Allowance for Credit Losses and Reserve for Unfunded Loan Commitments

3 Months Ended

Mar. 31, 2024

Allowance for Credit Losses and Reserve for Unfunded Loan Commitments

Allowance for Credit Losses and Reserve for Unfunded Loan Commitments

NOTE 8. 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 real estate, 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) and commercial 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, consumer and residential construction 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 following tables detail the activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2024 and 2023:

	For the three months ended March 31, 2024
		SBA							Residential
(In thousands)	Held for Investment		Commercial		Residential		Consumer		construction		Total
Balance, beginning of period	$	1,221	$	15,876	$	6,529	$	1,022	$	1,206	$	25,854
Charge-offs		—		(98)		—		(70)		(277)		(445)
Recoveries		8		12		—		10		—		30
Net recoveries (charge-offs)		8		(86)		—		(60)		(277)		(415)
(Credit to) provision for credit losses charged to expense		(20)		397		(135)		(40)		439		641
Balance, end of period	$	1,209	$	16,187	$	6,394	$	922	$	1,368	$	26,080

	For the three months ended March 31, 2023
	SBA									Residential
(In thousands)	Held for Investment		Commercial		Residential		Consumer		construction		Total
Balance, beginning of period	$	875	$	15,254	$	5,450	$	990	$	2,627	$	25,196
Effect of adopting Accounting Standards Update ("ASU") No. 2016-13 ("CECL")		163		171		376		101		36		847
Charge-offs		(113)		—		—		(120)		—		(233)
Recoveries		—		271		—		12		—		283
Net (charge-offs) recoveries		(113)		271		—		(108)		—		50
Provision for (credit to) credit losses charged to expense		178		(395)		309		37		(21)		108
Balance, end of period	$	1,103	$	15,301	$	6,135	$	1,020	$	2,642	$	26,201

The following tables present loans and their related allowance for credit losses, by portfolio segment, as of March 31, 2024 and December 31, 2023:

	March 31, 2024
		SBA								Residential
(In thousands)	Held for Investment		Commercial		Residential		Consumer		construction		Total
Allowance for credit losses ending balance:
Individually evaluated	$	382	$	337	$	300	$	1	$	116	$	1,136
Collectively evaluated		827		15,850		6,094		921		1,252		24,944
Total	$	1,209	$	16,187	$	6,394	$	922	$	1,368	$	26,080
Loan ending balances:
Individually evaluated	$	3,680	$	2,415	$	7,440	$	366	$	3,127	$	17,028
Collectively evaluated		37,497		1,288,904		620,024		71,909		120,656		2,138,990
Total	$	41,177	$	1,291,319	$	627,464	$	72,275	$	123,783	$	2,156,018

	December 31, 2023
		SBA								Residential
(In thousands)	Held for Investment		Commercial		Residential		Consumer		construction		Total
Allowance for credit losses ending balance:
Individually evaluated	$	348	$	341	$	306	$	—	$	—	$	995
Collectively evaluated		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	$	3,444	$	1,948	$	11,272	$	388	$	2,141	$	19,193
Collectively evaluated		37,458		1,275,512		620,234		72,288		129,136		2,134,628
Total	$	40,902	$	1,277,460	$	631,506	$	72,676	$	131,277	$	2,153,821

Reserve for Unfunded Loan Commitments

In addition to the allowance for credit losses, the Company maintains a reserve for unfunded loan commitments at a level that management believes is adequate to absorb estimated probable losses. At March 31, 2024 and December 31, 2023, a $0.6 million commitment reserve was reported on the balance sheet as “Accrued expenses and other liabilities” and reported on the income statement as “Provision for credit losses, off-balance sheet”.