		—		3,308		33,849

Subdivision construction
Satisfactory (1-4)		4,478		25,864		800		203		134		588		—		32,067
Watch (5)		—		—		—		—		—		—		—		—
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		—		—		—
Total		4,478		25,864		800		203		134		588		—		32,067

Construction and land development
Satisfactory (1-4)		16,746		6,914		4,866		7,338		762		3,990		613		41,229
Watch (5)		—		—		—		—		—		—		—		—
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		—		384		384
Total		16,746		6,914		4,866		7,338		762		3,990		997		41,613

Other construction
Satisfactory (1-4)		113,512		446,125		176,340		21,713		—		—		—		757,690
Watch (5)		—		—		—		—		—		—		—		—
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		—		—		—
Total		113,512		446,125		176,340		21,713		—		—		—		757,690

One- to four-family residential
Satisfactory (1-4)		340,886		219,504		128,509		73,162		39,685		97,236		687		899,669
Watch (5)		—		—		—		179		88		1,341		57		1,665
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		158		—		—		1,832		79		2,069
Total		340,886		219,504		128,667		73,341		39,773		100,409		823		903,403

Other residential
Satisfactory (1-4)		83,822		133,648		168,232		142,630		122,614		123,538		3,939		778,423
Watch (5)		—		—		—		—		—		3,338		—		3,338
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		—		—		—
Total		83,822		133,648		168,232		142,630		122,614		126,876		3,939		781,761

Commercial real estate
Satisfactory (1-4)		221,341		171,484		109,939		203,426		185,682		577,216		36,658		1,505,746
Watch (5)		—		—		—		—		—		23,338		—		23,338
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		1,579		—		1,579
Total		221,341		171,484		109,939		203,426		185,682		602,133		36,658		1,530,663

Commercial business
Satisfactory (1-4)		45,349		66,258		39,645		15,505		9,309		65,307		64,088		305,461
Watch (5)		—		—		—		—		—		34		—		34
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		—		—		—		—		394		191		585
Total		45,349		66,258		39,645		15,505		9,309		65,735		64,279		306,080

Consumer
Satisfactory (1-4)		21,309		11,168		5,711		2,708		3,263		16,380		132,792		193,331
Watch (5)		—		28		—		7		—		160		100		295
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		11		9		—		2		248		359		629
Total		21,309		11,207		5,720		2,715		3,265		16,788		133,251		194,255

Combined
Satisfactory (1-4)		869,328		1,088,230		635,433		466,685		361,449		884,255		242,085		4,547,465
Watch (5)		—		28		—		186		88		28,211		157		28,670
Special Mention (6)		—		—		—		—		—		—		—		—
Classified (7-9)		—		11		167		—		2		4,053		1,013		5,246
Total		869,328	$	1,088,269	$	635,600	$	466,871	$	361,539	$	916,519	$	243,255	$	4,581,381