LOANS | NOTE 4 – LOANS The Company’s loan portfolio at the dates indicated is summarized below: June 30, December 31, 2024 2023 Commercial and industrial (1) $ 155,146 $ 162,889 Construction and land 3,469 9,559 Commercial real estate 1,599,743 1,668,585 Residential 105,222 86,002 Consumer 602 738 Total loans 1,864,182 1,927,773 Net deferred loan (fees) costs (10) 56 Allowance for credit losses (19,000) (22,000) Net loans $ 1,845,172 $ 1,905,829 (1) Includ es $2.3 million and $3.8 million of U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans as of June 30, 2024 and December 31, 2023, respectively. Net loans exclude accrued interest receivable of $5.8 million and $6.7 million at June 30, 2024 and December 31, 2023, respectively, which is included in interest receivable and other assets in the condensed consolidated balance sheets. The Company’s total individually evaluated loans, including collateral dependent loans, nonaccrual loans, modified loans to borrowers experiencing financial difficulty, and accreting purchase credit deteriorated (“PCD”) loans that have experienced post-acquisition declines in cash flows expected to be collected are summarized as follows: Commercial Construction Commercial and industrial and land real estate Residential Consumer Total June 30, 2024 Recorded investment in loans individually evaluated: With no specific allowance recorded $ 95 $ 366 $ 12,715 $ 1,291 $ — $ 14,467 With a specific allowance recorded 1,341 — 6,067 — — 7,408 Total recorded investment in loans individually evaluated $ 1,436 $ 366 $ 18,782 $ 1,291 $ — $ 21,875 Specific allowance on loans individually evaluated $ 1,140 $ — $ 350 $ — $ — $ 1,490 December 31, 2023 Recorded investment in loans individually evaluated: With no specific allowance recorded $ 273 $ 366 $ 1,298 $ 1,349 $ — $ 3,286 With a specific allowance recorded 1,799 — 7,745 147 — 9,691 Total recorded investment in loans individually evaluated $ 2,072 $ 366 $ 9,043 $ 1,496 $ — $ 12,977 Specific allowance on loans individually evaluated $ 1,423 $ — $ 3,008 $ 2 $ — $ 4,433 From time to time, the Company may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. At the time of restructuring, these loans are generally placed on nonaccrual. These loans may be returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months The ACL on a is measured using the same method as individually evaluated loans. During the three and six months ended June 30, 2024 and 2023, there were no modifications of loans to borrowers experiencing financial difficulty. A summary of previously modified loans to borrowers experiencing financial difficulty by type of concession and type of loan, as of the dates indicated, is set forth below: Number of Rate Term Rate & term % of Total loans modification modification modification Total loans outstanding June 30, 2024 Commercial and industrial 2 $ — $ 110 $ — $ 110 0.07 % Construction and land — — — — — — % Commercial real estate 4 — 2,079 — 2,079 0.13 % Residential 1 — 747 — 747 0.71 % Consumer — — — — — — % Total 7 $ — $ 2,936 $ — $ 2,936 0.16 % Number of Rate Term Rate & term % of Total loans modification modification modification Total loans outstanding December 31, 2023 Commercial and industrial 2 $ — $ 125 $ — $ 125 0.08 % Construction and land — — — — — — % Commercial real estate 4 — 3,400 — 3,400 0.20 % Residential 1 — 778 — 778 0.90 % Consumer — — — — — — % Total 7 $ — $ 4,303 $ — $ 4,303 0.22 % For the three and six months ended June 30, 2024, the C ompany recorded no charge-offs and $1.3 million of charge-offs for modified loans to borrowers experiencing financial difficulty, respectively. During the three and six months ended June 30, 2023, the Company recorded no charge-offs for modified loans to borrowers experiencing financial difficulty. As of June 30, 2024 and December 31, 2023, individually evaluated modified loans to borrowers experiencing financial difficulty had a related allowance of $27,000 and $1.3 million , respectively. As of June 30, 2024 and December 31, 2023, none of the modified loans to borrowers experiencing financial difficulty were performing in accordance with their modified terms. Accruing modified loans to borrowers experiencing financial difficulty are included in the loans individually evaluated as part of the calculation of the allowance for credit losses for loans. Risk Rating System The Company evaluates and assigns a risk grade to each loan based on certain criteria to assess the credit quality of the loan. The assignment of a risk rating is done for each individual loan. Loans are graded from inception and on a continuing basis until the debt is repaid. Any adverse or beneficial trends will trigger a review of the loan risk rating. Each loan is assigned a risk grade based on its characteristics. Loans with low to average credit risk are assigned a lower risk grade than those with higher credit risk as determined by the individual loan characteristics. The Company’s Pass loans include loans with acceptable business or individual credit risk where the borrower’s operations, cash flow or financial condition provides evidence of low to average levels of risk. Loans that are assigned higher risk grades are loans that exhibit the following characteristics: Special Mention loans have potential weaknesses that deserve close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. A Special Mention rating is a temporary rating, pending the occurrence of an event that would cause the risk rating either to improve or to be downgraded. Loans in this category would be characterized by any of the following situations: ● Credit that is currently protected but is potentially a weak asset; ● Credit that is difficult to manage because of an inadequate loan agreement, the condition of and/or control over collateral, failure to obtain proper documentation, or any other deviation from product lending practices; and ● Adverse financial trends. Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans classified substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. The potential loss does not have to be recognizable in an individual credit for that credit to be risk rated Substandard. A loan can be fully and adequately secured and still be considered Substandard. Some characteristics of Substandard loans are: ● Inability to service debt from ordinary and recurring cash flow; ● Chronic delinquency; ● Reliance upon alternative sources of repayment; ● Term loans that are granted on liberal terms because the borrower cannot service normal payments for that type of debt; ● Repayment dependent upon the liquidation of collateral; ● Inability to perform as agreed, but adequately protected by collateral; ● Necessity to renegotiate payments to a non-standard level to ensure performance; and ● The borrower is bankrupt, or for any other reason, future repayment is dependent on court action. Doubtful loans have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and value, highly questionable and improbable. Doubtful loans have a high probability of loss, yet certain important and reasonably specific pending factors may work toward the strengthening of the credit. Losses are recognized as charges to the allowance when the loan or portion of the loan is considered uncollectible or at the time of foreclosure. Recoveries on loans previously charged off are credited to the allowance for credit losses. Revolving loans that are converted to term loans are treated as new originations in the tables below and are presented by year of initial origination. During the six months ended June 30, 2024, and the year ended December 31, 2023, $512,000 and $7.1 million of revolving loans were converted to term loans, respectively. The following tables present the internally assigned risk grade by class of loans at the dates indicated: Revolving Term loans - amortized cost by origination year loans 2024 2023 2022 2021 2020 Prior amortized cost Total June 30, 2024 Commercial and industrial: Pass $ 15,600 $ 22,939 $ 22,686 $ 15,047 $ 18,047 $ 37,339 $ 15,586 $ 147,244 Special mention — 555 — — 563 2,498 1,785 5,401 Substandard — — — — 854 626 1,021 2,501 Total commercial and industrial $ 15,600 $ 23,494 $ 22,686 $ 15,047 $ 19,464 $ 40,463 $ 18,392 $ 155,146 YTD gross charge-offs $ — $ — $ — $ — $ 45 $ 311 $ — $ 356 Construction and land: Pass $ — $ 1,370 $ — $ 134 $ 1,136 $ 463 $ — $ 3,103 Special mention — — — — — — — — Substandard — — — — 366 — — 366 Total construction and land $ — $ 1,370 $ — $ 134 $ 1,502 $ 463 $ — $ 3,469 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate: Pass $ 24,908 $ 80,443 $ 372,000 $ 483,577 $ 102,200 $ 418,761 $ 8,454 $ 1,490,343 Special mention — 637 7,066 3,198 19,040 44,993 — 74,934 Substandard — — 2,288 16,588 — 15,590 — 34,466 Total commercial real estate $ 24,908 $ 81,080 $ 381,354 $ 503,363 $ 121,240 $ 479,344 $ 8,454 $ 1,599,743 YTD gross charge-offs $ — $ — $ — $ 1,934 $ — $ 1,272 $ — $ 3,206 Residential: Pass $ 23,135 $ — $ — $ 41,237 $ 1,589 $ 5,208 $ 32,185 $ 103,354 Special mention — — — — — 424 — 424 Substandard — — — 316 — 1,128 — 1,444 Total residential $ 23,135 $ — $ — $ 41,553 $ 1,589 $ 6,760 $ 32,185 $ 105,222 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer: Pass $ 88 $ 39 $ 44 $ — $ — $ 39 $ 373 $ 583 Special mention — — — — — — — — Substandard — — — — — 19 — 19 Total consumer $ 88 $ 39 $ 44 $ — $ — $ 58 $ 373 $ 602 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ 1 $ 1 Total loans outstanding Risk ratings Pass $ 63,731 $ 104,791 $ 394,730 $ 539,995 $ 122,972 $ 461,810 $ 56,598 $ 1,744,627 Special mention — 1,192 7,066 3,198 19,603 47,915 1,785 80,759 Substandard — — 2,288 16,904 1,220 17,363 1,021 38,796 Doubtful — — — — — — — — Total loans outstanding $ 63,731 $ 105,983 $ 404,084 $ 560,097 $ 143,795 $ 527,088 $ 59,404 $ 1,864,182 YTD gross charge-offs $ — $ — $ — $ 1,934 $ 45 $ 1,583 $ 1 $ 3,563 Revolving Term loans - amortized cost by origination year loans 2023 2022 2021 2020 2019 Prior amortized cost Total December 31, 2023 Commercial and industrial: Pass $ 26,055 $ 25,039 $ 19,294 $ 22,831 $ 26,008 $ 17,357 $ 17,754 $ 154,338 Special mention — — — 1,323 932 1,926 1,831 6,012 Substandard — — — 156 320 1,039 1,024 2,539 Total commercial and industrial $ 26,055 $ 25,039 $ 19,294 $ 24,310 $ 27,260 $ 20,322 $ 20,609 $ 162,889 YTD gross charge-offs $ — $ — $ — $ — $ 27 $ 436 $ — $ 463 Construction and land: Pass $ 1,217 $ 6,040 $ — $ 1,177 $ 109 $ 650 $ — $ 9,193 Special mention — — — — — — — — Substandard — — — 366 — — — 366 Total construction and land $ 1,217 $ 6,040 $ — $ 1,543 $ 109 $ 650 $ — $ 9,559 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate: Pass $ 80,576 $ 397,319 $ 377,165 $ 140,265 $ 180,859 $ 370,887 $ 9,405 $ 1,556,476 Special mention — 10,348 1,894 17,001 15,101 41,482 — 85,826 Substandard — 158 946 — 11,579 13,600 — 26,283 Total commercial real estate $ 80,576 $ 407,825 $ 380,005 $ 157,266 $ 207,539 $ 425,969 $ 9,405 $ 1,668,585 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential: Pass $ — $ — $ 2,432 $ 4,319 $ 7,986 $ 36,814 $ 32,420 $ 83,971 Special mention — — — — 437 — — 437 Substandard — — — — — 1,594 — 1,594 Total residential $ — $ — $ 2,432 $ 4,319 $ 8,423 $ 38,408 $ 32,420 $ 86,002 YTD gross charge-offs $ — $ — $ — $ — $ — $ 172 $ 3 $ 175 Consumer: Pass $ 65 $ 67 $ — $ 6 $ 18 $ 69 $ 494 $ 719 Special mention — — — — — — — — Substandard — — — — 19 — — 19 Total consumer $ 65 $ 67 $ — $ 6 $ 37 $ 69 $ 494 $ 738 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ 5 $ 5 Total loans outstanding Risk ratings Pass $ 107,913 $ 428,465 $ 398,891 $ 168,598 $ 214,980 $ 425,777 $ 60,073 $ 1,804,697 Special mention — 10,348 1,894 18,324 16,470 43,408 1,831 92,275 Substandard — 158 946 522 11,918 16,233 1,024 30,801 Doubtful — — — — — — — — Total loans outstanding $ 107,913 $ 438,971 $ 401,731 $ 187,444 $ 243,368 $ 485,418 $ 62,928 $ 1,927,773 YTD gross charge-offs $ — $ — $ — $ — $ 27 $ 608 $ 8 $ 643 The following tables provide an aging of the Company’s loans receivable as of the dates indicated: Recorded 90 Days investment > 30–59 Days 60–89 Days or more Total Total loans 90 days and past due past due past due past due Current PCD loans receivable accruing June 30, 2024 Commercial and industrial $ 556 $ 218 $ 1,253 $ 2,027 $ 152,954 $ 165 $ 155,146 $ — Construction and land — — 366 366 3,087 16 3,469 — Commercial real estate 2,375 675 4,696 7,746 1,567,083 24,914 1,599,743 — Residential 69 747 283 1,099 103,773 350 105,222 — Consumer — — — — 602 — 602 — Total $ 3,000 $ 1,640 $ 6,598 $ 11,238 $ 1,827,499 $ 25,445 $ 1,864,182 $ — Recorded 90 Days investment > 30–59 Days 60–89 Days or more Total Total loans 90 days and past due past due past due past due Current PCD loans receivable accruing December 31, 2023 Commercial and industrial $ 803 $ 146 $ 1,782 $ 2,731 $ 159,960 $ 198 $ 162,889 $ — Construction and land 97 — 366 463 9,071 25 9,559 — Commercial real estate 2,908 1,702 7,793 12,403 1,631,129 25,053 1,668,585 — Residential 55 — — 55 85,500 447 86,002 — Consumer — — — — 738 — 738 — Total $ 3,863 $ 1,848 $ 9,941 $ 15,652 $ 1,886,398 $ 25,723 $ 1,927,773 $ — Nonaccrual loans totaled $16.1 million and $13.0 million at June 30, 2024 and December 31, 2023, respectively. Nonaccrual loans guaranteed by a government agency, which reduces the Company’s credit exposure, were $2.1 million at June 30, 2024 compared to $740,000 at December 31, 2023. At June 30, 2024, nonaccrual loans included $3.2 million of loans 30-89 days past due and $6.3 million of loans less than 30 days past due. At December 31, 2023, nonaccrual loans included $927,000 of loans 30-89 days past due and $2.1 million of loans less than 30 days past due. At June 30, 2024, the $3.2 million of nonaccrual loans 30-89 days past due was comprised of three loans and the $6.3 million of loans less than 30 days past due was comprised of 19 loans. All these loans were placed on nonaccrual due to concerns over the financial condition of the borrowers. There were no loans that were 90 days or more past due and still accruing at June 30, 2024 or December 31, 2023. Interest foregone on nonaccrual loans was approximately $226,000 and $709,000 for the three and six months ended June 30, 2024, compared to $185,000 and $420,000 for the three and six months ended June 30, 2023. Interest income recognized on nonaccrual loans was approximately $79,000 and $86,000 for the three and six months ended June 30, 2024, compared to $16,000 and $81,000 for the three and six months ended June 30, 2023, respectively. Pledged Loans Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $977.9 million and $1.14 billion at June 30, 2024 and December 31, 2023, respectively. Our discount window advance line with the FRB of San Francisco is |