| Loans and Allowance for Credit Losses | Note 3 – Loans and Allowance for Credit Losses The following table presents the components of loans as of the periods shown: (Dollars in thousands) June 30, 2024 December 31, 2023 Commercial: Business $ 731,420 $ 797,100 Real estate 679,905 670,584 Acquisition, development and construction 103,251 134,004 Total commercial 1,514,576 1,601,688 Residential real estate 655,985 672,547 Home equity lines of credit 12,415 14,531 Consumer 22,742 27,408 Total loans 2,205,718 2,316,174 Deferred loan origination costs, net 1,075 1,420 Loans receivable $ 2,206,793 $ 2,317,594 We currently manage our loan portfolios and the respective exposure to credit losses (credit risk) by the specific portfolio segments shown below. Our loan portfolio segmentation is based primarily on call report codes, which are levels at which we develop and document our systematic methodology to determine the ACL attributable to each respective portfolio segment. The ACL portfolio segments are aggregated into broader segments in order to present informative yet concise disclosures within this document, as follows: Commercial business loans – Commercial business loans are made to provide funds for equipment and general corporate needs, as well as to finance owner-occupied real estate, and to finance future cash flows of Federal government lease contracts. Repayment of these loans primarily uses the funds obtained from the operation of the borrower’s business. Commercial business loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. This segment includes both internally originated and purchased participation loans. Credit risk arises from the successful operation of the business, which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy. Commercial real estate loans – Commercial real estate loans consist of non-owner occupied properties, such as investment properties for retail, office and multifamily with a history of occupancy and cash flow. This segment includes both internally originated and purchased participation loans. These loans carry the risk of adverse changes in the local economy and a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies, which can adversely impact cash flow. Commercial acquisition, development and construction loans – Commercial acquisition, development and construction loans are intended to finance the construction of commercial and residential properties, and also includes loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to periodically advance loan funds to pay interest charges on the outstanding balance of the loan. Residential real estate – This residential real estate segment contains permanent and construction mortgage loans principally to consumers, but also includes loans to residential real estate developers, secured by residential real estate, which we previously presented under commercial acquisitions, development and construction loans under the incurred loss model. Residential real estate loans to consumers are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios and collateral values. Credit risk arises from the continuing financial stability of the borrower and, where applicable, the builder, which can be adversely impacted by job loss, divorce, illness or personal bankruptcy, among other factors. Residential real estate secured loans to developers represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral. Home equity lines of credit – This segment includes subsegments for senior lien and subordinate lien lines of credit. Credit risk is similar to residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan. Consumer loans – This segment of loans includes primarily installment loans and personal lines of credit. Consumer loans include installment loans used by clients to purchase automobiles, boats and recreational vehicles. Credit risk is similar to residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan. This segment primarily includes loans purchased from a third-party originator that originates loans in order to finance the purchase of personal automotive vehicles for sub-prime borrowers. Credit risk is unique as this segment includes only those loans provided to consumers that cannot typically obtain financing through traditional lenders. As such, these loans are subject to a higher risk of default than the typical consumer loan. As of June 30, 2024, the Bank’s other real estate owned balance totaled $0.8 million, all of which was related to a 2020 acquisition of another bank. The other real estate owned balance consisted of two unrelated commercial properties. As of June 30, 2024, there was one residential mortgage in the process of foreclosure with a loan balance totaling $0.2 million. Bank management uses a nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. Loans categorized as “Pass” rated have adequate sources of repayment, with little identifiable risk of collection and general conformity to the Bank's policy requirements, product guidelines and underwriting standards. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors. Loans categorized as “Special Mention” rated have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification. Loans categorized as “Substandard” rated are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans categorized as “Doubtful” rated have all the weakness inherent in those classified Substandard with the added characteristic that the weakness makes collections or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Any portion of a loan that has been or is expected to be charged off is placed in the “Loss” category. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories, unless a specific action, such as past due status, bankruptcy, repossession or death, occurs to raise awareness of a possible credit event. The Bank’s Chief Credit Officer is responsible for the timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis. The Bank's Credit Department ensures that a review of all commercial relationships of $1.0 million or more is performed annually. Review of the appropriate risk grade is included in both the internal and external loan review process and on an ongoing basis. The Bank has an experienced credit department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct independent loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships with the intent of reviewing 40% to 45% of the Bank's commercial outstanding loan balances on an annual basis. The Bank's credit department compiles detailed reviews, including plans for resolution, on loans classified as Substandard on a quarterly basis. The following table presents the amortized cost of loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system by vintage year as of the period shown: Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Converted to Term Total June 30, 2024 Commercial business: Risk rating: Pass $ 19,872 $ 156,870 $ 237,920 $ 70,856 $ 76,081 $ 123,730 $ 4,598 $ 689,927 Special Mention 47 — 24,712 182 804 4,132 — 29,877 Substandard — 1,249 2,342 57 — 4,680 438 8,766 Doubtful — — 951 612 264 1,023 — 2,850 Total commercial business loans $ 19,919 $ 158,119 $ 265,925 $ 71,707 $ 77,149 $ 133,565 $ 5,036 $ 731,420 Gross charge-offs $ — $ — $ 820 $ 690 $ — $ 367 $ — $ 1,877 Commercial real estate: Risk rating: Pass $ 48,078 $ 111,914 $ 139,631 $ 177,683 $ 11,675 $ 128,952 $ 489 $ 618,422 Special Mention — — — 25,854 — 17,003 — 42,857 Substandard — — — — — 18,626 — 18,626 Doubtful — — — — — — — — Total commercial real estate loans $ 48,078 $ 111,914 $ 139,631 $ 203,537 $ 11,675 $ 164,581 $ 489 $ 679,905 Gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial acquisition, development and construction: Risk rating: Pass $ 6,364 $ 7,694 $ 32,294 $ 30,758 $ 7,213 $ 3,637 $ — $ 87,960 Special Mention — — — — — — — — Substandard — — — 14,652 — 639 — 15,291 Doubtful — — — — — — — — Total commercial acquisition, development and construction loans $ 6,364 $ 7,694 $ 32,294 $ 45,410 $ 7,213 $ 4,276 $ — $ 103,251 Gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential Real Estate: Risk rating: Pass $ 27,331 $ 49,756 $ 404,055 $ 103,241 $ 34,210 $ 28,805 $ 2,692 $ 650,090 Special Mention — — — — 2,363 743 — 3,106 Substandard — — 983 — 81 1,302 118 2,484 Doubtful — — — 211 — 94 — 305 Total residential real estate loans $ 27,331 $ 49,756 $ 405,038 $ 103,452 $ 36,654 $ 30,944 $ 2,810 $ 655,985 Gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Converted to Term Total June 30, 2024 Home equity lines of credit: Risk rating: Pass $ — $ 58 $ 35 $ — $ 1,041 $ 10,932 $ — $ 12,066 Special Mention — — — — — 270 — 270 Substandard — — — — — 79 — 79 Doubtful — — — — — — — — Total home equity lines of credit loans $ — $ 58 $ 35 $ — $ 1,041 $ 11,281 $ — $ 12,415 Gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer: Risk rating: Pass $ — $ 1,877 $ 15,764 $ 4,864 $ 2 $ 47 $ — $ 22,554 Special Mention — — — — — — — — Substandard — 43 135 10 — — — 188 Doubtful — — — — — — — — Total consumer loans $ — $ 1,920 $ 15,899 $ 4,874 $ 2 $ 47 $ — $ 22,742 Gross charge-offs $ — $ 226 $ 1,374 $ 211 $ — $ — $ — $ 1,811 Total: Risk rating: Pass $ 101,645 $ 328,169 $ 829,699 $ 387,402 $ 130,222 $ 296,103 $ 7,779 $ 2,081,019 Special Mention 47 — 24,712 26,036 3,167 22,148 — 76,110 Substandard — 1,292 3,460 14,719 81 25,326 556 45,434 Doubtful — — 951 823 264 1,117 — 3,155 Total loans $ 101,692 $ 329,461 $ 858,822 $ 428,980 $ 133,734 $ 344,694 $ 8,335 $ 2,205,718 Gross charge-offs $ — $ 226 $ 2,194 $ 901 $ — $ 367 $ — $ 3,688 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Converted to Term Total December 31, 2023 Commercial business: Risk rating: Pass $ 187,743 $ 249,718 $ 95,547 $ 66,195 $ 51,025 $ 91,435 $ 4,617 $ 746,280 Special Mention 990 30,695 72 830 339 3,767 1,647 38,340 Substandard 368 988 317 — 4,640 1,436 204 7,953 Doubtful — 2,022 839 264 — 1,402 — 4,527 Total commercial business loans $ 189,101 $ 283,423 $ 96,775 $ 67,289 $ 56,004 $ 98,040 $ 6,468 $ 797,100 Gross charge-offs $ — $ 228 $ 1,250 $ 141 $ — $ 2,953 $ — $ 4,572 Commercial real estate: Risk rating: Pass $ 112,063 $ 149,189 $ 217,222 $ 11,952 $ 26,438 $ 108,934 $ 546 $ 626,344 Special Mention — — 7,961 — 6,079 11,201 — 25,241 Substandard — — — — — 18,999 — 18,999 Doubtful — — — — — — — — Total commercial real estate loans $ 112,063 $ 149,189 $ 225,183 $ 11,952 $ 32,517 $ 139,134 $ 546 $ 670,584 Gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial acquisition, development and construction: Risk rating: Pass $ 6,546 $ 54,468 $ 31,120 $ 22,041 $ 2,940 $ 1,483 $ — $ 118,598 Special Mention — — 14,652 — — — — 14,652 Substandard — — — — — 754 — 754 Doubtful — — — — — — — — Total commercial acquisition, development and construction loans $ 6,546 $ 54,468 $ 45,772 $ 22,041 $ 2,940 $ 2,237 $ — $ 134,004 Gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential Real Estate: Risk rating: Pass $ 54,453 $ 429,326 $ 107,763 $ 40,202 $ 8,292 $ 21,313 $ — $ 661,349 Special Mention — — — 4,224 414 708 — 5,346 Substandard — 988 3,764 82 146 777 — 5,757 Doubtful — — — — — 95 — 95 Total residential real estate loans $ 54,453 $ 430,314 $ 111,527 $ 44,508 $ 8,852 $ 22,893 $ — $ 672,547 Gross charge-offs $ — $ — $ — $ — $ 19 $ 381 $ — $ 400 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Converted to Term Total December 31, 2023 Home equity lines of credit: Risk rating: Pass $ 58 $ 36 $ — $ 1,338 $ 5,147 $ 7,568 $ — $ 14,147 Special Mention — — — — — 223 — 223 Substandard — — — — — 161 — 161 Doubtful — — — — — — — — Total home equity lines of credit loans $ 58 $ 36 $ — $ 1,338 $ 5,147 $ 7,952 $ — $ 14,531 Gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer: Risk rating: Pass $ 2,295 $ 18,926 $ 5,753 $ — $ 39 $ 51 $ — $ 27,064 Special Mention — — — — — — — — Substandard 20 266 58 — — — — 344 Doubtful — — — — — — — — Total consumer loans $ 2,315 $ 19,192 $ 5,811 $ — $ 39 $ 51 $ — $ 27,408 Gross charge-offs $ 1,144 $ 10,608 $ 1,753 $ — $ — $ 2 $ — $ 13,507 Total: Risk rating: Pass $ 363,158 $ 901,663 $ 457,405 $ 141,728 $ 93,881 $ 230,784 $ 5,163 $ 2,193,782 Special Mention 990 30,695 22,685 5,054 6,832 15,899 1,647 83,802 Substandard 388 2,242 4,139 82 4,786 22,127 204 33,968 Doubtful — 2,022 839 264 — 1,497 — 4,622 Total loans $ 364,536 $ 936,622 $ 485,068 $ 147,128 $ 105,499 $ 270,307 $ 7,014 $ 2,316,174 Gross charge-offs $ 1,144 $ 10,836 $ 3,003 $ 141 $ 19 $ 3,336 $ — $ 18,479 Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the amortized cost basis in loans by aging category and accrual status as of the periods shown: (Dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Total Past Due Total Loans Non-Accrual 90+ Days Still Accruing Non Accrual with No Credit Loss Interest Income Recognized June 30, 2024 Commercial Business $ 723,579 $ 2,452 $ 1,353 $ 4,036 $ 7,841 $ 731,420 $ 6,223 $ — $ 2,129 $ — Real estate 679,905 — — — — 679,905 — — — — Acquisition, development and construction 88,599 — — 14,652 14,652 103,251 15,292 — 15,292 — Total commercial 1,492,083 2,452 1,353 18,688 22,493 1,514,576 21,515 — 17,421 — Residential real estate 652,579 — 343 3,063 3,406 655,985 1,318 1,745 — — Home equity lines of credit 12,149 — 266 — 266 12,415 79 — — — Consumer 20,290 1,670 595 187 2,452 22,742 187 — — — Total loans $ 2,177,101 $ 4,122 $ 2,557 $ 21,938 $ 28,617 $ 2,205,718 $ 23,099 $ 1,745 $ 17,421 $ — December 31, 2023 Commercial Business $ 788,430 $ 4,728 $ 448 $ 3,494 $ 8,670 $ 797,100 $ 6,926 $ — $ 1,825 $ — Real estate 670,170 — 414 — 414 670,584 — — — — Acquisition, development and construction 134,004 — — — — 134,004 754 — 754 — Total commercial 1,592,604 4,728 862 3,494 9,084 1,601,688 7,680 — 2,579 — Residential real estate 670,539 1,671 337 — 2,008 672,547 82 — — — Home equity lines of credit 14,522 9 — — 9 14,531 161 — — — Consumer 24,494 1,792 778 344 2,914 27,408 344 — — — Total loans $ 2,302,159 $ 8,200 $ 1,977 $ 3,838 $ 14,015 $ 2,316,174 $ 8,267 $ — $ 2,579 $ — The increase in acquisition, development and construction loans in non-accrual status from the December 31, 2023 was primarily the result of the addition of a $14.6 million commercial construction loan in the multifamily space. The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the loan balance is uncollectible. Accrued interest receivable is excluded from the estimate of credit losses. Management determines the ACL balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit behaviors along with model judgments provide the basis for the estimation of expected credit losses. Adjustments to modeled loss estimates may be made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term, as well as for changes in environmental conditions, such as changes in economic conditions, property values or other relevant factors. The Bank’s methodology for determining the ACL is based on the requirements of ASC 326. The ACL is calculated on a collective basis when similar risk characteristics exist. The ACL for the majority of loans and leases was calculated using a discounted cash flow methodology applied at a loan level with a one-year reasonable and supportable forecast period and a one-year straight-line reversion period with loss rates, prepayment assumptions and curtailment assumptions driven by each loan’s collateral type. Expected credit loss rates were estimated using a regression model based on historical data from peer banks which incorporates a third-party vendor’s economic forecast to predict the change in credit losses. As of June 30, 2024, the Bank expects the markets in which it operates will experience economic improvements over the next one to two years. The ACL for only one portfolio segment consisting entirely of automotive loans to consumers was calculated under the remaining life methodology using straight-line amortization over the remaining life of the portfolio. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When Bank management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of the periods shown: (Dollars in thousands) Real Estate Vehicles and Equipment Assignment of Cash Flow Accounts Receivable Other Totals Allowance for Credit Losses June 30, 2024 Commercial Business $ 2,636 $ 2,294 $ — $ 225 $ 1,205 $ 6,360 $ 3,685 Real estate — — — — — — — Acquisition, development and construction 14,652 — — — — 14,652 — Total commercial $ 17,288 $ 2,294 $ — $ 225 $ 1,205 $ 21,012 $ 3,685 Residential 983 — — — — 983 5 Home equity lines of credit — — — — — — — Consumer — 187 — — — 187 67 Total $ 18,271 $ 2,481 $ — $ 225 $ 1,205 $ 22,182 $ 3,757 Collateral value $ 34,554 $ 2,672 $ — $ 84 $ — $ 37,310 December 31, 2023 Commercial Business $ 424 $ 2,277 $ — $ 452 $ 1,037 $ 4,190 $ 1,583 Real estate — — — — — — — Acquisition, development and construction — — — — — — — Total commercial $ 424 $ 2,277 $ — $ 452 $ 1,037 $ 4,190 $ 1,583 Residential — — — — — — — Home equity lines of credit — — — — — — — Consumer — 344 — — — 344 60 Total $ 424 $ 2,621 $ — $ 452 $ 1,037 $ 4,534 $ 1,643 Collateral value $ 301 $ 2,040 $ — $ 906 $ 320 $ 3,567 The Bank evaluates certain loans in homogeneous pools, rather than on an individual basis, when those loans are below specific thresholds based on outstanding principal balance. More specifically, residential mortgage loans, home equity lines of credit and consumer loans are evaluated collectively for expected credit losses by applying allocation rates derived from the Bank’s historical losses specific to these loans. The reserve was immaterial at June 30, 2024 and December 31, 2023. Management has identified a number of additional qualitative factors which it uses to supplement the estimated losses derived from the loss rate methodologies employed within the Current Expected Credit Losses model because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from the loss rate methodologies. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory and governmental sources are: lending policies and procedures, nature and volume of the portfolio, experience and ability of lending management and staff, volume and severity of problem credits, quality of the loan review system, changes in the value of underlying collateral, effect of concentrations of credit from a loan type, industry and/or geographic standpoint, changes in economic and business conditions, consumer sentiment and other external factors. To estimate the liability for off-balance sheet credit exposures, Bank management analyzed the portfolios of unfunded commitments based on the same segmentation used for the ACL calculation. The estimated funding rate for each segment was derived from a funding rate study created by a third-party vendor which analyzed funding of various loan types over time to develop industry benchmarks at the call report code level. Once the estimated future advances were calculated, the allocation rate applicable to that portfolio segment was applied in the same manner as those used for the ACL calculation. The resulting estimated loss allocations were totaled to determine the liability for unfunded commitments related to these loans, which management considers necessary to anticipate potential losses on those commitments that have a reasonable probability of funding. As of June 30, 2024 and December 31, 2023, the liability for unfunded commitments related to loans held-for-investment was $1.1 million and $1.0 million, respectively. Bank management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ACL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ACL. The following table presents the balance and activity for the primary segments of the ACL as of the periods shown: Commercial Residential Home Equity Consumer Total (Dollars in thousands) Business Real Estate Acquisition, development and construction Total Commercial ACL at March 31, 2024 $ 8,289 $ 3,304 $ 2,121 $ 13,714 $ 6,302 $ 90 $ 2,698 $ 22,804 Provision (release of allowance) for credit losses 2,180 (839) (684) 657 (54) (6) (467) 130 Charge-offs (896) — — (896) — — (642) (1,538) Recoveries — 7 — 7 — 1 680 688 ACL at June 30, 2024 $ 9,573 $ 2,472 $ 1,437 $ 13,482 $ 6,248 $ 85 $ 2,269 $ 22,084 (Dollars in thousands) ALL at December 31, 2023 $ 7,931 $ 2,931 $ 1,674 $ 12,536 $ 6,412 $ 97 $ 3,079 $ 22,124 Provision (release of allowance) for credit losses 3,477 (474) (237) 2,766 (199) (14) (428) 2,125 Charge-offs (1,877) — — (1,877) — — (1,811) (3,688) Recoveries 42 15 — 57 35 2 1,429 1,523 ACL at June 30, 2024 $ 9,573 $ 2,472 $ 1,437 $ 13,482 $ 6,248 $ 85 $ 2,269 $ 22,084 Commercial Residential Home Equity Consumer Total (Dollars in thousands) Business Real Estate Acquisition, development and construction Total Commercial ACL balance at March 31, 2023 $ 9,918 $ 3,177 $ 1,640 $ 14,735 $ 7,618 $ 119 $ 13,041 $ 35,513 Provision (release of allowance) for credit losses 1,504 (133) 67 1,438 (450) (6) (4,969) (3,987) Charge-offs (127) — — (127) — — (3,573) (3,700) Recoveries 13 7 — 20 — 1 2,447 2,468 ALL balance at June 30, 2023 $ 11,308 $ 3,051 $ 1,707 $ 16,066 $ 7,168 $ 114 $ 6,946 $ 30,294 (Dollars in thousands) ALL, prior to adoption of ASC 326, at December 31, 2022 $ 8,771 $ 5,704 $ 1,064 $ 15,539 $ 2,880 $ 131 $ 5,287 $ 23,837 Impact of adopting ASC 326 (126) (2,846) 288 (2,684) 3,889 (5) 6,482 7,682 Initial allowance on loans purchased with credit deterioration 710 — — 710 507 — — 1,217 Provision (release of allowance) for credit losses 2,186 180 355 2,721 (86) (14) (2,153) 468 Charge-offs (268) — — (268) (22) — (8,257) (8,547) Recoveries 35 13 — 48 — 2 5,587 5,637 ACL balance at June 30, 2023 $ 11,308 $ 3,051 $ 1,707 $ 16,066 $ 7,168 $ 114 $ 6,946 $ 30,294 During the three and six months ended June 30, 2024, there were charge offs totaling $1.5 million and $3.7 million, respectively. For the three months ended June 30, 2024, $0.6 million, or 40%, of charge offs were related to the subprime consumer automotive segment and $0.9 million, or 60%, was related to five commercial notes secured by business assets. During the three and six months ended June 30, 2024, the provision related to unfunded commitments was $0.1 million. During the three and six months ended June 30, 2023, there was a $0.2 million and $0.1 million release of allowance related to unfunded commitments, respectively. The ACL is based on estimates and actual losses will vary from current estimates. Management believes that the granularity of the portfolio segments, the related loss estimation methodologies and other qualitative factors, as well as the consistency in the application of assumptions, result in an ACL that is representative of the risk found in the components of the portfolio at any given date. Loan Modifications for Borrowers Experiencing Financial Difficulty Occasionally, the Bank modifies loans to borrowers in financial distress by providing concessions that allow for the borrower to lower their payment obligations for a defined period, these may include, but are not limited to: principal forgiveness, payment delays, term extensions, interest rate reductions and any combinations of the preceding. The following table summarize the amortized cost basis of loans that were modified as of the period shown: (Dollars in thousands) Principal Forgiveness Payment Delay Term Extension Interest Rate Reduction Total Total Class of Financing Receivable Three Months Ended June 30, 2024 Commercial Business $ — $ 3,531 $ — $ — $ 3,531 — % Real estate — — — — — — % Acquisition, development and construction — — — — — — % Total commercial — 3,531 — — 3,531 — % Residential — — — — — — % Home equity lines of credit — — — — — — % Consumer — — — — — — % Total $ — $ 3,531 $ — $ — $ 3,531 — % Three Months Ended June 30, 2023 Commercial Business $ — $ 4,563 $ — $ — $ 4,563 1 % Real estate — 11,376 — — 11,376 2 % Acquisition, development and construction — — — — — — % Total commercial — 15,939 — — 15,939 1 % Residential — — — — — — % Home equity lines of credit — — — — — — % Consumer — — — — — — % Total $ — $ 15,939 $ — $ — $ 15,939 1 % (Dollars in thousands) Principal Forgiveness Payment Delay Term Extension Interest Rate Reduction Total Total Class of Financing Receivable Six Months Ended June 30, 2024 Commercial Business $ — $ 4,899 $ — $ — $ 4,899 1 % Real estate — — — — — — % Acquisition, development and construction — — — — — — % Total commercial — 4,899 — — 4,899 — % Residential — — — — — % Home equity lines of credit — — — — — % Consumer — — — — — % Total $ — $ 4,899 $ — $ — $ 4,899 — % Six Months Ended June 30, 2023 Commercial Business $ — $ 4,563 $ — $ — $ 4,563 1 % Real estate — 11,376 — — 11,376 2 % Acquisition, development and construction — — — — — — % Total commercial — 15,939 — — 15,939 1 % Residential — — — — — — % Home equity lines of credit — — — — — — % Consumer — — — — — — % Total $ — $ 15,939 $ — $ — $ 15,939 1 % The above table presents the amortized cost basis of loans at June 30, 2024 that were experiencing financial difficulty and modified during the three and six months ended June 30, 2024, by class and by type of modification. Also presented above is the percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable. Sixteen loans to fifteen borrowers received payment delay modifications in the six months ended June 30, 2024, including fifteen commercial loans with government guarantees totaling $4.7 million. The Bank closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified as of the periods shown: (Dollars in thousands) 30-59 Days 60-89 Days Greater Than Total Past Due Three and Six Months Ended June 30, 2024 Commercial Business $ — $ 235 $ 449 $ 684 Real estate — — — — Acquisition, development and construction — — — — Total commercial — 235 449 684 Residential — — — — Home equity lines of credit — — — — Consumer — — — — Total $ — $ 235 $ 449 $ 684 Three and Six Months Ended June 30, 2023 Commercial Business $ — $ 2,075 $ — $ 2,075 Real estate — — — — Acquisition, development and construction — — — — Total commercial — 2,075 — 2,075 Residential — — — — Home equity lines of credit — — — — Consumer — — — — Total $ — $ 2,075 $ — $ 2,075 As of June 30, 2024, there are two modified loans past due, with an amortized cost basis of $0.7 million. The two loans are commercial notes with a government guarantees and considered non-accrual as of June 30, 2024. As of June 30, 2023, there was one modified loan past due, with an amortized cost basis of $2.1 million. This note is a commercial note with a government guarantee and considered non-accrual as of June 30, 2023. The following table presents the amortized cost basis of loans that had a payment default and were modified prior to that default to borrowers experiencing financial difficulty as of the period shown: (Dollars in thousands) Principal Forgiveness Payment Delay Term Extension Interest Rate Reduction Total Three and Six Months Ended June 30, 2024 Commercial Business $ — $ 449 $ — $ — $ 449 Real estate — — — — — Acquisition, development and construction — — — — — Total commercial — 449 — — 449 Residential — — — — — Home equity lines of credit — — — — — Consumer — — — — — Total $ — $ 449 $ — $ — $ 449 Three and Six Months Ended June 30, 2023 Commercial Business $ — $ 2,075 $ — $ — $ 2,075 Real estate — — — — — Acquisition, development and construction — — — — — Total commercial — 2,075 — — 2,075 Residential — — — — — Home equity lines of credit — — — — — Consumer — — — — — Total $ — $ 2,075 $ — $ — $ 2,075 |
